SE-KB.24 – International Business Transactions

In the modern global economy, even relatively small companies are aware of the savings and opportunities available by sourcing or exporting products outside the United States. Of course, these opportunities often involve additional risks, as well. Although companies can take a number of precautions to limit their risks in international transactions, the primary legal tool for such purposes is the sales contract.

In the world of transactional law, unpredictability and ambiguity are “dirty words”. When a contract fails to clearly address a given situation and a dispute arises, it often takes a judge or jury to determine the correct result. Most companies would prefer to know what their rights and obligations are in a contract, rather than leave such decisions to a judge or jury. As such, transactional lawyers go to great pains to eliminate unpredictability and ambiguity — a task made more difficult when the parties to a contract are from different countries.

A good international contract for the sale of goods is, in most respects, quite similar to a good domestic contract. However, because of differences in legal jurisdictions and practical issues related to enforcing contracts across national borders, a number of provisions standard to many domestic sales contracts gain special importance in an international transaction.

These provisions include, but are not limited to, the following:

Choice of Law

Because of variations in legal heritage, culture and language, the law which would be applied to a contract is often decisive. For example, it is likely that the application of Texas law to a contract would lead to a different result than the application of Brazilian law to that same contract. Therefore, if the parties to a contract choose law that is acceptable to both of them, they can better anticipate how the contract provisions might be interpreted.

Also, most domestic contracts are governed by the Uniform Commercial Code (UCC), a harmonized system of commercial laws adopted by almost every state in the U.S. However, in many international contracts for the sale of goods, the U.N. Convention on Contracts for the International Sale of Goods (CISG) will apply by default. The impact of CISG as governing law versus UCC as governing law can be of critical importance.

Jurisdiction and Venue

In addition to selecting the choice of law for the contract, the parties can select a jurisdiction to decide any disputes related to the contract. International contracts make such provisions more important because of issues

related to jurisdiction over the parties and the transaction, enforcement of judgments, legal processes, and travel and litigation expenses.

This would be an appropriate place in an agreement to address arbitration, if desired. If the parties do not agree to arbitration in the contract, they cannot be forced into arbitration later on.

Force Majeure

“Force majeure” clauses allow for a party to be excused from its contractual obligations without punishment if certain unexpected events occur, such as natural disasters. Domestic contracts in the United States generally do not address events such as terrorism, piracy, financial market collapse, war and so on. However, in international transactions, these are often very real concerns.

Shipping Terms

Instead of spelling out a number of elements related to the delivery of the goods, parties often use shipping terms — a short hand for allocating responsibilities between the parties with respect to such matters as transfer of risk of loss, arrangement of carrier, payment of freight charges, cargo insurance and so on.

Under U.S. law, these shipping terms are defined under state law in accordance with the UCC. Common domestic shipping terms include FOB (Free On Board) and CIF (Cost, Insurance & Freight). However, international sales contracts do not necessarily use the same terms. Instead, many international agreements incorporate a separate set of shipping terms called Incoterms (International Commercial Terms), which are promulgated by the International Chamber of Commerce, or ICC.

Payment

Making or receiving payment is also a bit more involved in international transactions. Because of governmental currency controls and fluctuations in exchange rates, a key consideration is the currency in which payment is to be made.

The method of payment also merits special attention in international transactions. Payment by check is often not an option; instead, parties to international transactions often elect to use wire transfers or letters of credit. If a letter of credit is used, the parties must comply with strict documentary requirements if they expect to receive payment.

Translations

When dealing with international parties whose principal language is not English, the parties will often prepare and execute a translated version of the contract. Because of subtle differences in translation, it is important for the parties to elect which version of the document will control if a dispute arises.

Compliance With U.S. Laws

Finally, exports and imports — as well as currency transfers — are subject to numerous U.S. laws. In some situations, customers or agents can hold U.S. companies liable for violations of these laws. As such, a requirement written into sales contracts requiring compliance with these laws can serve as a notice to the customer, and makes compliance a material term of the agreement.

Of course, this article addresses only a handful of the provisions that take on special importance in an international contract for the sale of goods. The most important thing to remember is that international agreements are different than domestic agreements. For this reason, it is imperative that companies obtain

expert legal advice from attorneys who appreciate these differences and can draft agreements that will lead to predictable interpretations.