Introduction
I am an international transactions lawyer. I frequently handle the initial stages of transactions and often find myself negotiating with parties who do not have legal representation. In these scenarios, I am trying to put together the easiest and most streamlined contract that the counterparty will be comfortable with. This work requires a deep understanding of the context within which companies do business across borders.
My Practice Focus
I cut my international contracting chops doing business with China. I lived there for three years many years ago, so I built a practice around doing business in Chinese and with Chinese companies. We represent Chinese and other foreign companies in their U.S. work, and we also represent U.S. and foreign companies doing business in China.
My international practice generally revolves around international manufacturing. That is as challenging as it sounds because the global supply chain is constantly in flux, moving from China to Southeast Asia to Latin America, and beyond, even Africa. I've used China as my starting point, but the supply chain keeps moving, which means that I have to keep learning to understand the bigger issues that are at play.
Geopolitical Considerations
Geopolitical considerations are the backdrop to all international business transactions.
For example, the U.S.-China trade war introduced tariffs and export controls that forced businesses to rethink their supply chains and sourcing strategies. The COVID-19 pandemic exposed vulnerabilities in global supply chains, leading to disruptions and a renewed focus on resilience. And more recently, the Russia-Ukraine conflict has triggered sweeping sanctions and economic uncertainty, impacting energy markets and global trade.
These events underscore the importance of considering factors such as political stability, trade policies, intellectual property protection, and potential sanctions when making strategic decisions. By understanding the geopolitical context, companies can develop contingency plans, mitigate risks, and seize opportunities in an increasingly volatile global environment.
You need to consider extraterritorial issues like the Houthis in the Red Sea, potential war in the Taiwan Straits or the South China Sea, and piracy in the Straits of Malacca. That is before you pull in international financial and currency market fluctuations and the significant upheaval in global governance via the elections occurring in 2024.
How Did We Get Here?
Many multinational corporations began diversifying their global supply chains more than a decade ago. President Trump added a significant exclamation point to the idea of reshoring, nearshoring, friendshoring, or whatever you want to call it. Then COVID hit, causing international shipping costs per container to skyrocket from $2,000-$3,000 to $25,000, prompting companies to rethink their business strategies. For some reason, many companies throw caution to the wind when engaging in international business, relying on hope, luck, and sheer enthusiasm.
International Contracts Must be Built on a Good Foundation
When I started becoming an international lawyer, I built on my foundation as a general legal practitioner. Approximately 75% of skills I use now I learned before doing a single international deal. People doing business across borders should be in a similar scenario. If you don't know how to do business in your home country, you really shouldn't be doing business internationally.
The other 25% of my skills have been crucial for dealing with international jurisdictions. Once we start engaging with one or more parties across borders, we are often dealing with one or two international jurisdictions. Sometimes, parties from three different countries are involved, depending on where parents, subsidiaries, and partners are located in the deal.
I am always staggered by the number of companies that sheepishly admit to me that they have been using purchase orders for deals involving tens or hundreds of thousands of dollars or more. Sometimes they incorporate a few key provisions on the back side of the purchase order that reflect hard lessons they have learned along the way. In this complex contracting environment, there are certain key provisions that need to be included in a contract that most parties do not consider.
Financial Provisions
Financial covenants are crucial, especially in joint ventures. Each party agrees to contribute assets to the venture, but typically, one party contributes the majority of the capital. The party contributing capital will expect to monitor certain financial ratios, such as debt to collateral, debt to assets, and other key financial metrics. These financial metrics can be important even in international transactions where a buyer is advancing significant sums to the seller or manufacturer.
Exclusivity or Territoriality
A good portion of my 2024 work to date has involved restructuring of the way that companies are doing business. Lately, we have rarely set up joint ventures in China, but we are commonly drafting manufacturing agreements or distribution agreements that deal with the idea of territoriality. The concept of territoriality can be complex. For example, does "China" refer only to mainland China? Does it include the special territories of Hong Kong and Macau? Or does it mean the "one China" that the Communist Party claims includes Taiwan?
Reporting and Audits
Ongoing reporting is important in international ventures, especially if you are the party requesting the performance rather than performing. This is coupled with the concept of manufacturing and financial audits, both of which can be done remotely or onsite and should be coupled with noncompliance penalties written in clear dollar amounts.
Control Provisions
Most companies only want to do business with the party they contracted with. But changes of control happen often in the life of a business. What constitutes a change of control? It may be any change of the equity interests, voting interests, effective voting interests, or beneficial ownership interest. It may also refer to the purchase of a parent company where the subsidiary ownership technically doesn't change.
Nonassignment and Change of Control
Nonassignment is related to control. If there is any change of control or assignment permitted by the terms of the contract, you should push to have veto power over whether the contract stays in place. If the other party is going to be able to assign the contract, ideally, they should still remain liable for the performance.
Payment Currencies
I usually defer to my clients to determine the payment currency of their transactions. But I ask them if they have talked to any type of financial adviser or someone who understands the idea of the constant flux of the global currency markets. If they don't have a strong opinion, I'll usually introduce them to foreign exchange experts who can often give them equivalent or better expertise at a better rate than any bank.
Using International Partners
Good contracts are often meaningless without the ability to enforce or at least threaten enforcement. You should have key partners ready in the international jurisdictions to oversee all aspects of your counterparty's performance. This can include financial auditors, supply chain experts, engineers, and others relevant to the specifics of your business.
Conclusion
Navigating international contracts involves a deep understanding of both the legal framework and the geopolitical environment that can influence business strategies and outcomes. We continue to see companies that are adept at adapting and responding to the ever-shifting global landscape. They know the importance of using these key provisions in their international contracts.
Navigating international contracts requires a deep understanding of both the legal framework and the geopolitical environment that can influence business strategies and outcomes. Companies that adapt and respond to the ever-shifting global landscape recognize the importance of incorporating these key provisions in their international contracts.
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