The following discusses the six most common forms of international business agreements, how they function, and what businesses ought to be aware of when writing or signing such agreements. 

1. International Sales Contracts: The Foundation of Cross-Border Trade 

An international sales contract is a contract that regulates a sale between a buyer and a seller located in different countries. It establishes prices, product specifications, terms of payment, delivery terms, risk transfer, and dispute resolution procedures. The most significant element of these contracts is the application of Incoterms, the internationally accepted system of delivery regulations issued by the International Chamber of Commerce (ICC). 

Incoterms can be defined as the essential terms of trade for the sale of goods worldwide. According to the National Law Review, more than 90% of global trade contracts incorporate Incoterms in some form. 

Some of the common errors that exporters commit include the use of undisclosed terms of delivery, no reference to the version of the Incoterms, and the use of purchase orders rather than a comprehensive contract.

Exporters should ensure that the selected rule of Incoterms fits their logistics and capacity, confirm payment security, and that the law in force is properly defined before signing.

2. Distribution Agreements 

A distribution agreement is a contract where a foreign distributor purchases products and sells them in a specified area. The model suits companies intending to expand abroad without having to invest in a foreign branch or sales force. The distributor manages inventory, marketing, sales, and customer support – they usually take on the brunt of financial risk. For an exporter they are a cost-effective entry mode to new markets without having a physical presence. 

Distribution arrangements may become problematic in cases where there is uncertainty about the territory, exclusivity, or ambiguity in performance obligations.

Exporters are recommended to evaluate the distributor market coverage, financial strength, brand protection commitment, and reporting obligations. Clear regulations regarding marketing, digital sales, and intellectual property aid in the avoidance of conflict in the short and long term.  

3. Agency Agreements 

Compared to distribution, an agency agreement is different because an agent does not buy goods. Rather, the agent markets the products of the exporter and receives commission on successful sales. The exporter has full control over pricing, ownership, and invoicing.

In most jurisdictions, agency agreements are highly controlled. For example, as per European Union Law, “commercial agents are entitled to statutory termination compensation even if the contract states otherwise.” 

Companies often face issues when they blur the line between agents and distributors, do not clearly define authority, or fail to include confidentiality and intellectual property safeguards.

Exporters should review commission systems, clarify that the agent is allowed to sign on behalf of them, and verify that all domestic legal requirements (including claims to compensation) are familiar.

4. Licensing Agreements 

A licensing agreement gives a foreign firm rights to utilize intellectual property – trademarks, software, proprietary formulas, technology, or manufacturing processes –  in return of royalties or fees. Licensing also enables firms to venture across borders without transporting products or constructing facilities. 

The greatest risks are in markets where intellectual property protection is weak. Poorly executed licensing agreements may result in unauthorized duplication, brand damage, or a dispute over the calculation of payments. Licensors need to specify the scope of the license such as territory, exclusivity, duration, and quality-control conditions. Audit rights are necessary to facilitate the proper reporting of royalty. 

Companies need to consider the robustness of local IP laws, review the production or service levels of the licensee, and determine the precise sanctions against abuse of intellectual property before engaging in a licensing agreement.

5. Franchise Agreements 

A franchise agreement gives a franchisee the opportunity to run a business under the name of the franchisor, using their systems and business model. Franchising is common in hospitality, food service, retail, personal care and education sectors. 

According to the International Franchise Association (IFA), the growth of franchising remains high. In 2024 alone, U.S. franchises were expected to grow by more than 15,000 new locations, creating over 221,000 jobs. 

Globally, franchise and distribution legal services have been projected to expand at a double-digit CAGR in the time period ranging from 2025 to 2035, which shows continued global growth. 

Cross-border franchising involves adapting to the local laws, consumer behaviour, and standards of operation. Failure can be common when training is inadequate or when franchisees do not stick to the set standards.

Major points to consider before signing are the franchise fee, royalties, advertising expenses, quality-control measures, and the limitation of brand usage.

6. Joint Venture Agreements 

A joint venture (JV) is the process in which two or more companies establish a new business or a new business partnership to enter the market, create new technologies, or distribute the operational risks. JVs are widespread in fields where the entry barriers and capital requirements are high, or local knowledge is limited.

Nonetheless, JVs can be considered one of the most complicated international business contracts to negotiate. Mismatched expectations, poor governance systems, poor intellectual property rights, and exit systems are some major areas of dispute. Companies need to make clear profit sharing arrangements, decision making, dispute resolution, confidentiality, and jointly developed IP ownership before joint venturing.

Key Action Principles for Drafting Strong International Business Contracts 

In any international business agreement there are a number of principles when drafting. Words should be used clearly, expressions that are ambiguous may mean something different in different jurisdictions. All contracts must stipulate the law of governing and dispute resolution system including international arbitration over treaties like the New York Convention.

The appropriate version of Incoterms and the port or delivery point should be mentioned in contracts. In transactions focusing on intellectual property, including licensing agreements, franchise agreements, and distribution agreements, clauses of high level of confidentiality and IP-protection are absolutely non-negotiable.

Due diligence is also critical. Companies ought to research on the financial strength, reputation, and capacity of their foreign associates. Knowledge of local regulations helps to avoid unforeseen liabilities during contract negotiations, and especially in markets where there are agency law or foreign-ownership regulations. Finally, every contract must include a transparent and practical termination plan, without one, even strong partnerships can end in costly disputes. 

Helpful Resources for Global Exporters 

To deepen your understanding of international business contracts, these official sources provide detailed guidance: 

Trade Commissioner Service (Canada): Offers practical guidance on legal, compliance, and contract considerations. 

ICC — Incoterms® 2020 (International Chamber of Commerce): The official ICC page for Incoterms®: authoritative explanations, purchase information, and guidance on the 11 trade rules used in international sales contracts. 

U.S. International Trade Administration — Learn How to Export: U.S. government guidance on export readiness, documentation, payment methods, and compliance, helpful when structuring international sales contracts. 

WIPO (World Intellectual Property Organization) — WIPO Home: Global IP authority with tools and guidance for protecting trademarks, patents, designs, and other IP central to licensing, franchising, and distribution agreements. 

Strengthening Your Global Business with the Right Agreements 

International expansion rewards companies that prepare well. Exporters are able to reduce risk, protect intellectual property and establish successful cross-border relationships with well-defined, well-considered international business agreements.

The knowledge of international sales contracts, distribution agreements, agency agreements, licensing agreements, franchise agreements, and joint venture agreements assists North American exporters to act with confidence and grow sustainably in the global market. 

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With a background as an electrical engineer, it’s not surprising that W. Edwards Deming repurposed the ideas of connections and electric circuits as he became a business consultant.

One of his well-known theories is the “System of Profound Knowledge”, a concept that defines an organization as nothing more than a holistic system, connecting not only internal resources, but also interlinking with external stakeholders. For managing the system, four pillars are relevant: Appreciation of a system, knowledge of variation, theory of knowledge, and psychology.[1]

Deming published this concept back in 1993. But despite being almost three decades old, the philosophy sounds more modern than ever. Thanks to digital twins – virtual replicas of physical devices – his philosophy can now be practically implemented, not only in production facilities but also the office environment.

The new workforce is ready to take on AI systems

Believe it or not, Generation Z (born 1997 and later)[2] is now in the process of entering the  workforce. These employees not only grew up with the internet, but also have extensive experience with voice assistants and other forms of artificial intelligence. Accordingly, they appreciate the technology and are comfortable interacting with AI to achieve the required results. With Generation Z, the future workforce is skilled in system-thinking.

The concept of smart contracts was first defined one year after the “System of Profound Knowledge”, not by a lawyer, but the computer scientist Nick Szabo:

“A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives of smart contract design are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitration and enforcement costs, and other transaction costs.”[3]

As a mathematician, his definition of a legally biding document is nothing more than a rules-based algorithm.

Smart contracts can keep your company sustainable and secure

With extraterritorial laws such as the U.S. Foreign Corrupt Practices Act or the UK Modern Slavery Act 2015, companies can be held responsible for their vendors, sales agents and other partners. As a consequence, they must elaborate a code of conduct for vendors, and in parallel conduct background checks and request evidence.

The electronic signature on a contract is based on conditions. If a vendor stops complying with one or more of them, much like the effect of an electric circuit getting interrupted, the validity of the contract is disrupted.

For example, a company may require its vendors to upload an annual statement that their products are free of conflict minerals. Based on this condition, the agreement was signed. If the vendor does not comply with the deadline of the rule, the smart contract gets automatically abrogated until the issue gets resolved or the company decides to terminate the agreement.

Smart contracts can be combined with continuous monitoring, where an algorithm connects  automatically with various databases to check if a used vendor gets listed or delisted from a governmental sanction-list, is involved in a lawsuit, or negatively mentioned in the news which could lead to reputational risk.

Human interaction is still needed to execute smart contracts properly

The ideal collaboration of AI with humans is that the machine is responsible for the level 1-tasks, freeing up the human expert to focus on the level 2-priorities. Regarding smart contracts, this means that the algorithm can continuously monitor that all defined rules are still valid. The moment the AI perceives that this is no longer the case, it interrupts the smart contract and alerts the employee to analyze the situation.

The human stays in charge, and accordingly must make final decisions to confirm or dismiss the computer alert.

This requires not only that the human understands the system, but also that they are capable of critical thinking to avoid falling prey to automation bias or a general over-trust of the AI. This has become increasingly important in the current environment, where a host of disruptions have been deemed “force majeure” due to the COVID-19 pandemic.

Deming’s focus on human psychology inside the system is imperative. He says a contract is “a voluntary, deliberate, and legally binding agreement between two or more competent parties. Contracts are usually written but may be spoken or implied, and generally have to do with employment, sale or lease, or tenancy.”[4]

This broad definition should also apply to smart contracts. The province of Alberta published the “Electronic Transactions Act” in 2001. The law defines the validity of electronic contracts, including the option of “the interaction of an electronic agent and a person or by the interaction of electronic agents.” Today the wording “electronic agent” has become outdated, replaced by as the terms “automated” or “autonomous software”.

As the demands of all included parties must be ensured, it’s crucial that smart contracts need to be auditable at any time.

Blockchain technology adds an extra layer of security and transparency

Modern definitions align smart contracts with blockchain:

“A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible.”[5]

The blockchain technology promises enhanced cyber-protection for smart contracts, as the information does not get stored on just one server, but is encrypted and decentralized on numerous servers. The different machines validate each other, and any deviating information (such as a manipulated contract),  would be automatically overwritten with the correct authorized information stored on the other servers.

As expressed by “chain”, no information gets deleted, but all changes are registered with the date and time. If the smart contract is enabled to connect automatically with other databases where certifications are stored in blockchain, the contract would add those. If not, it could connect to an internal server, where vendors manually upload such documents.

In times of global anti-corruption enforcement and rising stakeholder activism, companies want to ensure that their partners continuously comply with the law and defined human rights-initiatives. As a result, more documentation and statements are required. Smart contracts are a possible solution to achieve transparency, and automatically control the needed certifications. In the spirit of W. Edwards Deming, they can act as a bridge to connect two crucial organizational systems.

[1] Deming, W. Edwards (1993): “The New Economics for Industry, Government, Education”

[2] Dimock, Michael (2019): “Defining generations: Where Millennials end and Generation Z begins”

[3] Szabo, Nick (1994): “Smart Contracts”

[4] BusinessDictionary (fetched 04.04.2020): “contract”

[5] Frankenfield, Jake (2019): “What is a Smart Contract?”

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Whether you’re new to global business or a veteran professional, the importance of getting a contract right can’t be overemphasized. A solid contract can help avoid disputes and possible litigation, both of which are especially risky and costly when selling internationally. When negotiating an international business contract, be sure to:

1. Identify the parties to the contract. If affiliated companies, agents or representatives are involved, the contract should include them as well.
2. Specify the law that governs the contract. The business laws of a foreign market will always differ in at least a few ways, which can lead to disagreements over what a clause in a contract means. To reduce the likelihood of a dispute, the contract should specify which country’s laws will govern the agreement.
3. Draft a comprehensive contract. It must include all the essential terms that the parties have agreed on, since leaving one out may lead to disputes.
4. Draft all parts of the contract so that it is clearly written and readily understood by all parties. Ambiguous language in a contract invites disagreements and litigation.

Want to learn more about how to keep your buyers and customers happy by resolving non-payment situations through the use of contracts in a conflict-free manner? Check out the FITTskills International Trade Finance online course.

Basic contract clauses and terms

To avoid misunderstandings when developing an international business contract, it’s important to understand basic contract clauses and terms.

There are certain basic elements that all international contracts should include. For example, contracts should include statements regarding the language and legal system that governs the contract, as this will be crucial if the contract ever needs to be disputed.

Elements to address in an international contract

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When doing business internationally, there are numerous areas for negotiation. What happens if the merchandise is damaged during transportation? What inspections or authorization paperwork is necessary? When will payment be made, in which currency and by what date? What, if anything, will the packaging consist of? What are the regulations related to importing and exporting the product, in all countries involved with the transaction?

Negotiation is where these and numerous other questions should be answered. If the contract does not address these questions, or is not clear, they will be answered by applying the law of whatever country or international convention has been chosen to govern the contract.

Negotiation is the fulcrum of commercial transactions. When parties consider buying or selling, importing or exporting goods, it is with the intention of gaining something that will benefit their bottom line.

These gains are often at the expense of other parties who have their own gains in mind. The final agreement on what will be exchanged is often the result of rounds of negotiations full of concessions: some voluntary and some based on foreign legislation (for example, some countries dictate local owners must retain 51 percent of legal ownership of a venture).

1) Hire a consultant

If there is no in-house expertise skilled in the international negotiation arena, retain one to help. If cost is an issue, purchase literature or search online to subscribe to an accredited expert.

2) Choose your team wisely

Consider a small, competent team to manage expenses, schedules and communication more effectively, especially if travel is necessary. Also, if there is a language or cultural barrier, be sure to include a translator and/or customary expert as part of your team.

3) Gauge your counterpart’s bargaining power and negotiation style

Usually one party has substantially more to gain or lose from an international venture. Over or underestimating the balance of bargaining power can result in unnecessary concessions or failed negotiations. Similarly, if you approach negotiations too aggressively and your counterpart is more passive, or if you are technically focused and they are financially focused, the business venture will not seem like a good fit.

4) Meet them in person

If at all possible, it is important to meet with prospective parties face-to-face. Be conscientious of cultural norms. Be on time, dress in appropriate attire and demonstrate proper manners and respect. First appearances go a long way in establishing the tone and trust level for further negotiations. Similarly, choosing a neutral site or persuading them to come to your home territory can help you overcome or address cultural biases.

5) Fix the agenda and keep detailed records

In addition to being perceived as professional and informed, an agenda (or a checklist) helps keep time, expenses and schedules in check, limits the number of issues that can be overlooked, keeps further rounds on track, and provides reference for future negotiations.

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