Updated: Jan 20, 2021
The formation of contracts is an important tool to ensure that parties to the contract perform the promised action. It is a tool that is legally binding unlike an agreement, which may or may not be legally binding. These contractual interactions need not be domestic in nature, they can also be international.
International contracts or cross-boundary contracts are more common today where it is easier to interact and communicate with their international counterparts. These contracts in the commercial world, help contracting parties to receive, provide services that they desire worldwide, provided the economics of it all pans out. With the rapid growth of the economy towards a global market, international contracts provide contracting parties to choose their best-fit requirements from around the world.
International contracts may now seem to be very convenient and interesting, but that is not the case. When contracting with parties internationally, parties are not only interacting privately, they are also in many ways interacting with different legislations governing that land. This factor may be the sole determining factor of the profit and costs that the contract brings about. The parties are both benefitted only when the contract has been performed by all the parties to the contract. When even one of the parties fails to do so, each party will incur a transaction cost in order to get the non-performing party to perform their promises. This transaction cost is the cost that will be incurred by the parties to enforce the contract over the non-performing party. This is the reason; international contracts can be tricky.
Enforcement of domestic contracts is fairly simple, as there exists a uniform set of laws that govern the contracting parties, which is not true for international contracts.
It is less of a hassle when the international contracting parties belong to the countries that are signatories to certain treaties that dictate the manner in which commercial contracts are to be enforced in cases of a breach with the least transaction costs.
When we are referring to commercial contracts, the most important aspect of a commercial contract is its profitability, that is the profits of the contract should surpass the cost that it would incur, there are further pre-emptive suggestions that can help you in understanding how to enforce an international or cross-boundary contract.
Pre-emptive measures are those that are taken up by the contracting parties before entering into the contract. These are the measures to be taken by the parties to provide them a sense of security while dealing with international parties.
Before entering into a contract with an international party, the contracting party should always do his required due diligence regarding the party that he will be contracting with, which is a common practice, but the contracting parties fail to look into the treaties, both bilateral, multilateral that they have signed and ratified. When contracting internationally, it is important to also look into the legal structure of the country to avoid any unnecessary transaction costs. In case the international party has committed a breach of contract, will the legal structure of the country assist your condition or not, as a foreigner can you bring a lawsuit in that country or not, are very important questions to be asked. When the judicial structure of the countries is different, the principles in which their judiciary is set up is different, these conflicts can seem immaterial, but can lead to high cost in the future.
One of the easiest ways to avoid this conflict, it is very important for contracting parties to include the ‘choice-of-law’ clause. This clause makes it clear to the contracting parties, what law will be applicable to this contract in case of a breach. This clause provides clarity on which country’s laws among the foreign contracting parties would be applicable in cases of a breach. It can also appoint a particular international treaty or model of the law that would be applicable to the dispute resolution if need be. For example, The United Nations on International Trade Law (UNCITRAL) promulgates the Convention on the International Sale of Goods (CISG) which has been adopted by most of the United Nations member countries, this convention provides a procedure for dispute resolution of international contracts. Application of this convention is not limited only to the signatories (countries) of the convention, this convention on private negotiations can be adopted by private international contracting parties to avoid any discrepancies with what substantive and procedural law will be applicable to the disputes arising from the contract.
Now that the country's substantive and procedural law has been chosen, the parties have to choose the specific jurisdiction courts, authorities, or forum where the dispute can be heard and solved. This competent authority is appointed by the ‘forum selection clause’ clause. This clause allows the contracting parties to agree upon a country where the jurisdiction of filing a case in case of breach is limited to beforehand. This clause also has certain restrictions, the jurisdiction of filing a case in case of a breach can lie either at the place of signing of the contract by either of the parties, the place where there is a transaction that is taking place with respect to the contract, the place where the beneficiaries of the contract reside or the head quatres of either of the commercial entities that are entering into the contract. The choice of allotment of the jurisdiction in the contract must be directly associated with the functioning of the contract, if not, it will not be applicable. This jurisdiction can be changed or reappointed by the parties after signing the contract, if and only if all the contracting parties accept and sign the new amendment to the contract.
The other last protection that the contracting parties can apply in their contract is the Arbitration clause. Arbitration has come to one of the best channels of dispute resolution. This a comparatively less costly solution, where the matter at hand can be resolved without any judicial presence by a compromise of all the parties to the contract, in order to come up with a cost-effective solution to the problem. Arbitration can be done by appointing a neutral individual or a procedure to appoint a neutral individual in the contract who would help the contracting parties discuss and resolve the dispute among themselves. The contract can also appoint different bodies such as The World Intellectual Property Organization sponsors arbitration and mediation forum for resolving disputes arising out Intellectual Property rights disputes in international contracts, The International Center for Settlements of Investment Disputes is a body which used for dispute resolution with respect to bilateral investment disputes, Convention on The Recognition and Enforcement of Foreign Arbitral Awards or also known as the New York Convention, is a treaty which has more than 50 signatories, which recognizes and enforces arbitration or alternative dispute resolution clause in international contracts. Many countries like Canada, India, Iceland, the United Kingdom, the United State of America, and many others recognize alternative dispute resolution within their judicial system.
It is a fact that when matters reach the court of law, large amount of time and money is spent on dispute resolution. This seems even more harder while dealing with international contracting parties. There is a high probability that various cases may be file in various courts and the jurisdiction to hear the case is wide in an international contract. Multiplicity of cases and varies judgements strain the contractual relationship between the parties and it destroys the economic efficiency that international contracts bring to the table. This is the reason, while drafting contracts, we need to allot a system of contract enforcement and dispute resolutions. International commercial contracts allow the contracting parties to make sound economical decisions by widening the horizons of business, thus it is the duty of the contracting parties to take the most advantage of this luxury and create well defined judicial allotments in case of breach or dispute in the contract.