This article is written by Abhinav Anand, a student pursuing B.A.LL.B(Hons.) from DSNLU, Visakhapatnam. The article deals with how to effectively execute the cross border contracts and it also suggests different techniques that must be applied to avoid ambiguities while drafting the cross border contract.
The industrialisation has embarked upon different avenues for the contracts. The giant business conglomerates started investing in their business across the border. This article deals with how effectively the companies or business giant of one country will execute the cross border contracts in another country. It shows that different facets need to be taken care while entering into a cross border contract. The effective drafting is the key component of any contract. The drafter must keep the probable dispute in mind that may arise in future after the execution of the contract.
Efficient ways to execute cross-border contracts
Following general principles like avoiding vague words
The vagueness in the contract should be avoided. But, sometimes vagueness in the contract helps in future operations of the contract. The general principle of the contract is that the parties to the contract must be clear about their contractual obligations. However, sometimes the obligations are not clear to the parties. In such cases, the principle of the contract should work based on the understanding of a reasonable and prudent man. The terms like intention, materiality and reasonableness must be interpreted with a gentleman’s perspective. If the terms of the contract are not clear, the strongest party has the benefit of the doubt on whether the duty is duly performed or not.
The two reasons of ambiguities in any contract are:
- Lengthy sentences.
- Use of exceptions.
Lengthy sentences: the lengthy sentences used in the contract allows multiple interpretations leading to confusions. The long sentences can be split into simple sentences. It will reduce the ambiguities. The contracts have to be clear so that it can be enforced effectively.
Use of exceptions: the use of exception also leads to ambiguities because the exception confuses the parties regarding the intention of the contract. When the parties consider the exceptions of the contract they reach a different conclusion and also sometimes the contract is misunderstood by the parties because of the exceptions.
Maintaining consistency in the contract
Do not use different words for the important terms in the contract: A contract drafter must use the same term, the use of the different terms leads to ambiguities in the long run. Examples of words that are sometimes used inconsistently:
- Goods, product, equipment, tooling,
- Clause, article, subsection, paragraph, item,
- Rule, regulations, laws, statutes.
Draft contract to reflect the reality of the business: the contract exists to facilitate business relationships. The consistency should not only be maintained within the contracts but also between the contract and its purpose. The actual performance must be ensured with what is to be performed and what is agreed and vice versa. The provisions of the contract should be clear on how the creditor, debtor and the business environment under which the contract is enforced will operate.
Usage of defined terms
These are the following usage of defined terms:
- Defined terms and conditions to make the interpretation of the contract easier. It makes the contract terms concise whereas the defined terms should reduce any kind of ambiguities.
- The first term of each defined term should be capitalized. If a defined term consists of more words, each word should be capitalized, except for conjunctions and prepositions.
- A defined term must be used in the body text by capitalizing the term as defined.
- A term defined in the body text should not be used before it is defined.
- Once a term is defined, then any part of the defined term should not be used.
- Do not create a new defined term, unless it is used more than once, and once created, use each time in the appropriate definition.
- Do not create a defined term unless the ordinary meaning of the word doesn’t express the concept of the defined term.
- Only one definition should be created for each term and it should be used exclusively.
- If the contract uses more than one defined term in several places, and the contract is more than six or seven pages , then bring all the defined terms of the contract under one article.
- In the article, the defined term should be ordered alphabetically, a paragraph for each, together with its definition.
- A term defined in the definition article should not be preceded by an article and preposition, it should be followed consistently by the word “means”.
- To exclude something that would ordinarily be within the scope of the definition, the defined term, or a part of it, it should be followed by “excludes”.
- In the definition article, do not repeat the text of the term that is already defined in the body text, and never summarize or redefine such a definition.
- A term defined in the body text A) be placed immediately following the concepts it defined B) be placed with the brackets together with an article C) be distinguished from other text D) be marked consistent with the term defined in the article.
- A term defined in the body text must be placed immediately before the definition.
- The defined term should correlate with the substance of the definition.
- Never include condition, obligations and warranties in a definition.
- Define a term as narrowly as possible so that it fits in all the definitions where it is used.
- A definition may include a defined term.
- Never create the circular definition.
Reference to time and date
These are the following methods that should be adopted for reference to time and date:
- Write out the month, preceded by a figure for the day. Use four digits when referring for the specific years.
- When referring to the decades write “1980s”.
- Use the 24 hour system in preference over the 12 hour system.
Top tips for negotiating cross-border contracts
These are the following tips for negotiating the cross border contracts:
- The due diligence should be carefully done for identifying the credibility of the parties. The full details of parties must be mentioned and cross-checked by the interested parties.
- The parties must be legally capable of entering into the contract.
- The scope of work must be defined clearly. This should include deliverables of each party and the cost of performing it and the time agreed for performing it. The roles and responsibilities of each party should be conveyed clearly and also the obligations that have to be carried by the parties.
- The payment should be clearly categorised and the due date of payment should also be discussed.
- The payment method and terms should be clearly incorporated. The mode of invoicing also be mentioned and the deadline for the payment should be categorically mentioned in the contract.
- If the parties fail to pay the dues timely then a written clarification is sought by the parties at fault.
- The termination of the agreement must be specified with or without reasons. The grounds of early termination may be material breach, insolvency and force majeure.
- The representation, warranties, liabilities and indemnities has to be specific and explicit. The uncapped nature of any indemnity will lead to prolonged dispute between the parties. The liabilities must be fixed on breach of respective obligations of the concerned parties. The warranties must be provided for the specific loss in the contract to avoid dispute between the parties.
- The parties should decide about the applicability of laws that will govern the contract. The trend that has been followed in the international contract is they are governed by the English laws. But, even if the parties negotiate under any countries domestic law then they are allowed to do so.
- The contract should explicitly mention about the resolution arising out of the disputes- whether it will be resolved by the courts or arbitration? The process of arbitration is advantageous as it is time and money-saving, flexible and amicable for dispute settlement.
- The parties should decide in the contract about their relationship being exclusive or non-exclusive.
- It is important to decide whether the contract is binding or non-binding and it should be mentioned in the contract as the court may apply the interpretation leading to further prolonging the dispute matter in the court.
- The usual and detailed confidentiality provisions should be incorporated in the contract.
- There is always a possibility that the parties do not want their agreement to become public, if this is the case then it should be stated in the agreement.
- The intellectual property right is an important element of the legal relationship. The parties to the agreement should be specific about what kind of intellectual property will be used and how much will be used and also where it will,be used. The details must be clearly laid out that what would happen to the intellectual property.
- All the relevant communication details should be mentioned in the contracts. If the parties are to accept the notice with emails then it should also be mentioned in the contract. For the international transactions, it must be specified that the language of the notice must be in English or in the language parties agreed to.
Common mistakes that you can make in a cross-border contract (or while negotiating it)
These are the following common mistakes the parties make while forming cross border contracts:
No investigation and understanding future business partners
The most common mistakes made by the contracting parties are that they do not adequately research about their partners. They only look into the beneficial aspect of the contract rather going into the future route wherein they may face problems by the other contracting party. The trend has been evident in cross border contracts for many years. The party does not look into the desirable outcomes of the contracts, they just negotiate on the basis of beneficial aspects. The financial viability of the other party has not been checked by the contracting party in any case.
Hasty and non existent due diligence
After assuming that the contracting partner is reliable and credible, the next significant step is to indulge in the process of due diligence. The step of due diligence is actively missed by the parties as they want to hastily lock the deal and complete the transaction. This activity of the contracting parties creates more problems for them as it is the legal compliance they have to deal with. So, if they are not following the rules and regulations of the market then they are not left with any legal remedy.
Failing to include choice of provision of law
The common mistake that is done in the cross border contract is the determination of the jurisdiction and applicability of laws in that case, if there is any dispute. If the parties fail to mention the applicability of provision of the law then it becomes a very tough task for the courts to determine the liabilities of parties if there’s any dispute relating to the contract. The cross border contract involves parties from two different countries so the amicable method is to go with the international contract standard but if it is not made explicit then any of the courts have to do immense work to determine the liability of either of the parties.
The specification of the damages if the dispute arises in the contract
The potential business partner should also specify the damages if the material breach occurs in the contract. The problem is with the intention of the contracting parties. If a material breach occurs and the intention of the parties is completely different relating to the pre-contract agreement, then it’s very tough to determine the liability of damage on either of the parties.
Famous cross-border contracts
These are the following famous cross border contracts:
- Forming alliances and joint ventures
- International Sale of Supply Contract
- International Contract Manufacturing Agreement
- License Agreement
The cross border contract is an innovative development in the recent past. The International Trade Center has been instrumental in promoting such contracts as it helps in creating job opportunities in the countries of contracting parties. But, the rules and regulations relating to the dispute resolution must be made transparent and the dispute resolution process should be expedited as it adversely affects the health of concerned parties.
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