International Contract Law for Businesses
Drafting Contracts for International Business
International business relationships require contracts that take account of different legal systems, commercial interests and the practical enforcement of rights. I advise companies on drafting, reviewing and negotiating cross-border contracts, from international supply and distribution agreements to cooperation arrangements and long-term business relationships.
A particular focus is on German-American transactions. However, my advice is not limited to business involving the United States.
Choice of Law and Jurisdiction in Cross-Border Contracts
Cross-border contracts should clearly specify which law governs the contractual relationship and which court has jurisdiction in the event of a dispute. Choice of law and jurisdiction are separate issues: choosing a particular law does not automatically determine the competent court, and a jurisdiction clause does not necessarily determine the governing law.
Within the European Union, contracting parties can generally agree on the governing law. Depending on the circumstances, however, mandatory legal provisions may also need to be considered. The validity and practical enforceability of a jurisdiction or arbitration agreement should also be reviewed before the contract is signed.
International sales of goods raise the additional question of whether the United Nations Convention on Contracts for the International Sale of Goods (CISG) applies. It may apply directly to sales between businesses located in different contracting states or through the applicable national law. The parties may exclude the CISG by agreement, but whether it is appropriate to do so should be assessed in light of the transaction.
Contracts with US business partners may also require consideration of the specific requirements of US contract law.
Machinery and plant supply contracts often combine delivery, assembly, installation and acceptance obligations. The contract should therefore clearly address site requirements, responsibility for assembly, acceptance procedures, delays and potential performance problems.
Exports of machinery and equipment to the United States may also be subject to specific US industrial standards.
International Delivery Terms and Incoterms 2020
For deliveries of goods, the Incoterms® 2020 rules allocate responsibilities and costs between buyer and seller and specify when the risk of loss or damage passes. They do not replace a complete sales contract or comprehensively regulate payment terms, transfer of ownership, liability or governing law.
The chosen delivery term must suit the mode of transport and the actual arrangements for the transaction. EXW, FCA and DAP allocate transport arrangements, costs, risks and export and import responsibilities differently. Where the seller assumes additional obligations, the associated costs and risks should be taken into account when pricing the offer.
The contract should specify more than the delivery term’s abbreviation. It should identify the agreed place or port as precisely as possible and state the applicable version, for example “FCA Nuremberg, Incoterms® 2020”. The remaining contractual provisions should also be consistent with the chosen delivery term.
General Terms and Conditions in International Contracts
In cross-border transactions, a party’s general terms and conditions do not automatically become part of the contract. Relevant factors may include when the terms are introduced, whether they are made available to the other party, their language and the other party’s agreement. A simple reference to standard terms may be insufficient in international business.
Particular risks arise when both buyer and seller use their own standard terms. These conflicting terms may contain different provisions on liability, warranties, delivery, payment or jurisdiction. Which provisions ultimately apply depends on the governing law, the contracting process and the documents exchanged. Different principles may apply under the CISG and the US Uniform Commercial Code.
Commercially important provisions should therefore not appear solely in standard terms. Limitations of liability, scope of performance, payment terms, termination rights, choice of law and dispute resolution should, wherever possible, be clearly addressed in the negotiated main agreement. The contract should also establish which documents take precedence if their provisions conflict.
Securing Payment in International Contracts
Where payment is deferred, the seller bears the risk of performing before receiving full payment. Payment terms and the chosen security arrangements should therefore be coordinated in the international contract from the outset.
Depending on the transaction, options may include advance payments, bank guarantees, documentary collections or documentary credits. For a documentary credit, the required documents, deadlines and payment conditions must be precisely defined. If the credit is to be governed by the International Chamber of Commerce’s UCP 600 rules, this must be expressly agreed.
A retention-of-title clause agreed under German law does not automatically provide the same protection abroad. Whether and how a security right in the supplied goods arises and can be enforced against other creditors generally depends on the law applicable where the goods are located. Additional agreements, registrations or alternative security arrangements may be required in the destination country.
Effective payment security therefore begins before a payment default occurs. Creditworthiness, the payment schedule, security arrangements and the legal requirements of the destination country should all be considered before the contract is signed.
Distribution Agreements in International Contract Law
Different models are available for international distribution. Companies may work with commercial agents, distributors, franchisees or independent consultants. The appropriate model depends, among other things, on who contracts with customers, sells the goods, assumes commercial risks and develops the relevant market.
The distribution agreement should clearly define the territory, any exclusive rights, allocation of customers, minimum sales targets, commissions or margins, and reporting obligations. Equally important are the term, termination provisions, treatment of existing customers and any potential claims following termination.
Cross-border distribution arrangements must also take account of mandatory rules in the relevant countries. Territorial protection, non-compete obligations, pricing restrictions and limitations on online sales may raise competition law issues. Depending on the distributor’s activities, tax risks relating to a permanent establishment may also arise.
Distribution and market entry in the United States involve additional considerations under US commercial law.
Force Majeure in International Contracts
Unforeseen events may prevent contractual obligations from being performed as agreed, either temporarily or permanently. Whether an event qualifies as force majeure and what consequences follow depend on the governing law and, in particular, the agreed force majeure clause.
The clause should define the events covered and the conditions under which a party may invoke it. These may include natural disasters, war, embargoes, government measures, strikes, epidemics or major disruptions to transport and supply chains. Simply listing possible events, however, is often insufficient.
The affected party’s obligations are equally important. The contract should specify notification deadlines, the evidence required and the measures expected to limit the effects of the event. It should also establish whether performance obligations may be suspended, deadlines extended, the contract adapted or the agreement terminated after a specified period.
Force majeure should also be distinguished from economic hardship. If a significant change in commercial circumstances is intended to trigger renegotiation or contract adaptation, this should be addressed separately. The International Chamber of Commerce’s model clauses can provide a starting point but should be adapted to the specific transaction.
Frequently Asked Questions
An international contract is advisable whenever a business relationship involves more than one country. This may arise from the contracting parties, the place of delivery or performance, a foreign branch or the intended enforcement of rights abroad. Typical examples include international supplies, services, distribution arrangements, cooperation agreements and joint ventures.
The parties can often expressly agree on the governing law. If there is no effective choice-of-law clause, the applicable law must be determined under the relevant conflict-of-laws rules. The location of the German company does not automatically determine the governing law. A clear choice-of-law clause therefore provides greater certainty.
The CISG may apply directly to international sales of goods, particularly where the businesses have their places of business in different contracting states. It may also apply through the applicable national law. The parties can exclude the CISG by agreement, but should make that decision deliberately.
Key provisions include a clear description of performance, prices and payment terms, delivery terms, liability, warranties, force majeure, term and termination, choice of law and dispute resolution. Multilingual contracts should also specify which language version prevails if the versions conflict.
Yes. International contracts can be reviewed, drafted and negotiated remotely. The relevant legal systems, the parties’ commercial interests and the practical enforceability of the agreed terms should all be considered together.
