UK: International Contracting: A Look At Some Of The Challenges

When an organisation or individual is looking to undertake work in a territory other than its home market it should ensure that it is fully aware of the practical considerations arising due to the location of the project.

Market standards

Parties need to be aware that positions or behaviour considered as market standard in their domestic market may be different in other jurisdictions:

  • Contracting conventions There may be significant differences in contracting practice resulting from a contrast in approach between different legal systems. For example, contracts in civil code jurisdictions are often shorter than those in common law jurisdictions. The civil code will impose key provisions on the contracting parties and there is a corresponding reduction in the number of express terms the contract needs to contain. Common law concepts such as liquidated damages for delay may not be recognised, or their use may be restricted, in other jurisdictions, particularly civil code jurisdictions. Furthermore, parties may find that negotiating practices differ significantly – high pressure tactics may only cause offence in some locations, as may fielding negotiators of unequal seniority.
  • Balance of power and negotiating style Different levels of power, or difference in typical negotiating positions, may occur between different locations. For example, state entities may have an extremely strong and intractable negotiating position or there may be significant differences in the normal approach to limitation of liability.
  • Local business ethics Parties need to understand if the prevailing culture results in local business ethics and they should be sensitive to these. Given the extraterritorial nature of anti-bribery and money laundering legislation such as the Bribery Act, parties will need to have strong procedures in place to ensure compliance with applicable laws and procedures, and therefore may need to consider carefully the risks of contracting in some locations.

Language implications

It is important not to underestimate the effect of the negotiating parties having different native languages. Even if a common language is theoretically able to be used, a desire to save face may result in negotiators failing to indicate that their understanding is not complete, and nuances might be lost in translation. The official language of the contract will need to be decided upon. Even if English is chosen, this ultimately may not be the working language for the project. Therefore, not only will translations need to be provided for project management purposes but if there is a dispute, both records and witnesses may operate in different languages, adding considerably to costs and complexity.

Standard form contract

Every construction and engineering contact will have to address issues which are particular to the specific project it relates to. However, a number of core provisions will need to be addressed in most construction and engineering contracts. As a result, professional institutions and trade and industry bodies have historically produced standard form contracts to protect the interests of their members. This is especially the case in common law jurisdictions such as England and Wales.

Risk allocation

Although the UK has a longer history of using standard forms than most, standard form contracts are now used in a number of countries. Certain internationally recognised standard forms are regularly used in a wide variety of jurisdictions.

The purpose of a standard form contract is to provide a template contract which standardises risk allocation between the contracting parties, and which can be adapted for use anywhere. The intention is to create greater parity between the negotiating parties by ensuring that they understand their obligations under a contract, by virtue of being familiar with the form of contract being used.

The main standard forms are available as suites or families of contracts, due to the recognition that risk allocation will vary depending on the type of project, the procurement methods adopted and perhaps the parties. For example, if the employer is undertaking the design of the works which are the subject of the contract this will require a different form than that required where the contractor is both designing and building the works.

Due to the increasingly international nature of contracting, the divide between international and domestic standard forms is becoming blurred. For example, some formerly international standard forms, such as FIDIC, are now being used in the UK and some UK domestic standard forms, such as NEC, are being used internationally with increasing frequency.

Standard forms do however have their limitations, not least that they attempt to balance suitability across a range of projects with relative simplicity and brevity. Domestic contracts may include a layer of complexity derived from local legislation, which becomes irrelevant in an international context.

Bespoke Terms & Conditions

Often legal advisors consider that the facts, structures and complexities of projects, and the clients' needs in respect of them, require terms and conditions that would require substantial re-writing were a standard form to be used. In these circumstances, the client may feel that it is worth producing a bespoke contract to be drafted to suit the individual project. This may particularly be the case where a project is to be project financed, and therefore requires a flow-down of specific items from a project agreement and/ or a substantial re-balancing of risk allocation.

Parties or law firms that engage in particularly complex or specialist areas may have their own specific bespoke forms for particular types of project which can then be tailored to particular jurisdictions. The size and complexity of international projects, together with the fact that some jurisdictions do not use standard forms widely, is likely to mean that parties will encounter bespoke contracts more frequently when contracting internationally.

Governing law

The law governing the contract will affect how the contract is interpreted, and parties to a contract should therefore clearly identify the governing law of contract. Failure to do so could lead to disputes as to which law applies (especially in cross border transactions with parties of different jurisdictions). This could result in a shift in the interpretation of the contract and possibly the risk allocation.

In some jurisdictions, there will be little room for negotiation in relation to which law should apply. When considering the law which should apply to the contract, how developed a country's legal system is and the ease of enforceability of a party's rights will be key factors to take into account. If the project requires external financing of that project, the lenders may prescribe what law should apply to the contract to ensure that they are comfortable with the risk matrix.

Although the contract may specify a particular governing law, parties should consider the interaction of the domestic law and the named law and the possibility of conflict between the different laws.

Laws applying from other jurisdictions

Parties should also consider laws applying from other jurisdictions. The most common are ones relating to corruption and bribery, such as the Bribery Act (England and Wales) and Foreign Corrupt Practices Act (USA). These cannot be contracted out of so are highly significant to a contractor considering work in a territory other than its home market.

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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