Cross-border trade has increased globally due to liberalisation, where countries create a friendly environment by reducing trade barriers and market entry limitations. As your business grows, it is essential to draft contracts that accommodate international trade, especially when parties and performance occur in multiple jurisdictions.
Suppose you enter into a contract with a Japanese buyer to export goods. Several unique issues related to cross-border trade will arise. First is the pricing of the contract. Due to differences in currency, parties must predetermine the transaction’s currency.
Foreign exchange fluctuations can significantly affect the contract price. For example, if you set the delivery price at $10,000 when the exchange rate is Sh150 to the dollar, your contract price would be Sh1,500,000. If the exchange rate drops to Sh100 per dollar, you will face a foreign exchange loss of Sh500,000.
Conversely, if the rate rises to Sh200 per dollar, you will gain a foreign exchange profit of Sh500,000. In the first scenario, you lose by selling the goods at a lower price than anticipated, while in the second, you gain more from the foreign exchange, but the buyer pays more than expected.
Including a clause specifying the transaction currency and a foreign exchange clause to hedge against risks from exchange rate fluctuations is crucial. In more complex transactions, parties can use derivatives contracts for additional protection.
The second key consideration in international contracts is dispute resolution. Parties to the transaction are governed by different laws. The Kenyan seller is subject to Kenyan laws, while the Japanese buyer is governed by Japanese laws.
Determining which law will govern the transaction is critical. If only Kenyan law is chosen, the Japanese buyer may be at a disadvantage, and vice versa if only Japanese law is selected.
This is why the dispute resolution clause is vital in international trade contracts. It sets out how conflicts will be resolved, specifying the applicable law and jurisdiction. The first principle is the choice of law, where parties agree on the governing law for their dispute.
The second principle is an arbitration clause, where parties agree that disputes will be resolved by a private tribunal instead of courts. There are many international arbitration mechanisms available for international trade, such as the International Chamber of Commerce (ICC), which uses its rules of arbitration to ensure disputes are resolved in a neutral jurisdiction acceptable to both parties.
Parties also need to choose the place and seat of arbitration, a crucial consideration in cross-border transactions, especially when parties are domiciled in different jurisdictions.
In summary, as cross-border trade increases, drafting international trade-friendly contracts is essential. Key considerations include addressing currency and foreign exchange fluctuations, choosing the applicable law, and specifying dispute resolution mechanisms.
By including these elements, parties can navigate the complexities of international trade more effectively.
Ms Mputhia is the founder of C Mputhia Advocates | [email protected]
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