Culturally Effective Contracting--Modifying Contracting Practice for International Use
Dick Locke, President, Global Procurement Group (www.globalpg.com), San Francisco, CA 94114 - 415/695-1673, firstname.lastname@example.org
84th Annual International Conference Proceedings - 1999
Abstract. Standard U.S. purchasing contracting practices can be not only ineffective, but also counterproductive when buyers use them in other countries. This presentation will explain both the cultural and legal differences that cause this loss of effectiveness. It will suggest specific changes in practices and provide examples of the right and wrong way to work with potential foreign suppliers.
Introduction. Like all countries' legal practices, the practices in the United States developed from both legal and cultural influences. Our practices have become unique, however, because our legal system developed from a legal basis that most of the rest of the world does not use, and because we buy and sell a small percentage of our gross domestic product compared to other industrialized countries. We are not as knowledgeable about normal ways of doing business internationally as people in other industrialized countries are.
This discussion will cover first the legal basis, and then the cultural underpinnings of our legal practices. It will then cover some practices that are unique and explain why people in other countries find the practices disturbing. Next, it will discuss the reasons why many (but not all) buying companies want contracts with their suppliers. Finally, it will show ways to meet (and not meet) the goals for contracting.
I should note here that I am not an attorney, and that you should check the applicability of any advice in this presentation with your attorney before making any significant decision.
Legal differences. There are two major legal systems in the world. The system that 49 of the 50 United States use is called "common law." This legal system grew out of British law in the 12th century, and is found only in Britain and its former colonies. The basis of common law was originally that judges should strive for a just conclusion based on the facts of a particular case. When enough judges found the same way in the same circumstances, this became de facto law by precedent. The idea of creating law by precedent did not survive the industrial revolution, and our legal system now has a lot of legislative-written laws. However, there is still more room for precedent in our system than in the other legal system.
Contracts in a common-law system are almost infinitely negotiable. Almost everything has to be written down unless buyer and seller wish to rely on precedent or on the Uniform Commercial Code. This leads to very lengthy contracts. A "default" clause in an U.S. contract, for example, often defines default, specifies the remedies for default and defines the procedures by which those remedies will be attained. It's not unusual to see a 350-word default clause in an U.S. purchase contract.
The rest of the developed world uses "civil law." (This is also called "code law.") This grew out of Roman law, and was developed in continental Europe during the Renaissance. Under civil law, legislatures or other bodies write lengthy codes to cover as many situations as possible. Precedent has much less weight in influencing decisions. Contracts are usually much briefer because the parties expect to use the established codes that define terms, establish rights, provide remedies, and define the procedures for attaining them.
One company that had a 350 word default clause in its standard U.S. purchase contract had a nine-word clause in its German (civil) contract: "In the event of default, German law will apply." Parties contracting in Germany generally regard the default law as fair, and spend their negotiating time discussing business issues, not legal details.
Countries that had a choice of legal systems chose civil law. Most attorneys that are trained in civil law find common law difficult and troublesome. It seems too vague and too subject to the whims of a particular judge or jury.
Cultural differences. A buyer must consider cultural differences as well as legal-system differences. There are a many cultural differences between countries, but there are three major differences that affect purchase contracting.
The first difference is a different emphasis on "uncertainty avoidance," a term developed and explained by Geert Hofstede in his pioneering book Culture's Consequences. Simply put, it reflects differences in how sure people in a culture want to be of the future before they will proceed with something. France and Japan have high uncertainty avoidance scores. The U.S. has a fairly low score. This cultural characteristic affects lead time and flexibility more than it affects anything else.
In addition to different emphases on uncertainty avoidance, there are different mechanisms for coping with uncertainty. In the U.S., a legal contract is a major uncertainty avoidance mechanism. A normal American reaction to any potential difficulty is "put it in the contract." We even usually have a "complete agreement" clause, which states that the total understanding between the companies is in the contract. A contract reduces uncertainty by allowing a powerful third party, the courts, into a dispute.
In most Asian countries, even those with high uncertainty avoidance, contracts are much shorter and much vaguer. In those societies, the major uncertainty avoidance mechanism is to get to know potential business partners very well before entering into a business relationship.
This leads to the second major cultural difference, the importance of a personal relationship in business. The US treats business rather impersonally compared to other countries. Fons Trompenaars, a Dutch researcher, illustrates this well. He runs multinational workshops in Europe where he asks for reactions to hypothetical situations. One question involves a car accident where your close friend is driving. The friend is speeding and injures a pedestrian. The friend's attorney comes to you and encourages you to lie in court to protect your friend. Trompenaars asks two questions: What right does the friend have to ask you to lie in court? Would you or would you not lie? Approximately 95% of Germans, Canadians and Americans answer either that the friend had no right to ask this or the friend had some right but they still wouldn't lie. Approximately 65% of Spanish and 25% of Koreans give these answers. While Trompenaars' book seems to treat this data as an 'honesty graph', it's much more enlightening to consider it as a graph of the different importance and sense of obligation given to friendships in different countries.
Trompenaars specifically suggests not loading contracts with penalty clauses or strict requirements when dealing with cultures that get low scores on this exercise. These clauses will be seen as an accusation that the other party would cheat if the contract didn't forbid it, and a person whose integrity is challenged may react by acting with less integrity.
The third major cultural difference is the attitude toward contracts. Western cultures, and particularly the United States, tend to believe "a deal is a deal," and once a contract is signed everyone is expected to follow it without requesting changes. As a result, contracts are expected to cover everything that could happen and become very long. In most Asian countries there is a more flexible attitude. A contract is seen as more of a guideline, and life with its frequent changes is seen as too complex to capture all the possibilities in a written document. As a result, if something unexpected happens, either party is able to reopen negotiations. Both parties are assumed to be well intended and to take reasonable care of each other's interests.
Both of these attitudes toward contracts can be carried to counterproductive extremes. The best solution is somewhere in the middle.
U.S. legal practices. There are a few legal practices that are especially disturbing to sellers in other countries. We already mentioned one, which is that contracts become lengthy because too many items go into them. A second one is that they are wordy and written in a special type of English, legal English (More on correcting that later). A third common problem is that they are written one-sidedly and give the buyer a variety of rights and the seller as few rights as possible. Domestically, we recognize that the draft language is usually negotiable and the buyer often doesn't seriously intend to insist on it. Buyers routinely, and sometimes carelessly, send these draft documents to foreign sellers with an assumption that they will ask to have items changed if they find them distasteful. Some special caution is needed here. There have been academic studies that show that one of the biggest obstacles to a negotiated agreement that could have been win-win is the opening offer being seen as completely unreasonable to the other party. A seller faced with an unreasonable contract may draw back from the deal.
Purpose of contracts. I see two major purposes for written, signed agreements between the buyer and seller. The first purpose is to get people to write down and agree (in some degree of detail) to the major responsibilities of the parties. I believe this is especially important when dealing with foreign suppliers. This exercise will bring most disagreements and misunderstandings into the open before business starts. It also creates a document that will survive personnel changes.
The second major purpose is to use a signed, legally enforceable agreement to get a party to do something they would not do otherwise. A strong third party, normally a court, enforces compliance. Achieving this goal is much more difficult when dealing internationally. The international legal system is slow and expensive. A legal cycle may be several times longer than a product life cycle. Many major companies do not try very hard to make an agreement that will be useful in court.
Preparing a contract draft. Here are six key steps to take in preparing a contract proposal for foreign suppliers. This is by no means an exhaustive list, but one designed to reduce problems due to legal and cultural differences.
- Remove all clauses from your standard contract that are applicable in the US only. Some of these are veterans' rights, EEO, and OSHA clauses. Even if a clause says "when applicable" take it out if it isn't applicable. One very common clause states in essence"Seller will follow all U.S. federal, state and local laws." A foreign supplier will have a difficult time even deciding which laws are applicable, if any. If there is a particular U.S. law or group of laws that you want the seller to follow, state it.
- Rewrite or eliminate all clauses that are too harsh or one-sided. Carefully consider whether they are necessary, and if not, take them out. A clause stating that the supplier will not sell to anyone else at a lower price, for example, is a poor way to start a new relationship. If there is a clause that you would normally agree to make two-way during negotiation, make it two-way before the supplier sees it.
- Simplify the English. Legal writing is often indefensibly hard to read. If one of the major purposes of an agreement is to document expectations, then the contract should function as a communication tool. If you are working with an attorney, this is not a trivial problem. Many complex contract clauses have been passed on from attorney to attorney over the years with a comment that "this has worked in the past." To rewrite them into simple English will take time and thought. You might face resistance.
Fortunately, you have support. The Securities and Exchange Commission has drafted rules that require prospectuses to be written in plain English. Vice President Gore's Reinventing Government program is requiring all government communications to be written in plain English. Both organizations have published guidelines. Some key recommendations are:
- use active verbs
- use short sentences
- avoid legalese and jargon
- use bulleted lists and tables, rather than long lists of words separated by commas
A good test, and an enlightening exercise, is to use your word processor's grammar checker on your contract proposal. Often, the grammar checker will reject entire paragraphs. (Think of the effect of this style of writing on someone for whom English is a second language.) Pay attention to typography, white space and overall appearance of the document.
- Decide if you want to have the United Nations Convention on the International Sale of Goods (CISG) applicable to your contract or not. The CISG is a UN treaty that the US and several other countries have signed. If the buyer's and seller's countries have both signed it, it will be applicable to your contract unless you specifically exclude it. There are some aspects of the CISG that are unfavorable to buyers and some that are unfavorable to sellers, and it is not completely understood. Most companies exclude it. You will need to put specific exclusionary language in your agreement: "The United Nations Convention on the International Sale of Goods will not apply."
- Consider arbitration rather than courts to solve problems. Arbitration will be faster and less costly in most cases. It also will tend to reach a compromise, rather than have one party prevail completely. It is a good solution for solving what both parties see as a temporary impasse in their relationship.
- Establish the courts and legal system under which disputes will be settled. You need to pick a country and city. If the supplier has all of its assets in its home country, often the best choice is the supplier's home country. This works best if the buying company has a legal presence in the supplier's country and there is a stable, functioning legal system.
Summary. Cultural and legal differences make international contract negotiating challenging, but also often enlightening. Many of your assumptions will be challenged. You may discover excellent foreign practices that are also applicable to domestic contracting, and often you can improve your overall contracting processes. If there is one key lesson, it is that U.S.-style contracts are not the only way to achieve optimum supplier performance. Personal relationships, obligations to customers, and the ease with which a foreign supplier can do business with your company also can lead to success.
Clinton, William Jefferson. "Presidential Memorandum on Plain Language." (June 1, 1998). Internet. Available URL: http://www.plainlanguage.gov/cites/memo.htm
Hofstede, Geert. Culture's Consequences, International Differences in Work-related Values, abridged edition. Newbury Park, CA. Sage Publications, Inc., 1989
Locke, Dick. Global Supply Management, a Guide to International Purchasing. Burr Ridge, IL: Irwin Professional Publishing, 1996
Securities and Exchange Commission. A Plain English Handbook: How to Create Clear SEC Disclosure Documents. Washington, DC. August 20, 1998. Internet: Available URL http://126.96.36.199/pdf/handbook.pdf
Trompenaars, Fons. Riding the Waves of Culture. Burr Ridge, IL: Irwin Professional Publishing, 1993
Wydick, Richard C. Plain English for Lawyers. Durham, NC. Carolina Academic Press, 1979