Urgent Legal Help When Your Counterparty Is a Foreigner

"The economy is

strongly influenced by mentality."

Viktor Stepanovich Biryukov

Each of us, in everyday life, sometimes consciously and sometimes automatically, concludes all sorts of transactions. We hardly stop to think about the legal nature of our dealings when we buy groceries at the supermarket, grab a coffee on the way to work, fill up the car with fuel, or visit a beauty salon for a manicure or a nice hairdo for the evening. Every one of us will surely agree that the smaller the value of a transaction, and the fewer the negative consequences its non-performance could cause, the fewer requirements are placed on its form and content. The process of concluding major commercial contracts is governed quite differently, especially where the parties to the contract are located in different legal jurisdictions. There are numerous subtleties here, and failing to understand them can lead not only to friction and disagreements while performing previously concluded contracts and agreements, but also to significant losses of time and money. That is why describing every condition of a deal in as much detail as possible — its pricing, delivery specifics, and other significant details — is an essential ingredient of successful and secure business dealings going forward. When preparing a contract for signature, especially in cases involving a foreign element, the main task of the company's in-house lawyer or of the consultant supporting the deal is to work meticulously through every clause of the contract, stating important nuances and details precisely and in full. Naturally, when drafting a contract, one should certainly not simply agree to sign if a partner, including a foreign one, proposes their own version and treats it as the only acceptable one. In such a case, one should never hesitate to put forward a different view on the content of particular clauses.

Because the parties to foreign trade contracts most often communicate in different languages, difficulties can arise in conveying the intended meaning of the written text during translation. A carefully drafted section of the contract, containing a short glossary of the terms used within it, helps avoid divergent interpretations. Setting out clearly the meaning intended for each term, including when translated from a foreign language, ensures fewer mutual grievances and misunderstandings later on.

What is more, the accumulated practice of legal disputes arising in this field, and the decisions handed down in them, pushed the international business community towards developing and adopting shared interpretations of the most common concepts and possible terms. The Incoterms rules are, in essence, a dictionary of the terms used in contracts. They set out a system of abbreviations that are interpreted the same way everywhere in the world.

They address some very important points regarding:

the point at which title to the goods being supplied passes;
the point delineating liability for the integrity and safekeeping of the goods;
delivery deadlines;
the allocation of transport and insurance costs.

Unfortunately, the parties negotiating a deal often do not attach much importance to the form of the contract being drawn up. In practice, it does indeed happen that, once the managers have discussed and agreed all the significant commercial terms, the contract is drafted on the basis of a template someone had previously used elsewhere. This can create the illusion that everything is bound to go off "without a hitch," but a contract form that worked perfectly in one case may fail to work in another. In such cases, the assistance of an attorney specialising in international commercial law can prove invaluable. Terms of the agreed deal set out in detail serve as a kind of guarantee that no unpleasant "surprises" will arise once the contract is being performed. In this article, we describe one case from our legal practice in which we were able to help two major entrepreneurs from different countries find the optimal solution to a seemingly hopeless deadlock.

A corporate affairs director — let's call him Gustav — came to our law firm. The company whose interests he represented was the supplier under a contract concluded with a Russian company that planned to open a new sports and wellness centre in Yaroslavl. Under the terms of the high-value contract that had been concluded, equipment for a large swimming-pool complex was to be delivered in stages from Germany to Russia within an agreed timeframe. Although the managers had discussed the terms of cooperation between the companies at considerable length and in detail, both by phone and in person, various problems kept cropping up once the order actually had to be performed.

First, the supplier's own obligations had not been clearly set out in the contract. A specification of the equipment to be supplied and an agreed delivery schedule were attached to the contract, but there was no clear statement of who was responsible for arranging delivery of the equipment, exactly where that delivery was to be made, or at what point the supplier's liability for the delivery ended.

Second, the contract did not clearly state which country's law applied to its terms. As a result, should it become necessary to resolve a dispute through the courts, it was not obvious which country's legislation ought to be applied. What is more, the contract contained a clause standard for domestic contracts, stating that all disputes under the contract would be resolved at the defendant's place of business — that is, either the buyer company, registered in Russia, or the supplier company, registered in Germany. Unfortunately, no one had given much thought, when concluding the contract, to the fact that it is not currently possible to actually enforce judgments handed down by the state courts of Russia or Germany in the other country.

Finally, the contract had been drawn up in both Russian and German. Perhaps because of a carelessly used template, the contract text contained numerous discrepancies between the Russian and German versions, along with typographical errors and inaccuracies. There was also, unfortunately, no statement as to which language version would prevail. Naturally, each party to the contract relied on its own native language for interpretation, which likewise did not help ensure the trouble-free performance of a costly commercial contract by the parties.

The commercial relationship between the parties to the deal reached a genuine deadlock once the equipment manufactured by the German side was ready for shipment. The supplier, however, was unwilling to take on the risk of sending the equipment to the buyer without receiving full advance payment, while the buyer, for its part, was unwilling to make full advance payment before actually receiving the equipment. The contract concluded between the parties likewise contained no clear answer as to how payment and delivery were to be carried out while respecting the principle of "parity between the parties." At the same time, representatives of both sides still intended to see the contract through to a successful conclusion. Gustav, the corporate affairs director of the supplier company, came to our law firm for a consultation so that we could help find a way to resolve the problem that had arisen and break the deadlock. After listening carefully to our client, we thoroughly reviewed the terms of the previously concluded equipment-supply contract he had presented to us. Having concluded that, working solely from a document containing quite a number of gaps and ambiguities in the agreement of key commercial terms, we proposed that the client rework the contract by drafting a supplementary agreement negotiated between the parties. With the client's consent and an appropriate power of attorney from him, we conducted lengthy negotiations with the Russian buyer company, recorded all the previously unresolved issues in a protocol of disagreements, and were able to find compromise solutions for most of the points that had not previously been agreed. We also proposed that the parties use an escrow account, opened for that purpose in their mutual interest, for their settlements with one another. Under the scheme we proposed, the buyer would transfer funds into an account specially opened for the supplier's benefit. Those funds would then be held in that account until the supplier had fully performed its obligation to deliver the equipment. Only then would the money be transferred on to the supplier's account, without any risk of non-performance of the contract on its part. Using this scheme, the risks for both parties were minimised — the supplier was protected against non-payment of the contract price by the buyer, and the buyer was protected against not receiving the equipment within the agreed time. In addition, the supplementary agreement to the contract set out a new dispute-resolution procedure before an arbitral tribunal, whose awards can be enforced in another country. All the arrangements reached were carefully set out in a supplementary agreement to the previously concluded contract and signed by both parties. On the basis of this document, drawn up in both Russian and German, the parties were left with no unresolved questions or difficulties regarding the further performance of the contract they had concluded.

Representatives of both parties thanked our firm's attorney for a job excellently done and expressed a wish to continue working with us in the future. All that remained for us was to wish both sides good luck in their business, one hallmark of success in which is landing major projects on foreign markets. Agreeing terms, finding compromise solutions, explaining mandatory statutory requirements and, finally, putting the arrangements reached into the form of a contract, an agreement, or separate statements by the parties — all of this falls within our area of expertise. If your company has a similar need, or requires advice to clarify possible legal risks and consequences, we invite you to get in touch with us.

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THE LAW FIRM REPRESENTS CLIENTS' INTERESTS THROUGHOUT GERMANY

Civil Law

All rights reserved. Copying or republishing this article requires a link to the original source.