The Importance of Drafting International Contracts as a Primary Means of Preventing Disputes

By Mostafa El Rouby Law Firm and International Arbitration

Preventing international disputes does not begin when a dispute arises and the parties choose arbitration or litigation; it begins much earlier, with the drafting of the contract itself. A well-drafted international contract does more than merely record the parties’ agreement. It allocates risks, defines obligations, addresses delay, non-conformity, force majeure, and changes in circumstances, and establishes a clear mechanism for resolving any dispute that may arise.

The importance of drafting increases in international contracts because of the involvement of multiple legal systems, differences in currencies, performance schedules, and payment methods, and the possibility that international conventions or specialized trade usages may apply alongside the chosen national law.

What Makes a Contract «International»?

A difference in the nationality of the parties is not sufficient in every case. The international character of a contract is determined by the nature of the relationship and its connection with more than one country, such as where the parties have places of business in different states, obligations are performed across borders, or goods, services, or payments move between different countries.

In international sales of movable goods, the United Nations Convention on Contracts for the International Sale of Goods 1980 «Vienna Convention» may apply where its conditions of application are satisfied, unless the parties exclude its application within the limits permitted by Article 6 thereof. :contentReference[oaicite:0]{index=0}

First: Determining the Governing Law

One of the most common causes of disputes is leaving the contract without a clear determination of the law governing it, or relying on general wording that does not clarify whether the parties intend the law of a particular state alone or also international conventions forming part of its legal system.

Accordingly, it is preferable for the contract to expressly specify:

The law governing the contract.
Whether the Vienna Convention on the International Sale of Goods applies or is excluded.
The extent to which international principles or usages may be relied upon such as the UNIDROIT Principles or International Chamber of Commerce rules where appropriate.

It should not be assumed that choosing the law of a particular state automatically excludes the Vienna Convention; this depends on the scope of the Convention, the chosen law, and the wording of the governing law clause. :contentReference[oaicite:1]{index=1}

Second: Drafting the Subject Matter and Obligations with Precision

The more ambiguous the description of an obligation, the greater the scope for dispute. The contract should therefore precisely define the goods or services, specifications, quantities, acceptance criteria, stages of performance, required documents, and which party bears each cost, permit, or procedure.

In international supply contracts, it is not sufficient to state that the seller «delivers the goods». The place of delivery, date or period of delivery, shipping documents, responsibility for transportation, insurance and customs, whether Incoterms are used, and which version applies should all be specified.

Third: Failure to Specify the Price Does Not Always Mean the Contract Is Invalid

It is inaccurate to establish a general rule that an international contract is invalid if the price is not stated as a numerical amount.

In international sales contracts governed by the Vienna Convention, Articles 14 and 55 raise a more nuanced issue. Article 55 addresses the situation where a contract has been validly concluded without expressly or implicitly fixing the price or providing a mechanism for determining it, and treats the parties – in the absence of any indication to the contrary – as having referred to the price generally charged at the time of conclusion for comparable goods sold under comparable commercial circumstances. Applications of the Convention have shown differing approaches to the relationship between Articles 14 and 55, and explicit drafting of the price or the mechanism for determining it therefore remains safer. :contentReference[oaicite:2]{index=2}

It is preferable for the contract to specify:

The price or the formula for determining it.
The currency.
The payment due date.
The bank or account and method of transfer.
Which party bears banking charges and taxes.
The effect of exchange-rate fluctuations where the risks are material.

Fourth: Setting Timeframes in a Manner That Prevents Disputes

Performance deadlines should not be left to vague expressions such as «as soon as possible» or «immediately» unless that is intentional.

The UNIDROIT Principles provide that where a contract specifies a particular time, performance must occur at that time; where it specifies a period, performance may occur within that period subject to its terms; and where no time is specified, performance must take place within a reasonable time after conclusion of the contract. :contentReference[oaicite:3]{index=3}

In practice, it is preferable for the contract to specify the commencement and completion dates, the method of calculating days, whether they are business days or calendar days, the effect of holidays, and the time zone used for electronic notices.

Fifth: Place of Performance Has Legal and Practical Effects

The place of performance affects the allocation of risks and costs, jurisdiction, and sometimes taxes and mandatory rules.

The UNIDROIT Principles provide, in the absence of an agreement or another criterion determining the place, that a monetary obligation is to be performed at the obligee’s place of business, while other obligations are to be performed at the obligor’s place of business. This is only a supplementary rule, and the parties may agree otherwise. :contentReference[oaicite:4]{index=4}

Accordingly, the place of delivery, payment, inspection, or acceptance should not be left unspecified where it has a material commercial effect.

Sixth: A Force Majeure Clause Alone Is Not Sufficient

One common error is to include a general paragraph on «force majeure» without specifying its effects.

More precisely, the contract should address:

The events that may constitute force majeure.
The notice obligation and the period within which notice must be given.
The effect of the event on the performance deadline.
The duty to mitigate loss.
The duration of suspension.
The right to terminate if the event continues for an extended period.

A distinction must also be drawn between force majeure and changes in economic or commercial circumstances that make performance onerous without rendering it impossible.

Seventh: Renegotiation upon Changes in Circumstances

In long-term contracts, raw material prices, transportation costs, legislation, or monetary conditions may change in a manner that alters the economic balance of the contract.

Accordingly, it may be useful to include a hardship or renegotiation clause that precisely specifies:

When the change is considered material.
The percentage or threshold triggering renegotiation, where possible.
The negotiation period.
What happens if negotiations fail.
Whether the contract may be adjusted by an arbitrator or expert, or whether it terminates.

The general statement that «the parties shall negotiate in good faith» may not be sufficient if the contract does not specify the effect of failed negotiations.

Eighth: A Documentary Credit Is a Payment Method, Not a Guarantee of the Quality of the Goods

A documentary credit is one of the most important payment methods in international trade, but its nature must be understood precisely.

A documentary credit is a transaction independent of the underlying sale contract, and banks deal with documents, not with goods, services, or actual performance. Articles 4 and 5 of UCP 600 clearly establish this principle. :contentReference[oaicite:5]{index=5}

Accordingly, if the seller presents documents complying with the terms of the credit, the bank examines them in accordance with the credit rules, but it does not guarantee that the goods actually conform to the specifications or arrived in the agreed condition.

The buyer should therefore link the list of documents required under the credit to the risks it seeks to cover, such as an inspection certificate, transport document, or certificate of origin, while recognizing that the bank continues to examine the document rather than the underlying physical fact.

Ninth: A Documentary Credit under UCP 600 Is Irrevocable

The former distinction between a «revocable» and an «irrevocable» credit as the two ordinary types requires updating.

Under UCP 600, a credit is irrevocable even if there is no indication to that effect, and the definition of a credit itself in Article 2 is based on its being an irrevocable undertaking by the issuing bank. :contentReference[oaicite:6]{index=6}

Article 10 provides that, as a general rule, a credit may not be amended or cancelled without the agreement of the issuing bank, the confirming bank – if any – and the beneficiary. :contentReference[oaicite:7]{index=7}

Accordingly, a «revocable credit» is not the ordinary model under UCP 600. If the parties wish to create a revocable arrangement outside this usual framework, it must be drafted with considerable clarity and its effects and risks must be understood.

Tenth: It Is Not Sufficient Merely to Provide for «Payment by Documentary Credit»

Where a documentary credit is selected, the contract should specify more detailed elements, such as:

The applicable UCP rules and their version.
The acceptable issuing bank.
Whether the credit is confirmed or unconfirmed.
Whether payment is at sight or deferred.
The date for opening the credit.
Its expiry date and the place for presentation of documents.
The documents required in precise terms.
Which party bears bank commissions.
The effect of failure to open the credit on time.

UCP 600 requires the credit to specify an expiry date for presentation and a place for presentation, and also defines forms of availability such as payment at sight, deferred payment, acceptance, or negotiation. :contentReference[oaicite:8]{index=8}

Eleventh: Bank Guarantees Are Not Documentary Credits

A bank guarantee may be used alongside an international contract, but it performs a different function from a documentary credit.

A documentary credit is commonly used as a mechanism for arranging payment of the price against compliant documents, whereas a bank guarantee is generally used to secure a particular obligation, such as performance, repayment of an advance payment, or bid security.

Accordingly, the type of banking instrument required and its purpose should be specified, and the two terms should not be used as though they were identical alternatives.

Twelfth: Defining Inspection and Acceptance Conditions

One of the greatest sources of international disputes is disagreement between the parties as to whether performance conforms to the contract.

Accordingly, the contract should specify:

When and where inspection takes place.
Who conducts it.
The applicable technical standard.
The period for notifying defects.
The effect of failing to object within the prescribed period.
The right to repair or replacement.
Who bears the costs of reinspection or transportation.

The more complex the technical specifications, the more preferable it is to include them in separate schedules clearly linked to the contract.

Thirteenth: Defining Liability and Damages

A well-drafted international contract does not merely state generally that «the breaching party shall be liable for all damages».

Rather, it should address:

Direct and indirect damages.
Loss of profit.
A maximum liability cap.
Penalties or agreed damages.
Exclusion of fraud or gross fault where required by the governing law.
The injured party’s duty to mitigate losses.

The validity of liability limitation provisions must be examined under the governing law, because agreements excluding or limiting liability may be restricted by mandatory rules in some legal systems.

Fourteenth: A Governing Law Clause Does Not Replace a Dispute Resolution Clause

The governing law answers the question: What legal rules govern the contract?

A jurisdiction or arbitration clause answers a different question: Who will determine the dispute?

Accordingly, the two clauses should be drafted separately and consistently.

Fifteenth: Arbitration Is Not Always the Best Option

International commercial arbitration may be appropriate where the parties require neutrality, enforcement of the award in multiple jurisdictions, confidentiality, or arbitrators with technical expertise.

However, it is not automatically the best choice for every international contract. National courts may be more efficient or less costly in certain transactions, particularly where the assets and enforcement are concentrated in one country.

The dispute resolution method should therefore be selected according to the nature and value of the transaction, the location of the parties’ assets, and the countries in which the judgment or award is likely to require enforcement.

Sixteenth: If Arbitration Is Chosen, the Clause Must Be Fully Drafted

One of the most common sources of disputes is inadequate drafting of the arbitration clause itself. Where necessary, it should specify at least:

The arbitral institution or whether the arbitration is ad hoc.
The applicable procedural rules.
The legal seat of arbitration.
The number of arbitrators.
The language of arbitration.
The law applicable to the merits of the dispute.

Contradictory provisions combining exclusive jurisdiction of a national court with a comprehensive arbitration clause covering the same dispute should also be avoided unless the relationship between them is clearly defined.

Seventeenth: A Multi-Tiered Dispute Resolution Mechanism

It may be useful for the contract to require stages preceding arbitration or litigation, such as:

Written notice of the dispute.
Negotiation between project representatives.
Escalation to senior management.
Mediation or a technical expert for specified matters.
Arbitration or litigation if amicable resolution fails.

However, the time limits and the effect of their expiry should be specified so that the negotiation clause does not become a means of delaying access to the authority responsible for determining the dispute.

Eighteenth: Language and Conflicting Versions

In bilingual contracts, the version that prevails in the event of conflicting interpretations should be specified.

Failure to include such a clause may create a separate dispute concerning the meaning of a term before the parties even reach the underlying commercial dispute.

Technical and legal terminology should also be standardized throughout the contract, and more than one expression should not be used for the same obligation unless intentionally.

Nineteenth: Formal Notices

Many contractual rights depend on valid notice: claims for damages, rejection of goods, invocation of force majeure, termination, or commencement of dispute resolution procedures.

The contract should therefore specify:

The approved addresses.
The email address recognized for legal notices.
When a notice is deemed received.
The effect of changes to contact details.
Whether certain notices require an additional method of delivery.

Twentieth: Termination Rights and Their Effects

It is not sufficient merely to state that «the contract may be terminated upon breach».

The contract should specify:

What constitutes a material breach.
Whether there is a cure period.
The duration of that period.
The circumstances permitting immediate termination.
The effect of termination on amounts due.
The treatment of goods, equipment, or data.
The provisions that survive termination, such as confidentiality and dispute resolution.

Twenty-First: International Contracts Are Not Drafted Solely by Reference to the Laws of the Parties’ Countries

It is inaccurate to state that drafting a contract requires only knowledge of «the laws of the contracting parties».

The contract may be connected to the law of the country of performance, the law of the seat of arbitration, customs or banking rules in a third country, an applicable international convention, or mandatory rules that the parties cannot exclude.

Accordingly, drafting requires preparing a legal map of the transaction before choosing the governing law.

Twenty-Second: Checklist Before Signing an International Contract

Are the parties, their capacities, and their authority to sign clearly identified?
Are the subject matter and specifications clearly defined and measurable?
Are the price, currency, and payment method clear?
Are the place and time of performance specified?
Have transportation, insurance, and customs risks been allocated?
Is there a mechanism for inspection, acceptance, and objection?
Have force majeure and changes in circumstances been addressed?
Are liability limits and damages clearly defined?
Has the governing law been specified?
Has the application or exclusion of the Vienna Convention been determined where necessary?
Is the arbitration or jurisdiction clause valid and enforceable?
Are the contract language and prevailing version specified?
Are notices, cure periods, and termination provisions clear?
Is the banking instrument used consistent with the contract?

Conclusion

Preventing disputes arising from international contracts is not achieved merely by adding an arbitration clause at the end of the contract; it begins with drafting the obligations themselves in a manner that reduces the scope for disagreement over what must be performed, when, where, and how.

A well-drafted contract specifies the governing law, price, currency, delivery, inspection, payment methods, allocation of risks, force majeure, renegotiation, limits of liability, termination mechanism, and dispute resolution provisions in a coherent manner.

The more complex the transaction and the greater the number of countries connected to it, the more important preventive drafting becomes, because addressing risk within the contract before it materializes is generally less costly and more controllable than attempting to resolve it after the disagreement has developed into litigation or arbitration.

Mostafa El Rouby Law Firm and International Arbitration provides services for drafting and reviewing international commercial contracts and assessing governing law clauses, arbitration provisions, payment mechanisms, and risk allocation in a manner appropriate to the nature of the transaction and the countries connected to it.