With globalization, businesses are able to work together, sell products and services, and source materials and supplies across borders.
International contracts typically act as more than an instrument that specifies business terms instead, they connect and contract various legal systems, specify compliance obligations with different acts, regulations, and statutes, and can legally protect interests within a foreign legal system. Without an appropriate international contract, companies risk disputes, unenforceable contracts and expensive litigation.
In this blog, in addition to assessing what makes an effective international contract, we will assess common key clauses, compliance obligations, and considerations to avoid.
Introduction
The international contract refers to the legal kind of relationship between the parties located in two sovereign states. Such contracts usually govern commercial undertakings such as trade, partnerships, services, licensing agreements, and joint ventures.
International agreements have to take into consideration jurisdictional variations in the law risks since they include:
- Some fluctuation in the law of contract, such as which law will be controlling as to the enforceability of the contract, the possible remedy should there be a breach, and the rules of liability.
- The international compliance requirements like trade-related requirements, sanctions and control of exports and anti-corruption requirements.
- The differences in culture and operations, such as language barriers, business etiquette, and other expectations.
The Conditions that Require an International Contract
An international contract should be deemed to be appropriate when the commercial arrangement in question crosses some borders. There are typical situations –
Monetization of goods or services, exporting or importing goods or services – e.g. an Indian textile producer selling garments to a U.S. retailer.
- One company contracting another company overseas – e.g. a tech company contracting developers in Eastern Europe.
- Joint ventures/partnership with the foreign party.
- Licensing/franchising intellectual property in other countries, e.g. selling a foreign distributor the right to use your brand name.
- Selling across borders, selling digital services to other countries (examples would be SaaS platforms with international clients).
Although the business participation may appear to be trivial, both countries may have regulatory requirements when it comes to any cross-border transaction.
An International Contract is subject to crucial factors, which include the following:
1. Jurisdictions and Parties
Identification of parties is very important. Include –
- Legal name of each party.
- Company registered address and number.
- The jurisdiction of incorporation of each of the parties.
Why it matters – Suppose that there is an incorrect party named, then one may object to the enforcement in court. In addition, determination of the jurisdiction assists in clarifying the law applicable in which country.
2. Dispute Resolution and Governing Law
This provision determines –
- What country laws will be applicable to the contract?
- Issues of where and how disputes shall be settled, either in courts or by arbitration.
Example –
A UK buyer and an Indian exporter might opt to use Singapore law and the Singapore International Arbitration Centre (SIAC) as the method of resolving disputes, as it is neutral and resolves disputes quickly.
3. Currency/Terms of Payment
Specify –
- The way of payment (bank transfer, PayPal, letter of credit).
- Money to which payment is to be paid.
- Who pays the transfer fees?
- The way exchange rate fluctuations will be managed.
Indian seller: Suppose an Indian seller quotes in USD, but he experiences cost in INR, then the devaluation of currency can destroy the profit margins. An agreement dealing with currency risk can avoid disputes.
4. Incoterms (Delivery Terms)
In the case of goods, Incoterms (such as FOB -Free On Board, CIF -Cost Insurance Freight, DDP -Delivered Duty Paid) make it clear –
- Who covers shipping/ insurance?
- What happens when the risk is passed on by the seller to the buyer?
Example Under CIF, the seller bears the costs of transportation and insurance to the port of the buyer; he only transfers the risk after the goods are loaded on the ship.
5. Compliance Clauses
The international contracts ought to be designed with provisions that will compel parties so that they –
- Comply with the trade laws in their countries.
- Do not negotiate with persons, organizations, or states that are under sanction.
- Follow anti-bribery law, e.g. –
- S. Foreign Corrupt Practices Act ( FCPA).
- UK Bribery Act.
The clauses included ensure that both parties are not exposed to legal impacts of actions of the other party.
6. Data Protection
In case the transfer of personal data crosses the boundaries, the contract should discuss the adherence to the corresponding data legislation-
- GDPR (EU).
- CCPA (California, the USA).
- PDPA (Singapore).
Include provisions in regard to –
- Gathering and analysis of data.
- Place of storing data.
- Security.
- Procedures for transferring cross-border.
7. Intellectual Property Rights(IPR)
Make clear-spectrum –
- Existing IP is brought into the contract ownership.
- Ownership of IP generated in the course of the relationship.
Restrictions upon use following the end of the contract.
Examples: Requirements that should be clarified in software development- If there is no IP ownership, the developer may reserve the right to the code and the client may be barred from utilising the code.
Considerations of International Compliance
1. Regulatory Compliance Jurisdiction-by-Jurisdiction
There are clauses that can be considered invalid in another country, although they are valid in a country. As an example –
- Some non-compete agreements that can have a real effect in the U.S. are inadmissible in India.
In other countries, contracts must be stamped or notarised to hold a license.
Hint: Be sure to refer to a lawyer in both locales before settlement.
2. Tax Compliance
Transnational payments tend to provoke –
- Deduction of tax in the country of the payer.
- Possible Double taxation.
To prevent this, see the Double Taxation Avoidance Agreements (DTAA) between the two countries.
Explanation: Where India has a DTAA with the U.S., then the tax paid in the U.S. can be credited against the Indian tax liability.
3. Exports and Trading Laws
In case of regulated goods, software or technology:
Confirm whether or not an export license is needed.
- Find out whether such goods are restricted from being imported into the country of the buyer.
Illustration: The export controls in the United States have the ability to limit the sale of certain technologies to certain countries, regardless of the location of the seller.
4. Translating
In the event that the contract is written in more than one language, then indicate the version that shall hold in the event of inconsistencies.
Example: Where there is any discrepancy between the English and French versions, the English version will prevail.
5. Business Norms, Cultural Norms
The misunderstanding may be prevented by familiarising oneself with the cultural approach of the other party. For example:
Verbal commitments are heavy in some countries.
Some other people might anticipate elaborate written provisions of all mandatory requirements.
Some usual pitfalls to avoid
- Transaction domestically with international templates.
- Failure to observe compliance regulations of the partner country.
- Failure to resolve currency fluctuation and payment delays.
- Omitting the sanctions and anti-bribery provisions.
- The impossibility of confirming the legal capacity of the foreign parties that may enter into contracts.
Conclusion
International contracts are not just legal formalities, they are strategic tools to ensure smooth and compliant global business relationships.
When drafting such agreements, invest in legal advice from professionals experienced in cross-border transactions. This upfront effort saves significant time, money, and risk later, ensuring your global ventures operate on a solid legal foundation.
