Foreign Suppliers Beware: Five Contract “Gotchas” when Adapting Your Agreements

A couple of months ago, I posted International Business and Agreements: Learning about Legal Culture. This is a follow-up that discusses certain common problems when foreign suppliers bring their standard-form agreements to the U.S.

Filling in Gaps

During the past several years, I have helped quite a few foreign technology suppliers adapt their standard-form agreements for use in the U.S. The agreements that they use back home (translated to English, as required) are quaint by U.S. standards. There is a lot of white space, and fonts tend to be large. Furthermore, while the agreements specify business terms in detail, they address many legal provisions in a cursory fashion or not at all.

This last point is critical. In other countries, applicable law fills in many gaps adequately, thus the parties assume that problems will be worked out satisfactorily. Litigation is a last resort reserved for extreme situations, such as fraud or a complete failure to perform.

In the U.S., in contrast, we include many provisions expressly in anticipation of a suit that either party may bring at any time for any reason.

Common Weaknesses

Here are five areas where I frequently have needed to strengthen client agreements:

1. Confidentiality – While detailed obligations to protect confidential information are important, it is equally important to have exceptions to those obligations. For example, agreements typically carve out information that a party develops independently and information that a party discloses in a legal proceeding.
2. Exclusion of Warranties – If the agreement provides certain warranties, it is critical to exclude all other warranties. Absent such an exclusion, the supplier might find that the law imposes other warranties that the supplier never intended to provide.
3. Limitations of Liability – In other countries, if suppliers limit their liability for direct damages, they tend to be more generous than is customary in the U.S. Even worse, foreign companies often do not exclude consequential or punitive damages, which can reach astronomical levels here.
4. Intellectual Property Indemnification – While the goal of the indemnification provision is to protect the customer, the supplier should make sure to limit its obligations appropriately.  For example, it may be prudent to limit indemnification geographically and by type of IP. Furthermore, it is important to specify appropriate procedures, including customer cooperation.
5. Jurisdiction and Venue – Foreign agreements typically have choice-of-law provisions. What they often lack, however, is a provision specifying exclusive jurisdiction and venue in courts that are convenient to the supplier. Such a provision can provide a potential tactical advantage if litigation does arise.

Similar Problems Can Arise Here

Interestingly, I find that start-ups in this country sometimes use agreements that share these same shortcomings.

I believe that this is most likely to happen when an entrepreneur, pressed for cash, adapts an agreement that s/he either used at another company or found online.

Regrettably, this results in an agreement that is not as robust as it should be.

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.