By Donald W. Hudspeth, Esq.
A
decade or more ago a client of our business law firm needed
some advice on an international transaction. We called several
local firms that we thought might do that kind of work, but they didn’t. So, I
concluded, “What the heck. If they are not going to develop a practice in that
area, I will.” Thus, we invested in multiple volume sets on the international
law of contracts and the law of various foreign nations. Since that time we
have done a number of transactions all over the world.
Fortuitously, a friend of mine who has done business all over the world did a
short presentation to my business law class at Arizona State University,
explaining some of the “Do’s and Don’ts” of doing business in various
countries.
Now, my firm, perhaps like yours, finds itself with clients or potential
clients from all over the world – in my case seeking representation to bring
their business to the U.S. in general and Arizona in particular. Conversely,
some Arizona clients now do business around the world and need contracts
tailored to the particular country. For example, our latest transaction is for
the sale of environmentally safe paint in the Middle East through a Jordanian
distribution company. Because of the Internet such deals are common.
I. Payments and
Collections.
Doing business internationally can be complicated. For
example, due to problems of financing, payment and collection, large
international contracts are typically funded by letters of credit. This means
that the businesses on both sides of the transaction must have a bank familiar
with international commerce and willing and able to enter into letter of credit
transactions. Fortunately, while the banker that you deal with at your local
branch may not have expertise in that area, the “downtown” office usually does.
So, it may be simply a matter of arranging the appointment.
Alternatively, transactions may be funded by wire transfer – that is typically
how this firm is paid. And, recently we were paid on a small matter by a client
in China through PayPal. This is rare for us and we do not yet have
sufficient experience with PayPal on international transactions to recommend
it. But, it appears to be a possibility.
II. Currency
Transfers, Exchange Rates, and Risk of Change.
When
a foreign company, say from Japan, pays
money to a U.S. company, or vice versa, the currency must be converted
according to the exchange rate. International banks, and perhaps even PayPal,
can do the conversion, but they charge for this and the cost can be
significant. So, the contract must allocate the costs of conversion.
There is also the question of exchange rates. Exchange rates vary virtually on
a daily basis, which change can benefit one of the parties and hurt the other
by making the goods more or less expensive. The risk of loss from this
variation must be dealt with – perhaps by stipulating to a given rate of exchange,
e.g. Euros per Dollar.
III. Choice of Forum
and Governing Law.
Among the most important considerations – at least to a lawyer – are the forum
and choice of law. Provisions for the state of litigation and governing law are common fixtures
of contracts in the U.S.[1] But
in the absence of these governing law, venue and jurisdictional clauses for
parties and subject matter within the United States we still have applicable
law and a forum for resolution. The parties may argue where the suit belongs,
e.g. whether in Arizona or California, but there is no question the case can be
heard and that some state and or federal law will apply.
In contrast, speaking figuratively, “There is no courthouse to run to in the
middle of the Ocean.” Specifying applicable law, like the CISG, discussed
below, and the forum for resolution -- often through international arbitration
in London or Geneva – is absolutely essential. Without such designation and
agreement as to what law will apply and where the dispute will be heard, the parties
can literally be “nowhere” in terms of dispute resolution and contract
enforcement.
According to Wikipedia among the most significant forums are
the International Chamber of Commerce (ICC), the International Centre for Dispute Resolution (ICDR), the
international branch of the American Arbitration Association), the London Court of International Arbitration (LCIA), the Hong Kong International Arbitration Centre, and the Singapore International
Arbitration Centre (SIAC). Specialist alternative dispute resolution(ADR)
bodies also exist, such as the World Intellectual Property Organization (WIPO),
which has an arbitration and mediation center and, according to Wikipedia a
panel of international neutrals specializing in intellectual property and
technology related disputes. We typically designate London or Geneva under the
U.N. Convention, but that practice may change as our international business practice expands.
So, to repeat – because it is so important – the contract which you use
must specify the governing law and the forum of dispute resolution. By the way,
if the other contract party will agree, you may designate a court in the United
States, say the federal District Court of Arizona. Typically, however, the
common practice has been to choose a more “neutral” site like London or Geneva as
the forum for international disputes.
A. Some Types of Law
in the U.S.
In
contracts between parties located and/or doing business in the United States,
the bodies of law most commonly applied by this business
law firm in Arizona are:
(i) the Uniform Commercial Code (commonly referred to
as the UCC), which applies to transactions in goods. The legal definition of
“goods” is things moveable at the time of the transaction, a paradigm example
of which would be furniture and equipment, but which also applies software,
data and digital transactions.[2]
(ii) the law of real property, which governs
transactions in buildings and lots, and
(iii) the common law, developed in case decisions over time,
which most typically applies to transactions in services.[3]
Some transactions can include both the law of goods, like carpet, and services,
like carpet installation. In that case the law of the predominant factor
applies. For example, if the sales price of the carpet is $2000 and its
installation cost is $1000 (I apologize if these figures are way off) then the
UCC would govern because the cost of goods predominate over the services in the
transaction.
B. The Contract for the International
Sale of Goods (CISG).
Many international transactions involve the sale
of goods (think Chinese products to Walmart). Unless otherwise specified, e.g.
an insistence that the Law of China would apply, the parties to such
international transactions in goods would typically stipulate and agree that
the CISG would apply.
Generally, the CISG is compared to and said to be similar to the UCC. But, as
Article 2, the chapter on Sales, of the UCC (out of nine Articles) is an entire
law school course by itself, we cannot cover the UCC and CISG here in these few
paragraphs. Generally speaking, both the UCC and CISG are liberal in
their writing requirements for a contract. The UCC requires at least some
writing, e.g. a check or receipt -- some indication that a transaction actually
occurred (kind of a credibility “speed bump” on the way to court) -- while the
CISG, in Article 11, does not require a writing.
Although more liberal as to what is called the “Statute of
Frauds,” i.e. the writing requirement, the CISG is much more particular in the
formation of contracts than the UCC. Under the UCC only the parties, subject
matter and quantity are required to create a contract. Other terms, like price,
and payment terms, can be filled in by the court as to what is standard or
reasonable in the industry. In contrast, the CISG follows the
“mirror image rule” of the common law, which requires that acceptance match the
offer on a number of factors, including price, payment terms, delivery, etc.
For our purposes here the point is that international
contracts should be carefully drawn to specify parties, subject matter, price,
payment terms, delivery, etc. to avoid the defense of lack of contract. U.S.
parties, particularly those engaged in the sale of goods under the UCC, may be
not be accustomed to negotiating and completing contact terms and conditions
with the completeness and particularity required under international law.
C. Warranties and Disclaimers.
Whatever
general law may apply, important contract provisions in the sale of goods,
domestically or internationally, include warranties, disclaimers and the limitation of remedies. In the
U.S. we are used to and commonly accept contract provisions stating that the
product is sold without warranty of “merchantability,” AS-IS, and without any
other warranty including the warranty of fitness for particular purpose. Also,
U.S. contracts commonly exclude “consequential damages,” e.g. monies paid to a
third party to fix the situation, and state that, in any case, such damages
will be limited to the cost of repair or replacement, which could be a remedy
of $139.95 versus $1.5 million in consequential damages for defective
software.
While hotly litigated in the US, especially where death or serious bodily
injury is alleged to have been caused by a defect, European countries may not
accept such disclaimers of warranties and remedies at all. In any case the
lawyer for the party from the other country may argue for the law of that
country to apply, or at least that the contract to provision reflect local
custom, and not the case law of the U.S. The U.S. business party and its attorney should be prepared to negotiate these
issues and not assume that the European or other nation’s business will just
accept the U.S. way of doing things.
Foreign “temperament” is also a factor. While not legally required, French
businesses and their attorneys prefer the contract to be in French or
translated into French. This adds a whole level of time and complexity to the
transaction as each side hires its translator to review and confirm the
accuracy of the translations.
German businesses tend to be quite specific, which means
that contract negotiations can be more arduous and take longer than such
negotiations might be in the United States. For example, in the US a contract
may refer to a material breach as an event of default, without defining
“material,” but rather looking to case law to define the term as necessary.
But, a German lawyer may want the term defined in the contract, which may force
the parties to consider and anticipate the possible types of breach and list in
the contract those types of breach events which they agree to be “material.”
Terms like “reasonable,” “significant” or “substantial” may require a similar
process of examination and definition.
IV. Conclusion.
Obviously,
this article is but an introduction to some of the issues that arise in
international transactions. My primary purpose here is not to educate you about
such transactions, but to inform you of their possible complexity and to
encourage you to get legal representation in doing the deal. As briefly shown
above, contract requirements and acceptable terms in international transactions
may be completely different from what the client is used to in transactions
within the United States.
As I have said elsewhere “Good legal contracts are like
shoes: One size does not fit all and one pair is not suitable for every
occasion.” A good contract is informed by the knowledge and experience of the
business client together with its business law attorney, and
is tailored to the client’s typical transaction.[4] This admonition and advice applies
to international contracts as
well – perhaps more so, given the probable larger size of the transaction and
the downside risk of “being nowhere” if the contract is not properly drawn.
For
more information about business law topics and our firm, please see our website or call our representative
at: www.AZBUSLAW.com - 602-265-7997 - Phoenix law offices
[1] Such
a provision might read as follows: “Disputes arising out of this agreement and
its formation shall be governed by the law of the State of Arizona with venue
an jurisdiction in Maricopa County, Arizona.
[2]
Interesting story about that, the short version of which is that the creation
of technology outpaces the creation of law; thus, the law is left scrambling to
adapt to the new world constantly under creation. While the pace now is
greater this problem has always been through. For example, the corporation as
we know it was a legal response to the social-economic phenomenon of the
Industrial Evolution.
[3]
There are of course other bodies of law, like patent law, maritime law and the
International Law of the Sea, etc. but this firm does not practice in those
areas.
[4] For
example, one of my first clients, which sold office phone systems, had a long,
three-part form contract on NCR paper which was in general excellently drawn,
but did not allow a remedy for non-payment. Based on this experience the firm
added a provision for repossession and the right of peaceful entry (i.e.
showing up with a security guard) to repossess same. The dollar amount of the
client’s uncollected receivables and write-offs declined precipitously where
the remedy was not just to sue but to repossess.
