Australia: Lost In Translation – Issues In US/Australian Contracts

Last Updated: 23 December 2008
Article by Catherine Logan

Introduction – aren't we the same?

Until a fairly recent backlash against it, the theory of "strong convergence" in contracts law internationally has been a popular theme amongst legal academics. There are certainly many codes, international treaties, and glossaries like the International Chamber of Commerce's Incoterms in existence that attempt to bring harmony by globalising contractual terms and contract law fundamentals, at least with respect to shipping trade terms and sale of goods.

However, at the coal face of US/Australia commercial contract negotiations, from intellectual property licencing to service agreements and everything in between, misunderstandings and different priorities are still faced every day in drafting and negotiating contract terms with parties in these jurisdictions.

Considering the US is a common law jurisdiction, and English is the native language, it is interesting to note how different US law and practice, including contracts law, can be from ours. Young players in this area are often lulled into a false sense of cultural security until they learn the hard way that the law, and indeed the languages of these two jurisdictions, are still very different, and likely to remain so. (There are differences in business culture that need to be respected as well, but that is a discussion for another day).

It is therefore beneficial from time to time to summarise current issues experienced in practice in this area, if for no other reason than to provide a heads up to lawyers and their clients, to some of the issues that may arise in the average contract negotiation between US and Australian parties.

Language difficulties

On a day to day level the starkest differences are not so much in the law of contract, but in terminology and usage of language.

The fact that a joint venture has a different legal definition in the US to Australia, means that the US party may be uncomfortable with the characterisation of the document – a fairly fundamental objection. On the other hand, there is a fondness in the US for the use of the term "partner" in all sorts of commercial relationships that are nothing like the specific legal relationship that the use of that term signifies in this country. Australian parties are often equally uncomfortable with this.

The US liking for the concept of "affiliate" which has no precise meaning in our law, means a definition is often called for, and it can be hard to reconcile with the definitions of "related body corporate", "related entity" and "associate" that are so precisely defined in our statute law, particularly when the choice of law for the contract is the law of the US.

The US law speaks of course of "stock" as opposed to "shares" in corporations. This is a word that is used heavily in law and commerce in Australia as well, but we hardly ever use it to refer to shares. Rather, it is used to refer to trading stock of a business - rather than an equity share in a company – a different asset entirely.

Even the US predilection for putting the month first in the dating format is well known to cause serious confusion in other jurisdictions, including Australia. I won't even mention the spelling differences as they are simply too numerous, (and in any event are less likely to lead to serious misunderstandings).

The format challenge

Did I mention format? Australian lawyers with little or no US experience are often surprised by the appearance, layout and language of US contracts. The "plain English" movement in legal drafting which swept Australia in the 1980s and 90s appears to have skipped both the west and east coasts of the north American continent, leaving no trace of its passing.

Most commercial documents originating in the US could, as far as their appearance, style and the type of legal jargon that is used, have come from a 1950s Australian legal precedents text. There are no contents or index to assist the reader, not even any headings to clauses. Indeed, there is often very little punctuation, the sentences running for whole clauses, which themselves tend to be very long.

It must be said that, like our legal documents of old, the excessively long and prolix prose does almost inevitably cover every conceivable circumstance and nuance of the relationship or transaction, but the legal jargon it is couched in, as well as the old fashioned format, means that this takes longer to work out than it should.

Another issue is that plain English drafting has been around in Australia for so long now that our young lawyers have often been brought up on modern formats and drafting, and find this more of a challenge than those of us who have been around for decades. Sometimes it is necessary to live with the past though, and suppress the urge to modernise the document, to get the matter across the line.

Contracts Law ain't Contracts Law

Pure contracts law issues are the second category of challenges.

Good faith in commercial contracting (at least in performance of the contract) is a part of the landscape in US law. Our courts' lukewarm attitude to implying a duty to act in good faith to negotiations, performance and exercise of rights in contracts means we Australians often want an express clause in the contract providing that parties will both act in good faith in these matters – a US party may not see the need for such clauses.

On the other hand, "best endeavours" and "reasonable endeavours" in our law mean pretty much the same thing. Not so in the US. If the contract is to be governed by US law, you need to know what the difference is.

Unlike Australia, there is no general concept of "costs in the cause" in US litigation unless expressly agreed. In other words the party that wins will not be awarded costs to be paid by the losing party. The substantial costs of litigation in the US also mean that the US party will often be seeking various indemnity provisions providing expressly for entitlement to costs, and will place alternative dispute resolution procedure or procedures high on its list of priorities for the contract.

Indemnities sought are often broad based and in addition to the usual intellectual property indemnities and the like. Remember, unless they are carefully drafted and the liability arising under them is limited, indemnities can head a party into unexpected areas of exposure, even where they have not breached the contract and the loss or damage caused is not reasonably foreseeable. Good alternative dispute resolution arrangements, on the other hand, can be very useful. Some types of award may even be able to be enforced here, unlike US court decisions.

Choice of law – choose wisely

As parties to a formal contract, you get to expressly agree what law will govern the contract and what courts you will go to in the event of a dispute arising. It is important to try to get this right – by this I mean choose the proper law of the contract – that is the law (and corresponding jurisdiction) that has the closest connection with the contract and its performance, not just the law that the party that drafted the contract has suggested, or the law that the party with the strongest bargaining position says it should be. This is not going to work in the interests of either party if a dispute arises.

The jurisprudence difference

The latest academic thinking is that differences will persist because contracts is judge made law in both countries, and the prevailing judicial reasoning style of the two countries has always been fundamentally different. The reasoning of the UK, New Zealand and Australian courts is thought to be more formal (promoting the law in books) whereas the style in the US (and Japan as well for that matter) is thought to be more substantive, in other words more open to moral, economic, political and other considerations (promoting the law in action).

Many of the statutory regimes that are relevant to a contractual arrangement are also substantially different (for example copyright and trade practices laws) for historical and other reasons, and we need to work with the differences rather than expect uniformity to occur.

For those of us who get the opportunity to practice in matters involving more than one jurisdiction, these differences are usually what makes the work interesting and keep us engaged in our transborder matters, despite the sometimes unusual phone conference hours. Vive la différence!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Catherine Logan
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