Understanding and negotiating key clauses in international contracts

Written by guest contributors – Ahlam Mekkaoui, Attorney (Casablanca Bar Association) – also a member of the ICC Global Commercial Law and Practice Commission, and Hasnae El Kamel, Legal Counsel, the article discusses the key clauses in international contracts, with an emphasis on managing unforeseen changes and disputes. It explains how contract variation clauses such as force majeure and hardship can help parties adapt to changes and protect their interests as well as important considerations for a successful negotiation.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of ICC Academy or ICC.

What is an international contract? They are legally binding agreements between parties based in separate countries.

These contracts cover a wide range of commercial activities, such as the sale of goods, services, intellectual property, technology transfer and more. Given the diversity of international contracts – think sales contracts, commercial agency contracts, distribution contracts, licensing contracts, and franchise contracts – there is no universal formula, and each international business contract raises unique issues.

As in all contracts, international agreements are the result of the parties' mutual consent. Subject to compliance with public policy, the parties are therefore free to include any clauses they wish. These clauses are essential for ensuring compliance with relevant laws and regulations, protecting rights and obligations, setting clear expectations, and avoiding or minimising potential disputes between involved parties.

However, to ensure the legal security of international contracts and minimise disputes in the future, it is necessary to pay proper attention to each clause in the contract, including boilerplate clauses, and key elements that make up a cross-border contract. These elements include, but are not limited to:

Key clauses in international contracts

Confidentiality clause

In a society evolving from an industrial to an information and knowledge-based economy where the value of information is increasingly appreciated in business, certain information is precious and can be one of the most valuable assets of a business. Therefore, the inclusion of clauses specifying the commitments of the parties in this respect has been gradually becoming a basic need for international transactions.

International business contracts typically include a confidentiality provision (also known as a nondisclosure provision) which prohibits or restricts the ability of the parties to disclose confidential information to third parties.

In the absence of a confidentiality clause, the law provides for the protection of certain confidential information. However, the applicable law does not always offer sufficient protection, and in many cases, practitioners establish clauses and agreements requiring confidentiality from the persons to whom the information is to be disclosed.

A confidentiality clause is a contractual provision by which the parties agree to accept that certain information, clearly specified and indicated in the contract, will be confidential and therefore cannot be freely accessed by third parties, subject to consequences specified in the contract.

Confidential information includes information which, if disclosed, could significantly harm a company's competitiveness. This includes trade secrets, know-how, as well as any other information such as marketing plans, new product projects, patentable inventions, and others. The term also generally refers to ideas, technology, and inventions. Confidential information could include the contract itself, communications and documents pertaining to the contract, and any other proprietary information designated by the parties.

The purpose of the confidentiality clause is not only to specify the organisational content of the contract, but it also provides the possibility of maintaining the confidentiality of certain information beyond the end of the contract.

ICC Model Confidentiality Agreement 

A balanced model confidentiality agreement taking into account interests of both disclosing and receiving parties in an e-book format.

Contract variation clauses

In a constantly changing environment, where the [GU1] [MM2] circumstances that led to the signing of the contract continually evolve, the stability of contractual commitments is significantly challenged. The use of contract variation clauses as risk management tools enables the parties to address unforeseen events that either render the fulfilment of the contract impossible or impracticable (force majeure) or substantially disrupt the financial balance of the contract (hardship).

Force majeure clause

Force majeure clause has become one of the most important clauses since Covid-19.

This clause provides circumstances and grounds on which you can terminate or vary a contract if parties cannot perform due to an event beyond their control.

Force majeure can be defined as a cause of exoneration from liability for the debtor when the non-performance of his obligations is due to an unforeseen event. Such an event is sometimes referred to as an ‘Act of God’. These include natural disasters such as tornadoes, tsunamis, pandemics, and earthquakes, war explosions, strikes, and lockdowns, among many other examples. Government actions include limiting or prohibiting any party from performing its obligation.

The parties often enumerate a list of events which they qualify as force majeure. This list should not be interpreted as an exhaustive list, but only as a series of examples. For the sake of clarity, events are often classified by category, like political events or meteorological events.

As for the effects of the force majeure, when the impossibility of performance due to the force majeure is temporary, its effects are suspensive. On the other hand, if the impossibility of performance is permanent, the debtor will be released from his obligation. It should also be pointed out that, where force majeure has extinctive effects, it results in the retroactive annulment of the instant performance contract (resolution). In the case of a contract with successive performance, this annihilation will only be felt for the future (termination).

The force majeure clause must be distinguished from various clauses which also deal with the occurrence of an irresistible and unforeseeable event, but which do not make performance of the contract impossible. This is the case of the hardship or foreseeability clause, or the rebus sic stantibus clause, the purpose of which is to regulate the occurrence of an event that upsets the economic equilibrium of the contract because of an unforeseeable change in circumstances.

ICC Force Majeure and Hardship Clauses

A free resource on the two types of clauses.

Hardship clause

The hardship clause can be invoked to terminate a contract or to renegotiate and adapt it when unforeseeable circumstances arise that are not attributable to the party invoking the unforeseeability and that disrupts the economic equilibrium of the contract[1]. This arrangement prevents hasty termination by a party experiencing difficulties in meeting its contractual obligations.

This clause is therefore a prospect provision against unforeseeability, which, to be effective, must be drafted in such a way as to clearly establish the factors of imbalance to be considered and the way in which they are to be remedied. The validity of such a provision, which is based on the principle of party autonomy, is not subject to any specific rules other than those common to ordinary contract law. However, according to many legal writers, the circumstance triggering the revision procedure must be objective and based on an event that could not have been foreseen by either party at the time the contract was entered into.

[1] D.PHILIPPE, Les clauses relatives au changement de circonstances dans les contrats à long terme, 2009, p.3

Dispute resolution clauses

Disputes may still arise during a contract despite best efforts to mitigate risks and address potential conflicts.

The purpose of including dispute resolution clauses delimiting the choice of applicable law and the provisions governing the resolution of disputes is to strengthen the predictability and security of transactions by defining both the decision-maker and the legal rules in force for future disputes. It is therefore important that these clauses receive as much attention as the material provisions of the contract since they help to avoid lengthy and potentially costly disputes.

While jurisdiction and governing law clauses are separate, they are linked and should align.

Choice of law clause

When it comes to international contracts, one of the most important questions to decide: Which country’s laws should the contract be compliant with?

The governing law (or “choice of law”) of a contract is the body of law that will govern the interpretation and enforcement of the contract.

There are several reasons for parties to include a choice of law clause. In international contracts involving parties from different countries, this provision enables parties to agree in advance on the legal system that will govern the contract. In this regard, parties can choose the law of their own country or that of another country, even if they are not established there.

The parties may also opt for "rules of law" that are not the national laws of a specific country. For example, they may choose to apply the UNIDROIT Principles, which are a set of rules drawn up by the International Institute for the Unification of Private Law (UNIDROIT) with the aim of harmonising and modernising international contract law.

Under Article 21(1) of the ICC Rules of Arbitration, the parties can choose the rules of law applicable by the arbitral tribunal to the merits of the dispute, whether national laws or non-state rules of law such as the UNIDROIT Principles. This offers greater flexibility and enables the parties to select the legal framework best suited to their specific needs and the nature of their transaction.

The choice of law clause is based on the principle of autonomy of contractual consent and allows the parties to adapt the provisions relating to the chosen law to the specific characteristics of their transactions[2]. Only provisions that are mandatory or of public policy escape such adjustments by their nature.

The choice of law has a significant impact on the interpretation of the international contract since each legal system has different rules and regulations which affect the interpretation of the contract and the outcome of a dispute. This provision can affect the validity and enforceability of the contract and its terms, as well as the extent of rights and obligations that are not expressly set out. It should also be emphasised that the choice of law may lead to the application of related international conventions  such as United Nations Convention on Contracts for the International Sale of Goods (CISG).

[2] P. MOISSAN, Technique contractuelle et gestion des risques dans les contrats internationaux : les cas de force majeure et d'imprévision, Les cahiers de droit, 1994, p. 288

Choice of jurisdiction clauses

Independent of the choice-of-law, the choice of court determines in advance the court which will decide a possible dispute.  By its positive effect, it establishes the jurisdiction of the designated court and by its negative effect, it extinguishes the jurisdiction of any court not designated, even those which would objectively have recognised themselves as having jurisdiction if, in the absence of the clause, the dispute had been brought before them.

Such provisions are particularly appreciated in international contracts, as they alleviate the legal uncertainty resulting from competition between the courts of the different countries of the contracting parties. This choice also allows the parties to choose and control the dispute resolution process. Thus, parties may choose a court that is reputed for its specialisation in a particular field or for its favourable procedural practices, or they may choose a specific jurisdiction out of a desire to reduce legal costs or delays .

However, such a clause does not produce its effects without limit or control. For a choice of court clause to be enforceable, it must be lawful, admissible, and valid. For example, the court may find the clause unlawful if it allows one of the parties to choose any court it wishes[3]. This could imply unpredictability which is contrary to the purpose of the choice of law clause itself.

[3] Brooke Marshall, A en ayantsymmetric Jurisdiction Clauses, Oxford University Press, 2023

Dispute resolution mechanisms

International agreements frequently provide that the parties must first try to settle their disagreements before resorting to litigation or arbitration. There is usually a deadline by which parties should attempt to resolve their dispute. If the dispute cannot be resolved amicably within the allotted time, it can then be referred to litigation or arbitration.

Parties may decide to use alternative dispute resolution methods to resolve their disputes before a jurisdiction other than the traditional state court. The parties may decide to submit their disputes to conciliation, mediation, or arbitration. These resolution mechanisms may be provided for in statutory clauses or extra-statutory agreements and generally involve the intervention of a third party, whether it is an arbitrator, a mediator or even a judge in the case of conciliation.

Actually, practitioners of international contracts and international law agree that arbitration is the most appropriate and most acceptable method of resolving commercial contracts disputes involving parties from different countries. They also agree that ICC, as the world’s leading arbitral institution, offers high-quality services and is the most respected and trusted arbitration institution. By submitting their dispute to arbitration, the parties benefit from significant advantages in terms of confidentiality, flexibility, specialisation given that selected arbitrators are specialist in the field relevant to the dispute and cost compared with traditional state courts. It can be supervised either by the parties themselves (ad hoc arbitration) or by an institution that offers international dispute resolution and arbitration services such as the International Chamber of Commerce (ICC) of Paris.

Standard ICC Arbitration Clauses

Download this free resource now.

By opting for mediation or conciliation, contracting parties undertake, when a dispute arises, to implement a mediation or conciliation process prior to any court proceedings, to find an amicable solution under the aegis of a mediator or conciliator. This process will end either with the conclusion of an agreement, usually in the form of a settlement, or with its failure, thus allowing the parties to regain their freedom of recourse before the courts[4].

The ICC International Centre for ADR (Centre) offers mediation, expert appraisal, and dispute boards services, providing parties with a procedural framework for settling proceedings quickly in a cost-effective manner.

With all the key elements in place, negotiations can begin. Successful negotiation of cross-border contracts requires a nuanced approach.

[4] M.C. River, Les modes alternatifs de règlement des conflits, 2014, p.53 et ss.

Drafting and Negotiating International Commercial Contracts

A guide clarifying the issues surrounding international contracts and will help lawyers and business people avoid the most common pitfalls.

Practical tips for negotiating contract clauses

A contract is an agreement resulting from the will of the parties involved, establishing rights and obligations. The purpose of this negotiated process is to determine the nature, extent, configuration, and conditions of performance of these rights and obligations. This process can be complex in view of the many issues involved. Each party has its own interests and constraints and seeks to adopt the contractual terms that are most beneficial to it. However, the principle of freedom specific to these negotiations is framed by the requirement of good faith (or duty of loyalty), the duty of confidentiality and the duty to inform.

Legal and cultural considerations

First, before entering a contract with a company, due diligence should be performed on that company to verify that the company is registered to do business in its home country and in good standing with the relevant government authorities.

The individual who is designated to sign the contract on behalf of each party should have the legal authority to do so, and the contract should be signed in accordance with the relevant formalities.

Before drawing up the first drafts of the agreement, it is crucial to understand the stakes involved in the transaction by finding out about all the aspects involved, as well as the counterparty's commercial and legal environment. Gathering information about the counterparty and its reputation may be necessary to establish your intentions and expectations arising from the negotiation.

It is also advisable to analyse the legislation in force in the country concerned to identify the legal implications of the various contractual clauses envisaged. Each party is faced with a different legal framework and different legal principles, which increases the legal risks.

It is also essential to take cultural differences into account during the negotiation process and adapt your approach to the culture of the counterparty. Flexible contractual clauses that take account of the partner's business practices and cultural values, while protecting its own interests, should be considered.

Strategies to adopt for a successful negotiation

The differences in legal systems, language, culture, can affect the success of an international business relationship.

Before entering negotiations, it's essential to be prepared. There are three considerations. Firstly, it is important to analyse with whom you are negotiating and to ensure that the parties involved in the negotiation and signing of the contract have all the necessary authorisations to proceed. In addition, it is necessary to confirm all statements in writing and to ensure the validity of the documents provided (plans, premises, certificates).

Secondly, it is crucial to be prepared for the negotiation, to understand the substance of the transaction and to clearly define the objectives and benefits arising from it. This will enable the negotiation of terms that correspond specifically to the needs as defined. It also requires you to be aware in advance of any relevant laws or regulations and terms of engagement.

Lastly, it is important to be prepared in terms of how to negotiate and how to proceed, and this comes under the heading of effective communication. If necessary, it may be important to consider seeking legal advice or guidance to help ensure that the procedure is properly carried out.  Furthermore, if the negotiations are to remain confidential, a confidentiality agreement should be signed before negotiations begin.

In conclusion, drafting international contracts requires an understanding of the different laws and customs involved, as well as an ability to anticipate the risks and unforeseen events against which it is best to safeguard by drawing up solid, enforceable agreements at international scale.

Moreover, international contracts are drawn up on the basis that the contracting parties are knowledgeable professionals, equal in terms of strength and therefore entitled to include in their contracts clauses tailored to their requirements. However, some countries are challenging this presumption, particularly in the context of contracts relating to industrialisation or technology transfer. In such cases, the presumption of equality between the partners is reversed and the contract should be interpreted accordingly, based on the assumption that the contracting parties are not equal. For instance, in technology transfer contracts, it might be envisaged to impose a heightened obligation to provide information on the company of the industrial country, like the one imposed on manufacturers and professionals in their relations with customers. This enhanced information obligation arises from the principle of good faith, which is often invoked in the interpretation of contracts.

Business Transactions and Contracts

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This article does not address all the topics which should be addressed in an international business contract but examines some of the key aspects to consider when forming a cross-border contract and explore some examples of the types of clauses most included in international contracts, highlighting the reasons underlying their inclusion in these agreements.