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Bridging the Divide: Drafting and Negotiating Contracts in Cross-

Border Transactions

The Risk Doctor5 June 2012

Andrew GodwinMelbourne Law School

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• Objectives: to consider the challenges that arise when

lawyers draft and negotiate cross-border contracts

to identify tips and techniques for overcoming those challenges

Point of reference/comparison is China and Chinese counterparties

Today’s seminar

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• Impact of Law on the draftingo Clauses that appear odd to a Chinese lawyero Clauses that appear odd to an Australian lawyer

• Impact of languageo Choosing the right terminologyo The impact of language clauseso Plain language and the benefits for translation

• Impact of culture o Attitudes towards contractso Negotiations and the impact on drafting

• Strategies and techniques

Topics

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Key factors in the drafting process

LAW

ATTITUDES TOWARDSCONTRACTLANGUAGE

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• Common law approach to contracts:–Entire agreement–Parol evidence–Literal approach to interpretation–A deal is a deal (pacta sunt servanda)

• Civil law approach to contracts: –Civil and commercial codes–Principle of “good faith”–Change in circumstances (rebus sic stantibus)

Impact of Law on the drafting

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This Agreement is the entire agreement of the parties on the subject matter and replaces all representations, communications and prior agreements in relation to the subject matter. The only enforceable obligations and liabilities of the parties in relation to the subject matter are those that arise out of the provisions contained in this Agreement. All representations, communications and prior agreements in relation to the subject matter are merged in and superseded by this Agreement.

What appears odd to Chinese lawyers – an entire agreement clause

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• The Parties, adhering to the principles of equality and mutual benefit and after friendly consultations, have agreed to enter into this Agreement.

– PRC Contract Law• Article 5    The parties shall observe the principle of fairness in defining each other‘s rights and obligations.  

– 第五条　当事人应当遵循公平原则确定各方的权利和义务。

• Article 6    The parties shall observe the principle of good faith in exercising their rights and fulfilling their obligations.  

– 第六条　当事人行使权利、履行义务应当遵循诚实信用原则。

• Article 3    The parties to the contract have equal legal status, and neither party may impose its will on the other.

– 第三条　合同当事人的法律地位平等，一方不得将自己的意志强加给另一方 .

PRC Contract Law

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• Supreme People’s Court: "Interpretation on Several Issues Concerning the Application of the PRC Contract Law" (No. 2)”Article 26: After the conclusion of a contract, if:

(1) objective circumstances result in a substantial change that the parties could not have foreseen when the contract was signed, that is not caused by force majeure and that does not belong to a commercial risk;

(2) the continued performance of the contract would be obviously unfair to one party or would not be capable of achieving the purpose of the contract; and

(3) the parties request a People’s Court to amend or terminate the contract,

The People’s Court shall determine whether or not to amend or terminate the contract in accordance with the principle of fairness and after having regard to the actual circumstances of the case.

• 最高人民法院关于适用《中华人民共和国合同法》若干问题的解释（二）

　第二十六条 合同成立以后客观情况发生了当事人在订立合同时无法预见的、非不可抗力造成的不属于商业风险的重大变化，继续履行合同对于一方当事人明显不公平或者不能实现合同目的，当事人请求人民法院变更或者解除合同的，人民法院应当根据公平原则，并结合案件的实际情况确定是否变更或者解除。

PRC Contract Law

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• The Parties shall strive to settle any dispute arising from or in connection with this Agreement through friendly consultations. In case no settlement can be reached through friendly consultations within 60 days of the date of notification of the dispute by one Party to the other Parties, then such dispute, including a dispute as to the validity or existence of this Agreement, shall be resolved by arbitration in Singapore conducted in Chinese and English by three arbitrators pursuant to the Rules of the International Chamber of Commerce.

• Any matters arising in the future that have not been specified by this Agreement will be agreed separately by the parties.

What appears odd to Australian lawyers - common PRC clauses

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• Necessary to choose the correct legal terminology, e.g.

– terminate/rescind

– representations and warranties: ‘Warranties and misrepresentations’

– deeds: “Contract” or “agreement”

• Necessary to choose the correct general terminology

• The impact of language clauses

Impact of language

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• Use short sentences and paragraphs• Use ordinary words in their ordinary meaning• Avoid technical language to the extent possible• Use the active voice instead of the passive voice• Avoid double negatives

“Plain language” and the benefits for translation

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• Is a contract the conclusion of a business deal or is it instead the start of a business relationship?

• Is a contract a conclusive statement of a static relationship or a tentative reflection of an evolving relationship?

–What impact does this have on drafting and negotiation?

Impact of attitudes towards contract

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• Obligation to negotiate in good faith – is it enforceable?

• The emergence of renegotiation clauses

“Each party agrees to meet with the other party every five years with a view to considering in good faith whether this Agreement is continuing to operate fairly to each of the parties and with a view to discussing in good faith any problems arising from the practical operation of this Agreement.”

• The role of lawyers

Negotiating and its impact on drafting

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• Sequential decision-making vs holistic decision-making

• Results-oriented vs process-oriented

• Top-down decision-making vs bottom-up decision-making

• Straight-talking vs circumlocution

• Absolute positions vs relative positions

Negotiating – different styles

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• Pre-negotiation (relationship-building)

• Negotiation• exploratory process of identifying the basic principles on which the final agreement will be based

• lawyers often overlook the importance of conceptualization, particularly in terms of defining interests and exploring options, and focus exclusively on the drafting.

• Post-negotiation: working out the details and implications of the agreement.

Negotiation stages

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• Communicate effectively through interpreters (where necessary)

• Prepare for cross-cultural communications

• Act as a bridge for cross-cultural understanding and communications

• Think about the “how” and “when” of communications, not just “what”

Language and cultural factors

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• choose words carefully• apply plain language principles• define terms clearly• think about expression as well as content• be aware of different negotiation styles• make sure that the drafting is not too far ahead of the negotiations• put aside the draft to discuss principles (don’t get caught up in the draft

wording)• make the most of the pre-negotiation stage to explore options and

discuss principles• be aware of the importance of relationship to the client and the extent to

which this might be affected by the drafting (particularly one-sided drafts)

Strategies and techniques

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Questions & Discussion