For a U.S. company, the decision to go international can be daunting. Particularly if it means having to negotiate contracts under foreign laws, let alone in a foreign language. It is therefore natural that the company would want to reduce the fear factor associated with dealing with the unknown and would want to push to transact using its standard terms of business under U.S. law.
But this doesn’t always work, particularly if the European client is much bigger than its U.S. counterpart and makes it clear that unless the U.S. company accepts to transact on its paper and under local law there would simply be no deal. In that situation, there are 2 viable options: (1) either the company accepts the European client’s paper and the application of European law to the contract; or (2) it hires a lawyer who can draft and negotiate the contract under local law for them. But then which lawyer to choose? Using a lawyer who is only admitted to practice in the country where the client is located – creates the risk that the local lawyer may not be familiar with the U.S. client’s preferred terms of business and their meaning under U.S. law. This may also create the perception that the local lawyer is siding with the local client and advocating in the local client’s favor. A lawyer who is admitted to practice in both the EU and the U.S., and therefore better to defend the U.S. client’s interests under European law would be a far superior choice. The best of both worlds in a way. This is where we come in!
“Many US clauses in commercial contracts are either invalid or they carry a completely different meaning under European law.”
The European Union is composed of 27 member states, all having different local laws. That is why a company wishing to do business in an EU country must be careful to comply not only with the local law (which differs from one country to another), but also with the law at the European level.
Thus, when doing business internationally, one must remember to « think globally (and) act locally ».
The European Union is governed by civil law, which is very different from the English common law upon which U.S. law is based, even though they share a few concepts.
Today, globalization has encouraged the standardization of “boilerplate” contractual provisions, some of which appear in almost all commercial contracts. However, while some clauses are appropriate for use in certain countries, some are not. Indeed, contractual approaches and standard contractual terms are very different depending on the country’s jurisdiction, which is why it is important to never assume that what works in the United States may work somewhere else.
It is common practice for U.S. parties to an international contract to choose to submit the contract to English Law, a law that is perceived to be closer to U.S. law, and therefore easier for an American to accept than other European laws. It is also in the English language, and therefore easier to understand and relate to. But, despite its apparent similarities with U.S. law, the law of England is quite different. Terms that are the same or are similar to U.S. law have different meanings under English law. The rules of contract drafting and interpretation are also different and hard to master for lawyers who weren’t trained as UK lawyers. In addition, English law has, in the past 50 years (since the UK joined the EU in 1973), somewhat departed from a traditionally English approach to the law and moved in a direction that is more aligned with the predominant EU continental civil law legal culture. As a result, English law has become less English and more European over the years. And if one were to predict that since the UK has left the EU following Brexit, it is likely that English Law will revert to a more traditionally English approach to the law, as it is no longer bound by EU precedents, and therefore may no longer be accepted as a governing law by EU companies based outside the UK.
Continental Europe, on the other hand, is entirely civil law-based and has very different legal concepts than those commonly found in the U.S. Although the laws and regulations that are passed in the 27 Member States of the EU have some elements of commonality due to their common origination in the French Napoleonic civil code, and a certain level of uniformity brought about by the legislative instruments (Regulations and Directives) used to pass legislation at the European/supranational level, the laws do vary country to country in the EU. Last but not least, they are in the local language only, which makes them difficult to understand by foreign speakers not trained in the local laws and in the local language.
The language and specificities of the local law set aside, a typical example of the differences in the legal culture in the U.S. and Europe is in the area of warranties and limitations of liability. For more on this see Understanding liability limitations in Europe vs. the U.S.
Here are some of the differences:
In the U.S.:
• A contract would typically include a clause to the effect that the company shall not be liable for any special, indirect, incidental, punitive or consequential damages, including loss of profits, arising from or related to the breach of the agreement or the operation or use of the products and services, whether or not the consumer has advance notice of the possibility of such damages.
• The company would state that its sole and exclusive maximum liability, whether based in contract, tort, or otherwise, shall not in any event exceed the contract price for the particular products or services.
In France:
• The Civil Code states that a party is liable to the other one, up to the amount of the damage. However, the parties, by contract, can agree on the limitation of their contractual liability.
• The Cour de Cassation, France’s highest court for civil and criminal matters, underlined the validity of limited liability clauses in contracts, except in cases of willful misconduct and gross negligence on the debtor’s part. Furthermore, limitation of liability clauses may be struck out if the court considers that such clauses exonerate the obligor of its essential obligations.
• The U.S. notion of “special, incidental, punitive or consequential” damages does not exist under French law, which only recognizes the distinction between direct and indirect damages.
• Parties to a contract cannot limit or exclude liability for death or personal injury.
• A cap on liability is generally accepted based on the value of the transaction.
In the UK:
• Exclusion of liability clauses are subject to the reasonableness test under the Unfair Contract Terms Act 1977 (UCTA).
• A total exclusion of liability for consequential, financial or indirect losses may be held unreasonable. It is therefore recommended to separate each type of economic loss, so that a court may sever reasonable from unreasonable exclusions.
• Case law suggests that loss of profits may not qualify as an indirect or consequential loss, therefore, to avoid this issue, loss of profits should be generally excluded as a specific loss.
• A term excluding or restricting liability for death or personal injury caused by negligence is wholly ineffective.
• A clause which places an upper limit upon liability must be reasonable.
A particular application of these differences can be found in the area of software contracts. See Negotiating software contracts under EU law: Practical tips
Because legal theories and rules of contract interpretation are very different in the U.S. and Europe, U.S. companies doing business in Europe should be very careful not to include U.S. boilerplate language in agreements governed by UK or EU law. Whereas the interests of international business would command a uniform approach to contract drafting and construction, law is essentially a local product that is very much influenced by the culture of the country in which it is passed. UK and EU courts often have to interpret American style contracts against local standards and have more often than less struck out provisions that simply have no corresponding meaning under local law or violate local legal principles. It is therefore essential that U.S. companies doing business in Europe under European law retain the services of European counsel able to ensure that contract clauses they negotiate with European clients carry their intended meaning and afford them the protection they seek to derive from them.
Because we are admitted as lawyers in the U.S, the UK and the EU, we are ideally equipped to assist U.S. companies doing business in Europe in the drafting and negotiation of their contracts under UK or EU law while ensuring that our clients continue to benefit from the protections afforded to them under their standard terms and conditions under U.S. law. For more information see our International Business Lawyer services page on our website.
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This article was written in collaboration with Auriane Wilhelm