geneva water jet may 2020

Some practical advice before starting negotiations in international business law

By Prof. Dr. Bernd REINMÜLLER

As a general rule, the drafting of most contracts in the field of international commercial law is preceded by a phase of negotiations between the parties involved. However, even before negotiations start, a preliminary study and preparations by each party are required, with a view to the future drafting of the contract, in order to prevent (pre-)contractual or tortious liability, if any, e.g. in case the contract is not concluded.

These important preliminary considerations include, in particular: reflections on the "cultural background" of the parties to the contract (1), preparations as to the details concerning the drafting of the contract (2), the contractual documentation (3), the language of the contract (4), as well as the drafting of the contract with the applicable law being taken into consideration (5) and whether the parties should be bound by an arbitration agreement or a provision granting the parties the choice of selecting a State court (6).

Given the large number of different international contracts, it is of course not possible to consider all the preliminary considerations and necessary preparations here (7). Only the most important preliminary considerations and preparations for contracts in international commercial law will be mentioned below, excluding, in particular, those relating to cross-border consumer contracts.

 

1. Preliminary considerations

The first step, for each party, is to find out about the other party's foreign jurisdiction, its legal system, the legal understanding of the contract envisaged, the legal terminology, etc.

The party and its lawyer should take into account the fact that negotiations would be starting with the other party in the near future, and that the latter may be composed of several persons who may have a different "cultural background" – which is, for instance, the case with parties from Asia or the Middle East (determination of the applicable hierarchical principles).

Before starting negotiations, it will be necessary to determine who will be involved in the upcoming meetings and in what capacity (CEO, Vice President, CFO, (Chief) Legal Counsel, Technician, etc.). In case technicians will be participating initially, followed by trade experts and then by lawyers, problems in understanding between delegations with different kinds of members may arise, which will have to be taken into account in the negotiations, through preliminary considerations and then by means of clear definitions when the contract is drafted ("technical language problems").

Due to the fact that there may be differences in understanding the legal aspects, in particular in cases where the parties come from countries with different legal systems, such as "common law-" and "civil law-"countries, communication between the parties must be prepared in advance in order to resolve possible misunderstandings.

 

2. Preparing for negotiations and pre-contractual liability

Before a party starts negotiations (with or without lawyers), it must carefully review the power of attorney held by the negotiating participants, in order to determine whether they are duly authorized to negotiate and sign the contract. Several European countries have company registers in which the negotiating participants' powers of representation and their limitations are set out. In contrast, in the United States, a Board of Directors' resolution, confirmed by the Company Secretary is required, with the signatures having to be certified by a notary and, in some cases, certification powers must themselves be confirmed by the competent authority.

Caution should be the byword in the use of specimen contracts and each clause should be carefully examined. There is always the risk of differences and diverging interpretations of so-called "standard" clauses (“boilerplates”), which could lead to liabilities on the part of the party applying such clauses.

Liability problems should be avoided by preparing the negotiations and – step by step – the final contract. Indeed, there are pre-contractual interests on both sides which are difficult to protect without contractual regulation, particularly where there are no general legal provisions, as is the case, for example, in civil law countries. Such provisions are most often contained in a "Letter of Intent", a "Memorandum of Understanding", a "Confidentiality Agreement", etc. In drafting such contracts, great care should be taken to be precise and to avoid any liability for the breach of obligations. In addition, clauses on the applicable law and on choice in the selection of a State court or an arbitration agreement should be included in each of the above-mentioned contracts.

 

3. Contractual documentation

All pre-contractual documents as well as un-finalised preliminary draft contracts should be kept and filed according to their binding nature and a timetable should be drawn up specifying intermediate objectives, which could, in case of non-compliance, possibly imply sanctions such as the assumption of costs by the responsible party or similar. In addition, correspondence, including explanations on any modifications in the contractual provisions, should also be archived.

 

4. Language of the contract

In general, it can be assumed that a contract is drafted in the same language in which the negotiations on it are held. However, this is not always the case, in particular where the participants – as is customary in international contractual practice – come from countries with different languages and have to agree on the language of negotiation. Because the individual language skills of the different participants in the negotiation are often very different, neither party should forego the assistance of an interpreter or translator with the necessary knowledge of the subject matter of the negotiations.

If the parties have chosen English as the negotiation and contract language, when it is not the language spoken by any of the parties (which has become almost self-evident nowadays), it should be borne in mind that English has developed differently over the last few centuries in different parts of the world, particularly with regard to everyday and technical vocabulary, and that, despite the similarity in terms, they may have different meanings in different countries. A clear and unequivocal definition of the vocabulary used should therefore be included in an article at the beginning of the contract, in particular, where only one contract language has been selected.

If the parties decide, as is often the case, to use a "bilingual" contract or if, as is the case in Turkey and Bahrain, international contracts must also be drawn up in the language of the country, it is recommended to mention, where possible, that one of the languages shall prevail and that only the version of the contract in that language shall be binding. This version of the contract should also be signed as the only original and the versions in the other languages must be declared to be mere translations and that they are not binding.

As far as translating the contract is concerned, it is recommended that the informal translation should not be shared with the other party since, in the event of a dispute, translation errors could then be charged to the party that provided the translation. Where this is not possible, it should in any event be ensured that in the translation, all legal terms are also included in the other language, in brackets, for clarification and to avoid misinterpretation.

 

5. Drafting of the contract

When starting to draft a contract, the concerned party should not forget to take into account various issues such as foreign currency, exchange restrictions, taxes, different rules regarding interest, embargoes, etc. (e.g. currently the case for Russia, Iran and Syria).

In addition, the party must also take formal requirements into account, e.g. in Germany the requirement of a notarial deed when selling and transferring shares in a GmbH (LLC), to which the contract and exhibits must be attached. In various states of the USA, e.g. in Colombia and Georgia, contracts have to be prepared "under seal".
While it may seem obvious and unnecessary to mention that in the beginning of a contract, the parties must be correctly identified in order to avoid mistakes, experience has shown, however, that even in this regard, errors or omissions often occur.

If the conclusion of other separate agreements is envisaged in the context of the "main" contract, inter alia with third parties such as, for example, with the parent company as a guarantor, the existence of these separate agreements should at least be mentioned in the preamble to the "main" contract, in order to make it clear that the "main" contract alone is not the sole determining factor in the event of problems in the execution of the contract by the parties.

The most important provisions in every contract include agreements relating to limited liability and extended liability which, in the majority of contracts, are contained in the pre-existing general conditions. When including such general terms and conditions in a contract at the international level, it should be taken into account that under many legal regimes the effective inclusion of general terms and conditions in a contract requires more than a mere reference to the possibility of their examination, in particular on the Internet, for them to be applicable, and that for example, these terms and conditions may actually have to be sent for information to the other party to the contract. It may be necessary to check that these conditions have been drafted in the negotiation and contract language and that they have actually been sent to the other party.

Special emphasis should be laid on the clause concerning the choice of the applicable law, together with the clause on the choice of State court or arbitration clause, before and during the drafting of the contract. Parties to the contract tend to choose and make their own law applicable. They should rather ensure that the substantive law selected provides the desired effect to the structure and provisions of the contract.

In order to ensure that the substantive law chosen has the desired effect, the rules related to conflict of laws should, after examination, be excluded, in order to avoid referrals to another legal system.

 

6. Litigation or arbitration agreement?

The type of settlement chosen in the event of a conflict with the other party to the contract is inextricably linked to the consideration of the applicable law. The question that arises is which one is the best, cheapest and quickest solution: litigation before a State court abroad or international arbitration? All cost and time factors (without forgetting the interest to be paid, the impact on the balance sheet, the costs of translation and interpretation, etc.) will have to be taken into account when comparing arbitration with proceedings before a State court, in the best interests of the party.

Additional questions such as the following should also be considered, like:

  • Will litigation before a State court be simpler than those in an arbitration process?
  • Will they be cheaper?
  • Will confidentiality be guaranteed?
  • Will State courts have the necessary objectivity and qualifications?
  • How will the facts be established?
  • How will the court hearing the case determine the applicable law?
  • What will be the likely duration of the proceedings, including the possibilities of appeal?
  • What will happen in the event of an appeal (will the facts be reviewed or not, etc.)?
  • If the parties choose a court in a third country, will that court agree to take up the dispute?
  • Will a judgment given in one country be enforceable in another country?

From the outset of a dispute, do not forget to take all necessary steps to ensure that the forum chosen is indeed the most favourable.

 

7. Final remarks

It must be noted that taking the preliminary considerations and the above-mentioned issues (the list is not exhaustive) into account before proceeding to draft a contract may facilitate the legal understanding of the contract and reduce liability risks. These preliminary points and considerations further demonstrate that knowledge and a careful consideration of the complex contractual rules of international commercial law are absolutely necessary in order to be able to act in one's best interests. Finally, it must be noted that negotiation and drafting of international contracts most often take place under considerable time pressure, which will have to be withstood, without neglecting timely and thorough preparations that take all the necessary preliminary questions and considerations into account.

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Quotation authorized with the following reference: PROF. DR. Bernd REINMÜLLER, Some practical advice before starting negotiations in international business law, published on May 6, 2020 by Bory & Partners, Attorneys-at-law, In Concreto News – May 2020.