14 July 2011 | John T Shapiro and Jeffrey J Mayer

Communications between parties in a supply relationship can be challenging – more so when parties from different countries bring different laws, unique business practices and diverse cultural perspectives to the mix.

To reduce the potential for disputes and increase control over the mechanisms that govern their resolution, supply professionals must identify, understand and address those differences when negotiating and drafting a transnational supply agreement.

How does a company protect its expectations when negotiating a transnational supply agreement? Two determinations are critical:

1. The governing law

2. The forum for dispute resolution.

Contractual rights and obligations can vary substantially depending on the law applied. Consider, for example, the UN Convention on the International Sales of Goods (CISG). CISG seeks to keep the contractual relationship intact and requires a “fundamental breach” before the purchaser can exercise remedies and the seller can still correct performance as long as it does not cause the purchaser unreasonable delay.

Similarly, the outcome of a dispute may vary depending on who decides it. A court in the country of your supply partner may apply concepts that differ from those you contemplated and subject the relationship to “hometown” latitude in favour of your opponent.

To alleviate such uncertainty, transnational businesses have created a private arbitration system – the revival of lex mercatoria (the law of the merchant) – that applies “a-national” contract principles to resolve supply chain disputes. But even if your relationship is subject to this, it is critical to understand who and what principals govern the parties’ rights and obligation and address these in unambiguous contract provisions.

You will be in a better position to avoid disputes and, should litigation ensue, control the outcome.

☛ John T Shapiro and Jeffrey J Mayer are partners at Freeborn & Peters