“All it takes is a handshake, between honest people.”

And, indeed, the world is full of business relationships that have always gone, and will always go well.

·       So why is it important to invest time and resources in negotiating and drafting a contract with a foreign counterpart?

In English there is a saying, “It always went well. Until it didn’t.”

Life is full of unexpected events and situations that were thought impossible, people leading companies change, events at the geo-political level can disrupt international markets.
In these cases, having a correct and comprehensive contract in place, negotiated in an informed and conscious manner, can make a big difference.

For some examples, one can look at the history of many international groups and draw interesting insights.
On the subject of international commercial distribution, a case that I think is very useful is that of Nike, which is described in the biography of its founder, Phil Night (very good book: in Italian the title is “The Wings of Victory”).

Phil Knight began his business in 1964, importing Japanese Onitsuka Tiger running shoes into the U.S. He then created Nike when he discovered that the manufacturer was looking for another distributor to replace him in the U.S. market.
This led to a complex and costly legal dispute, in which the parties exchanged allegations of contractual breaches, that threatened to prematurely end Nike’s existence.

What is interesting is that none of the issues that had triggered the litigation had been considered in the distribution contract.

• The first lesson that can be drawn from this story is about how to conduct a negotiation of the international commercial distribution agreement: Knight negotiated the original contract and its renewal after the first deadline, without legal assistance, leaving out fundamental issues that, not surprisingly, later led to the disagreements and misunderstandings that were the basis for the breakup of the agreement.

One of the loopholes in the agreement was that of territorial exclusivity and the commercial targets  that the distributor would have to achieve in order to retain the exclusivity for the USA.  The differing expectations of the Japanese manufacturer and the distributor on turnover, in fact, had not been discussed in the negotiations and were therefore not provided for in the contract. Such differences were the primary reason for friction: according to the manufacturer, the distributor’s sales were insufficient, while Knight took the opposite view.

The dispute on this matter could have been avoided if the contract had included a clause with agreed turnover targets and the consequences of not meeting them.
 

• A second mishandled issue was that of the duration of the agreement and the notice period for terminating the contract: the renewal of the agreement was scheduled for three-year periods, which proved to be too short in view of the significant investments required of the distributor to develop the sales network throughout the U.S..
  
• A third error concerned the failure to define the ownership of certain trademarks: the distributor had helped create two new shoe models (Cortez and Boston) that had been a huge success in the market; in the absence of a clear covenant on who owned these trademarks, both parties claimed ownership and believed they had the right to use these trademarks in future shoe collections.
  
• Another oversight of the contract was the lack of a dispute resolution clause, which clearly established which judicial authority the parties should turn to in case of litigation; in this situation of uncertainty, two separate court proceedings took root, one before an American judge and one in Japan, with an uncertain outcome and very high costs, which would have been impossible to sustain if the dispute had not been resolved by an amicable agreement.

Conclusion: the function of a good contract is to give the parties the tools they need to manage the relationship effectively, avoid disputes or resolve them amicably, allowing them to continue working together.

In an international agreement this can be very complex, and it is advisable, therefore, to avoid do-it-yourself and involve-as early as the negotiation phase-an experienced lawyer.

If you would like to learn more about the topics discussed in this article, read the long form post on the Legalmondo blog.