Risk Management in Commercial Contracts with Foreign Companies

Risk Management in Commercial Contracts with Foreign Companies

In today’s globalized trade environment, Turkish companies increasingly engage in various commercial relationships with foreign entities, such as supply of goods and services, partnerships, distributorship agreements, and licensing contracts. However, as these relationships bring together different legal systems, commercial practices, and judicial approaches, it is crucial that commercial contracts are carefully drafted and that potential risks are proactively managed to prevent future disputes.

1. Governing Law and Jurisdiction

One of the most fundamental risks in international commercial contracts concerns the applicable law and the forum where legal disputes will be resolved. If these elements are not explicitly agreed upon by the parties, significant complications may arise in case of conflict.

Recommendation: The contract should clearly state: “This agreement shall be governed by the laws of [country].”
Additionally, a jurisdiction clause should be included, such as: “Any disputes arising from this contract shall be resolved by the courts of [place] or [arbitration institution].”

2. Arbitration and Alternative Dispute Resolution (ADR)

Instead of state courts, contracts with foreign companies may prefer arbitration or alternative dispute resolution (ADR) mechanisms. Arbitration is often faster, more confidential, and more suitable for handling sensitive commercial matters.

International Arbitration Institutions: ICC (Paris), LCIA (London), SIAC (Singapore), ISTAC (Istanbul), among others.

Important Considerations: The place of arbitration, language, number of arbitrators, and the method of their appointment must be clearly defined in the contract.

3. Language of the Contract and Interpretation Issues

If the contract is drafted in more than one language and inconsistencies arise between the texts, serious problems in interpretation may occur.

Recommendation: The contract should specify: “In the event of any inconsistency, the English/Turkish version of this agreement shall prevail.”

4. Force Majeure Clauses

In international trade, force majeure events such as natural disasters, war, pandemics, or government interventions may render contractual obligations impossible to perform.

Recommendation: A detailed force majeure clause should be included in the contract, clearly defining the parties’ obligations in such events.

5. Payment Terms and Foreign Exchange Risk

Currency fluctuations, payment delays, and risks related to international banking transactions are among the financial risks commonly encountered in commercial contracts.

Recommendation: The method of payment (e.g., letter of credit, wire transfer, cheque), payment deadlines, and late payment interest must be clearly specified; if possible, risk-mitigation tools such as currency hedging should be considered in the contract.

6. Common Practical Issues

• Delays in Delivery and Quality Disputes
• Import/Export Restrictions
• Customs Clearance Issues
• Difficulties in Enforcement of Judgments Abroad

To avoid such issues, the counterparty’s commercial reputation should be thoroughly investigated, and legal due diligence should be conducted before signing the contract.

Conclusion

Commercial contracts with foreign companies offer high potential returns, but they also entail considerable legal risks. Drafting contracts that are clear, comprehensive, and resilient to disputes is essential to safeguarding parties’ rights and ensuring commercial security. Therefore, obtaining legal counsel from professionals experienced in international commercial law is the most critical step in managing such contracts effectively.