While it is always important to have a well-drafted contract, complications with enforcement of a contract can arise when one party is not based in the United States. In California you often see this come up where a party is working with a company based in another country, such as China. There could be a manufacturing arrangement, whereby a California business is having a product made by a Chinese company for distribution either in the United States or elsewhere abroad. Or it may be a more direct license or distribution agreement where a company not based in the US is both making and selling a good designed or conceived in America. The deal could also be for an acquisition of a business or assets from a California company or any number of other transactions or business arrangements.
No matter the type of arrangement, all contracts should have provisions detailing what laws should govern the interpretation of the contract and where disputes or litigation (whether it be mediation, arbitration superior court or other method) will be handled if the need arises. These governing law and dispute resolution provisions are often considered “boiler-plate” provisions and usually appear toward the end of a contract. As such, they are often overlooked as they do not speak directly to the terms of the transaction. But these provisions are always important when the parties are not in the same location and especially important when the parties are in different countries. Parties to a contract will have to make a choice as to which law to apply to the transaction, and as to where a dispute will be handled. When drafting an agreement between a California client and another party abroad, it is typically advisable that California law governs the contract and that disputes be handled in the city or county where the client is located. That makes it clear that the laws to which the client is generally subject (California) will be utilized and that any dispute would be conveniently handled locally.
On the flip side, handling disputes in California when the opposing party is located abroad provides a disincentive to the opposing party to bring a dispute or initiate litigation against the California party, as the foreign party would have to locate a California attorney and litigate under laws with which they are unfamiliar. So the relative inconvenience to the opposing party creates a chilling effect on the likelihood that they pursue a dispute or attempt to enforce the agreement against a California party. While this chilling effect may appear to be a positive byproduct of situating disputes in California under California law, it also begs the question of how useful the dispute resolution process is for the California party who is seeking to enforce the contract. While it should certainly be easier to obtain a judgment against a foreign entity in a dispute situated in California – perhaps the foreign party does not even contest the dispute – the process of enforcing a judgment against the foreign entity can be quite difficult.
Once a judgment has been obtained, either in court or through arbitration, the next step (assuming the foreign party is still refusing or failing to comply) is to enforce the judgment by attaching property to the judgment. If the foreign entity has no assets in the United States, the only way to satisfy the judgment with assets of the opposing foreign party is to enforce the judgment in the country where that party is located. This requires a treaty to be in place between that country and the US, where that country will observe and enforce US judgments. This also requires going through the applicable court process in the other country to enforce the judgment, and likely obtaining counsel in that country in order to do so. Certainly that would be a difficult, time and resource-consuming process, even if successful.
So while a clear and protective contract is always essential to documenting a business arrangement or transaction, when one party is located outside the US, you should be thinking about how and where disputes will be handled and whether the foreign party has assets in the US should the need arise to enforce a US judgment against it. Contracts can provide powerful incentives, and no one wants to get caught up in litigation even if they are located in a different country. But if one party to a contract is foreign, be aware of these additional considerations in advance so that the contract can be drafted to take them into account and provide as smooth an enforcement process as possible.