“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.
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.
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.