Tighter control needed on overseas contracts

A High Court judge in London has been hearing a case that involved Brazilian companies who were in dispute over a contract covering the construction of one of the world’s largest hydro electric facilities. The contract was for construction work in Brazil, it was governed by Brazilian law and was subject to the jurisdiction of the Brazilian courts.

But the dispute ended up in the English courts because parts of the original agreement were not precise enough, and the message to UK businesses trading overseas is to make sure they don’t fall foul of badly drafted contracts, particularly in emerging markets.

The contract in the Brazilian case said that any dispute had to be mediated and, if that failed, the dispute must be referred to arbitration in London. When the validity of the arbitration clause was challenged, the issue turned into a dispute as to whether the English courts or the Brazilian courts has jurisdiction to rule on the validity of the clause.

The judge ruled that the parties were obliged to arbitrate their dispute in London, and that English law applied to the arbitration.

The case has been highlighted as a clear lesson for anyone who has dealings with foreign companies. Whenever there is any foreign element, for example export of goods or foreign nationals as clients, the contract or terms of business must be clear about which country’s law will apply to the contract and which courts have jurisdiction. Any other details must then be consistent with the basic terms concerning the applicable law and jurisdiction.

Damian Humphrey, a commercial law expert at Ashtons Legal solicitors, says: “The devil is in the detail. It is absolutely essential that the contract states the applicable law, because you need to be certain as to the effect of the terms – both at the time the contract is being drawn up and later if there is a disagreement. Otherwise you may find yourself in a very difficult position where your only option is expensive and difficult action involving foreign courts and procedures.

“If the contract says nothing, quite possibly the laws of another country might apply. And of course those laws might be quite different from ours. The situation is different for consumer contracts within the EU because consumers are protected by EU regulations.”