A Journey Through Business Cultures And Contract Law
Author: Cristina Benezet
What is International Trade?
International trade is the exchange of capital, goods, and services across international borders or territories driven by a need or want of goods or services. Although international trade has existed throughout history, the last few decades have seen an acceleration of international business and trade, mainly due to improvements in the efficiency of long-distance transportation, advances in telecommunication, and developments in science and technology. Countries have gradually reduced trade barriers and opened up their markets under the framework of general agreements on tariffs and trade. Some international economic organisations such as the World Trade Organisation were formed to ease the process of trade between countries of different standing.
According to the Office on National Statistics, in 2020 the UK exported goods and services to the value of £577,988 million and imported goods and services to the value of £585,545 million. Although these figures have declined in recent months due to the impact of recent events such as Brexit and Covid-19, the UK is still heavily reliant of international trade. The UK government has published its comprehensive plans to increase cooperation and improve relations with a broad range of current and new partners across the world in the coming years. The UK Export Finance, working alongside the Department of Internal Trade, acts as the UK’s export credit agency supporting UK businesses.
Carrying out trade at an international level is a complex process when compared to domestic trade, as factors like currency, government policies, economy, judicial system, laws, and culture influence trade. When forging commercial relations across borders, having an awareness of such differences between countries is essential for effective business communication and negotiations. Going on a journey of discovery through very distinct realities may give us an idea of the different intricacies we may find when negotiating international agreements. Such differences have resulted from centuries of history shaped by geography, religion, wars, invasions, ruling systems, trading relations and culture.
Trading with the USA
Let us begin with the USA and its extensive, open, free and market, where commercial parties negotiate and conclude deals with limited interference from the state. USA’s large, highly competitive market is largely responsible for keeping the pricing of goods or services low.
When establishing commercial relationships with Americans, it is helpful to understand their working culture, which is generally open and informal. They tend to place value on exchanging ideas and opinions and have a positive and proactive approach to business. The casualness of their communications and interactions is in contrast with their strict culture of time-use and efficiency. Time is considered an asset, and deadlines should be strictly adhered to whilst striving to achieve the best results in the shortest possible time. Common tactics used within US companies include being punctual, establishing direct eye contact when shaking hands, keeping emails short, direct, and clear, and staying deal-focused whilst looking for mutual benefit results.
The US is characterised, like the UK, for its “common law” system, which is a complex legal system that originated in the middle ages. It recognises the weight of written promises, with a strong legal expectation that courts will enforce written contracts. Contracts are very much used as a basis to resolve conflicts when they arise. In the US, arbitration is a popular way to resolve commercial disputes, it being more efficient and cheaper than litigation. This is particularly relevant in this highly litigious culture (when compared with other more dispute-adverse societies), with contract litigation being one the most common and concerning areas of dispute in the current day, and one of the most sensitive to economic downturns. In this context, negotiation of limitation of liability clauses gains an even higher relevance, with US companies often seeking to introduce aggressive exclusions of liability within their commercial arrangements.
Trading with Germany
On the other side of the Atlantic, we have Germany, which is the world’s fifth-largest economy and is a major hub for European business. German business dealings tend to be marked by organisation, planning, formality, punctuality, and perfectionism. Meetings are taken seriously and follow a formal procedure, with detailed agendas which are rigorously followed. Given the German preference for analytical thinking, attendees are expected to provide solid facts and rational explanations to back up proposals. The organisational culture in Germany is hierarchical. Therefore, those who have reached the top make most of the business decisions which are to be abided by without question by the workforce.
Negotiating a contract with a German counterpart is generally a fair, courteous, well-planned process with a preference for compromise as opposed to forceful imposition of views. Long-term business relations are common as loyalty and reliability are characteristic values in the German business culture. Germans do not generally negotiate just for the sake of getting a discount or lower price. However, they need to know the pricing rationale – be it higher or lower.
Germany follows a civil law system based on “codified law”, which means that Germans follow statutes and other written sources of law. These codifications build on general principles such as ‘good faith’, ‘reasonable’, ‘fair dealing’ and ‘duty to co-operate’, which require that a party exercising its rights under a contract observes standards of proportionality. The “codified” system and “common law” system can be fundamentally different with regards to contract interpretation. For instance, a contract under German law is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words. Also, if parties reject each other’s general terms, then neither terms apply to the extent they contradict each other and instead the default statutory provisions apply. These differences between the two systems can make a great impact on the outcome.
German courts interpret the law and are not restricted by their own earlier decisions or those made by higher courts. However, generally, the lower courts respect the decisions of higher courts. Arbitration is common in Germany. However, in respect of long and complex proceedings, German court litigation can be comparatively more cost and time-efficient.
Trading with China
Moving onto our third and final continent we come across China. Until recently, China did not have an accessible legal system. Business deals historically depended on relationships of favour exchange, mutual benefit, and moral reciprocity. To this day, making mutually advantageous long-term relationships (which go beyond an economic exchange) is a way of life in China, where it is commonly believed that each relationship provides another path.
The Chinese devote a lot of time and resources to nurturing relationships even prior to bringing up business, but also during negotiations and whilst trading. They are more inclined to favour a mutual benefit approach, with high cooperation, harmonious timing, and friendly face-to-face communication, developing a sense of trust and maintaining ongoing flexibility with their commercial counterparts. Having said this, it is important not to mistake their tendency for relationship nurturing as a substitute for hard work and competence; producing outcomes is highly embedded in the Chinese culture.
Despite the importance given to establishing long-term relationships based on trust, in modern China, entering into an enforceable written contract that meets all legal requirements is standard practice in commercial dealings. Contract Law of the People’s Republic of China (1999) (“PRC”) stipulates that certain contracts must be in written form to be valid and that all written contracts must be duly signed and affixed with the company seal of the Chinese counterpart. In addition, the PRC imposes the principles of equality, fairness, and good faith when entering into and performing a contract.
Unlike other more litigious jurisdictions, courts of law in China are seen as the last resort for addressing disputes, to the extent that prior evidence of attempts to settle a dispute is a prerequisite for issuing court action. In addition, even if parties to a contract with foreign elements are permitted to choose a foreign law as the governing law, China has only signed mutual legal assistance treaties with a small number of countries, and enforcement of court rulings given by a foreign court may prove difficult in China. In addition, foreign counterparts may face difficulties in enforcing foreign arbitration awards in China. The International Economic and Trade Arbitration Committee is the leading arbitration institution handling foreign-related disputes in China.
In this ever-evolving and increasingly globalised world, UK businesses ought to have regard for and maintain an open, inquisitive approach to, business cultures and socio-economic realities found in other parts of the world. Survival through continuous market changes and world trade turbulences, such as those caused by recent events has reminded us of the need to remain alert, open, and flexible. Keeping a continuous eye on overseas opportunities, emerging markets, and new trading partners will help UK businesses stay ahead of international trade. States are responsible for creating alliances with other nations and for concluding international commercial treaties with a view to agreeing on mutual rights and regulating conditions of trade. But equally, it is in the hands of each businesswoman and businessman to work effectively across cultures, seize opportunities and make a success of international trade relations.
For further information and assistance with cross-border commercial arrangements, please contact our Commercial and Technology Team.