Editor’s note: “International Business Corner” is a weekly column written by Joan Keston that provides information for people involved in or considering international operations. Keston is an international business consultant. Over the next several months she will be writing about important issues that international businesses face as they compete in the 21st century global business environment. This article discusses the power of the contract.

RALEIGH — The contract is one of the strongest principles embodied in the U.S. business culture. There is a long history of case law and legislation that supports and enforces the power of the contract and the freedom to contract. It is by the contract that we express and implement our freedom as individuals to deal with each other, whether for personal or business purposes.

Government Interference

In the U.S., governmental interference is at a minimum regarding our freedom to decide upon the terms under which we will do business when the parties are private entities. Most rules regarding contract formation and implementation are structured around the protection of the parties and of the contract process itself as fundamental for doing business.

Tax legislation affects transactions and business relationships, sometimes being the driving force behind the actual transaction. Anti-trust legislation may also impact business conduct. These are considered legitimate governmental functions in our system to raise money, protect markets, provide incentives, etc.

Contracts in Developing Countries

The significance and role of the contract in developing countries is not the same as in the U.S. One reason for this is that these countries rely heavily on the power of relationships, and not the power of the contract. Another important reason is the interference and involvement of the government in the business process, far beyond that which is accepted in the U.S.

Parties are usually more restricted in deciding on some of the terms that we assume we can freely negotiate. For example:

  • restrictions on which currency can be the currency quote in the contract
  • restrictions on the freedom to agree to arbitration
  • restrictions on the freedom to choose which is the applicable law
  • requirements on physical location for contract signing
  • language requirements
  • restrictions on international transfer of money
  • corporate entity requirements
  • restrictions on subject

In certain cultures, the actual meaning of the contract may be something other than its embodiment of a finalized agreement. It may be viewed merely as a symbol of the intentions to do business or continue talking.

The enforcement of a contract may be less secure or certain and subject to inequities. Following are several factors that may affect the enforcement of your contract:

  • relationships that ensure contract enforcement
  • government interference represented as protecting the economy or market
  • current mood toward foreign investment, which may swing to the negative during the term of your contract
  • economic or political instability and its impact


Conclusion

The first step when doing international business is to accept and recognize the differences between our business culture and the cultures in developing countries.

Our business culture is, to a large extent, the model for doing business that developing countries seek to emulate. However, most developing countries are still evolving their business cultures, and those cultures embody the traditional as well as the new. Even as business concepts become more universal, they will still always reflect the local business cultures. Once again it is important to employ individuals on your international bridge that have experience in developing countries.

About the Author: Joan Keston is the managing principal of Keston & Associates, Ltd., an international business consulting firm located in Raleigh, N.C., and a partner at Paladin and Associates, Inc. She has 25 years of experience with mature as well as entrepreneurial companies, domestically and internationally, coupled with an executive managerial and legal background. Her firm facilitates international business transactions, and assists companies establish, grow and integrate their international operations. She can be reached at 919-881-7764 and jkeston@kestonassociates.com.