Contracting with overseas counterparts – issues to consider

“This would never go to court”, I said to the client. “I agree”, the client responded, “so why are we bothering with the contract?”. Fair point, I thought… “Well, it’s important that if there’s a dispute, we all understand what’s been agreed, and that there are no vague clauses in the contract”.

This is the nature of international business. The client is in Thailand, licensing their data to a customer in New Zealand. The contract is governed by English law and dispute resolution is through arbitration at the Singapore International Arbitration Centre. Merely establishing the arbitral tribunal to hear any dispute would be prohibitively expensive to many emerging businesses – a matter which is frequently overlooked when considering dispute resolution mechanisms.

Another client is in Australia, licensing a product to a customer in the USA. They settle on the contract being governed by Australian law, but are they realistically going to enforce a judgement or arbitral award against their American customer if the licence is breached? Unlikely.  Even in the days of Zoom and virtual hearings, the tyranny of distance alone makes drafting a contract appear to me more of a formality than something that can be relied on.

So, as the first client asked – why bother? Because even in the most unexpected cases, disputes do arise, contracts do get enforced and a good contract can ensure that all parties understand their obligations.

Know your counterpart

Especially in the digital world of data, it is tempting to licence data sets and provide remote consulting services to anyone who will pay. While the short-term cash may be welcomed, this is a risky strategy. You should be considering the following issues when deciding whether to do business with an unknown overseas party:

·       Are they a reputable company? Whilst nothing beats local knowledge, even a basic search of the company and its directors can give an indication of whether they are there to stay or are a fly by night setup. Reputable companies (even small ones) with good governance processes are less likely to breach the terms of your contract deliberately or inadvertently.

·       Are they sanctioned? If you are a US person, or have operations in the US, you are subject to US sanctions laws. Even if you are not in the above category, a check of the sanctioned entities list on the Office of Foreign Assets Control (OFAC) website can help you decide whether this is a party you should do business with. Many other countries, including Australia, Singapore, Canada and the UK have lists of sanctioned entities, which should be considered. 

·       Are they ethical?  Environmental, Social and Governance (ESG) obligations are key to businesses surviving and thriving. Your counterpart should have a robust ESG program that prevents practices such as kickbacks and bribery, exploitation, and environmental degradation. The UK, Australia and soon California have anti-slavery legislation which requires large companies to report on the risk of modern slavery in their supply chain. When doing business with a company, particularly one overseas in an unknown market, the risk that they may engage in modern slavery practices should be addressed. At a minimum, clauses which address the requirements of the applicable anti-bribery and anti-slavery legislation should be incorporated into your contract templates. 

Remember, if you’re not proud to be doing business with that party, you probably shouldn’t be.

Be careful what you licence

Many of my clients commercialise some form of data, either as a standalone product or with accompanying consulting services. I always advise them to think carefully about how much data is licensed to an individual customer. Licensing the company’s entire raw (unprocessed) dataset is a high-risk sale for most companies, as if just one customer breaches the confidentiality obligations of the licence it could do irreparable harm to your business. Instead, I advise clients to licence limited datasets, avoid licensing excessive unprocessed data and, best of all, license data as part of an overall consulting arrangement with the customer.  

Given the difficulty of enforcing any contracts against an overseas counterpart, it may be a challenge to obtain an injunction or other remedy against a customer who is releasing your data to third parties. This could mean that your company’s precious data is publicly available on the web.

Clear contracts avoid disputes and misunderstandings

Most small companies, and even some large companies, manage their contract process by themselves without the assistance of a lawyer or contract expert. The vast majority of the world does not read and write English as a first language, so overly complex and archaic contract language is unhelpful. I’m a strong advocate of drafting in plain English, and even more so when working with counterparts who may find it difficult to understand some of their obligations in a contract. 

Governing laws and dispute resolution clauses are still important

While it may seem contradictory to the points above, it is still vital to consider how and where any disputes will be dealt with. You should discuss this with your counterpart early in the contract process, rather than as an afterthought (which is so often the case). A robust mediation clause between senior executives of both companies may assist to resolve disputes before they escalate, and the Singapore International Mediation Centre is doing some great work in this area.

Where all else fails, and the stakes are high, a dispute may result in litigation. You should consider whether litigation or arbitration are most appropriate, where this should occur, and what law the contract should be subject to. A lot of factors will go into this decision, including the availability of enforcing any award or judgement against your counterpart, and advice is often required.