Back to Basics - Entering into cross-border construction contracts

7 minute read
27 July 2015


In our latest Back to Basics article, we look at some of the common issues that parties can face when signing contracts with overseas companies.

The construction industry is global, and entering into a contract with a counterpart domiciled in a different jurisdiction is not unusual. For projects in the UK, common examples include contractors domiciled in a different jurisdiction or a parent company guarantee being issued by a foreign parent. Such agreements are commonplace and often don't raise any concerns for the parties entering into them. Yet there are some pitfalls waiting for the unwary who might assume that everything works the same across borders.

1. Make sure the execution is right

It is critical to ensure that the contract is validly signed and clearly, additional considerations will apply if you are contracting with a foreign company. Where a contract is to be governed by English law, getting the execution right depends on both the law of England and the law of the jurisdiction where the company is domiciled.

In our Back to Basics article on signing your documents correctly, we highlighted the requirements for ensuring that a contract is valid under the law of England and Wales.

2. Is a legal opinion necessary?

It is worth considering whether a legal opinion from a qualified lawyer in the jurisdiction of the foreign entity is required. A legal opinion can provide comfort for the parties that all necessary formalities will be complied with and that the terms of the contract will be enforceable. Obtaining this opinion is likely to be a requirement where third party funders are involved, although in other circumstances this may come down to the value and commercial importance of the contract.

A typical legal opinion would cover:

  • Status: confirmation that the company is duly incorporated and exists - this is a basic protection to make sure that the company you are contracting with is a genuine legal entity and it has not been dissolved
  • Capacity: ensuring the company is entitled under its constitution to enter into and perform the obligations set out in the contract, and that those obligations will be binding on and enforceable against the company
  • Due execution: as emphasised above, you need to get this right and obtaining a specialist legal opinion from the relevant country may avoid uncertainty.
  • Enforceability: confirmation that if disputes arise, proceedings may be brought against the company in England and Wales or in such other jurisdiction as relevant, and that judgments or determinations made against the company will be enforceable in that jurisdiction.

3. Commercial terms to consider

International agreements can raise specific commercial issues to address in the terms of the contract. The parties should consider whether events and circumstances outside of the country where the works are being performed should affect the contract. For instance:

  • should force majeure outside the country of the project relieve the contractor of its obligations?
  • should the contractor be solely responsible for the costs and risks of importing plant and equipment into the country?
  • how will the contractor manage its labour and resource the project?

The answers may depend on the circumstances of the project and the negotiating strength of the parties. If the contractor is competing in a tender against other domestic companies, it may not be competitive to allow relief for events which would not affect a domestic contractor.

Common international contracting forms such as the FIDIC suite of contracts often differentiate between force majeure inside and outside the country of the project - as an example, FIDIC entitles the contractor to receive costs for certain events only if they occur inside the country where the works are to be performed.

For international supply contracts, using standard provisions such as the International Chamber of Commerce's Incoterms can simplify and clearly allocate responsibility between parties. However, even these terms must be used carefully, bearing in mind that using terms which are inappropriate for your particular project can add more confusion and uncertainty.

For general construction contracts, clear provision for who is responsible for any costs or delays from importing plant and equipment are recommended to ensure that there are no disputes later on if the parties encounter unexpected difficulties.

4. Choice of law

The choice of law (which country's law applies to the contract) is of key importance in any contract, but where the parties (or the location of the works) are international, there is much greater scope for uncertainty and competing claims.

A governing law clause is commonly used and allows the parties to specify which law will apply to the interpretation of the contract and any dispute arising under its terms. Any omission or ambiguity will mean uncertainty for the parties, leaving the courts to determine the governing law through the complex principles relating to "conflicts of law" along with applicable regulations.

It is worth being aware that the contractual election of a choice of law may not be effective in all circumstances - certain aspects of a contract (such as the capacity of the contracting parties, labour provisions or anti-bribery provisions etc.) may still be governed by other legal systems. However, clearly specifying the agreed choice of the law for contractual and non-contractual issues is critical to reducing this risk.

5. Forum for disputes

Another important consideration for the parties is deciding on the most appropriate forum for any disputes and then ensuring that this agreement is clearly reflected in the contract.

Typically, where the project is to be carried out in the UK, the courts of England and Wales or arbitration in England will be convenient for all parties. However for international contracts, determination by the courts or arbitration in a "neutral" country may be preferred.

The question of the enforcement of any award against a company that may be located in a foreign jurisdiction is also important. If the company is domiciled in a country whose courts do not recognise foreign judgments (or for instance have not ratified the New York Convention of 1958 for the enforcement of arbitration awards) the parties may wish to consider whether further security is required (such as a bond or retention) or potentially even to re-assess the commercial risks in proceeding.

A contract should include a clear (and preferably) exclusive jurisdiction clause to ensure that claims are not brought in an inconvenient location where the process of seeking a resolution will be more difficult.

There are certainly a number of issues to consider when signing a contract with a foreign counterpart, but relatively straightforward measures can be taken to ensure that the contract operates as the parties intend, and that you are not left exposed to unfamiliar legal systems and risks.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.