Handling Risk in International Contracts

A complex global landscape and extensive regulatory development require companies engaging in international contract to be particularly vigilant about potential risks.

At our recent breakfast seminar together with Wikborg Rein, partner Christian James-Olsen and specialist counsel Håkon Stalheim Meldahl shared insights about navigating international contracts and compliance in contractual relationships.

The speakers highlighted essential key considerations when entering into international contract.

Here are important key takeaways from the presentation:

1. Contractual issues

When drafting a contract, the choice of law will be essential for the later interpretation of the contract and must therefore be considered carefully. 

It is also important to be aware of which terms applies in the event the buyer and seller presents different standard terms – which could lead to a "battle of forms".

Another key takeaway are to streamline contractual relationships in order to ensure consistency and alignment between contracts in a complex supply chain or project, ensuring that key risks are regulated back-to-back to avoid a residual liability that cannot be put forward to sub-contractors.

2. Key risks and regulations

When managing key risks, it is important to have liability regulations and limitations in place to ensure that the risk of delays and defects align with the contract's value.

Further, especially in high risks areas such as offshore contracting, a sound indemnity regime ("knock for knock") aligned with each party's insurance policies for liability for loss or damage to property and personnel and pollution liability, is important.

Another key measure is to regulate the total cap of liability for breach of contract at a reasonable level, and carefully consider exclusions to this.

The background law may also impose limitations to liability exclusions. Under Norwegian law, it is difficult to exclude liability for gross negligence or wilful misconduct by the management or senior personnel of the company, but more common to exclude liability for gross negligence and wilful misconduct by individual employees.

Norwegian suppliers often provide goods and services to projects or operations where the consequence of a halt in operations could be astronomical compared to the price or margin of the supplied goods or services. Having in place indemnities and liabilities for consequential losses can balance this risk.

Other important considerations are the credit risk in the payment terms and protection of intellectual property rights, and ensuring a proper dispute resolution mechanism that can be enforced in the jurisdiction of the counter party.

3. Compliance

When entering into an international contract, several international and local compliance laws apply.

It is increasingly important to be aware of export controls and international sanctions in today's geopolitical landscape. Norwegian supplier industry manages cutting edge technology which is of interest to military end users and other excluded trading partners, which could raise questions both relating to export of dual-use technology and sanctions regimes, such as those against Russia.

There are also numerous import bans, meaning that goods of certain origins cannot be imported to Norway and included in the supply chain.

Supply chains also raise ESG and human rights questions, and human rights due dilligence is now a legal requirement for Norwegian enterprises pursuant to the Norwegian Transparency Act as well as it is increasingly important in EU legislation.

Failure to manage compliance risks in contracts can lead to legal violations, and significant reputational and financial risks. Breach of sanctions and export controls can also lead to criminal liability, default in financing agreements and exclusion from future contracts with international suppliers and customers.

What Does This Mean for You?

Contracts which lacks important risk allocation bot contractually and with respect to compliance laws may come at a cost for the company —financially, legally, and reputationally.

It is key to know your supply chain, your products, their end use and who you are (really) dealing with. It is important to understand the commercial risk level through carefully contract analysis and qualifications as required in addition to performing integrity due diligence of suppliers and business partners.

If you would like to ensure that the risk allocation in your contract is reasonable and acceptable to your company and ensure that important compliance considerations are taken, you may contact:

Christian James-Olsen (partner) or Håkon Stalheim Meldahl (specialist counsel) at Wikborg Rein.