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What to insist on when documenting your intercompany agreements

Group Reorganisations

Intercompany Agreements

1 April 2017

This article appears in the April issue of our International Corporate Structures Newsletter.

“I didn’t have time to write a short letter, so I wrote a long one instead.” Mark Twain (1835-1910)

This sentiment applies as much to contracts as it does to letters – particularly the Anglo Saxon, “all you can eat” style of drafting. Very often, if you ask a lawyer to draft intercompany agreements for you, their first step will be to find some kind of precedent (the longer the better), insert some more sections to cover possible eventualities (the more obscure the better), and generally add as many bells and whistles as possible. They will want to put in some important-sounding recitals at the start, and ideally a bit of latin here and there. Usually the end product will involve at least 15 pages of definitions and four pages of ‘boilerplate’, so that you have to read 20 pages or more before you actually find out what the contract is actually about. And usually the commercial terms like price and payment and the description of the products or services involved are dotted around the document in schedules and appendixes, so that you have to flip backwards and forwards to keep track.

The problem with this is that not many contracts are designed to be referred to purely by legal professionals – and this is certainly not the case with intercompany agreements. And the longer and more densely written a contract is, the more likely it is that:

  • it will not match the factual scenario it is supposed to deal with – because it will have been adapted from a document which was created with a completely different purpose in mind;
  • it will not be read or understood by the people who need to review it and comment on its suitability – who has time to read through 40 pages of legalese, and filter out the commercial nuggets?;
  • for the same reason, it will not be read or understood by the directors who will need to sign it, or the people who will need to operate it; and
  • it will not actually make sense.

To help you strike a blow for sanity and against legal gobbledygook, here’s a short list of what you should insist on the next time that you ask anyone to help to create legal agreements to document your intercompany supplies or business restructurings.

  1. Make each contract as short as reasonably possible. Every clause should justify its existence.
  2. Wherever possible, put the commercial terms together in one place, so that they can be reviewed easily.
  3. Use simple words and short sentences.
  4. Avoid quoting statutes and regulations unless it’s absolutely necessary. This is particularly important for international.
  5. Avoid archaic words like “aforesaid”and “heretofore” and “witnesseth”.

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Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance