A contract is a written or oral promissory agreement between two or more parties to do a particular activity or enter into a relationship enforceable under the law.

When developing a contract, there are specific fundamentals to consider to avoid disputes and set the stage for smooth market entry. The activities leading up to a contract are also worth noting to gain a holistic understanding of the contract process and where things may go awry.

Additionally, there are some principles which are common to both civil and common law that can be summarized in the following ways:

• A contract is a voluntary agreement.
• A clear offer must be made and the offer must be clearly accepted.
• The contract must pertain to a legal activity, that is one not prohibited by the Criminal Code.
• Contracts must not subvert ethical behaviours or expectations, for example, an employee should not be made to sign a contract for life.
• The contracting parties are legally bound to the rights and obligations established in the contract.
• If contractual obligations are breached without a valid legal reason, courts can enforce them.

The elements of a contract

In contrast to a promise or agreement, which are not binding, a contract is a legally enforceable arrangement. As such, an understanding of the elements required for a contract to be binding is necessary.

There must be an exchange of value between the individuals or organizations that enter a contract. These individuals, or organizations, are called the contracting parties. The value exchanged can be money for goods, goods for services, money for services, and other similar exchanges.

The exchange of value for the contract is referred to as the consideration. Consideration must be present for a court to enforce the contract against a party who is not living up to the terms and conditions of the contract, otherwise known as the breaching party.

The Four Corners of a contract

The elements of a binding contract are often referred to as the Four Corners of a contract. A contract must have all four elements present—otherwise, it is a considered an agreement.

The following is a description of each component of the Four Corners:

• Offer: A promise to perform specified acts on certain terms. The offeror is the person who makes an offer. The offeree is the person to whom an offer is made.
• Acceptance: An unqualified willingness to contract on exact terms specified. Communication of acceptance is essential. This is an unconditional assent to the offer in its entirety.
• Consideration: The price paid for a promise. Each party must receive something of value, money or otherwise, from the other. If an agreement is reached to alter or amend a contract, the consideration must also be revised to reflect the changes.
• Legal intention: The promise must be intended to be a contractual one that can be legally enforced by the courts. If the contract is for a business relationship, there is a legal presumption that it is intended to be binding.

When developing contracts, international trade practitioners will need to ensure that the contract is enforceable by including these four basic components.

How do I differentiate an LOI from a contract?

A Letter of Intent (LOI) or Memorandum of Understanding (MOU) is often used when parties are considering doing business with each other or considering purchasing real estate, capital equipment or other property. At this stage in building a contract, each party has yet to reach a final understanding of what their contractual relationship will look like.

LOIs and MOUs frequently end up in court because one party thinks they have reached a solid understanding, and the other party thinks the document only represents a preliminary negotiation. The best way for an organization to protect its business when using these documents is to place a statement on each page that reads:

THIS DOCUMENT REPRESENTS PRELIMINARY DISCUSSIONS ONLY. THIS IS NOT A BINDING CONTRACT.

It should be noted that under some legal interpretations, if an MOU meets all four of the requirements of a contract, it may be considered as a contract no matter what the documents are called.

Does an email ever count as a contract?

In many situations, a contract can be formed by an exchange of emails. It is important to be cautious, as it is possible to inadvertently become obligated to perform a contractual undertaking even if one party considered email exchanges as preliminary negotiations.

The way to handle this risk is to ensure that email communication only contains preliminary negotiating, and there is no obligation by either party until both enter a mutually signed written agreement.

Battle of the forms

It is not uncommon for issues to arise when contracts are piggybacked on to other processes and forms.

Many companies do business with their suppliers by issuing purchase orders with the major business terms on the front of the purchase order form, such as the price, the quantity of goods, the delivery date or the shipping method. On the reverse side are pre-printed legal terms and conditions.

Suppliers will then send back their acknowledgment form, which has different terms and conditions on its reverse side. These terms and conditions on both forms will often conflict. Lawyers tend to call this situation “the battle of the forms”, as it is not always clear which side will prevail if a dispute arises.

It is not recommended to stop using pre-printed forms for routine transactions as they enable business to be conducted more efficiently. Rather, for significant transactions that involve major revenue or financial risks, it is important to use a mutually signed written contract prepared by a qualified attorney.

For example, multimillion dollar purchases should never be made using an exchange of pre-printed forms. Such forms are more appropriate to smaller purchases, such as routine office supplies.

Written contracts—the gold standard

While a contract does not need to be in writing to be enforceable, the best practice is to negotiate a written contact that is signed by both parties. A properly drawn, written and enforceable contract must have six fundamental aspects. The contract must:

• Be based upon an exchange of value, such as money for goods.
• Identify the subject matter, the identities of the parties and the value exchanged.
• Describe the promised duties and responsibilities of the parties in performing under the contract.
• Allocate risk between the parties.
• Set forth a dispute resolution process.
• Be mutually signed with an effective date and term.

There are serious risks when parties solely rely on verbal agreements, as there is a lack of proof if the parties disagree about their respective obligations. In some jurisdictions, verbal agreements are not enforceable in court, especially for real estate transactions and transactions over a specified dollar amount.

Many entrepreneurs in small-and-medium-sized businesses (SMEs) prefer to save money by drafting their own contracts with forms found on the Internet. Unfortunately, this practice can eventually result in a higher cost than paying legal counsel to draft a contract in the first place.

Beware of verbal modifications of written contracts

Even after taking the time to negotiate a mutually signed written contract, many organizations agree to verbal modifications of the contract, such as delayed delivery dates or changed quantities. Then, if a dispute arises at a future date, one party may be trying to argue the terms in the original contract, while the other party may argue that the verbal modification is the agreement that should be enforced.

Avoid being put in this position by ensuring that everything is documented in writing and both parties mutually sign any modifications to the original contract. As noted above, each modification must be supported by a revised consideration.

What’s the best way to handle service contracts?

A challenge for practitioners entering service contracts in the foreign market is to accurately define the services being provided. Services are much harder to quantify than a contract for the sale of physical goods where, for example, a written product specification exists, such as a schematic and materials list for a motorcycle.

Describing the measure of performance is important in a service contract. If the level of service cannot be documented, it can be almost impossible to prove a breach of contract if the service was unsatisfactory. The challenge can be even greater in international transactions because of cultural differences and differing expectations for service levels.

The best way to handle service contracts is to attach a very detailed statement of work to the contract which documents exactly what the service provider has agreed to provide along with completion milestones. A common mistake that leads to disputes and litigation is when contracting parties fail to take the time necessary to develop an appropriate statement of work.

The post Master the fundamentals of business contracts with these tips appeared first on Trade Ready.

Sanctions compliance is more important than ever. As a result, companies need to spend more time to review, assess and enhance their sanctions compliance programs.

Most companies know how to screen potential customers, business partners, vendors and suppliers against Office of Foreign Assets Control (OFAC) lists of prohibited persons and entities.

However, while such a process is important to a compliance program, much more is needed to ensure compliance throughout a company’s operations.

“Check-the-box” type programs are a thing of the past

Gone are the days when a sales clerk ran a customer’s name on a purchase order through a trade compliance database to ensure that the customer was not a prohibited sanctions list.

Companies are required to do much more than that if they want to get full credit from the government for its sanctions compliance strategies.

Under OFAC rules and Department of Justice guidelines, a company has to design and implement an effective sanctions compliance program.

This cannot be a mere check-the-box type of program – it requires a full complement of compliance program elements, most of which are already known to the business community.

I do not intend to list here the elements of an effective program as required under the U.S. Sentencing Guidelines and the DOJ/SEC FCPA Guidance. We all are familiar with those requirements.

Instead, I want to suggest some helpful practical steps.

There are many lessons from recent OFAC enforcement actions. Perhaps the most significant and consistent theme is the fact that many companies have little to no commitment to OFAC compliance other than a basic screening protocol.

Beyond that, companies have focused on anti-corruption, third-party payments and other “more” significant risks.

Here’s where that mindset has to change:

1. Company Culture:

Everyone’s favorite compliance-related topic these days is promoting a “culture of compliance”. That is a welcome development, but there needs to be more to it than just saying culture is important.

Culture is created by actions and communications surrounding conduct and accountability.

When it comes to sanctions compliance, companies have to add the importance of sanctions to the “culture of compliance” message.

2. Risk Assessment:

In many situations, I urge companies not to expend significant resources on a risk assessment. However, in the sanctions area, a risk assessment could be critical, depending on the business’ global operations and potential risks.

For global companies, it is important to examine closely its operations and identify situations where sanctions risks exist.

3. Policies and Procedures:

Too often, companies relegate sanctions enforcement to lower-level managers or employees. A Chief Compliance Officer has to take responsibility for this substantive area and work closely with trade compliance staff to ensure standards are being met.

As part of this effort, a company has to adopt specific policies and procedures for its sanctions compliance program.

The government requires companies to develop trade compliance “manuals,” which need not be exhaustively detailed, but should be drafted to provide procedural guidance for compliance with sanctions.

A sanctions compliance program must name a specific individual, the CCO in most cases, as the person responsible for sanctions compliance.

4. OFAC Database Screening:

Companies rely on database services to conduct OFAC checks. That is all well and good. However, your program is only as strong as your data, and not all data services are infallible.

Companies need to double-check these services, conduct random audits of the checks, and make sure there are adequate reviews of the screening process.

5. Training:

Recent OFAC enforcement actions have highlighted the failure of a company to ensure appropriate training of managers and employees.

This is a requirement that has to be satisfied and documented to demonstrate to the government, if necessary, that training has been conducted.

6. Documentation and Advice of Counsel:

I tend to repeat myself (just ask my wife), but here is a mantra that I say all the time,

A compliance program by definition is ineffective if it is not documented.

Further, to provide additional legal protection, a written “advice of counsel” memo, letter or email should be obtained in any situation where there is a significant question as to the legality of going forward with a transaction.

7. Internal Audit:

A company should audit its sanctions compliance program in accordance with appropriate auditing risk formulas.

If deficiencies are identified, managers should be held accountable for completing any remediation as directed by the internal audit staff.

8. Investigation and Remediation:

A company has to promote a “speak-up culture” and investigate complaints relating to sanctions compliance, remedying any violations that are discovered.

[Tweet “A company has to promote a “speak-up culture” and investigate complaints relating to sanctions compliance”]

9. Contract Management System:

A company has to maintain a robust contract management system so that it can review contracts in order to ensure compliance with sanctions restrictions.

Once approved, the contract has to be managed to protect against sanctions violations and any attempt by a customer to evade sanctions requirements, either by facilitating a violation for the benefit of an otherwise prohibited person, or by failing to confirm end user identities and requirements.

Is your sanctions compliance program up to date? Does your company’s “culture of compliance” cover sanctions?

Want to read more about ethics and compliance?

“My hope is that my contribution can lend some weight to an already significant revolution in corporate governance — the rise of the compliance professional and the dedication of corporate leaders and organizations to ethics and compliance.” Michael Volkov

The Revolution in Ethics and Compliance includes a collection of recent essays and blog posts aimed at encouraging corporate leaders to understand how a culture of compliance is not only the best best protection against code of conduct and legal violations, but also how such a culture creates sustainable financial benefits to a company and its employees.

The post 9 ways global businesses need to step up their sanctions compliance strategies appeared first on Trade Ready.