Even Without a Legal Department, You Can Spot 'Dangerous Clauses' in English Contracts

I've read through it, and there don't seem to be any major issues.

A staff member reports this after reviewing a Distributor Agreement received from an overseas business partner. There is no legal department in the company, and hiring a lawyer would be costly and time-consuming. The partner is the long-awaited first overseas buyer, and they claim, 'This is our standard format, so it cannot be modified.'

And so, they sign it.

Problems usually surface anywhere from six months to two years later.

• You can no longer sell to any other company in that country.

• Even though you're barely selling anything, the contract keeps renewing automatically.

• When you tried to terminate the contract, you were hit with demands for inventory buybacks and compensation.

• For some reason, your own brand's trademark was registered locally under the partner's name.

All of these things were written in the contract. It's not that they weren't read. The work of translating the English into Japanese had been done, and the meaning was understood. Yet, they were still overlooked.

The reason is that what is truly dangerous in overseas contracts is not the difficult English.

The most dangerous clauses are written in the simplest English.

In the Korean business world, clauses that are extremely disadvantageous to one party are called 'toxic clauses.' In Japanese, they are often referred to as 'disadvantageous clauses' or 'risk clauses.'

For example, consider this sentence:

It contains only words learned in junior high school. If you put it into a translation tool, it will return the accurate Japanese: 'The distributor shall have the exclusive right to sell the products in the territory during the term of the contract.'

What gets overlooked is not the meaning of this sentence, but what is not written next to this sentence.

If this contract does not include:

• Minimum Purchase Quantity

• A clause stating that exclusive rights will revert to non-exclusive if targets are not met

then even if the partner sells almost nothing for a year, you cannot develop another distributor in that country. The translation is perfect, but the business comes to a standstill.

In short, what is needed for the initial review of an English contract is not the 'ability to translate,' but the ability to imagine how that clause will affect your company's business. And the latter is a matter of business experience, not English proficiency.

That is precisely why companies without a legal department have a place to use generative AI. Because instead of experience, you just need to have checklists and question templates.

7 places that companies without a legal department should look at first

Even if a contract is 50 pages long, there are not that many places to look during the initial review by the sales side. I have organized 7 points that often have long-term consequences in export transactions (basic sales agreements/distributor agreements).

▼ 7 places to look at first in an English contract

1. Asymmetry of exclusivity and quotas

Is it Exclusive, Sole, or Non-exclusive? If it is exclusive, is the minimum purchase quantity and the handling of cases where it is not met written as a set?

2. Contract term and automatic renewal

The term, the presence or absence of automatic renewal (Evergreen), and the notice period for stopping renewal. If you miss the 90 days in '90 days prior written notice' by even one day, another term may be confirmed. Also, check if the conditions for termination are the same for both parties.

3. Governing law and dispute resolution

Governing Law, and Jurisdiction or Arbitration. If the court of the other party's country is designated, for small and medium-sized enterprises, it practically means 'we will not fight anymore' in terms of operations.

4. Scope of liability

Is the Indemnification one-sided? Is there a Limitation of Liability? An unlimited indemnification obligation becomes a risk that is not commensurate with the gross profit of the transaction.

5. Payment terms and risk allocation

Payment timing, currency, and late interest. And check if the Incoterms (FOB, CIF, DDP, etc.) and the description in the contract body are inconsistent. ICC Incoterms 2020 defines the point of transfer for costs and risks, but it does not determine when payment is made. If you confuse this and think 'it's CIF so it's safe,' the risk allocation and collection terms will be misaligned.

6. Intellectual property and trademark registration

Ownership of trademarks and designs. Is there a clause prohibiting the other party from registering in their own name locally? If it is discovered after several years of being left blank, it will take time and money to recover.

7. Obligations after contract termination

Obligation to buy back inventory, termination compensation, non-compete clauses, and handling of customer lists. Depending on the country, compensation beyond what is written in the contract may be required due to agency protection laws.

Even just being able to identify 'where in the contract' these 7 points are written will change the content when you consult with an expert. This is because you can hand it over saying 'I want to confirm the interpretation of these 3 clauses' instead of 'please look at everything.' JETRO's trade and investment consultation and other free consultation services are also more useful when the issues are organized.

Use AI for 'initial screening,' not as a 'translator'

This is the main point. Even with the same generative AI, the results will change completely depending on how you give instructions.

▼ 3 steps to use AI for 'initial screening'

Step 1 | Declare your position and purpose first

If you just throw a PDF at it and write 'Please analyze this contract,' it will return a long, textbook-like general theory. This is because even for the same clause, the direction of risk reverses depending on whether you are the seller or buyer, or the manufacturer or distributor.

Step 2 | Have it provide 'original text citations' as a set

This is the most important part. If you only receive a summary, you may end up receiving plausible-sounding Japanese for clauses that are not actually written. If you make citing the original text mandatory, you can verify it on the spot.

Whether or not you include the two sentences 'Do not supplement with guesses' and 'Please write Not mentioned' changes the time it takes to verify. Search for the cited original text within the PDF to confirm its existence. This part must always be done by a human.

Step 3 | Have it look for 'things that are not written'

As in the example of exclusivity at the beginning, what matters in overseas contracts is often not the clauses that are written, but rather missing clauses. And you cannot notice things that are missing even if you read them. Because they are not visible to the eye.

Minimum purchase quantity, conditions for termination of exclusivity, procedures for price revision, handling of inventory after contract termination, prohibition of trademark registration. Just by throwing this question once, these omissions will appear in a list.

Instead of spending several hours translating 50 pages, identify the '5 pages you should look at' using these 3 steps. As an initial check, this is more realistic.

Even so, 3 things you must not leave to AI

1. Final judgment on governing law and dispute resolution

This is a clause with a large impact and one that often leaves room for negotiation. More than 170 countries and regions are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and a mechanism is in place that makes it easy to enforce arbitral awards across borders. On the other hand, judgments issued by foreign courts cannot always be enforced in the other party's country as a matter of course. Since 'which is more advantageous' changes depending on the content of the transaction and the other party's country, please go through an expert's judgment rather than AI's general theory.

2. Always cross-check numbers with the original text

Amounts, days, quantities, units, currencies. When dealing with long documents, numbers are what generative AI is most likely to mistake. '30 days' vs '30 business days', 'USD' vs 'JPY', 'per unit' vs 'per carton'. Do not trust the summary here; check the relevant line in the original text with your own eyes.

3. Decide as a company what you are allowed to input

Contracts contain trade terms, pricing, and the names of business partners in their entirety. Check the data handling policy of the service you are using, and establish rules based on the sensitivity of your business information before using it. You cannot simply draw a line by saying 'free is dangerous, paid is safe'.

What these three have in common is that you are not letting the AI make the decision, but rather having it create the material for humans to make the decision. Initial screening and final judgment are separate tasks.

Turning 'I can't read it' into 'I can ask about it'

The lack of a legal department is not in itself a reason to stop expanding overseas. The real reason things stall is that contracts are left on desks as 'unreadable blocks,' leading to delayed responses and the cooling of business negotiations.

With seven checkpoints and three types of questions, you can reply the day after receiving a contract, saying, 'Please let me confirm just these three points.' For the other party, specific questions feel more like progress than silence.

Regarding how to approach English contracts, Are you still reading 50-page English contracts from the beginning? also outlines a way to stop translating the entire text. Please take a look at that as well.

Rinda is a platform that streamlines everything from finding overseas buyers to managing English business negotiations. While it is not a tool that performs contract reviews on your behalf, it provides the materials needed to judge 'how much time to spend on which transaction' starting from the negotiation stage.

If you would like to consult about how to proceed with overseas sales, please contact us here.