International Contracts

Culture and Contracts for International Lawyers 

Lawyers working in international law oftentimes interpret, review, and advise their clients on contracts written by other international lawyers in foreign countries.  Considering the great possibility for legal, linguistic, and cultural misinterpretations, it is important for international lawyers to become familiar with the types of contractual clauses that they see in such diverse contexts.

In understanding the commonly used clauses in contracts drafted by lawyers in other countries, international lawyers will be better prepared to explain to their clients the consequences and implications of contract language written according to the laws and customs of other countries.  International lawyers may do work with clients and their legal representatives across the world.  However, the purpose of this article is to help guide those lawyers practicing outside of the U.S. toward understanding the common clauses used in contracts written by U.S. lawyers.

Common situation

The international-contract scenario is easy to identify.  It begins with a party in Mexico, for example, who contracts with another party in Germany.  Or it starts with a Spanish company wishing to employ a French agent to work in Spain.  While the parties negotiate the contract terms, one party’s lawyer may, in the end, write most of the contract due to the difference in the bargaining positions of the parties.  The party whose lawyer drafts most of the contract has the advantage of including certain clauses with legal concepts that may be unknown to lawyers not practicing in that country.  To avoid this situation of allowing unfavorable contract terms into a business deal, international lawyers should become familiar with — to the extent time and circumstances permit — the country’s laws and customs where the other contracting party resides.

An understanding of the typical contractual clauses used in the U.S. legal system is beneficial to those international lawyers whose clients contract with parties represented by U.S. lawyers.  Because the U.S. legal system is based on the common law (judge-made law), typical contractual clauses encompass legal concepts of well-developed case law of which international lawyers may not be aware.  The following paragraph and examples provide the basic background about the standard terms and conditions clauses normally included in many contracts drafted by U.S. lawyers.

Standard terms and conditions

A contract contains the standard contractual clauses and performance deliverables to which both parties agree.  While the performance deliverables section of a contract provides the parties with general ideas of expectations, the standard terms and conditions section of a contract is just as important.  Signing the contract binds a party to the common contractual clauses as much as it does to the performance deliverables clauses.  In summary, the standard terms and conditions section may contain just as many or more calls to action as the performance expectations.  Therefore, while a French agent contracted to do work in Spain may be more aware of his or her duties to carry out performance, the standard terms and conditions that also bind the agent are critical to the agent’s understanding of how to perform.  This is because standard terms and conditions clauses in U.S. contracts generally lay the legal framework for how to interpret the contract, which law applies, dispute resolution options, etc.

The clauses contained in the standard terms and conditions section consist primarily of those clauses the parties include to protect themselves in case of breach of contract or potential litigation over contract terms or circumstances.  A breach of contract may result, for example, from a breakdown in the parties’ relationship or a misunderstanding about performance or enforceable promises.  To assist international lawyers with identifying and understanding common contract clauses to prevent a breach of contract for their clients, listed below are some of the typical contract clauses normally contained in a standard terms and conditions section of contracts.  This list is not exhaustive, but it does contain some of the more commonly included contract clauses in the U.S. legal system.

Commonly called:  Merger/entire agreement/complete agreement clause

Effect: This clause indicates to the reader that the parties have no agreement other than the agreement containing the merger clause.  A merger clause pronounces an agreement’s completeness and restricts other prior agreements from consideration when determining the contract’s terms.  The function of the merger clause is to keep out any side conversations when determining the parties’ intent captured in the contract at issue.  The effect of this clause is that one agreement only governs the parties’ relationship.

Example: This agreement represents the parties’ entire agreement.

Commonly called:  Modification clause

Effect: This clause generally requests that two contracting parties memorialize their modification in a writing that both sign.  Important to the modification clause and its effect is the general rule that contract modifications typically require new consideration.  Consideration is a common-law concept that refers to a bargained-for exchange.  However, some types of contracts may not require new consideration for modification, so it is important to check (1) the type of contract and (2) the laws in the jurisdiction governing the contract.  While the consideration issue may be more complex, a modification clause simply requests that amendments to the contract be in a signed writing.  This writing requirement of the clause encourages the parties to negotiate any modifications before reducing their changes to writing and obtain a similar and clear understanding of what will be modified before any change occurs.  However, oral modifications — despite what a contract says — may be effective depending on the U.S. jurisdiction.

Example: The parties may modify the contract only by an agreement in writing signed by both parties.

Commonly called:  Employee or independent contractor clause

Effect: In a contract for services, this clause identifies whether one of the parties will be considered an employee or independent contractor.  The greatest difference is that employers are responsible for certain financial and liability matters for employees, where those who hire independent contractors are not responsible for the same matters.  In summary, an employee means more employer control but also more employer liability.

Example: Mr. X will act only as an independent contractor for the ABC corporation.  Mr. X is NOT considered an employee of the ABC corporation for the purpose of this contract for services.

Commonly called:  Confidentiality clause

Effect: A confidentiality clause or agreement defines what confidential information is, who must keep it private, and what the consequences of disclosure are.  Confidentiality clauses may have exceptions relating to publicly known information or where the other contracting party consents to the disclosure of otherwise confidential information.

Example: Mr. X, independent contractor, will not disclose confidential information obtained through Mr. X’s scope of services for ABC corporation.

Commonly called:  Conflict of interest clause

Effect: A conflict of interest clause restricts a contracting party from engaging in relationships, transactions, or circumstances external to the contract at issue.  The purpose of the clause is to prevent a conflict of interest from arising between the contracting parties.  A conflict of interest issue may arise due to a party’s personal situation or position.

Example: Contractor has disclosed any interest that presents or may present a conflict of interest.  Contractor will disclose any actual, apparent, or potential conflict of interest that arises throughout the term of the parties’ contractual relationship.

Commonly called:  Choice of law clause

Effect: A choice of law clause identifies where the contracting parties prefer to litigate issues arising from the contract.  Usually, the party who drafts the contract chooses the applicable law.  Other jurisdictional issues may become relevant in the future if litigation arises.

Example: The laws of the State of Delaware will govern this contract.

Commonly called:  Dispute resolution clause (commonly involving arbitration and waiver of jury trial)

Effect: These clauses tell the reader whether either party has waived some type of dispute resolution option.  A contracting party may want the other party to opt out of certain dispute resolution options in light of likely costs and inconveniences.

Example: ABC corporation agrees to resolve all matters arising from this contract through arbitration.

Commonly called:  Severance clause

Effect: This clause refers to the situation where a court determines that part of the contract is illegal or unenforceable.  The clause states that in this case, the validity of the remaining portions of the contract is unaffected.

Example: If any of the provisions of this agreement contravene or are invalid under state or federal laws, this finding will not invalidate the whole agreement.

Commonly called:  Indemnification clause

Effect: This clause states that one contracting party will indemnify (reimburse) the other for failure to meet a contractual obligation or other illegal or damage-causing action.

Example:

ABC corporation shall indemnify, defend, and hold DEF corporation harmless from any and all liabilities, damages, penalties, claims and expenses (including defense and settlement costs) resulting from any breach of this agreement.

Conclusion

This article clarifies some of the most common clauses found in the standard terms and conditions section of a contract drafted by a U.S. lawyer.  While the explanations and examples of the clauses are generally consistent across a wide variety of U.S. contracts, these clauses vary depending on the U.S. jurisdiction in which the drafting lawyer is licensed or the interests of the party drafting the clause.  As a result, international lawyers should carefully read and assess the standard terms and conditions of the contracts that guide their clients’ contractual obligations.  Even if U.S. law does not govern the contract at issue, understanding and recognizing common U.S. contract clauses will allow international lawyers to better help clients to perform on contracts in a way that does not offend U.S. cultural notions of compliance and fairness.

In understanding contractual clauses common to any particular legal system, both international lawyers and clients will be more prepared to fulfill contractual obligations and maintain healthy international business interests and relations.

Melanie Glover 

This article is not considered as legal advice

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