Insights Into Law: Will A Contract Save You In Guangdong?

Glenn P. Hendrix, managing partner of Arnall Golden Gregory, and John L. Gornall, a partner with Arnall Golden Gregory

August 25, 2008

W e sometimes hear contracts with foreign business partners are not worth the paper they're written on.  Why bother with all that "legalese"?  Who wants to sue a foreign company in their own backyard?  For that matter, who wants to sue here in the U.S. if the foreign company's assets are all overseas?

Do you really think you're going to recover anything from a manufacturer based in, say, Guangdong Province?

Perhaps not (an issue we'll return to shortly), but the entire exercise of drafting a detailed contract still is worthwhile. Get the deal down on paper.  The very process of hammering out a contract helps identify potential disagreements that might arise down the road.  This is important especially in the cross-border context, where language and cultural differences can lead to the mistaken belief that both sides are of the same mind.  It's always better to address the thorny "prenuptial" issues upfront, even if it results in the other side walking away from the deal (better now than later, after you've invested further time and resources in the relationship.)

A well-drafted contract also will contain useful provisions that give you the moral high ground in the event of a dispute.  That won't help if you're dealing with someone who is truly unscrupulous or desperate; but assuming you've properly done due diligence regarding your business partner, you'll find most business partners feel bound to honor their contracts.

Think arbitration. While the U.S. has no treaties with any other country for the enforcement of our court judgments, it is a party to the 1958 New York Convention, which is a treaty providing for the enforcement of arbitration awards.  This might seem counter-intuitive.  Doesn't a court judgment carry greater weight than a private arbitration award? In the domestic context, yes.  But in the international context, whereas an award issued by an arbitrator in Atlanta has some legal standing in, say, Moscow or Shanghai, a ruling by a U.S. federal district judge has effectively none.

Worldwide, the success rate in enforcing foreign arbitration awards is approximately 90 percent.  Not surprisingly, the track record in certain countries is worse. Yet even in tough legal environments, the prospects are less bleak than one might expect.

Despite the challenges in enforcing an arbitral award, an arbitration clause at least affords a credible threat of holding the other party to its end of the bargain.  It also allows a Georgia-based company to have its dispute decided by an impartial arbitrator, as opposed to a foreign judge who may be biased or subject to improper influence.

Many arbitration organizations maintain panels of arbitrators who are experienced in international business disputes, including, for instance, the International Centre for Dispute Resolution, which is the international division of the American Arbitration Association; the International Chamber of Commerce; the London Court of International Arbitration; and the Singapore International Arbitration Centre, among others.

It's all about business-partner selection and maintaining the relationship. Thorough research and investigation, and prudent selection of the right foreign partners are the foundations of successful international business. While well-crafted contracts are critical, they cannot take the place of building personal relationships with your foreign business partners.

Notwithstanding the ease of global communication in the Internet age, this is difficult to do from within the confines of your office.  There is no substitute for personal contact.  The best protection remains doing business with someone you trust.

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