When in Rome, Don’t Contract in English

CORP - Aug 22When advising clients on international transactions, we often provide counsel that runs counter to our clients’ expectations and initial inclinations. For example, Texas clients usually assume they want Texas law and courts to govern the contract, when often the foreign law is more favorable to their contract position, and a foreign court will be better able to enforce it. Clients can be particularly surprised when we advise that their contract should be translated into a foreign language.

On one recent client matter, our client was a US tech company negotiating a joint technology development agreement with a manufacturer in Brazil. When we recommended translating the client’s contract into Portuguese, the client responded, “There’s no way we’re signing our contract in a language we can’t read! Let them translate it.” We pointed out that we can easily ensure that the translation is done accurately so that the contract says what we intend, but it’s also important, though less obvious, that the contract be understood by the Brazilian party, and by the courts that may ultimately be asked to enforce it. It is not just “the other side’s problem.”

Principles of contract law provide that if two contracting parties fundamentally misunderstand each other on a key term, there’s no meeting of minds sufficient to form an enforceable agreement. Moreover, disputes over interpretation are typically resolved against the drafter, who bears the burden of ensuring that the written terms are understandable to both parties. Therefore, asking the Brazilian manufacturer to execute the client’s contract in English would simply provide the manufacturer a possible defense against enforcement that it wouldn’t otherwise have. If the manufacturer argued, “The way we translated that provision, it means that we own all the joint IP,” the client would bear the burden of demonstrating that the manufacturer’s interpretation was unreasonable.

Having the contract subject to international arbitration in English wouldn’t help, as it wouldn’t change the underlying principles of contract law. Moreover, even if the client obtained a favorable arbitral award, that award would still need to be enforced against assets of the manufacturer in Brazil—i.e., with the assistance of a Brazilian court. If the Brazilian court found there was no “meeting of the minds,” then arguably the contract was never validly formed and the arbitration clause is void ab initio; different jurisdictions have different approaches to this issue, but the Brazilian court would likely look favorably upon any argument protecting the local manufacturer.

Worse, if the client needed an injunction against the manufacturer to prevent IP theft, that relief could only be issued from a Brazilian court. If the contract was executed in English, then a translation would need to be provided to the court, and the parties would submit competing translations, each supporting their own arguments. At that stage, facing delays, expense, and uncertainty caused by arguing over translations, the client would sorely regret its decision to not to have an agreed translation into Portuguese from the outset.

We usually advise, then, that such contracts be executed in both languages, with the text of the two versions appearing side-by-side in columns, and with each version having equal effect. The key objective is to ensure that there is an agreed foreign-language version that can be enforced in the relevant foreign courts, and in US courts, with no squabbling over misunderstandings or strained translations.

When a client remains unwilling to give effect to any contract not drafted solely in English, then we recommend adding language such as the following, in hopes that this will at least help to weaken a foreign counterparty’s ability to hide behind alleged misinterpretation of the agreed terms.

COUNTERPARTY represents that it has carefully reviewed this Agreement with the involvement and assistance of COUNTERPARTY’s officials, advisors, and legal counsel fluent in the English language, that it has consulted with legal counsel competent to render advice with respect to transactions subject to the law that the Parties have chosen to govern this Agreement, that it has no questions regarding the meaning of any of this Agreement’s terms, and that it has obtained high-quality translations of this Agreement for use by any of COUNTERPARTY’s officials who are not fluent in the English language, with the understanding that COUNTERPARTY alone shall bear the risk of any misunderstandings that may arise as a result of such translation.

This article was written by Martin Lutz. For more information regarding this post, he can be reached at mlutz@gdhm.com.

 

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