It is usually very complicated and difficult to set an agreement between two parties. It is necessary to bridge the information gaps and to find a common ground, to minimize conflicts of interests and to express commercial agreement in a fair, clear and accepted manner. It is a very hard work that once in a while requires a long and exhausting negotiation, and that is even without mentioning the pre-examinations which are sometimes necessary and unavoidable.
This complication is much more important while negotiating regarding an international agreement. In such case, the physical distance, the difficulty to communicate and the cultural and commercial gaps intensify the difficulties.
Assuming the parties managed to bridge all the gaps and to reach agreements, a good and fair agreement must consider a mechanism of disputes resolution. In this context, when two parties of an agreement are both residents of the same country this question is important, but less critical.
For example, an agreement between two commercial companies when one of them is located in Haifa and the other in Tel-Aviv. In such case the question if and how disputes will be resolved (in court or in arbitration) and where, meaning whether the jurisdiction will be in Tel-Aviv or Haifa, is important but not essential. Especially in today’s reality, when the means of transportation are comfortable and accessible.
However, when it comes to an international agreement, the governing law and the jurisdiction for disputes resolution which were agreed between the parties are very important, and sometimes these terms have the power to determine the result in advance… What does it mean?
Assume an agreement between an Israeli corporation and an American corporation which is located in the west coast of the United States, in California. If the parties agreed that the governing law will be the American law, and specifically California state laws, and that the exclusive jurisdiction will be given to the court in California, so sometimes it is worthwhile for the Israeli corporation to conduct legal proceedings against the other side to the agreement. In such case, the Israeli corporation has a point of weakness which places it in a weak position during the term of the agreement, and forces a reality in which it might suffer financial damages.
From our experience, corporations usually care about their profit in international agreement and therefore focus on mutual obligations. Also, it is important for them to set the agreed commercial terms, such as the payment and the terms of payment, but they usually care less about “technical terms”, such as the governing law and the jurisdiction.
Corporations tend to see these terms as technical and sometimes do not insist on negotiating them. It is a huge mistake. Sometimes the mistake is revealed too late, and the current situation in which the corporation is forced to conduct long and expensive proceedings abroad, in the state of California and in accordance with the domestic law, only intensifies the risk. Legal proceedings are usually long, expensive and uncertain. These proceedings require energy and many resources, so sometimes it is not worthy for the corporation to fight for its legal rights. For example, if the other side to our story in the example above caused damage of several hundred thousand dollars to our corporation, but the expected cost of conducting legal proceedings abroad according to the applicable law is also hundred thousand dollars, including costs of travelling to hearings, etc.
Therefore, while negotiating an international agreement it is very important to insist on these terms, and even if the negotiation power of the parties is not the same, it is necessary to find the balance point which will take the parties out of their comfort zone. For example, it is possible to determine the jurisdiction in case of disputes to an alternative tribunal (such as arbitration institute or international mediation) of another country which is located between the two countries where the corporations are located. If we imply this idea to the example of an agreement between an Israeli corporation and an American corporation, it is possible to determine that disputes will be resolved in the international mediation institute in London, England. Such agreement eliminate any excessive motivation or lack of profitability to use the agreed mechanism of disputes resolution.
In conclusion, especially in international agreement it is highly recommended to act in a careful and prudent manner and to take into account other considerations apart from the profit. A corporation must consider the less optimistic scenario, and to take into account possible disputes between the parties and the need the resolve them. Consulting a lawyer who has proven experience in this field can help minimizing the risks and sensitivities of the agreement, and finding the best solutions for both parties, without placing one party in an inferior position.
Note:
This article provides general and preliminary information only and should not be construed in any event as legal counseling and/or as a substitute for legal counseling in respect of any case and its circumstances.
The above should not be relied upon without consulting with an Israeli lawyer before taking any action or making any decision. The above is true as of the date of its composition, and its veracity may change from time to time.
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