How to draw up ironclad international contracts

An international agreement often entails contracts between a business and its foreign business partners. Make sure your contract clearly spells out the type of business relationship, objectives, partner roles and responsibilities and jurisdiction in order to reduce the risk of misunderstanding.

Ironing out an international agreement often entails drawing up one or more contracts between a business and its foreign business partners. A contract must spell out such things as the parties, objectives, type of business relationship, partner roles and responsibilities and jurisdiction. Businesses should always have their draft contracts reviewed before signing with foreign partners in order to reduce the risk of misunderstanding at any point during the business relationship.

The main types of contracts and agreements

• An international sales agreement specifies the deliverable (product or service), terms of sale, timetable, terms of payment and delivery, performance guarantees, etc. It may include clauses concerning territory, intellectual property and trademarks. It is the basic agreement for international commerce.
• A distribution contract is usually an agreement between a supplier and a distributor whose role is to buy and store the product and resell and deliver it to the end user. It specifies how a product or service will be distributed: territory, exclusivity, price, discounts, limits, responsibilities, compensation, intellectual property and trademarks, etc. This type of contract also aims to manage the parties' expectations regarding after-sales service, order timeline, performance and support.
• An agency agreement is an agreement between a supplier and an agent whose role is to help sell the product or service and maintain the relationship with the end user. It specifies the terms of the partial subcontracting of the sales effort. Unlike in a distribution contract, the agent never takes possession of the business's products but is compensated in the form of commissions.
• A strategic alliance agreement is used when partners with complementary businesses want to join forces on things like production, prospecting or research and development. A joint venture is an example of a strategic alliance. This type of agreement is much more binding than an agency agreement or a distribution contract.
• A technology transfer agreement is often used by a supplier with intellectual property rights and an integrator in order to govern the licensed manufacture or use of a component, module or other item. It is a way for exporters to protect their intellectual property.

To learn more, see Negotiating with foreign partners.

The basics of contract preparation

• Language: The contract obviously must be written in a language understood by both parties. In some countries, the law requires that contracts be written in a specific language, but English is usually the language of business and is a good language for your contracts.
• Different legal systems and environments: Before your start drafting your agreement, research possible jurisdictions and consult with an attorney to discuss your options. The parties will have to agree on applicable law, otherwise a judge may have the arduous task of determining it based on international conventions.
• Signing authority: Make sure the individuals negotiating and executing the agreement are signing officers or have the necessary authorizations.
• Written documents and specifications: During complex discussions, it is important to get things in writing and make sure documents drafted have legal force. The same goes for appendices (drawings, logos, etc.) because they too can be sources of dispute.
• Financial considerations: The parties must agree on the terms and methods of payment, currency, foreign exchange risk sharing arrangement and dispute resolution and penalty mechanisms in the event of non-payment.
• Act of God: In addition to addressing domestic and foreign trade risks, the partners must spell out the risk management mechanisms to be triggered in the event of an act of God, such as a natural disaster, major accident, political crisis, war or economic calamity.
• Amendments: The contract may have an automatic review clause for certain contract items and be amended at any time during the term of the contract if the partners mutually agree on language.
• Appendices: Appendices have the same force as the contract itself. They are part and parcel of the contract, so be just as careful negotiating and drafting them. Appendices are a good place to add specifics to the contract.
• Non-compete clause: A non-compete clause ensures that the work your business does under the agreement is not used for any purposes not set out in the contract.
• Non-disclosure clause: These clauses ensure that the parties keep strategic information and trade secrets confidential and control communication channels and access. They are also a way for the parties to highlight their respective strategic and tactical contributions.

What are International Commercial Terms (Incoterms)?

To standardize definitions and specify how risks and responsibilities are shared by international partners, logistics suppliers and government control bodies during commercial transactions, the International Chamber of Commerce has published more than 10 terms that are widely used around the world. They indicate where transaction risks and obligations and documentation responsibilities are transferred. They do not have to be used but are highly recommended, and they facilitate contract preparation.

Incoterms 2010 are divided into 4 groups.

• Group E: The buyer is responsible for everything (carriage, risk, documents).
• Group F: The buyer is responsible for international carriage and risk, and the seller is responsible for unloading freight at the international terminal and supplying the customs documents.
• Group C: The seller is responsible for international carriage and risk, and the buyer is mainly responsible for loading freight at the destination terminal and transporting it to the final destination.
• Group D: The seller is responsible for everything (carriage, risk, documents).

Key

• B: Buyer
• S: Seller
• EXW: Ex Works
• FCA: Free Carrier (named place of destination)
• FAS: Free Alongside Ship
• FOB: Free on Board (named port of shipment)
• CFR: Cost and Freight (named port of destination)
• CIF: Cost, Insurance and Freight (named port of destination)
• CPT: Carriage Paid To (named place of destination)
• CIP: Carriage and Insurance Paid to (named place of destination)
• DAF: Delivered at Frontier (named place of delivery)
• DES: Delivered Ex Ship (named port of delivery)
• DEQ: Delivered Ex Quay (named port of delivery)
• DDU: Delivered Duty Unpaid (named place of destination)
• DAT: Delivered at Terminal (named terminal at port or place of destination)
• DAP: Delivered at Place (named place of destination)
• DDP: Delivered Duty Paid (named place of destination)

To learn more about commercial contract terms, see the guide on the Export Development Canada website.

Desjardins can help you do business internationally, maintain good relations with your foreign customers and suppliers and manage your business risks. Contact Desjardins International Services