Planning an International Business Contract

Contract is enforceable as agreed “Pacta sunt servanda” Letter of intent => NOT a contract Consideration doctrine => unilateral acts are NOT binding

INTERNATIONAL CONTRACT Whereas Recitals (Preamble) General conditions of the contract Definition of the concepts List of the relevant previously made agreements Details of the agreement Goods, price, terms of delivery, terms of payment etc. Settlement of disputes Signatories

LIFECYCLE OF A CONTRACT Planning the offer and the contract Negotiations and documents Concluding the contract Enforcement payments, supervision, additional work and changes Delivery and reception Use, maintenance period of warranty and liability Source: Modified from Haapio et.al. Yritysten sopimus- ja vastuuketjut. Tietosanoma Oy. Pieksämäki 2005.

ISSUES TO CONSIDER Target of the contract Resources Time No uncontrolled risks Time Marketing conditions Competition Company’s position on the market Product, service etc. in question Legal restrictions Economic fluctuation

GOOD CONTRACT Written Comprehensive Unambiguous Financially safe Credible Leagally valid Enforceable

ANALYZE THE RISK • Identify, characterize and assess risk Describe possible events based on the contract clauses as applied to the contractual relation • Estimate the likelihood and consequences of each identified risk Consider both the likelihood of facts and the likelihood of a relevant interpretation of the contract clauses • Evaluate the risks, distinguishing between acceptable risks and those risks that should be considered for treatment • Consider how risks can be treated through practical measures or a suitable contract amendment

MANAGE THE RISK Prioritize risk reduction measures based on a strategy Strategies to manage risk : Avoiding the risk Eliminating the risk Withdrawing from the situation Sharing the risk Transferring the risk to the other party Taking insurance Reducing the negative effect of the risk Accepting some or all of the consequences of a particular risk

INTERNATIONAL BUSINESS CONTRACTS: HIERARCHY OF NORMS National law (mandatory) Contract clauses International treaties and conventions United Nations Convention on Contracts for the International Sale of Goods, CISG National law (dispositive) Conventional norms, common trade practices Court rulings Authorities supplementary provisions

PRACTICE AND USAGE Any practice the contracting parties have agreed and any usage they have established between themselves, is binding to them Any usage, which in the trade is widely known and which the parties should have known, becomes part of the contract Therefore the contracting parties (and especially those who are negotiating the contract) should be aware of the trade usage of the industry and of any practice and standard processes the companies do have established for normal day-to-day business.

United Nations Convention on Contracts for the International Sale of Goods, CISG PARTS: 1. Sphere of application and general provisions 2. Formation of a contract 3. Sale of goods 4. Final provisions

FORM OF A BUSINESS CONTRACT To avoid problems, a business contract should be in writing or at least an oral agreement should be confirmed in writing there should be some documentation giving evidence on what has been agreed In many countries the validity of an oral contract is limited CISG includes no requirements as to the form

PROBLEMS OF INTERPRETATION CISG COMMON LAW 1. SUBJECTIVE INTENT OF A PARTY ”Meeting of minds” Applied if the other party knew or could not have been unaware of the intent 2. OBJECTIVE INTENT ”The understanding that a reasonable person of the same kind as the other party would have had in the same circumstances” OBJECTIVE INTERPRETATION Interpretation must go by the externals => the conduct of the parties SUBJECTIVE APPROACH - rejected completely by some common law countries => ”The law has nothing to do with the actual state of the parties’ minds. In contract, as elsewhere, it must go by the externals, and judge parties by their conduct” CISG and many civil law countries accept it All relevant circumstances of the case Practices and usages the parties have established between themselves or widely known and regularly observed in international trade

CONTRACT CLAUSES (1) Contracting parties Definitions Clear definition of names and terms used in the contract helps avoiding problems Important especially when the parties have different backgrounds Preferential order of documents Important in case of contradictory documents General rule: recent documents override older ones

CONTRACT CLAUSES (2) Entire agreement – principle Only what is stated explicitly in the contract can be referred to Standard contract terms Can be used in the process of drawing up an offer/a contract To facilitate the process and to make sure nothing is forgotten Must be explicitly included in the contract Interpretation to the detriment of the composer

CONTRACT CLAUSES (3) Supplier’s obligations Buyer’s obligations Exactly what to supply, how, when Other obligations Buyer’s obligations How much to pay, how, when Confidentiality

GOOD CONTRACT IN A NUTSHELL When When Where Where How How What if… What if not… What What What if… What if not… Payment Delivery Source: Modified from Haapio et.al. Yritysten sopimus- ja vastuuketjut. Tietosanoma Oy. Pieksämäki 2005.