US Contract Law vs UK: Do I Need to Change my Terms to do Business in the US?
This article was derived from an interview with Jonathan Strassberg, US Attorney and Law/Solicitor of England & Wales at Truecourse Ltd.
When international businesses are expanding into the US, they often ask us about how they can mitigate the risks of doing business through their contractual terms. We invited a special guest, Jonathan Strassberg of Truecourse Law to talk us through US contract law and whether the terms and conditions businesses use in the UK are still effective under US law.
To those thinking of expanding business to the US, how can a US attorney help them navigate the process?
As a US Attorney, I get two types of clients. The first is recruitment agencies that are not currently trading in the US but have a specific opportunity to sign a working contract or secure a client in the US. They’re often not really thinking about expanding their business to the US but are aware that they would be protected better if they had US terms to operate under. I'm usually very thankful that they've called me before they've signed the contract.
Those that often call me after they've signed a contract, have to call a litigator rather than me and they're comparing US and UK contracts. Both contracts can look very similar but in the event of a dispute, the way they are worded and structured would leave a UK company at the mercy of their US client if they've got the wrong contract.
Unfortunately, when business terms are not properly drafted, a UK company can become vulnerable to damages and losses far in excess of the value of the contract they secured. This is why it is important for businesses to be aware of US contract law vs UK, and protect themselves with properly drafted provisions.
The other type of client I get is those that are doing their homework in anticipation of expanding their business to the US. They often take the form of a subsidiary. As a US attorney, I always advise that there are three components to US business expansion to keep in mind.
1. Protect your UK limited company
The first task for businesses is to protect their UK limited company. If successful domestic companies are considering expanding business to the US, they've likely already established a solid presence in the UK. This means they have built a following, assets, and reputation. It is really important to not harm any of that during the expansion process.
2. You have two tax authorities when doing business in the US
The second task is to recognize that there are two tax authorities in a cross-border context. A common mistake many businesses make is believing they can go out to the US to make money and bring it all back to the UK.
When approaching that scenario, there are two typical things that a US attorney will do. For the majority of cases, the lawyer and a cross-border accountant will have a phone call with the client to make sure that this part of business expansion is satisfied. This includes securing the best aggregate tax treatment that clients can get.
3. Speak to the right business professionals
When clients come to Truecourse, I gather together all the various professionals that my clients will need to successfully expand their business into the US. So yes, I’m a lawyer but I’m also a business consultant. It is important that businesses understand cross-border insurance issues. This can include:
Currency exchange issues once they get to the US
Understanding payroll and health benefits issues
Trademark immigration issues.
I want to make sure that my clients come to me with questions on expanding business to the US. Often businesses don’t even know the right questions to ask. I want to ensure that they are able to fill in this canvas and address all the issues that need to be addressed.
What does a company need to consider when agreeing to terms of business with a US client? Do they need to change their UK terms to do business in the US?
The US and UK are not required to honor each other’s courts
This is a very serious issue and often where US business expansion becomes complicated. There is no treaty between the United States and the United Kingdom that requires either country to honor the courts of the other country. For example, if you’re a UK recruiter and haven't previously worked in the US and suddenly have an opportunity to work with a client in the US. Rather than waste time with a lawyer, you might just charge ahead and send them your UK terms to secure the deal.
If the work is retained search for a permanent position, you might be ok. In this instance, you probably would take a third of your money upfront, and maybe during the shortlisting process, you'll get the other third of your money. But for that final third of the money, let’s say you provided the candidate and the client decides not to pay you. This is where you come into trouble for not fully understanding the differences in US contract law vs UK.
In this example, the business terms are pursuant to UK law. You're free to sue the client in the UK, and you'll probably win. However, the UK court can't force your client to pay you for the candidate. The judgment you receive from the UK court doesn't mean anything in the US.
This means you have to bring that judgment to a US court and ask them to enforce it. The US court will have the discretion to either enforce it, not enforce, or relitigate the case. Regardless of what decision the US court makes, you can be assured that your litigation costs will be at least twice as much as they would if you had used US terms.
Another more complicated example of what could happen if you don’t change your UK terms to do business in the US is when recruiters are making temporary placements for a US client. This is not the corporate court situation, instead, it is where you place candidates who are on a payroll. Let’s say something goes terribly wrong and the client or somebody associated with a client/third party suffers a terrible loss. As you didn’t read up on US contract law vs UK, you only have terms that are pursuant to the UK.
The UK under pursuant to English law, is very well settled and it will limit your liability in England but it will not limit your liability in the US. The problem is if you read that clause to any business person in the US, it would seem like the terms are saying the same thing, but the catch is they're not.
Understand the risks involved if you don’t update your terms to honor US contract law
This is why it is essential to consider US contract law vs UK when expanding your business to the US. If you're going to use your UK terms instead of changing them and don't understand the risks involved, you may find yourself in a terrible position in the event of a dispute.
What are the most common mistakes businesses make when it comes to using business terms in the US? Particularly staffing agencies?
1) Businesses making ‘frankenstein’ contracts
The most common mistake I witness is businesses scratching out ‘this agreement shall be enforced in accordance with English law’ and inserting the law of some of the US states such as New York or California. These businesses end up having what I call a ‘Frankenstein contract.’ This is because it states that the contract should be interpreted and enforced in accordance with New York law for example, but the contract recites statutes that exist in England and do not exist in the US.
What is a US court going to do with that type of contract? They have to start chopping up provisions and disregarding them which leaves holes in the contract. This leaves the business in a very unsettled state, where more issues have to be litigated in order to find a resolution.
2) Be aware that US contracts are designed to make you a target for litigation
Litigation in the US means settlement negotiations. As a matter of fact, only 1% of commercial litigation in America ever goes to trial. The majority at 99% becomes settled. It's rarely settled on the basis of who has the best argument. It's usually settled on who has the most powerful bargaining position in terms of financing because litigation in America is a war of financial attrition. Whoever has more money to spend on litigation is more likely to get the settlement that they want.
It's a much more mercenary system in the US and that underpins everything when it comes to US contract law vs UK. If there’s one fundamental takeaway on US contract law, is that contracts are designed to make you a target for litigation. In the US it's not so much about who's right and who's wrong but rather about whether you are an attractive target for a litigator to drag through the courts. This is to make you spend extortionate amounts of money or settle for an unfavorable amount of money. It’s unfortunate but that is the reality. It is somewhat of a game of chess.
If you could provide one main piece of advice for businesses, what would that be?
When you assess the financial impact of a possible dispute in the US, it is a very different exercise from considering the financial impact of a contract dispute in the UK. In the UK, if you're thinking about suing a business you have to think long and hard. If you sue and you lose in the UK, you'll have to pay the legal fees of the other side.
The default rule in the US is that the loser does not have to pay the legal fees. This underlays everything. In other words, do not venture into serious commercial transactions in the US without consulting legal advice first. Sometimes I tell my clients to use their UK terms of business because their risk is so low. However, as the risk increases, you have to seriously consider using US terms of business.
Speak to a US Attroney about your terms of business before entering a contract with a US client
At a time when companies are increasingly partaking in cross-border work, particularly within the US staffing market, it is important to not jump straight into opportunities by using the same terms of business you use in the UK. You should consider changing your term of business and speak to a specialized lawyer first.
If you would like to learn more about this topic, Jonathan wrote a fantastic article for PGC on ‘UK Terms & Conditions Not Fit for U.S. Market’ which touches on the key areas businesses expanding into the US market must be aware of to protect themselves with properly drafted provisions.
At PGC we know employing workers and doing business in the US vs the UK differs greatly, and we’ll happily assist you with any other queries you have regarding US business expansion.
Disclaimer: PGC does not endorse any personal views or opinions of the author. All information here is for general informational purposes only and is not intended to be a substitute for professional and/or legal services.