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International Commercial Contract Challenges Made Clear

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Doing business overseas (unless on the Isle of Wight) will always involve issues of international law – even in Northern Ireland.  It doesn’t need to be overseas either, consider Scotland which has Scottish law, not English. Doing business always involves contracts, even if they are unwritten and so here Geoffrey Sturgess, Consultant Solicitor, highlights the potential pitfalls you must be aware of when doing business overseas.

Written or unwritten?

Whilst you might get away with an unwritten contract with an English counterparty, where the subject matter and performance are most closely connected with England, it’s not recommended for an international transaction. If for no other reason, unwritten international contracts are subject to various trade treaties which imply terms and conditions, which you might not want, into your contract.

As way of an example, consider an unwritten contract for services with your chimney sweep.  You agree with the chimney sweep to sweep your chimney today after which you pay either cash, cheque or card (£ +VAT).  English consumer law says the chimney sweep will do a good and suitable job and compensate you if it goes wrong, and you can enforce that right in the Small Claims County Court.

Now, consider the possibility that the chimney sweep, a specialist in the chimneys of chateaux and stately homes who is based in France and is coming over for the annual sweep of the fifty or so chimneys of your stately pile which, as a result of a deal with HMRC to avoid death duties after the death of your late father, the late Fifth Baronet, you allow the great unwashed to pay to visit on fifty days each year.

Consideration must now be given to the following additional factors: –

  • Law of France or England or an international treaty?
  • Are you a consumer, protected by consumer law, or contracting in the course of business? (There will be different tests in France and England).
  • If you are a business what terms are implied into the contract to protect you? (They will be different in France and England).
  • Will you make payment in Pounds or Euros?
  • What will the method of payment be?
  • In the event of dispute, which courts have jurisdiction?
  • If you win your case in England can you enforce the judgment in France?

On top of that; if the chimney sweep was an old family retainer and was doing the job as a favour, so without payment, then if English law applied there would be no enforceable contract, no consideration passing from you to him. No consideration is required to create a binding contract.  Under French law there is no need for consideration. There would be a binding contract. 

So what about the terms of the contract?

Whether your business contract is intra-national or international, the most important part is the meaning. Are the intentions of the parties so clear (what, when, where and wherefore) that even a judge could understand them?

Of secondary importance, but still important, does it fit in with relevant laws, i.e. is it lawful, enforceable and are the plain words not overridden by some statutory or regulatory provision in the place it is to be carried out or under the chosen law of the contract?

For international contracts the choice of law, the jurisdiction in which any dispute will be adjudicated and the language of the contract are all factors to consider.

When dealing with a contract between two English entities with subject matter and place of performance most closely connected to England (so there is no possibility of anyone arguing that mandatory laws of any other jurisdiction apply) a reasonably competent English lawyer with an understanding of the client’s business ought to be able to put a sensible contract together and be reasonably certain that the parties and a judge will interpret it in the way that it is intended.

Mandatory laws are the laws of a state designed to be protective of a contracting party or society in general, which, if the subject matter of the contract or its performance is closely connected with that state, may have effect whatever the contract says.

Example situations where a clash of laws could cause problems:

1.  You are a successful Franchisor in the UK (where franchising is unregulated) and decide to expand it into the US. Knowing that an ethical franchisor should always run a pilot before launching in any particular cultural/geographic area, to prove the concept works, you grant a franchise on a short term, test basis, to a franchisee in Boston, MA.

You have a good franchise agreement for your “Hire a Butler” franchise which you use in the UK. It was written by an experienced franchise lawyer and complies with the ethical requirements of the British Franchise Association.

You know that in Boston they speak a language which is close enough to English to allow the natives to understand English.  Your wife’s cousin has always lived in Boston and loves the idea of running a butler agency so she takes the first agreement.

Unbeknownst to you, you are now committing a criminal offence both under Federal and State law as franchising is regulated in the US and it is criminal to grant a franchise agreement there without going through full and public disclosure and producing a prospectus that is not dissimilar to the prospectus for the floatation of a company on the UK Stock Exchange.  This would cost perhaps $50,000.

2.  You are a provider of engineering services in the UK and wish to appoint a German company to act as your sales agent and sub-contractor in Germany.  Your English lawyer advises you to avoid calling them “agents” as under the EU Sales Agency Directive and the UK Sales Agency Regulations, agents, when terminated, or when their agreement expires, are entitled to compensation, like a redundant employee.

He doesn’t think that you have much to fear because your “agent” will be selling services and the English Sales Agency Regulations only apply to sales agents for goods.  He sets it up as a distributorship and to be sure, he makes the agreement subject to English law and jurisdiction.

In due course the agreement comes to an end and your distributor claims compensation, and subsequently wins it, in an English court.  Under German law, unlike English law, termination compensation is available to agents for services and to distributors with a close relationship with their manufacturer/supplier.

Those rules of German law are protective of sales agents and distributors and are mandatory law. The arrangement is set up in Germany so German mandatory law applies and the English courts have to apply it.

3.  Your customer, based in Brazil contracts with you for you to develop technology and manufacture spy in the sky drones.  You know the technology is risky and so wish to exclude yourself from liability of any nature, particularly liabilities resulting from any “fall from the sky” breakdowns.

Your customer wishes to contract under Brazilian law and your English lawyer, unusually, engages a Brazilian lawyer who advises that you can exclude all your liabilities.  You accept Brazilian law and jurisdiction, relieved that you can contract out of any liability including liability for death and personal injury, something which you would not be able to do under English law.

The inevitable happens and one of your drones, deployed in Portugal, falls out of the sky. You had manufactured it negligently.  You are surprised and disappointed to discover that the Brazilian court applies English mandatory law (not allowed to contract out of liability for death and personal injury) and fixes you with liability.  The wife of one of the Portuguese victims sues you successfully in the English courts under EU non-contractual product liability legislation.

These three examples illustrate traps the unwary (or those with inexperienced lawyers) could fall into when entering into international contractual arrangements:

1. Clarity

Use a good lawyer who understands your business and make sure that you, who understand the technology, products or services, understand what has been written. Do not be afraid to ask questions such as “What does that mean? Why is that there?” as this will assist with your understanding.  Do not assume that your lawyer is entirely brilliant, or omniscient.

2. Compliance

Always use a lawyer in the other jurisdiction to sanity check what your lawyer has written if the law and jurisdiction is other than England or the contract is most closely connected with another jurisdiction. Your lawyer should identify that person. Ideally he/she will have experience of both jurisdictions or he/she will not be able to answer the question “What might surprise an English lawyer or his/her client about the way that local law will affect this contract?” That is a very important question to ask. The more usual question “Does this contract work for Oman?” does not include the “Will it work in the way that I expect it to?” question.

3. Choice of Law and Jurisdiction     

Do not assume that English is best. For example if you are the party most likely to be pursuing the other for cases of debt, breach of contract, infringement of IP, it is probably best to do it in their country not yours.

If they are likely to be pursuing you then consider the former point, but coming to your courts does make it more inconvenient for them at the beginning and might put them off.

Most people are surprised to discover that there is no treaty between the US and the UK allowing for the reciprocal enforcement of judgements. So if you are selling faulty goods to America, under American law and jurisdiction they will have to win two cases against you, one based in the US and one based in the UK.  This might be a good reason to choose US law and jurisdiction.

If your business is an SME (so up to Eu 25 million turnover) the laws of our mainland European members are likely to be more protective of you and the contracts will be shorter because the Civil Codes under which they operate imply far more into their contracts than our statute law does in the UK. Those Codes generally include a provision to the effect that “You will not unfairly enforce any fair or unfair provision of the contract.” There are no such general provisions in English law to protect you, unless you are a consumer.

If you are contracting somewhere obscure, English law (the universal law of commerce) would be recommended, but include an arbitration clause with a venue of “equal inconvenience”.  But be wary when your lawyer choses Tahiti, it is probably just somewhere he wants to visit.

4. Language

English is best. Most competent international lawyers can speak English and work in it.  It is easy to find legal/technical translators who can translate English into their native tongue, however only use legal/technical translators.

If the contract is translated into more than one language ensure that it states which version is the definitive one as the same words may have different nuances in different languages.

For more information on international contracts, contact Geoffrey on 02380 717717 or email geoffreysturgess@warnergoodman.co.uk.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.