Basics of Drafting International Transaction Agreements

The Necessity of Drafting International Transaction Agreements

As the number of transactions with foreign companies increases, the need to draft international transaction agreements is becoming increasingly important for both large and small companies. Our firm is increasingly being asked by many companies to draft contracts in English. Although there are many different types of international transactions, most contracts follow a standardized pattern, such as a sales agreement, sales agency agreement, service agreement, license agreement, and joint development agreement. It is important to understand which type of contract is applicable to the actual transaction you are about to enter into.

English Contract Rules and Regulations

English-language contracts have many rules and regulations that have been developed over a long period of time, and there are many differences in format and content from Japanese contracts. In the case of transactions between Japanese companies, the Civil Code and the Companies Act contain many basic rules and regulations, so even if a contract is not stipulated in the contract, the provisions of these laws will apply, and standards for dispute resolution will naturally be established. Therefore, in contracts between Japanese companies, the content of the provisions is extremely simple, and even sales contracts involving transactions worth several hundred million yen are often as simple as two to three pages. On the other hand, when doing business with a foreign company, there are differences in laws, regulations, and business practices that apply to both parties, and even matters that are obvious to one party may be interpreted differently by the other party and also many situations in which a party may make a claim that is completely unexpected. Therefore, when drafting an international transaction agreement, it is necessary to stipulate in detail even if the matters are considered minor and obvious. Of course, it is usual to stipulate certain predetermined matters based on certain rules, rather than writing everything that the parties have in mind.

Whereas Clause (Recital)

The first thing that comes up when reading an international transaction agreement is the Whereas clause, which briefly states the purpose for which each party intends to enter into the agreement by drafting it in the first place. For example, the seller is considering the sale of certain goods and the buyer is considering the purchase of those goods. For example, it should be stated as follows:

（Sample) 
WHEREAS, Japan Gymnastic Machine Manufacturing Company Ltd. (“Seller”), is engaged in the business, among other things, of manufacturing and selling products as defined hereinafter; and
WHEREAS, China Tostem Co., Ltd. (“Purchaser”), desires to purchase said products from Seller and its subsidiary and to sell them to customers in People’s Republic of China; and
WHEREAS, Seller and Purchaser are willing to cooperate for the development, marketing, and distribution of the said products in People’s Republic of China;

 About Consideration

The term “consideration” is often used in international business contracts. The cause of contract means the consideration for the transaction. In the case of a sale of goods, the delivery of the goods and the delivery of money are mutual consideration. The drafting of a contract is not necessarily limited to transactions of tangible things, such as money and goods, as both parties engage in bargaining with each other, but also includes transactions of contractual terms, such as the other party assuming the risk in exchange for a warranty statement made by one party. Therefore, as long as both parties are bound by the terms of the contract, a cause of covenant is considered to exist. Under Anglo-American law, a contract without a consideration is interpreted as invalid. However, since the law is interpreted very broadly as to what concessions were made to each other, it is unlikely that the absence of a consideration will invalidate the contract in practice. However, the traditional contractual language usually ends with a “Whereas” clause, which states that the contract is entered into in consideration of mutual covenants.

（Sample)
NOW, THEREFORE, in consideration of the premises and mutual covenants and agreement hereinafter contained, the Parties hereby agree as follows:

 Standard English Contract Format

Since business practices differ significantly between transactions in Japan and transactions with foreign countries, simply translating a Japanese contract into English is not sufficient as a contract for international transactions. It is also necessary to include contract clauses specific to international transactions, such as jurisdiction and governing law. In order to avoid any transaction disputes with foreign countries, it is recommended that, if possible, a contract be drafted from the beginning in a form suitable for international transactions.

Use a sample contract that is favorable to you

When preparing an English contract, you should use a sample contract as a reference and customize it according to your company’s needs. Although sample contracts are prepared to be as neutral to both parties as possible, in actual practice, useful samples may differ depending on the contractual position, such as a contract that is favorable to the seller or to the buyer. It is important to utilize the most appropriate English contract sample for your purpose, taking into consideration your company’s position, such as whether you are the seller or the buyer.

Drafting contract clauses that meet your company’s requirements

The following requests may arise while drafting a contract, for example. (i) You want the contract price to be paid in installments according to the progress of the work, rather than in a lump sum upon delivery, (ii) You want to clarify that the sales price does not include the consumption tax, and that the tax is not included in the sales price, (iii) You want to clarify that the other party is responsible for overseas transportation charges, and (iv) You want to extend the performance date rather than cancel the contract even in the event of a force majeure. When you receive an English contract from a foreign company, you need to analyze the content of the contract accurately and consider whether it is consistent with your company’s business practices and desires. If it does not accurately reflect your company’s requirements, we will need to propose a counter proposal. We will prepare a draft of the contract terms and conditions to be proposed as a counter-proposal in accordance with your company’s requirements.