1. Introduction
As the global market advance itself, business survival hinges on a company's ability to compete globally. Companies are actively looking beyond their national boundaries to source for components and/or finished goods (Rajagopal & Bernard, 1994) and continuously searching ways to streamline business activities. According to Burt et al (2003), such buyer-supplier collaboration requires the companies to proactively manage its supplier as well as the contract management that administer the terms of the business relationship between suppliers and buyers.
Business relationships between different organisations involved certain degree of agreement to exchange goods, services or information and such relationship can be stabilized through a contract. Van Den Heuvel & Weigand (2000) illustrated that contracts are used to explicit the commitments made between the parties and are often used to prescribe coordination between the business workflows. Contracts can be managed through either formal or informal mechanism. While formal mechanism are through the use of written document or agreement, informal contract, on the other hands, are unwritten agreements between the parties which are enforce not by legal suit but by maintaining trust and intimate relationships between the parties involved.
Roles of International Contract
As business evolved globally, dealing with international business partners often yield problems when differences in cultural behavior, communications, legal system, custom restrictions, engineering practices and societal values cause adverse effect on the business operations (Cateora, 1996; Shippey, 1999; Nibley, 2000; Keegan, 2002). Therefore, to overcome business disputes which is the result of miscommunications, misunderstanding and misinterpretation of the requirements and expectations of a business relationship, contracts that clearly the required degree of cooperation, conformance and inter-organisational will encourage parties to achieve long-term interest in the relationship as well as providing the degree of stability in the relationship management. However, when drafting a international contract, it is essential that the contracting parties understand the aspects of the international contract and comprehend each other in establishing a mutual understanding to the business expectation.
Cultural Aspect
Culture is the way of living that consists of values, ideas, attitudes and symbols that shape human behavior passed on from generation to generation (Keegan, 2002). Cultural differences impact on the behavioral response towards the communications, understanding and interpretations of business requirements in the international markets and therefore ignorance of cultural differences may lead to conflicts in interest, disputes in business operations as well as potential loss of market competitiveness and being more culturally sensitive will reduce conflict, communications and increase success in collaborative relationships (Cateora, 1996).
For instance, the Americans develop relationships with business partners by formal written documentations of the business needs and expectations and the written agreement used as guideline for business performance. On the contrary, Chinese develop business relationships using the informal form of agreement based on mutual trust with their business partners and maintaining positive reputation through integrity to develop long-term business relationship ( Lee et al, 2001). Therefore, in order to succeed internationally, organizations need to be aware of the cultural diversity between different countries and develop cross-cultural consciousness when drafting written agreements, which include the choice of language used and simplified language structure, as the role of written contract in cross border transaction targets towards creating mutual understanding to the business expectations and joint agreement on each party's rights and obligations when performing the business agreement.
Government and Legal Aspect
When entering into a business relationship with foreign partners, it is important to know the local governing laws and legal systems which may differ or have adverse effect on business relationship when the law of the host countries may offers additional protections to protect the businesses in the host countries. For international trade, foreign investors are exposed to different tax systems, legal and custom regulations when engaging business in different countries. For example, Singapore signed free-trade agreement (FTA) with America and therefore American companies in Singapore will have a different set of tax and custom regulations to comply as compared to their business dealings in other countries which does not have free-trade agreement.
International transactions are not only subjected to governing law of the host country but are also governed by the law of the country where transactions are being established as well as an inter-governmental conventions (Szabo Associates, 1996; Shippey, 1999). The choice of which laws and legal system to be apply on the international transactions will have impact on the rights and responsibilities of the contracting parties involved (Szabo Associates, 1996). To overcome conflicts that might arise, determining the country's law which will govern the business disputes and agreed upon the legal systems by both contracting parties will assist in the jurisdiction on business disputes. It?s an important aspect when drafting an international contractual agreement (Cateora, 1996; Nibley, 2000).
There is an alternative when drafting an international contract which is to include a general arbitration clause in the agreement to resolve any international contract disputes (Stegink, 2004). Contracting parties should agree on the arbitration if any disputes arises or identify specialized institutions such as International Chamber of Commerce Court of Arbitration, the London Court of International Arbitration, the American Arbitration Association (AAA) or the International Centre for the Settlement of Investment Disputes (ICSID) that administer the arbitration with formal administrative rules (Cateora, 1996; Szabo Associates, 1996; Stegink, 2004).
Therefore, identifying the governing law and legal systems or including the arbitration clauses that are mutually agreed by involved parties will assist in providing resolution towards international business disputes and aiding the translation of the rights and obligations of the contracting parties (Nibley, 2000).
Social Behavior and Personal Commitment
Different social behavior and values affected by different cultural backgrounds will have an influential impact on level of commitment and obligation to be perform in a international contracts (Keegan, 2002).
When entering into international business, documenting the level of commitment and business behavior towards achieving the desired business requirement in a written agreement will help to reduce misperception and delivering mutually agreed level of commitment ( Keegan, 2002).
Balance of Power
According to Shippey,(1999) in cross border transactions, normally the party that draft the written contract or the party whose country has more developed legal system will gain superior position in contract negotiation and achieve greater contractual power to draft business terms and condition of the contract to favor that party. However, in order for the international contract to be enforceable, mutual agreement to the terms and condition need to be present hence attaining a balance of power during contract negotiation and achieving fair business terms will encourage contracting parties to perform to their obligations and reduces business disputes.
Scope of an International Contract
An international contracts should also include the following provisions in order to achieve a dispute free business relationships.
Business Terms
International contracts should detail the below business terms to avoid misinterpretations and misunderstanding that may arise when performing to the contractual agreement.
Delivery terms : specifying from the incoterms helps to determine the cost of delivery and identify the ownership of title transfer of the goods or services such as Free on Board (FOB) or Ex-works/factory terms.
Payment terms : specifying the choice of currencies used in the contract, including the foreign exchange restrictions on the currency and detail the period for payment of the goods and services exchanged.
Purchasing terms : specifying the period for order acknowledgement; descriptions of the goods and services exchanged; the types, contractual price, quality standards and quantity of the goods and services provided.
Effective and Termination Period
This clause is essential to establish the circumstances which the agreement will effectively take place and specify the beginning of the obligation to fulfill the contract. Similarly, this clause sets the duration covered for the agreement as well as how the agreement can be terminated with or without specified liabilities or compensations to the other contracting party (Stegink, 2004).
Goals of the Contract and Scope of Responsibilities
To avoid business disputes due to different practices and cultural backgrounds, international contracts should contain detail description of the goals of the business and the scope of each contracting party's responsibilities in fulfilling the contractual requirement..
Operations Requirements
To avoid conflict arises due to miscommunications of business requirements, international contracts should include detailed information of the business requirements. Indicating the operation requirements that define what are needed to be done to achieve the goals of the contract and stating the operation environment that will affect the exchange of the goods and services allow contracting parties to be aware of the contractual requirements and shaped operational behavior towards achieving the business expectations.
Clauses of Breach of Contract
Ideally, when entering into a contract, most contracting parties will ensure to uplift the rights and obligations in accordance to the agreed business terms and conditions. When business performance deviate out from obligations specified in the contractual terms, it consider an act of breach of the contract and the other contracting party will have rights to engage the agreed legal system for jurisdiction. Therefore, in order to protect the rightful party and create a fair trading marketplace, explicate the clauses that are mutually agreed as the breach of contract will allow contracting parties to be aware of the conditions that will disrupt the business relationships (Cateora, 1996; Nibley, 2000; Keegan, 2002).
Settlement of Disputes
Mutually agreement approach mentioned in the contract will allow the parties to take the variety of arbitration actions if either party breaches the contract. This clause provides contingencies to encourage fair-trading and build positive expectations on the business relationship. Ultimately, international contract targets in achieving win-win situation for both parties as terms and conditions are lay out in accomplishing the win-win agreement (Shippey, 1999; Juris International, 2003).
Non-Disclosure of Confidential Information
In a long-term business relationship across international boundary, sharing of confidential information with foreign partners are unavoidable, but sometimes may resulted in conflict of interest. In order to protect intellectual rights and avoid disclosing of confidential information to competitors, contracting parties may include non-disclosure clauses in the contract to bind the rights of the contracting parties and controlled in the agreement (Stegink, 2004).
Conclusion
As international business evolved in today's environment, business partners depends on detailed written contracts to develop and maintain relationship across international boundary. Trading disputes and business conflict aroused due to the misunderstanding of the business terms and the misinterpretation of the business requirements, hence the role of a contract aims to provide written agreement of the terms and conditions of the business requirement, exploiting the contract to shape desired behavioral patterns for business and allow trading parties to utilize contract as a guidelines in achieving successful partnership. Hence, a well-drafted international contract should include detailed description of the requirements and contain detailed terms and inclusions to make the contract more complete and reasonable for involving parties across international boundary.
Total Words: 1786.
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