Language Clauses in Cross-Border Contracts: More Than Just a Formality

Introduction

A cross-border contract is a legally binding agreement that governs business relationships across borders with a primary aim to mitigate risk in the transaction.

1 Such contracts are pertinent for setting intention of both the parties, protecting rights, setting obligations, while minimizing possible disputes between involved parties. It hence serves as a framework to conduct business internationally while maintaining compliance with local laws and regulations, thus being a safeguard to the interests of all parties involved.

Differences exist between cross border and domestic contracts, like the separate legal systems, normative practices, and distinct languages in the contractual agreements. English has become the Global standard language for drafting contracts, which does guarantee every nation to follow this trend.

2 Multiple reasons for non-acceptance could be (a) English, may not be understood by non-English speakers (b) even for people with English as their second language, there may be differing interpretation of the same phrase (c) different cultures have differing standard practices which could change contract could be affected. (d) nuances in the legal system of the country where the contract will be executed is crucial to ensure compliance and enforceability. Measures must be taken to mitigate this language barrier ahead of time is crucial. Understanding your counterparty, using a dual-language agreement may become an obvious option.

However, whilst drafting cross-border contracts, two versions may exist, but a canonical clause: & English version shall prevail &, a last-minute afterthought, allowing only the English contract alone to be the valid contract. It while being a standard practise doesn't cover all possible pitfalls.

Rethinking Language for Contract Drafting

While contracts are drafted in a language understood by most of the parties, this changes in cross border contracts. It no longer remains as an auxiliary for comprehension but bare necessity. In such a case having two linguistic version of the same matter is the only solution for international parties to communicate. Having said that two different contracts albeit being the same in content cannot be enforceable. Reason being translation are unlikely to be the perfect in writing down both the parties’ intent. The common practise for local courts to recognise the contract understood in the official language.

Hence intelligent use of language can be made a strategic choice rather than mere preference between parties. Instead of a perfunctory ‘English shall prevail’ clause, three considerations must be deliberated with: the likely claims to arise from the transaction, the likely venue for dispute resolution, and the collectability and enforceability of any judgment obtained. The value obtained is to minimise risk of conflict, by reducing scope of dispute, and being compatible with the local laws of likely place of dispute.

For example, contracted party’s only assets are in China, hence the local court in China, then making English the preferred language of contract is a strategic error. Chinese courts conduct proceedings in Chinese. They will require a Chinese translation regardless of what governing clause says. The local- language version gets the judge’s attention. The English version becomes a secondary document. The same logic applies across most of the nations with English as their secondary language, and each of such jurisdictions, enforcement is likely to be done in the local language. Governing clause is a statement of preference while the enforcement forum determines the interpretation.

Apart from these concerns, the compliance requirement must also be considered from both the parties. The party with higher technical and greater responsibility should be given greater preferences. This effort to allow the party with more onus to understand the nuances and execute the contract at their best ability. Performance becomes important when enforcement of the contract doesn’t remain as the primary concern. The contracts should hence be made to allow the parties to execute without being lost in translation. The other party may be given a copy of the translation which could be for reference only.

Therefore, it could be a healthy alternative, drafting in the secondary language and not the presumed English.

Inadequacy of boilerplate language

In apprehension of conflicting interpretations, the companies may choose to use boilerplate provision that rely on one version to mitigate this risk. Not only is it making the other linguistic versions futile and unenforceable, but it may also create difficulties to the parties who aren’t well versed with language of the contract.

Further language also does carry legal and cultural assumptions. International commercial contracts are usually drafted in English and therefore often contain concepts from common law, such as & quot; warranty,& quot; & quot; indemnity, & quot; and & quot; consequential loss" which do not always have the same consequences in civil law jurisdictions. As a result, parties from countries such as China or France may unknowingly agree to legal

concepts and interpretive approaches that are unfamiliar to them.

Lost in Translation

Drafting the contract in local language of likely location of conflict becomes a solution. While that is wise however it doesn’t negate the risk of translation by a non-native speaker. A governing clause may redirect to the enforceable contract; it doesn’t minimise risk of lapses in translation work. Typical process demands the contract to be negotiated in English, finalised in English, and then a translation maybe outsourced. Rarely it is a lawyer doing the translating. Outsourcing the translation with no understanding of the legal significance of the words being rendered makes this version unreliable. A translator who is asked to choose between several imperfect equivalents for “best efforts,” “warranty,” or “consequential loss” makes that choice without understanding the brevity of the terminology.

The underlying problem is jumbling of legal concepts during translation. English-language contracts systematically embed common law ideas that carry entirely different meanings for civil law counterparties. For example: A Chinese signatory reading a translated “warranty” clause is not reading the same legal concept the drafting lawyer was writing. The word travels across languages. The legal meaning may not. The fix is not a better governing clause. It is a better translation process conducted by bilingual lawyers, reviewed clause by clause, and certified before anyone signs.

Court’s Approach on Conflicting Versions of Contract

In instances where a dispute reaches a court or tribunal and the two language versions conflict, courts look at the contract as a whole including the translation, not severing designated version due to the mere existence of a governing clause. The US Federal Courts made this the status quo in MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D’Agostino, S.p.A. (11th Cir. 1998) 9 , where the court applied the UN Convention on Contracts for the

International Sale of Goods to hold that “all relevant circumstances” which was interpreted to include both language versions as admissible as evidence of what the parties actually agreed. A signed translation binds the party that signed it, even if they could not read it.

The famous “million-dollar comma” case makes the point even more starkly. In Rogers Communications . Aliant, 10 the Canadian regulator resolved an ambiguous English termination clause by reference to an unsigned French translation that was clearer on the point. An unsigned, reference-only translation of the contract became the decisive interpretive authority. The governing clause was irrelevant because the primary text was ambiguous and the translation was not.

At the international arbitration level, the stakes are existential. In Kilic Insaat v. Turkmenistan (ICSID), a divergence between the English and Russian texts of a bilateral investment treaty, one text making local court recourse optional, the other making it mandatory, leading the tribunal to decline jurisdiction entirely. The arbitration was killed before it started by a translation inconsistency.

it seems that legal concepts do not travel cleanly across languages. Hence courts have taken an approach of recognising contracts as a whole: the signed contract, as well as the unsigned translation. This is based on court's approach on equity in contracts and their interpretation of UN Convention on Contracts for the International Sale of Goods. A contract in two languages is, potentially, two contracts which needs to be verified for inconsistencies.

The Jurisdiction Problem

Language also possess a different problem depending on areas, like some jurisdictions make language compliance a condition of contract validity, meaning specific requirement of following said official language. This is hence, no longer an interpretation risk, however risks nullity. Such risks vary from jurisdiction to jurisdiction, with their own prescribed requirements like in the following instances.

Indonesia: Stark example being Law No. 24 of 2009 13 requires commercial agreements involving Indonesian parties to be executed in Bahasa Indonesia. In PT Bangun Karya Pratama Lestari v. Nine AM Ltd, a loan agreement executed solely in English was declared null and void which was upheld by the Indonesian Supreme Court. 14 Recently, the Supreme Court’s 2023 Circular Letter 15 relaxed this position, no longer void but, the enforceability is not guaranteed.

China: There is a requirement of Chinese-language documents for joint venture approvals and government filings. According to Sino-Foreign Equity Joint Venture Implementing Regulations, Art. 7 16 as well as the PRC Civil Code 17 , Chinese courts conduct proceedings in Chinese and will give the local- language version a structural interpretive preference disregarding the governing clause.

Vietnam: While they allow English it has identified sector specific requirement of their language. Hence. Vietnamese is mandated for technology transfer, consumer, and IT contracts according to their Civil Code 2015 18 & Commercial Law 2005.

Thailand: Thai courts will require translation of any English-language agreement before they proceed. But for contracts to be enforceable, both parties are required to understand the language, else can be challenged to be void according to Thai Civil and Commercial Code.

Other Significant Nations: Countries like India, Singapore, Japan, Malaysia a have recognised English as an accepted Language for commerce. While freedom of language is allowed for sake of business, there may be requirement of translations for sake of the court. The Indian Contract Act 1872 21 , Japanese Civil Code, National Language Act 1963/67 22 of Malaysia and such relevant countries of South- East Asia impose no language requirement, and English is well understood in Indian commercial courts.

Exception of India, any transaction that touches Southeast Asian jurisdictions, the language question that is posed for contract drafting must be answered at the start of the drafting process, not as a closing formality.

Conclusion

For a minimizing risks in Cross Border Contracts, identify the enforcement forum first. Then choose the governing language accordingly and not the other way around. If the realistic enforcement forum is not English-speaking, English is not the right primary language. for sake of translation a bilingual lawyeris advisable, preferably a sworn translator certification attesting that the translation is accurate and complete. It would then help to make it part of the executed contract if every party sign every language version.

Translated version is hence enforceable subject to whether an apostille or government certification is required under the Hague Convention or domestic law. If at all, above mentioned advise isn't possible due to certain reasons, the parties must know the risk. A language clause that says “English shall prevail” isn't a solution, but a statement of preference. If the enforcement forum is a Chinese or Indonesian court, translated version shapes the outcome in in courts. If the governing clause covers a bilateral instrument with two authentic texts, a tribunal may set the clause aside entirely and reconcile the versions on its own terms.

Author: Vijayvikrant Nag , in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.