Contracting with foreign entities

Contractual legal obligations with an international element

Legal obligations (especially contractual ones) containing an international element constitute a major part of legal relations governed by private international law. This is because all international trade and international economic relations and cooperation (unless they are relations regulated by public international law) take place within these relations. In these cases, however, the parties often neglect the fact that they come from different states with different legal systems and only address possible disputes (or conflicts – hence conflict of law rules, see below) when they actually arise. At this point, we will list the most important aspects that require particular attention when concluding contracts with foreign entities.

These are in particular:

• Determining the governing law, i.e. the law governing the contract
• Determining the court having jurisdiction to settle any disputes arising from the contract
• Removing language barriers

Determining the governing law

Determining the governing law, meaning the law of a particular state, is crucial for a contractual relationship with an international element. All aspects of the contract will be reviewed and governed in accordance with the governing law, especially in terms of its formalities, rights and obligations arising therefrom and any claims arising from its violation. As a general rule, the governing law applies to the extent to which the parties have not regulated their rights and obligations within the autonomous area. However, it cannot be disregarded that the governing law will also decide what and how large autonomous space the parties may have. The legislation of individual countries in (not only) obligation law naturally varies, and each of them may be less or more advantageous or disadvantageous for one or the other party. It is therefore advisable not to determine the governing law outside the contract.

The parties usually have a relatively wide discretion to determine which law will govern their contractual relationship. This is referred to as the choice of law, which is of primary importance for determining the governing law. Secondarily, unless the parties agree otherwise, subsidiary rules apply according to different connecting factors. In such cases, it is appropriate to apply the conflict of law rules contained in, for example, Act No. 91/2012 Sb., on private international law (hereinafter the “Act on Private International Law”) or, in the case of EU Member States, the Rome I Regulation, which has priority over the Act on Private International Law, or the Rome Convention of 1980 if the contractual obligation was concluded before 17 December 2009 inclusive.

In addition to the conflict of law rules, direct rules are also of great importance as they take precedence in application over conflict of law rules. We are referring to a set of internationally agreed direct rules that individual states have adopted into their legal systems on the basis of international law obligations and apply automatically as part of their domestic law. These include the UN Convention on the International Sale of Goods concluded in Vienna (hereinafter the “CISG”) or a number of multilateral conventions in the field of international transport (e.g. the Convention concerning International Carriage by Rail, COTIF).

Example: Simply put, if a Czech and a German entity enter into a purchase contract in 2021 and do not choose the governing law, it will be determined according to the connecting factors set for this case. In the case of a purchase contract, we only apply conflict of law rules if the purchase contract is not governed by direct rules in the specific case, i.e. especially the CISG (and the parties are also parties to the CISG or the law of a contracting state of which the CISG is part is to be applied). In other cases, conflict of law rules contained in the Rome I Regulation apply.

Determining the court having jurisdiction to settle any disputes arising from the contract

Any contract may sooner or later give rise to disputes that cannot be resolved amicably; therefore, in addition to determining the governing law, the issue of the court’s jurisdiction to resolve them is also a vital part of the contractual relationship. Again, we would like to emphasise that the legal systems of individual countries vary and the cost of court proceedings, which will be significantly higher in a foreign country, must be taken into account. As in the case of governing law, the parties may choose an authority to resolve any future disputes. The agreement on jurisdiction must be made in writing and its form should not contradict the parties’ customs of trade. Of course, the parties may also consider the possibility of negotiating an arbitration clause if they want the dispute to be resolved not by a court but by an arbitrator or arbitrators in a much less formal, faster and more intimate procedure. If the parties do not designate an authority competent to resolve disputes arising from the contract, the subsidiary legislation contained in the Brussels I bis Regulation (which replaced the Brussels I Regulation) will apply between the EU Member States. In other cases, the jurisdiction of courts is regulated by the Act on Private International Law or international conventions (such as COTIF).

Removing language barriers

One of the other problematic aspects of contracts concluded between foreign entities may be the language in which the contract is to be concluded. It is essential for the conclusion of the contract that both parties have an equal opportunity to acquaint themselves with its wording. No party should sign a contract that it does not fully understand. In these relations, bilingual contracts are used, i.e. contracts that are drawn up in two (or more) languages spoken by the parties. However, it is important to emphasise that every language is different and it is often difficult to prepare language versions that correspond as much as possible to the original (it is probably impossible to create a completely identical text), especially when it comes to legal terminology, which is not always equivalent, given the different legal systems in individual countries.

Due to diverging legislation, a literal translation of a legal term may thus have a different meaning in the target language. It this therefore advisable to bear this in mind during pre-contractual negotiations and when drafting the contract, especially in terms of careful wording. It is then advisable to agree in the bilingual contract which language version takes precedence in the event of a conflict. Besides bilingual contracts, there is of course the possibility of concluding the contract in one of the universal languages known to both parties, especially in English. However, legal terminology is very specific and differs in many ways from “commonly used” written English. It is therefore advisable to have the contract drafted by an expert who has a good knowledge of legal terminology in the language in question, thereby avoiding many errors and inconsistencies in the contract.

Conclusion

Our experts have not only theoretical but mainly practical experience in the field of contracts concluded with foreign entities. In order to minimise future disputes, we would be happy to draw up the contract for you in English or German or review and modify it in terms of substance, wording and terminology. Please do not hesitate to contact our law firm if necessary.

What situations do we typically handle for our clients in the context of contracting with foreign entities?

• Bilingual contracts
• Advice on negotiations with foreign partners and contracting
• International agreements – determining which legal system governs the dispute
• Advice on disputes with multinational companies, such as Booking, Airbnb, Uber, Bolt, etc.
• The contract cannot be complied with due to the imposition of international sanctions
• Drawing up an international trade agreement
• Buying, selling and managing real estate abroad
• Inheritance law abroad
• Legal assistance for insurance claims abroad (injury, damage to property, etc.)
• International competition
• International arbitration