We normally draw up a contract for USA based subcontractors that includes pretty much everything: compensation, intellectual property, NDA, etc. We also require an IRS Form W-9 for American subcontractors. What is the best way to handle contracts with a foreign subcontractor? Are the contracts even enforceable? What does the IRS require of us when hiring a foreign subcontractor? Any help would be most appreciated.
I’ll leave it to an expert to answer your detailed questions. But on the point “Are the contracts even enforceable?”, the answer is yes, of course they are.
The contract should contain a clause that stipulates which jurisdiction any disputes should be settled in. Assuming you are based in the US, you would want to specify your own state for that, but, like all contract terms, it’s a matter of negotiation between the parties.
I would add that the sort of contract you have described is in no way unusual. Even in my tiny business, I have had contracts for clients in many countries, and have sub-contracted work to people in countries other than my own. So don’t be put off by any supposed difficulties.
Mike
Unfortunately, a contract that is ‘enforceable’ doesn’t mean it’s practical or easy to enforce it. Forcing the contract to be handled in our own jurisdiction is a good way to address disputes, but it’s not perfect. If an offshore vendor damages you, there is no guarantee that they would come to the US or wherever to participate, and you’ll be left with a judgement against them. You’ll have ‘won’ but until you can collect on the judgement, it’s not worth much.
Another approach is to use international arbitration, which is equally binding in many places and can be done remotely.
You are wise to consider these things and use good agreements that protect you as much as possible. I exclusively do offshore work and I’ve got tons of specialized agreemtns for this kind of thing that my attorney has developed over the years. But, you simply cannot rely upon the law to protect you 100%.
The absolute best way to protect yourself is very simple, but takes a lot of time and work. That is to:
- Be wise about which vendors you work with, qualify them well and get to know them.
- Treat your vendors well, and make your business relationship valuable enough to them that they don’t really want to rip you off.
- Be diligent about keeping those relationships healthy, but also keep a close watch on everything.
You will hear from lots of people who say ‘oh I did my contract like this and it was fine’ (we always get that on legal threads) and many others who like to play lawyer. But, a contract that ‘worked’ usually implies that they signed the contract and there were no issues - which essentially means that the contract never needed to be enforced or interpreted legally. That doesn’t mean much in the real world. Ask around for people who have had actual disputes with overseas vendors and it’s a different story - unless your contract is fairly valuable (i.e. a 25k contract isn’t’ worth enforcing) you should really consider playing offense in this game as well as defense.
Good luck!
Thanks to both of you for your replies. I suspected exactly what you describe Sagewing. I did not, however, know about international arbitration which will I look into further.
Is there an IRS counterpart to the Form W-9 for foreign subcontractors? What IRS forms are used to report payments to foreign subcontractors?
In most cases there is no reporting requirement, but check with your CPA if in doubt.