This article is written by Kunal Chandriani pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from Lawsikho.

Introduction

Drafting and negotiating contracts is an art, whereby the ulterior objective must be to protect the interests of the parties thereto by ensuring that the draft captures their specific intentions, and at the same time does not step over the prevailing laws. Having stated that, one must understand that international contracts must be drafted/vetted considering the culture, trade and commerce, local practices and the laws of the countries to which the parties subject themselves to. 

Contracts are governed by the respective national laws and thus, during international transactions, differences in interpretational factors can pose hurdles in the successful execution of contracts. This article aims at focusing on the key areas to be considered during the pre-negotiation and drafting stages of cross-border commercial contracts. 

Essential points which must be considered while drafting cross border contracts

Certain pointers, which must be considered prior to drafting cross border contracts, are stated herein:

1. The term sheet

Definitive agreements contain detailed provisions, which govern the manner of conducting a particular transaction, right from the pre-opening stage to closing. Since negotiating definitive agreements can be time-consuming, it becomes important to lay down the key clauses viz. the subject matter of the transaction, consideration amount, governing law, and other aspects as may be considered essential by the parties, in a document which can act as a background for framing the definitive agreements. Such a casual-cum-formal engagement letter (Memorandum of Understanding/Letter of Intent), when executed prior to negotiating definitive agreements, makes it clear that the parties have an intention to proceed with the said transaction. This document becomes indispensable during international trade and commerce owing to different time zones and currency fluctuations, which can significantly affect the commercials of any transactions. For example; there may be a difference of 15 days between the execution of a term sheet and negotiation of definitive agreements. In such a situation, a difference in currency valuation may be adverse. Thus, a term sheet could be used to lock a specific value of consideration.

2. Does the Memorandum of Understanding/Letter of Intent bind the parties?

• Australia

In The Edge Development Groups Pty Ltd v Jack Road Investments Pty Ltd, the Edge Group Pty Ltd (the purchaser) and Jack Road Investments P ty Ltd (the vendor) signed a letter titled “offer of purchase” for the sale of certain property. The said letter contained several conditions which were supposed to be fulfilled for the offer/transaction to get materialized, one of the several beings that the offer was contingent on execution of a contract. Subsequently, the vendor wanted to sell the property to another purchaser who had offered a higher price, to which the purchaser opposed by stating that the letter titled “offer of purchase” was legally binding. The Victorian Court of Appeal ultimately found that a letter of offer signed by both parties but expressed to be “subject to the contract being executed” did not amount to a binding contract for the sale of the concerned property. The court observed that it was the execution of a contract of sale which was intended to mark the point at which the transaction would become legally binding.

• Canada

In Seelster Farms et al. v. Her Majesty the Queen and OLG the judgement, in this case, was as follows: “There is no language contained in the LOI that is not intended to have a binding effect… the intention of parties to enter an agreement having a binding nature must be determined from the evidence. This would include a statement whether the terms of a letter of intent are intended to be binding, thereby making it an enforceable agreement.” Thus, as per the Canadian precedent, an express statement to make it non-binding would be required. 

• India  

In Zostel Hospitality Pvt. L To. And Ors. V Gravel Stays Pvt. Ltd., a term sheet was executed in the year 2015 between Zostel Hospitality (“Zostel”) and Oyo Rooms (“Oyo”), to initiate the acquisition of Zostel’s assets by Oyo. However, the deal couldn’t be closed owing to the disputes between the parties, which eventually had to be adjudicated by the sole arbitrator appointed by the apex court of India. Oyo contented that the term sheet was non-binding in nature, as was expressly stated therein and stood terminated and conclusively, no definitive documents were executed owing to the dispute, as well as non-completion of the process of due diligence, though Zostel had taken various steps towards closing the transaction. It was observed that the term sheet contained a basic framework regarding acquisition, subject to which the definitive documents were to be executed. Even if the parties intended to keep the term sheet non-binding, by their conduct, the parties waived the non-binding preamble and created a binding and enforceable contract. 

• USA

In SIGA Technologies v. PharmAthene, Inc., it was held that the footer of the term sheet which mentioned “Non-binding terms”, was not adequate to make it non-binding.

Thus, it becomes indispensable due diligence to be performed to ascertain the binding nature of the term sheets in a particular jurisdiction.

3. Definitions clause

The definition clause is not something that is captured in all the agreements. However, this clause can be helpful for unnecessary repetition of the same terms in the same agreement. Another vital reasoning for the requirement of this clause is for capturing consensus-ad-idem, this is to say the intention of the parties should be one and the same. For example, the parties may loosely use the terms ‘securities’ and ‘shares’. However, it should be noted that considering the provisions laid down under the Companies Act, 2013 and Securities Contracts (Regulation) Act, 1956, the term ‘share’ means only the share capital; while on the other hand, ‘securities’ includes shares and debentures, thus implying capital as well as debt. If such terms are loosely or interchangeably used in agreements related to investment transactions, without assigning a proper definition, it may cause hurdles while exercising ‘Right of First Offer’, ‘Right of First Refusal’, ‘Tag and Drag’ along with rights. Thus, during international transactions, the definitions clause should be analysed properly in light of the governing law of that agreement to avoid any disputes in interpretation.

4. Payment terms

Though it may appear to be obvious, the payment terms must be captured appropriately during international transactions. Most importantly, make sure that only currencies, which are expressly permitted, are used as a medium in a transaction. Though the Hon’ble Supreme Court of India did not curtail the operations of cryptocurrencies in India. However, owing to the lack of a specific regulatory regime, Indian parties to a contract must avoid accepting or tendering cryptocurrencies as a mode of payment. Further, to avoid undesirable fluctuations in the value of the currency, the payment terms must lay down a fixed or floating rate. For example; if the market conditions are such that the value of USD against INR shall be expected to rise in the near future, the Indian party may consider having a fixed rate for a particular commodity, in case the Indian party is a buyer. Make sure that advance payments and deferred payments are captured as required, considering the political environment affecting the currency values, for a riot or social unrest may cause serious havoc in the banking channels as well. One may consider giving shorter credit periods where the political environment seems to be chaotic. 

Further, the possibility of a party fulfilling its payment obligations through accounts of shell companies cannot be ruled out. In such cases, to safeguard oneself from appearing on the radar of local and international anti-money laundering authorities, it is beneficial to capture complete bank account details of the parties to the contract.  Thus, during cross-border trade transactions, using a Foreign Currency Contract Agreement or Currency Forward Contract is advisable to hedge against the risk of fluctuations that may arise in foreign exchange rates. These contracts are customized to set a fixed rate of foreign currency for a transaction and for a specified future date. Since these contracts are private agreements between the parties thereto, they can be customized precisely to cater to the needs of the parties regarding the monetary amount, the exchange rates so agreed upon, and the duration covered by the contract.

5. Time and date formats

The format of writing date and time varies from one country to another. Ignoring this critical aspect will cause several hurdles in the fulfilment of contractual obligations. For example: when we talk about the 9/11 terror attack, many Indians would still be confused as to the date being 9th November, instead of the factual data being 11th September. This is because the USA follows the Month/Day/Year format; while India follows Day/Month/Year format. To avoid such clashes, it is advisable to draft the date format as “Month (in words) Day(numerical), Year(numerical)”. 

Further, certain transactions can be very time-sensitive, for example; import of goods and subsequent export of the same goods. In such cases, time is an essential factor as clearance from port authorities may consume more time. Thus, it is advisable to follow the 24-hour format along with specific mention of time zones of both the jurisdictions – GMT and IST). Furthermore, various jurisdictions have different working cultures. They can also be found in various entities in India (eg: Monday to Saturday with second and fourth Saturdays off; all Saturdays and Sundays off). However, most of the European nations have a fixed 5 days work week. 

This is where ‘working days’ must be specifically captured, not to forget the cultural/religious and bank holidays in both jurisdictions. One such example is the Chinese New Year celebrated in Singapore, which is typically celebrated in either January or February. During this occasion, generally, 2 days are granted as work holidays. However, there is no such culture followed in India. In such cases, capturing working days, especially for payment-related obligations becomes necessary. To avoid such consequences, a suggestive way of writing dates could be as ‘July 01, 2021’ or ‘01st July 2021’. Further, to select an alternative unanimous solution, the parties should consider adopting ‘ISO 8601 date and time format’ which lays down a way of mentioning dates and times that are specifically defined and understandable to all the parties to the contract.

6. Product description

While entering into a sales contract with a foreign party, it is essential to describe the product and the standard of the product so desired in an elaborate manner. For example; the size of a shoe is numbered differently in various countries. In such cases, if there is a demand for size 7 shoes by the Indian party, then size as per both the jurisdictions must be captured as Indian size 7 (US size 8). Further, certain countries have a specific standard or quality for dealing in goods. The Canada Consumer Product Safety Act and Food and Drugs Act lay down similar standards. Thus, when a party drafts an agreement including the words “fit for consumption”, one must reconsider incorporating the name of such regulation to avoid future disputes, since the opposite party may not be aware of such a law/regulation.

7. Force Majeure

The current pandemic has made the commercial space realize the importance and need of the forgotten boilerplate- “Force Majeure”. This clause can save a party when he/she/it is prevented or obstructed from carrying out the contractual obligations due to forces not within human control. However, such a clause can also act as a wrongful advantage in certain situations. Thus, it becomes important to figure out when to include or exclude this clause.  One must anticipate and recognize what can actually cause hardships in a particular transaction. For example, electricity/power failure can be an impediment in rendering technology-related services, however, the same may not be the case in the delivery/shipment of goods. Also, mere investment transactions, which do not involve any delivery of goods or provision of services, in such cases, force majeure clauses can turn away FDI. Thus, words play an important role in deciding force majeure.

8. Other boilerplates

• Severability

This clause provides for separating and enforcing the valid provisions of the agreement when a certain remaining part is rendered illegal/unlawful owing to some government regulations. However, where the agreement is only for the delivery of certain classes of goods, which subsequently get banned in the buyer’s country, in such cases, severability will have no role to play. Instead, government regulations pertaining to such a ban must be excluded from force majeure clauses.

• Non-compete clauses

In the case of international commercial agreements, this clause won’t be of much utility to the party. However, in cases where major intellectual property viz. patents and trade secrets are concerned, such clauses must be drafted so as to prevent the other party from engaging in similar businesses in other jurisdictions as well, since the intellectual property does not secure international protection unless applied for and received.

9. Governing law, jurisdiction and dispute resolution

• Governing law and jurisdiction

Selecting the appropriate law and jurisdiction, though is a matter of negotiation between the parties, one must remember that it is equally vital to analyze the regulatory pros and cons of the intended jurisdiction. For example, in cases of agreements related to licensing of intellectual property, one must select the governing law and jurisdiction of the country which has a proven record of resolving disputes related to intellectual property.

• Dispute resolution 

A dispute resolution clause in a contract provides for an understanding between the parties stating what should happen in cases when certain disagreements pertaining to contractual rights/obligations arise, during the subsistence of the contract, and provide for measures to resolve the disagreements before they escalate. Incorporating this clause can, in the initial instances, prevent the parties from resorting to lawsuits, which can be an expensive and time-consuming process. There are instances when the parties agree to dispute resolution by means of approaching various arbitral tribunals like the SIAC (Singapore International Arbitration Centre), the LCIA (London Court of International Arbitration), etc. At times the cost of arbitration could exceed the consideration of the contract. For example, the LCIA provides for charges at hourly rates, whereas the SIAC provides for fees that shall be contingent on the value of the dispute. Thus, an appropriate forum must be selected depending on factors such as time and cost. One could consider incorporating a clause for informal discussion for the mutual settlement of the dispute, prior to approaching formal institutions.

10. Language clause

When the parties of an international contract use different languages, the language clause should be included in the contract. This clause states that even if the parties have adopted 2 languages for drafting contracts (eg: one English draft and one Mandarin draft), the version of the document, either English or Chinese/Mandarin will be the official one. The reason for such contracts to be drafted in local languages could be due to the requirement of the parties or as per the mandates of the local laws. For example; Indonesian Law No. 24 of 2009 on the National Flag, language, coat of arms and anthem specifies that the Indonesian language must be used in memoranda of understanding or agreements involving state institutions, government agencies of the Republic of Indonesia, Indonesia’s private institutions, or individual Indonesian citizens. 

The language clause states further that such Memoranda and agreements involving a foreign party may also be made in the national language of such foreign parties and/or in English. (Article 31). In PT Bangun Karya Pratama Lestari v. Nine AM Ltd, the loan agreement was held to be void as it wasn’t reduced in writing in the Indonesian language. A provision that could be used as a rescue is to have the parties waive the right to claim the contract to be treated as invalid on the ground of language differences. Another rescue is to execute dual-language contracts, with English as the governing language.

11. Exit obligations

Just as employment contracts generally provide for a notice period, even commercial contracts must contain a notice period and the obligations of the parties thereto, which shall subsist during such a notice period. These obligations can be termed as ‘exit obligations’. This helps the bonafide party from suffering losses due to the abrupt termination of the contract by the other party. In other words, upon premature termination of the contract, either party or all the parties are obliged to complete a part of the contractual assignment, and in the meanwhile, the other party can make arrangements to make good for the losses that arise due to such premature termination of the contract.

In Ericsson Ltd v Hutchison 3G UK Ltd, H3G outsourced the provision of certain IT services for its 3G mobile network to Ericsson, by way of a Master Services Agreement. H3G gave a notice of more than 2 and half years for termination, as against 1 year stated in the contract. A dispute arose as to whether Ericsson was obliged to provide exit services during the entire period from the date H3G gave notice, or whether this obligation was limited to one year pursuant to the exit provisions. The court held the exit period was limited to one year as being sufficient time to achieve an orderly exit. To avoid such a dispute, the clause should have expressly stated that the obligation would be restricted to 1 year or such other period for proper completion of the part of the assignment. This would be imperative as obligation cannot be carried out for a longer duration. For example; in a contract where the tenure extends to 5 years, a notice of termination is sent in the 2nd year stating that such termination date would be in the 4th year. In such a case, the opposite party cannot be expected to carry out its obligation for an unreasonable period. Thus, exit provisions and obligations must be drafted separately for termination for cause and convenience, considering the previous stance of the judiciary. 

Conclusion

There isn’t any fixed set of rules to be observed while drafting/vetting cross border contracts. In any case, the above pointers could be used as a reference to build up further pointers, which could be used on a case-to-case basis. Thus, drafting contracts is an art, which needs a thorough study of not only the laws and the precedents but also several other quotients, which have a probable impact on the uninterrupted execution of the contract.

References

1. https://corporatefinanceinstitute.com/resources/knowledge/finance/currency-forward/
2. https://www.iso.org/iso-8601-date-and-time-format.html
3. https://legalvision.com.au/what-is-a-dispute-resolution-clause-and-why-do-i-need-one/

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