How Can an International Contract Be Illegal?

International business creates great opportunities for entrepreneurs and small businesses. International trade also presents complex legal challenges. After all, by their very nature, cross-border business deals involve at least two jurisdictions. Each has its own legal systems, rules, and regulations.

Contracts guide these international transactions. Whether it's a corporation involved in government contracts, national security, procurement, subcontracting, or international trade, a tech startup outsourcing software development, or entrepreneurs hiring overseas subcontractors, binding agreements are important.

Organizations doing business in foreign countries should be aware that it's easy for agreements to run afoul of business law and business practices in foreign countries.

An Example of an Illegal International Contract

Let's assume that two individuals, Gus and Marshall, enter into a contract to sell hemp, perhaps as a health care product. This contract is perfectly legal in countries that allow providers to cultivate, solicit, and sell hemp. But the contract would be illegal if Gus took delivery of the hemp in a country that forbids the product.

Illegality of performance can cause the cancellation of a contract. If a contract for the sale of goods originating in Ireland requires that the shipment include a NAFTA certificate of origin, the entire contract might be illegal. Certainly, that contract clause is illegal and void. The goods are Irish and cannot legally receive a NAFTA certificate of origin.

In another example, consider a situation where a U.S. corporation agrees to practices that are illegal under U.S. law. The practices might be legal in the other jurisdiction. But the U.S. corporation could face regulatory action at home from local governments and federal governments.

Intervening Illegality

Intervening illegality can also affect a contract's validity. Some contracts are legal when made. But a later law might outlaw performance or the subject matter. Sometimes, the illegal provisions can be omitted from the contract. This allows performance to go forward.

If the contract can't be completed without keeping the illegal part, the parties will be released from the deal. If that happens, you should check with your attorney to ensure your obligations under the agreement are finished. You don't want to unintentionally breach the contract unintentionally.

Is Your International Contract Enforceable?

One important business concern for international contracts is what happens if there is a disagreement. Before drafting or entering into a foreign contract, knowing if your contract is legally enforceable is important.

An arbitration clause is recommended. Arbitration is an effective form of dispute resolution for issues like intellectual property disputes. But this depends on whether adequate enforcement actions can be effectively implemented.

Courts will not enforce any contract that is illegal. An illegal contract involves either:

• The solicitation of prohibited goods or services
• Illegal activity

International business involves multiple layers of law and regulation. So, contracts that would be legal in one country may be illegal in another.

Sources To Help Prevent Illegal International Contracts

Business owners involved in international contracts should be familiar with U.S. federal law, such as the United States Code (U.S.C.). They must also be aware of the laws of the foreign country where they are doing business. Sometimes national security is a concern. Federal agencies can help.

Government agency resources include:

• The U.S. Department of Commerce's International Trade Administration (ITA): Helps U.S. businesses navigate global markets
• The U.S. Department of State: Provides assistance and advice on international trade matters
• The Export-Import Bank of the United States (EXIM): Provides advice and support to U.S. businesses exporting goods and services
• The Small Business Administration (SBA): Offers extensive resources to businesses engaging in international trade

International contracts involve many considerations. Organizations doing business in foreign countries should:

• Assess the enforceability of their contracts
• Understand local prohibitions
• Be prepared for changes that may call for the cancellation of the contract
• Regularly update contact information (it's essential, especially when executive orders might be issued that could affect operations)
• Assess changes in the business environment every fiscal year (e.g., changes in property laws of foreign countries can affect the legality of real estate contracts)

Getting Legal Help

Navigating the landscape of international contracts can be daunting. Companies should get legal advice when doing business with foreign countries. This helps make sure any deals, contracts, or purchase orders follow the law. If you're unsure whether an international business transaction or foreign business relationship is illegal, contact a local business and commercial law attorney.

For more information and resources related to this topic, you can visit FindLaw's Business Contracts and Forms section.