April 17, 2019

Three Global Drafting Considerations for International Construction Contracts

U.S. contractors should proceed with caution when seeking to expand their footprint to an international stage, especially in developing countries where the local infrastructure may not promote a sustainable, stable environment, or a sustainable business model for the contractor. But by considering these three factors, contractors can mitigate exposure to the various risks involved in an international project.

What contract form and language should we use for the agreement?

The construction industry has come a long way in recent years in its attempt to harmonize a set of legal principles that govern the relationship of the contracting parties. This is especially evident in the development of standardized contract forms by private national and international organizations, including the FIDIC forms created by a Federation Internationale des Ingenieurs-Conseils (a Swiss company with a presence of consulting engineers in over 70 countries) and the contract forms developed by the American Institute of Architects (AIA); both of which are the most widely used contract forms in the international and domestic (U.S.) communities, respectively.

Once the parties select a form, they then need to determine the language in which the agreement will be drafted. Ideally, both parties will have a large presence and practice in the same country and can draft in a language with which they are both familiar. If not, however, drafting can be difficult and time consuming. Once the language is agreed on, parties should hire counsel fluent in the language to facilitate effective negotiations.

What governing law and/or principles should we use for the agreement?

Traditionally, the governing law in construction contracts tends to be the law of the country or jurisdiction where the project is located. This system generally succeeds in the U.S., where the combination of well-developed construction law and an in-depth body of common law provides more predictability to potential disputes and contractual ambiguities. However, from an international perspective, many countries do not have the well-developed body of construction law that the U.S. system has, and many countries operate on a civil law system rather than a body of common law. In choosing a governing law, it is important that all parties be aware of the applicable local laws and government regulations where the project will take place. To the extent applicable, certain issues parties should be aware of include:

  1. any unusual civil or criminal laws.
  2. any U.S. regulation or treaty that apply to U.S. entities conducting business in the foreign country.
  3. any local government corruption or civil unrest that may affect the project and the parties involved.

If the governing law is not U.S. law or is not as well-developed in construction, governing principles may be chosen to assist the parties in negotiation and performance of the contract. In terms of which governing principles to use in an industry where both goods and services exchange hands, the International Institute for the Unification of Private Law’s Principles of International Commercial Contracts (UNIDROIT Principles) are considered one of the most significant contributions to international commercial contracting, because they function as a persuasive authority for interpreting commercial agreement for judges around the world.

The UNIDROIT Principles are intended to act as a neutral authority where certain laws may be inapplicable, and a gap filler for the contract language. The UNIDROIT Principles apply the same basic contract interpretation elements recognized in the U.S., including unconscionability and mistake of fact as a means to void the contract. Thus, where the governing law may not be favorable, the UNIDROIT Principles provide the parties a set of fair and neutral principles to govern and aid in interpreting the contract.

How will my construction project impact the local community (and vice versa)?

In a large, international construction project, before any dirt gets moved, the U.S. construction firm should do in-depth due diligence on the impact the project will have on the local community, as well as the impact the local community and government may have on the construction firm’s business. Everything from communication and language barriers between the construction parties, to potential economic and political impact of the project, to unfamiliarity with local culture, weather, different forms of disease, materials and labor used, and vegetation and wildlife can impact the project. The U.S. construction company should be cognizant of the geographical and geopolitical surroundings that may impact considerations in the contract. Additionally, local regulatory requirements may conflict with U.S. federal law or treaties that may govern U.S. companies, and these requirements may prohibit conducting business in the area envisioned by the parties.

While these considerations may discourage U.S. construction companies from expanding their business internationally, they are more easily managed with help of local firms, counsel and consultants who know the region well and understand how to mitigate the risk in the contract. With adequate advance preparation, research and negotiation, there are valuable opportunities for U.S. contractors with the capability to perform projects overseas.

For more on this topic, or for additional citations, see Chapter 20: International Law in Bruner & O'Connor On Construction Law or visit OnConstructionLaw.com.

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