The importance and impact of commercial contracts in managing international risks
Saeid Rah Anjam, PhD Candidate in Law and University Lecturer
In today’s globalized world, companies and economic institutions engage in cross-border interactions on a large scale. While these interactions create unprecedented opportunities, they are also accompanied by numerous risks, including political, currency, legal, cultural, and operational risks. One of the key tools for managing these risks is international commercial contracts. These contracts not only provide a legal framework for economic cooperation but also play a crucial role in forecasting, allocating, and mitigating risks.
International commercial contracts constitute the core of cross-border economic interactions. As legal instruments, they provide an appropriate framework for the exchange of goods, services, technology, investment, and other economic activities among countries. In general, any binding agreement between two or more parties from different legal systems, concluded for the purpose of conducting commercial or economic operations, falls within the category of international commercial contracts (Schwenzer, 2016).
Types of International Risks
Operating in the international environment offers opportunities for economic growth and development; however, it simultaneously exposes companies to various risks that may affect profitability, sustainability, and even business survival. Identifying and analyzing these risks is the first step in designing risk management strategies, including the drafting of international commercial contracts (Jüttner et al., 2003).
Political Risk
Political risk arises from governmental interventions or unexpected changes in domestic or foreign policies that may affect contracts and business operations.
Currency Risk
Currency risk refers to the potential losses resulting from exchange rate fluctuations, which may alter the profitability of international contracts. For example, a company that concludes a contract in euros may incur losses if the value of the U.S. dollar (its national currency) depreciates against the euro (Eiteman et al., 2019).
Legal and Judicial Risk
Differences among legal systems across countries represent a major challenge in international contracts. These differences may arise in areas such as the definition of liabilities, dispute resolution mechanisms, intellectual property rights, and the validity of contractual obligations (Bridge, 2017).
Cultural and Communication Risk
Cultural, linguistic, and behavioral differences between contractual parties may lead to misunderstandings, divergent interpretations of contractual provisions, and ultimately disputes. Hofstede (2010) emphasizes that cultural values significantly influence negotiation styles, decision-making processes, and risk management. For instance, in high-context cultures such as Japan or Saudi Arabia, trust and personal relationships are highly important, whereas in low-context cultures such as Germany or the United States, emphasis is placed on explicit and written contracts.
Commercial and Credit Risk
This type of risk refers to the possibility that one party to a contract may be unable or unwilling to fulfill its financial obligations. Such risk may arise from liquidity problems, bankruptcy, or commercial fraud. The use of instruments such as letters of credit and credit insurance can effectively mitigate this type of risk (Delhaise, 1998).
Operational and Logistical Risks
These risks include disruptions in the supply chain, transportation delays, customs problems, or lack of coordination in production and distribution processes. In international contracts, factors such as geographical distance, diversity of customs regulations, and infrastructural limitations play a significant role in increasing these risks (Christopher, 2016).
Challenges and Limitations
Differences in Legal and Cultural Systems
In international trade, contractual parties may come from countries with different legal systems (common law, civil law, etc.) or contrasting business cultures. These differences may lead to divergent interpretations of contractual provisions, conflicting expectations, and difficulties in enforcing specific clauses (Zhao, 2018).
High Costs of Arbitration and Dispute Resolution
Although international arbitration is an effective method of dispute resolution in contracts, the process can be costly, time-consuming, and complex. Arbitrators’ fees, institutional costs (such as ICC or LCIA), and international legal fees may impose a significant financial burden on small and medium-sized enterprises (Born, 2021).
Non-Enforcement of Awards in Certain Countries
Although the 1958 New York Convention guarantees the enforcement of international arbitral awards in more than 160 countries, in practice some states refuse or delay enforcement. This issue is more prevalent in countries with weak judicial systems, administrative corruption, or political considerations (UNCTAD, 2020).
Unforeseeable Risks and Fundamental Change of Circumstances
Even the most carefully drafted contracts cannot anticipate all future circumstances. Crises such as wars, pandemics, economic collapse, or sudden sanctions may render contractual provisions ineffective or unenforceable. Even force majeure clauses may not provide full coverage or may be ambiguously drafted (Schwenzer, 2016).
Conclusion
International commercial contracts are not merely instruments for regulating economic cooperation; they play a vital role in managing complex global risks. Through precise drafting of obligations, appropriate risk allocation, and the inclusion of effective dispute resolution mechanisms, potential losses can be substantially reduced. In the challenging environment of international trade, the conclusion of professionally drafted contracts based on international standards is an unavoidable necessity for economic actors.
