Updated: Dec 24, 2021
Whether or not a foreign contract is enforceable depends on a number of different factors. A foreign contract, where one party buys or sells goods or services to another party that is located in a different country, can be difficult to draft and manage in a way that is enforceable.
If you are buying or selling goods and/or services to overseas businesses, you need to ensure that the contract is robust and you maintain leverage throughout your commercial dealing.
Author: Farrah Motley, Legal Principal of Prosper Law.
Is it worthwhile entering into a contract with an overseas business?
Yes. It is always recommended that - even if you are contracting with a business overseas - you enter into a written contract. At the very least, a written contract ensures that both parties have a document to refer to that records the agreement that has been reached.
If you engage a lawyer that has experience with contracts between foreign businesses, you can also take comfort that your contract is legally enforceable.
However, it is vitally important that (aside from a robust and enforceable contract) you ensure you:
Even if your contract is legally enforceable, it can be expensive to start formal legal proceedings in a foreign country.
When it comes to doing business in a different country, sometimes the best way to deal with disputes is to avoid them in the first place.
An effective way to manage this is by ensuring that you have, and maintain, leverage by using something that you are in control of (such as legal rights over goods or intellectual property rights, or even business relationships) to ensure that the other party complies with their end of the bargain.
How are international agreements enforced?
Private, international contracts may be enforceable through court systems. This process can, however, be expensive and slow.
As an alternative, businesses can agree to use international arbitration as a dispute resolution option. Arbitral awards may be enforceable in different countries by relying on international treaties. An example is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).
Approximately 50 countries are signatories to the New York Convention and will enforce international arbitral awards in accordance with the Convention.
Another helpful international convention, which has not yet come into legal effect, is the Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters.
Here is an outline of that Convention and how it works.
What clauses are important in foreign contracts?
If you are seeking to ensure that a foreign contract is enforceable, the following clauses will be of particular importance:
Description of parties
It is always important to ensure that the description of the parties in a contract is accurate. If the identity of a party is not accurately recorded, the contract may be unenforceable against that party.
When it comes to contracting with foreign business, which law governs the contract is of vital importance. However, it is not as simple as just stating the governing law.
In some countries:
local law will apply to the transaction irrespective of which law you state in the contract will apply to the agreement
foreign laws may not be enforceable at all, or it may be difficult or costly to obtain and enforce foreign judgments
a particular contract or provision of a contract that is legal in one country may be illegal in another
Depending on which country's laws govern the contract, you may wish to:
ensure that disputes are subject to executive negotiation before formal legal proceedings can be commenced
insert an arbitration clause, so that the parties can only have recourse to arbitration in the event of a dispute
have an unfettered right to commence formal legal proceedings
What kind of dispute resolution clause you choose to adopt will depend on a number of factors, including the cost of litigation, whether the rule of law is observed and the likelihood of being able to successfully enforce a legal outcome against the other party.
Foreign contracts are often set out in dual languages. Either two full copies of the contract, each in a different language, is exchanged or one contract where each clause is set out in both languages.
It is important to ensure that you do not rely upon the other party to translate the contract. Instead, you should engage a certified and qualified professional translator that is independent of the parties.
United Nations Convention on Contracts for the International Sale of Goods
The United Nations Convention on Contracts for the International Sale of Goods automatically applies to the sale of goods internationally, between businesses from different member States.
If you don't want the Convention to apply to your contract, you must include a clause that specifically excludes its application.
How can risk be managed in foreign contracts?
Do your due diligence
It is important to understand whether your client or supplier:
has a good or a bad reputation in the local market;
is financially stable;
is operating in a market that is stable or highly volatile; or
is reliant on third-party payments in order to pay you.
You should be proactive in doing your due diligence to ascertain whether your business partner is a good option to do business with. This should be done before entering into a contract.
If this contract is high risk and/or high value, it may be beneficial to engage a local solicitor in the relevant country to carry out due diligence on your behalf.
Get payment upfront
If money is the major concern when it comes to contracting with an overseas business, you should consider whether it may be appropriate to:
if you are the supplier - get payment upfront; or
if you are the buyer - ensure that you receive the goods and/or services before you make payment.
How can Prosper Law help?
Prosper Law is experienced in providing commercial legal advice for cross-border business contracts.
If you are buying or selling goods internationally, talk to our contract lawyer about a bespoke contract to protect your business.
Farrah Motley | Legal Principal
PROSPER LAW - A Commercial Law Firm for Businesses
M: 0422 721 121
A: Suite No. 99, Level 54, 111 Eagle Street, Brisbane, Queensland Australia 4000