Left to right: Florian JÃ¶rg, Erik B. Wulff, Calvin Hamilton,
Fabiano Deffenti, Pierre-Yves Gunter
This panel, at the 2009 ABA Section of International Law Spring Meeting held 15-18 April 2009 in Washington D.C., addressed common pitfalls in negotiating and drafting international agreements. Panelists included Pierre-Yves Gunter, Calvin Hamilton, Florian JÃ¶rg, Fabiano Deffenti, and Erik B. Wulff. Panelists shared their “war stories” of cross-border transactions. The panelists agreed that lawyers need cross-cultural understanding and training and provided tips on how to deal with contract translations, choice of law, award enforcement, and arbitration.
- Pierre-Yves Gunter, Python & Peter, Geneva, Switzerland
- Calvin Hamilton, Hamilton Abogados, Madrid, Spain
- Florian JÃ¶rg, Bratschi Wiederkehr & Buob, Zurich, Switzerland
- Fabiano Deffenti, Carvalho Machado Timm & Deffenti Advogados, SÃ£o Paulo, Brazil (Moderator)
- Erik B. Wulff, DLA Piper LLP, Washington, DC (Moderator)
ABA-provided description: This program will address common pitfalls in negotiating and drafting international agreements, such as transplanting and adapting foreign legal concepts and using dual language contracts and ensuring enforceability of the parties’ intent. Emphasis will be given to specific problems that the speakers have encountered in drafting international agreements and how they are resolved at the negotiation stage and otherwise subsequently dealt with by courts or arbitrators.
For the majority of the session, panelists discussed the impact of cultural differences in negotiating and drafting contracts and provided various real-life vignettes from their practices about how cultural misunderstandings led to material breaches, failed negotiations, and litigation. During the last five minutes, panelists briefly identified pragmatic tips on recommended contractual provisions and answered questions from the attendees. I had been hoping for more hands-on advice with respect to specific legal concepts, wording, or provisions within a cross-border contract.
The following summarizes their recommendations. I also provide a list of pragmatic tips based on my experience with software development and data outsourcing.
Recommendations and Tips from the Panelists
- Know the local culture. 9 out of 10 transactions that fail do so largely because of cultural misunderstandings. (Hamilton)
- Do not assume a subsidiary of multinational company will have the same cultural as parent company. (Deffenti)
- Negotiate which language will govern in dispute of language and the choice of law at the beginning of negotiations. Never leave these two decisions to the end. (Deffenti)
- You are an agent, not a principal, in the transaction. (Wulff)
- Only use 1 language (Jorg, Hamilton); no right answer on translations (Wulff)
- If using more than one language, provide translations of each paragraph either alternately or side-by-side. If altered, you know exactly which paragraph. (Wulff)
- Some jurisdictions do not recognize liability clauses. (Hamilton)
- Pick good arbitrators. 90% of the time it is up to the arbitrator/tribunal, not the institution. (Hamilton)
- Need parties on both sides who understand the binding language. (Hamilton)
- Need to look beyond what drafting to consequences. (Gunter)
- After contentious negotiations, wait until the clients are gone and then go to coffee with opposing counsel. (Jorg, Swiss tradition). Try gin and tonics instead (unnamed panelist, to much laughter).
- Know whether domestic law requires mandatory provisions. (Gunter)
Real-World Vignettes from the Panelists
- Cultural Differences
Recent examples of high-profile individuals committing cross-cultural gaffs at the G-20 Summit and First Lady Obama hugging the Queen illustrate the hug gaps between traditions, even across developed countries. His firm introduces EU companies to the cultural nuances of doing business in Japan, including what to expect in litigation and agreements. Previously, many of these EU companies made the error of going directly to Japanese lawyers without understanding hte rules of the road. (Gunter)
- Award Enforcement
In Brazil, the “economic group theory” allows the harmed party to enforce an award against any entity within the economic group. As a result, recovery is possible from a parent company for a contract breach by a subsidiary. Because not all jurisdictions share this approach, the problem is whether the assets are in a jurisdiction that would honor the award decision. (Deffenti)
- Penalty Fines
A Brazilian exporter with distributors in many jurisdictions around the world entered into a contract containing a choice of law clause for Brazilian law to apply. The boiler-plate language included a 10% penalty clause and interest rate calculated on a daily basis. These penalty provisions are very common in Brazil and enforceable. Under English law, penalties cannot be enforced. Enforcement would depend on the jurisdiction. Lesson learned: Even if parties agreed to the clause, this does not mean the court will uphold the clause across jurisdictions and legal systems.
- Wiring Funds and Methods of Payment
A publicly-held Singapore company entered into a joint venture with a company in China. The Singapore company wired funds to Beijing, but the funds were “lost” in transit. Lesson learned: Do not assume that transactions will arrive successfully. (Wulff)
- Multiple Languages (by Accident)
The relationship and negotiations were in English. The draft contract was in English. The contract, however, did not state explicitly that the English language would be the legally binding language of choice. Further, a provision allowed for arbitration and even specified an arbitral body where the proceedings are conducted solely in Spanish. The parties did not necessarily intend to arbitrate in Spanish, but they did pick the rules that obligated them to do so. His client lost on the issue of using the English language for interpretation of the contract. Spanish prevailed. To mitigate the risks, he asked for an arbitrator who could manage documents in English. (Hamilton)
- The Clash of Civil Law and Common Law
US-EU contracts in the 1990s commonly relied on a “hand-shake European” format of 8-9 pages, stating that the contract was “comprehensive.” The U.S. client understood the contract to cover everything and be self-contained. In civil law jurisdictions, however, such a contract does not exclude other obligations based on common principles, common sense, and as proscribed by law.
- Binding Agreements and Signatures
A company domiciled in the Middle East was dealing with a big Swiss company with representations all over the world. After several negotiations the Swiss company sent a fax with a binding agreement to the foreign company’s representative in his hotel and asked him to sign the paper, which the latter did. A couple of days later, the Swiss company asked for performance under the agreement reached. The foreign company, however, refused to perform according to the signed agreement. Its representative explained that he did not feel himself bound to the text at all. When asked why he signed the agreement, he said that he only did it because he was asked to do so and did not want to be impolite. He had no intention at all to bind himself. In his view, he would only feel bound if he had met the representatives of the Swiss company in person and reached an oral agreement with a hand shake. (JÖrg, not his personal story)
- The Downside To When the Client Says, “Cover Everything!”
Russian client showed high needs for security and protection when they bought a Swiss company. The client insisted that every potential risk was to be checked and dealt with in a legal memoranda. Since a flood had destroyed the seller’s archives, it was difficult to convince the client that the seller did not deliberately cause the flood, a story supported by local newspaper reports of heavy rains at that time. Then, when the Austrian attorneys involved in the case mentioned that there could be a German competition issue due to a single project carried out by the Swiss target company in Germany, the client was very suspicious. The Austrian attorneys cited one example of a project located in Germany. Accordingly, their EU lawyers had to look into the issue and confirmed that there was no problem. Further, the warranty section was verbose. Every potential risk had to be addressed, regardless whether it was likely to occur or not. Finally, the client did not want to transfer the purchase price to an account of the seller’s attorneys, a process which would have facilitated the transaction. The client preferred to execute a direct transfer from a Russian Bank to the seller’s Swiss bank. Therefore, at the closing, the parties waited from 6am (8am Moscow time) until 3pm in the afternoon in the meeting room until the Swiss bank confirmed receipt of the money and the documents could be exchanged. (JÖrg, personal story)
My Short List of Lessons Learned
Working in software development with clients operating worldwide, I encountered assorted contractual issues related to boiler-plate provisions, enforcement clauses, intellectual property, and assignability of the contract or its performance. Here are a few general tips. This is not intended as specific legal advice for your situation.
- Arbitration clauses may be void as against public policy in some jurisdictions. In other jurisdictions, arbitration clauses are mandated by statute.
- In asking a court to enforce a foreign-arbitral decision, some courts may revisit the facts and examine the substance of the claim. Thus, a domestic court may view the matter as one of review rather than enforcement.
- Civil law jurisdictions tend not to use equitable or injunctive relief. You also may not be able to obtain a judgment for specific performance.
- For U.S. lawyers, “contempt of court” is not well-established in other jurisdictions.
- For U.S. lawyers, “acts of god” does not translate or have a parallel concept in some jurisdictions. Consider carefully what wording to use in any termination clauses.
- Some states have very strict exchange control statutes, such as in Brazil.
- The hierarchy of constitutions, federal laws, and treaties varies country-by-country. In some jurisdictions, treaties are treated equally to domestic laws, with the constitution being supreme. In other jurisdictions, treaties may trump and override domestic laws.
- When defining a regional area in the contract, such as to clarify the scope of sales distribution, be as specific as possible. Avoid vague terms such as “Asia,” “Southeast Asia,” “Central America,” and “the Middle East.” It is preferable to list the specific countries to avoid confusion.
- Specify the type of payment, in which currency, the means of transfer/payment, and timeline for payment.
- Consider the assignability of rights and obligations and include specific provisions.
- Specify who owns the data; who is responsible for lawful software/patent/IP licensing; data security measures; and available remedies for data breach.
Note: I provide pragmatic tips and in-depth discussion related to US-Mexico contracts in my forthcoming article:
This article identifies and discusses the pragmatic legal issues U.S. companies should consider when outsourcing to providers in Mexico. Because country-specific issues can impact contract performance and data security, the article first provides an overview of the information services infrastructure, political climate, legal framework, and judicial structures of Mexico. The article then describes the relevant commercial contract laws, the public policy laws that may limit the contract’s enforceability in each of the two countries, and the pros and cons of available remedies for nonperformance and data breach. The article also explores the strength and limits of intellectual property and data privacy protections under the domestic laws of each country, under NAFTA, and under international agreements. Because many U.S. companies receive data from EU businesses and individuals, the article briefly describes the impact of EU privacy laws on outsourcing personal data to providers in Mexico. Lastly, the article makes specific recommendations related to best practices for due diligence efforts when selecting a provider, arbitral clauses, and contract compliance monitoring.
2009 ABA Section of International Law Spring Meeting
- 2009 ABA Section of International Law Spring Meeting (Regular Session Summaries)
- 2009 ABA Section of International Law Spring Meeting: Re-Shaping the Human Rights Agenda: Opportunities in the New Obama Administration
- 2009 ABA Section of International Law Panel Discussion: Can Carbon Caps/Trade/Tax Save the World from Global Warming?
2009 ABA Section of International Law Spring Meeting Resources