Are Your International Contracts Built to Fail?
With the diversification of supply chains, businesses more often must navigate countries with unpredictable legal systems. This post explains how to create strong contracts for countries with weak contract enforcement.
Three Common International Contract Mistakes
- Over-reliance on Arbitration: Arbitration in a neutral country often does not provide the safety net companies expect Even if you obtain an arbitration award, enforcing it in the defendant’s home country can be difficult, especially in countries with shaky legal foundations.
- Operating Without a Contract: “Why pay for drafting a contract if the local court system isn’t reliable?” Becuase even in challenging legal systems, a well-crafted contract gives protection.
- Wholesale Rejection of Arbitration: Though arbitration can be problematic, it’s not always the wrong choice. Certain countries with underdeveloped legal systems have a history of honoring arbitration decisions from recognized international bodies.
A Two-Stage Guide to Better International Contracts
- Country-centric Contracts: Make your contract local. The issue with courts in countries with undeveloped legal systems is often not so much corruption, but inexperience with anything other than the typical local contract.
- Directly Address your Enforcement Challenges: Move away from generic, one-size-fits-all contracts. Understand the local landscape and design your contract to mitigate potential pitfalls.
Self-Enforcing Contracts Are the Key
The best type of contract to use in countries with less developed legal systems is usually a self-enforcing contract. Self-enforcing contracts are drafted so that if your counterparty fails to abide by the contract you are in control and you suffer only minimal damage. Self-enforcing contracts are written to give you the power to enforce your basic rights without needing to litigate.
Self-enforcing contracts typically include some or all of the following key protections:
- You make no advance payments or deposits.
- You pay only AFTER the product has been inspected and shipped or the service has been satisfactorily provided to you.
- You do not make commitments that are enforced solely by denying payment terms.
Conclusion
When doing business with countries with weak legal systems, avoid mistakes like unenforceable arbitration. Use self-enforcing contracts that include built-in protections that don’t rely solely on unreliable local courts.
