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Legal Compliance For Enforcement Of An International Contract

International Agreements and Contracts

Involving in a contract is often fundamental for a business to function effectively. It involves a plethora of responsibilities and liabilities which need to be fulfilled by both the contracting partners as a part of their mutual transactions. However, at times, there is a breach of responsibility from either end which often ends in a dispute.

This becomes more intricate while entering into cross-border transactions. If the procedures for resolving such disputes become cumbersome and bureaucratic it affects the smooth functioning of businesses thus affecting the economic growth tremendously. So we know that International Contracts are agreements between two parties from different territorial jurisdictions. When the contract is between two different countries, it is known as a bilateral agreement while it is termed as a multilateral agreement when the contract is between more than two countries.

In case if you are quite perplexed about the enforceability of an international agreement, read on! This article is going to address the issues, faced while drafting an international contract that shall make enforceability convenient.

Negotiation of International Contracts

Negotiating an international contract requires much more vigilance than one would require for penning down a domestic one. This is due to the reason that there may be some further issues that may be encountered in an international contract but may not be witnessed in a domestic contract.

It is the sine qua non to negotiate which court's jurisdiction shall be involved in determining the issues, should there be any dispute while enforcing an international contract. The issue of coming with a singular jurisdiction and venue is often difficult since it takes many aspects into its ambit. Such legalities may include the legal procedure, the legal expenses, and the enforceability of judgments.

However, in case of any unfavorable situation of unmatched jurisdiction before the door, the parties should always be ready with recourse. It has often been acknowledged that European parties may find the English law suitable, while those from Asian countries often favor Singapore and Australian laws, while African, European, and Middle Eastern people may find English Law more feasible.

It is very crucial to note that the parties should always select a law that shall be favoring each of them so as to eliminate any kind of barriers related to language, culture, or legal tradition for the days to come.

Kinds of International Contracts

International contracts can take any form and may cover any of the types elucidated below:
  • Intellectual property licenses
  • Supply agreements
  • Investment agreements
  • International distribution agreements
  • International sales contract
  • Letters of credit
  • Joint venture agreements
  • Development agreements
  • Franchise agreements

Salient points to keep in mind while negotiating an International Contract

Each of the parties in a bilateral or multilateral contract should make sure to chisel out the rights and the obligations that need to be fulfilled by both of them in order to prevent any kind of unnecessary complexity in the future.

In the process, the parties should pay close heed to the following points:
  • The parties should highlight the anticipations and the sale targets effectively. This would include the expected business performance as well as involve significant business decisions.
  • The rights and remedies of the parties should be articulated properly under the dispute resolution section.
  • The involvement of an arbitration clause is indispensable as it states explicitly the dispute resolution procedure in case of any rising conflicts in the future.
  • The involvement of important measures to be taken aid of, in case of termination without the breach of contract.
  • The inclusion of force majeure, so as to enable the parties to exit from their obligations in case of any natural mishap or forces beyond the party's control.
  • The payment and shipping provisions should also be annexed in the contract.
  • The necessary inclusion of a section that would incorporate the requirements to be in accordance with the applying laws.

Knowing International Commercial Arbitration

Arbitration is basically an alternative dispute resolution process where the dispute between the contracting parties is resolved by a third party, popularly known as an arbitrator, without the interference of a court of law. In the end, the arbitrator comes to a decision, determining the rights and liabilities of both the parties, which can be enforced.

The arbitral award can be enforced in the same way as an award pronounced by the court of law. Also, an arbitral award can be enforced in all jurisdictions un-biasedly. This is the major reason behind the popularity of arbitration in resolving cross-border disputes and so much so that it is often preferred more than the normal litigation process of the court.

This is expedited by The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention) which ensures that the arbitral award can be enforced on all the member states that are part of this convention. This means that an arbitral award can be enforced in any country that is a part of the convention, in the same way as an award passed by the national court of the country. As many as 157 countries are part of this Convention.

Choice of governing law and jurisdictional provisions in an International Commercial Contract

These clauses face constant negotiations while drafting an international commercial contract. The reason behind this is each of the contracting parties would desire each of their country's laws to be included as a part of the contract.

In case if the parties are unable to reach a conclusion regarding the governing law and the jurisdiction then they may settle down to deciding upon a uniform international convention that has been ratified by their countries respectively. One simple example may be, the countries Australia and Germany are a member of the International commercial framework called Contract for the International Sale of Goods (commonly known as the CISG or Vienna Convention) and can therefore adopt the same as the governing law while entering into a contract. This could be the best compromising choice since it is in alignment with the commercial laws of both countries.

In the case of Vita Food product Inc v Unus Shipping Co Ltd [1], it was held by the Privy council that the parties are free to choose any law to govern their contract, whether it is in nexus to the contract or not. However, the law should be bona fide, legal, and in line with public policy.

Necessary particulars for Negotiating International Contracts

An International Contract should necessarily adjoin the following elements in it.
  1. Parties:
    Prior to entering into a contractual relationship with a company from a different country, due diligence should be performed on that country to check for the qualifications that whether the company is authorized to carry on a business with a different country and whether it holds a good stance with various appropriate governmental authorities. Apart from that it also needs to be verified that whether the person entering into the contract on behalf of the company is authorized to do so and also that the contract is to be accepted and signed strictly with adherence to legal formalities. Thus the first necessary components of any contract are the contracting parties.
  2. Duties:
    At times it may so happen that one party may expect a score of responsibilities and obligations to be fulfilled by the other party, which may give rise to unnecessary conflicts. To keep things simple and uncomplicated the parties should be clear about the obligations and the liabilities that need to be performed by the parties amongst themselves. They should pen down the same as clear and specific as possible. For example, in the case of the international sale of goods, all the perils, costs, and duties related to the sale of goods should be stated explicitly in the contract, when shipped from one national territory to the other. Also, in cases where the government license will be mandatory for importing the goods from one country to another (like some sensitive goods and software technologies), there it should be mentioned clearly as to which party shall take up the responsibility of government licensing.
  3. Geographic scope:
    If the country is limited to a particular jurisdiction or territory for its business (like in the case of distributorship) then the same should be specified by the company as to which particular jurisdictions it is limited to, for the purpose of carrying on its business. This mention is very much important for the smooth enforcement of an international contract.
  4. Language:
    While contracting with a foreign country, the contracting language is generally English. However, the parties to the contractual relationship should not assume anything on their own that the complete gamut of the contractual transactions shall be completed in English. However, if it remains the main medium then it should be specified distinctly in the contract that any kind of correspondence that forms a part of the contract shall be completed in English. Where the parties use the dual-language format (i.e. the entire contract written in English and another language added in the dual language column) then the same shall also be communicated in explicit terms in the contract that the main controlling language shall be in English and that the notices and communications to that effect shall also be communicated in English only.
  5.  Notices:
    The contract should also contain the information regarding the number of notices to be given and particulars of contact with each and every organization (for instance, name, title, address, email address, etc). Along with that, the contract needs to specify the language in which the notice shall be initiated (it may be in English or any other language as per the choice of the parties).
  6. Currency:
    When entering into a contractual relation, nothing should be presumed but communicated expressly. The same holds notably with regards to the currency. The parties should mandatorily state which currency they would transact with rather than assuming it. In the case of Dollars (since it is used by many countries like the US, Canada, Hong Kong, Taiwan, etc), the parties should state in clear-cut terms as to which currency they would like to transact with like USD.
  7. Intellectual Property:
    Whether the parties want to bequeath the intellectual properties or prevent the transfer of the rights as a part of the contract, the same needs to be articulated in the contract. In such a case there has to be a provision that establishes the intellectual rights of the parties, taking into consideration the grant of any licenses and ownership of intellectual property rights which has been developed in nexus to the business transaction or the contractual relation.
  8. Audit Rights:
    If the payment of the contract is contingent, i.e, after fulfillment of a certain condition then there should be a separate provision to maintain a track of the same by the receiving party and ensure regular audits by the paying party. This is a necessary provision as such provisions maintain pertinent and indispensable information relating to the audit such as the cost of the audit, the frequency of the audit, the conduct of the audit, the procedural enforcement of the audit rights with respect to the expiration and termination of the contract and so on.

    At times the language of the audit may be in any other language but English. In such scenarios, there shall be a need for translators as well as the right amount of cooperation from the party being audited. Substantially a cross-border audit is considered to be high-budgeted than an audit at a domestic firm.
  9. Confidentiality:
    An important business clause in the presence of confidentiality is often known as the nondisclosure provision. That means the information relating to the business transactions is to be kept clandestine between the contracting parties. This means a third should not have knowledge about confidential business information. In many cases, there is no expiration of this confidentiality. It continues even after the contract ceases to exist, till many years or till perpetuity in certain cases.

    It is often expensive to maintain confidentiality provision internationally. Thus businesses limit the amount of information that needs to be shared with and also keep the number of audiences to share, limited. Also, encryptions are performed at such regular intervals as may be necessary and possible.
  10. Term:
    The parties should be clear and specific about the terms of the contract. A contract may be a one-time contract or a contract that needs renewal every year or a contract that shall take years to be performed. If the contract is silent regarding the term of the contract, then there may be a possibility of a dispute later. It may so happen that one party would desire to terminate the contract, maybe years later, then a conflict may arise as to how many months prior to the termination of the contract, notice should be served to the opposite party.
  11. Termination:
    The contract should be clear on the term whether a cause is mandatory for the termination of the contract or the contract can be terminated even without a proper cause. In the former case, the contract should articulate the exact grounds or components that act as the driving force for the termination of the contract. Nonetheless, the termination of international contracts is often complicated and exorbitant.
  12. Remedies:
    The contract should clearly state the rights and remedies available to the parties in case of breach or failure of performance of the contract from either end. Likewise, if the payment is delayed by the other part or there is some damage or loss of any goods then there may be a soothing provision of adding interest to the payment amount so that the other party is indemnified in case of any kind of loss suffered. This will ease down unnecessary complications in the contract. Nevertheless, the governing law of the contract will supervise the enforcement of such remedial provisions.
  13. Governing Law:
    Governing law sees to the enforceability of the contract. Thus each and every company would like to be governed by their local jurisdiction. Then the other party shall decide whether that party's laws are neutral in nature or not like that of England or Singapore. Therefore preference is always granted to the neutral law, no matter which jurisdiction it originates from. The parties who are member states to a particular convention can settle down with choosing the laws of that convention so as to eliminate disparities in the future.
  14. Dispute Resolution:
    The parties should avoid solving a dispute by litigation or arbitration prima facie. They should try resolving the matter amicably. In case if the subordinates of the companies are unable to solve the matter among themselves the superior managerial personnel of the contracting companies may step in to resolve the matter within a stipulated frame of time. In case of failure of the first resort the parties may opt for litigation or arbitration as a final resort.

    However, the parties should choose arbitration in place of litigation for two major reasons. First of all, arbitration proceedings are completely confidential. There is no involvement of the public in any of its proceedings and neither it is recorded for public purposes. Secondly, the New York Convention facilitates a proper process for the enforcement of arbitral awards. Whereas, litigation makes the enforcement much more complex and difficult.
  15. Venue:
    The venue of the dispute resolution should be included in the contract. The venue also forms an important part of the contract just like the method of dispute resolution and the governing law. If the parties choose to resolve their dispute through the arbitration process then the city for the arbitrational proceedings shall also be stated clearly. On the contrary, if the parties choose to litigate their conflicts then the designated state of the court of litigation, which shall decide any matter of conflict arising as a result of the contract, shall be stated in clear terms.
Elementary clauses present in every International Contract
A well-drafted commercial contract is a key to half of the complications that form a part of the business contract. To ensure that the transactions are hassle-free and the relations between the contracting partners are quite smooth and amicable, the parties should make sure that some of the very important clauses are present in the business agreement.

Some of the key clauses which should form a part of every business agreement are enumerated below:

  • Recitals/parties clause:
    This is the primary step to setting up a legally enriched contract. This clause recognizes the parties who come together to enter into an agreement. It also states clearly, the purpose behind the formation of the contract between the parties. Thus it summarizes who are the parties to a contract and what is their purpose behind entering into such a contract.
  • Confidentiality Clause:
    Once the parties enter into a contract, they need to share some confidential business information amongst themselves. To make sure that both parties maintain secrecy for the sensitive information, it is very important to introduce this confidential clause. This prevents any of the parties from divulging confidential information and in case of any breach of trust, the other party can make the defaulting party liable before the competent authority.

    However, to enforce this clause efficiently, the parties should make out what information needs to be kept secret and what is not required to be kept. This facilitates the parties to make sure that there is no spilling out of important information, thus keeping the trade secrets intact.
  • Force Majeure Clause:
    This clause holds great importance after what the Covid19 pandemic has left us with. Force Majeure translates as 'greater force'. This clause comes into the role when a situation that is unforeseeable and out of human control, comes into play. According to this clause if one of the contracting parties is unable to perform his business obligations due to some unpredictable and uncontrollable events then such part is exempted from any kind of business liability.

    This highlights the importance of this clause in international contracts. Whatsoever, this clause has no perfect legal definition. Consequently, the parties should include in the agreements what are the forces that can be accounted for under Majeure. Some of the examples which can bring under its ambit can be an act of God, embargoes, riots, pandemics, disasters, etc.
  • Termination of the clause:
    The termination clause is also one of the most important clauses and is often counted at the end of the contract. Every single contract needs to be concluded maybe after fulfillment of the contracting purpose or failure to perform obligations by any of the contracting parties. For the smooth exit from the contract by the contracting parties, a termination clause should necessarily be present.

    It lays down a set of pre-defined terms and conditions that can bring a contract to an end. Once any of such condition is satisfied the contract can be terminated. Thus as much as possible, the termination clause should be vivid and specific to leave no ground for any kind of ambiguities in the future. Also, before the termination of the contract, prior notice should be served prior to the termination of the contract.
  • Dispute Resolution Clause:
    Disputes are inevitable. However, we should try to avoid them as much as possible. This clause is therefore a very important clause for a business contract. In case of any kind of dispute arises then this clause helps to settle down the disagreement between the contracting parties. It is often seen that a friendly way of solving disputes is often preferred in any business conflict since the parties would prefer to maintain a long-term business relation amongst them rather than becoming complete rivals.

    Thus the dispute resolution clause should be drafted properly. Parties should first try alternate dispute resolution processes before moving on to stringent dispute resolution techniques. Following this particular technique parties now opt for multi-tier dispute resolution techniques such as which generally are initiated by mediation and negotiation followed by arbitration.

    The alternate dispute resolution techniques are always preferred more because of their cost-effective and less time-consuming nature. The best dispute resolution method should always be decided by the parties vigilantly, which would be catering to their needs. The arbitration clause should also contain information regarding the jurisdiction which shall take care of the dispute resolution process.

Challenges faced while enforcing an arbitral award

An arbitral award carries no weightage if it is limited just to paper and cannot be enforced. An arbitral award is significant only when it can be enforced. Sometimes the presence of some inefficient legal or technical issues during the drafting stage makes the enforcement of the arbitral award really complex. Let's look at some of the issues which pose a challenge towards enforcement of an arbitral award.
  • Location of assets:
    Before signing a contract it is important to know the location of the other party's assets. This shall ease complications in the future. This shall be influencing important clauses in the contract such as the venue, jurisdiction, and the governing law in the process of negotiation. For a better advantage, one should have the proceeding to be occasioned at the place where the other part's assets are located so as to have seamless enforcement of the arbitral award.

    This would prove to be a great stance for the winning party if the defaulting party fails to comply with the arbitral award. This is basically because if the defaulting party fails to comply with the amount then the winning party would know which of the assets of the defaulting party can be attached so as to extract the arbitral amount and to offset the claim.

    To enforce this process the winning party shall apply to the court where the defaulting party's assets are located, to freeze the orders so that the defaulting party cannot transfer his assets to another location. These needs are set forth properly before the award is announced.

    On the contrary, if knowing the location of the other party's asset is impossible then some kind of surety, like a bank guarantee should be demanded from the opposite party.
  • Laws governing arbitration at the place of arbitration:
    Before getting into a contractual relation one should hold no ambiguity about the legal grounds for objecting to an arbitral award in the process of arbitration. Secondly, whether there are any disputes that cannot be settled by an arbitration process and what are those. Thirdly, whether the jurisdictional courts discriminate between nationals and non-nationals and treat them unequally.

    The proper answers to all of the above issues are very important because the legal requirement in various countries are unanimous and needs to be known to the roots before entering into a contractual relationship.
  • Vigilant selection of restrictions in the international arbitration clause:
    The restriction in the contract should be chosen with utmost vigilance. One should be careful enough not to include such stringent restrictions which shall sabotage the enforcement procedure. Examples of such may be, being very rigid about the qualifications of the arbitrators or setting a particular time frame within which the arbitration proceedings are to be completed.

    This can prove to be detrimental with enhancing the chances of getting away with the arbitral award by the defaulting party.

    Such loopholes in the contract can help the defaulting party to circumvent the arbitral award in scenarios where such conditions are not complied with.
  • Inability of parties in arbitration proceeding:
    An arbitral award shall have no effect if the contracting parties lack the legal capacities to participate in the legal proceedings.
    One should make sure that all the legal obligations that are needed to ensure the proper legal capacity are confirmed. This may be a difficult task but if taken care of properly, it shall be a bonus point in the future.

Legal challenges faced while enforcement of an arbitral award

The intervention of the court is indeed necessary in many cases for the enforcement of an arbitral award. It cannot be enforced on its own. There might be some legal challenges that can make enforcement difficult.

Examples of such challenges may be incapacity of a party, the invalidity of an arbitration agreement under any particular clause, the opposite party not being informed about the arbitration proceedings or appointment of an arbitrator, an arbitral award obtained by fraud, corruption, is against the fundamental principles of natural justice, enforcement of arbitral award not taken up in the arbitration proceedings and is such enforcement is made then it shall be contrary to the public policy.

The countries which have ratified the New York Convention may have the same things included in the list more or less. This is the unity between international territories that seek to enter into commercial relations with different countries under the same set of rules.

How an international contract can be illegal
Before entering into a contract it is very crucial to know whether a contract is legally enforceable or not. Not all contracts are enforceable. There are a few cases in which the court chooses not to enforce a contract. For instance, the parties entering into a contract should be legally competent, which means they should have the mental capacity to understand their rights and obligations and should be a major. If a person is entering into a contract without understanding its gravity, the court may conclude that he lacks the capacity to enter into a contract.

Also, contract for any illegal goods is also prohibited and is illegal. However, the legal structure is varied in different countries. Thus what is illegal in one country might be very much legal in another country and in that way rightfully enforceable in that court of law.

Civil Enforceability of Agreements with regards to Specific Relief Act 1963

The Specific Relief Act, 1963 deals with the remedies available to the parties for the civil enforcement of individual rights. Especially, when a breach of contract comes into play the general remedy provided is to compensate the party for the loss suffered by him.

Specific Performance of Contracts: Specific performance of Contracts makes sure that the parties comply with the actual terms and conditions that have been stated in the contract. Section 10 of the Specific Relief Act, 1963 states explicitly the grounds when the specific performance of contracts can be enforced by a court of law.

When there exists no standard for ascertaining the loss suffered: In such cases where the plaintiff is unable to determine the loss suffered by him there this principle applies. For example: where there has been a contract for buying a painting of a painter which is just one and only left then in such cases the price of the painting may be unascertainable.

When the amount being compensated with is not adequate enough: If the amount that is being paid as a part of compensation is not adequate enough to satisfy the claims. Such instances may include:
  • Where the contracting property is a movable property, or
  • Where the contracting property is an immovable property, and
  • The property is of such a nature that it cannot be easily available in the market for buying or purchasing
  • The property is of a value or interest specific to the plaintiff
  • The article is unique or rare and generally is not available for sale in an open market.
  • The goods or property is generally entrusted with the defendant as an agent or trustee for the plaintiff.

In the case of Ram Karan v Govind Lal,[2] the plaintiff had paid the full consideration amount for the execution of a sale deed for a plot of land but the seller refused to execute the sale as per the terms of the agreement. The buy brought a suit against the seller for specific performance of the contract and the court also concluded that paying the compensation to the buyer shall not suffice the buyer adequately and the seller in that case was directed to execute the sale deed in favor of the buyer.

Contracts that cannot be specifically enforced

According to Section 14 of the Specific Relief Act 1963, there are some contracts that cannot be specifically enforced.

These may be:
  • Contracts which have a minute or innumerable details:
    These are basically the contracts which depend upon the personal skills and qualifications of the contracting party and their violation cannot ever be satisfied in terms of money. An instance of this may be a dancing contract in a concert where the violation to perform on a stipulated date cannot be made well in terms of pecuniary value.
  • Where money compensation stands to be an adequate relief:
    Here the court shall not ask for specific performance of contract since it believes that the defaulter can pay compensation to the plaintiff as a remedy.
    For example, contract for the sale of immovable property, contract for repair of premises.
  • Contracts of determinable nature:
    Determinable contract means a contract that can be revoked or terminated by any of the contracting parties.
  • Contract of arbitration:
    A contract that refers to present or future differences to arbitration will not be enforced specifically. This has been stated under Section 14(2).

The international commercial contract has always been a complex topic when it comes to the proper drafting and choice of jurisdictional laws of a contract. This complexity is further enhanced when the parties hold ambiguity about the fundamental business laws of that country. It is of utmost necessity that the parties get to know the laws properly before submitting to their terms and conditions.

Thus the object of this article is to solve the simple complications and queries faced commonly while introducing certain nuances which would help the contracting parties to enforce the contract rightfully against the other party. Moreover, the very crucial decision of the choice of law stays in the hands of the parties, to choose the best governing law while keeping the autonomy and interests of the parties unharmed. An international contract perhaps is a pathway for more international business relations in the future among the contracting parties if it is enforced evenly.

  1. (1939 UKPC 7)
  2. Civil Second Appeal No 402 of 1998

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