Offshore Companies and Contracts: Legal Rights, Enforceability, and Real-World Practice

Many people have questions when they think about offshore companies because of their complexity, international banking involvement, and international ownership. Often, one of the first questions is “Can offshore companies enter into a contract or agreement?” The simple response is, “Yes” – offshore companies may enter into contracts in virtually all countries as long as they are recognized legal entities (i.e. incorporated) and have full corporate powers.

Legality, however, is just one element in this equation. The reality of the matter is whether those contracts entered into by an offshore company will ever be honored, enforceable, and usable for operations. As such, it is very important for bankers, compliance teams, and counterparts to understand the entity’s organizational structure and documentation.

In essence, offshore companies can make contractual commitments relatively easily by signing them on paper, but whether those contracts operate effectively in actuality will depend upon the effectiveness of the entity’s structure and documentation.

Key Takeaways

• As long as an offshore company is formally registered as a legal entity, it should be able to execute agreements just as any other type of business would.
• Its capability will depend upon its registration status and continuing to maintain “good standing.”
• In reality, most banks and counter-parties are likely to focus on such items as ownership structure (who owns what) / location of operation (jurisdiction) / apparent risk (risk of loss).
• Although legally binding, even otherwise legitimate agreements can fail to hold up when there are inadequate or inconsistent supporting documents.
• The choice of jurisdiction may directly affect the credibility and acceptability of the structure chosen.

What Gives an Offshore Company the Right to Contract?

Offshore companies have the right to enter into contractual commitments because of their legal personality. A company’s legal personality allows for a corporation to be treated as a separate legal entity, independent of the individual who owns shares of the company.

An offshore company, therefore, has the power to:

• Independently execute contracts.
• Independently own property/assets.
• Independently sue and/or be sued by other parties.
• Independently hold rights and obligations under its own name.

Separate legal personality is one of the most important concepts that allows for corporate structures to be used effectively in International Business. Instead of having an agreement signed with another party by the individual(s) who own shares of the corporation, the corporation itself enters into contractual commitments as the contracting party.

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When Contracting Rights Can Be Limited

There are times when a corporation’s ability to contractually commit may be limited/ restricted due to:

• The corporation being dissolved or non-existent, and therefore unable to meet its obligations (example: Unpaid fees or being struck off the Register).
• Lack of clarity within the corporation’s Internal Structure.
• Any restrictions on contracting contained in the Corporation’s Constitutional Documents (Articles of Association).

Example:

A corporation that has been dissolved and removed from the corporate register may still appear on some historical documentation; however, absent its restoration to active status through reinstatement, this corporation will lack sufficient legal capacity to create legally enforceable binding contracts.

How Offshore Companies Gain Legal Capacity

A corporation obtains legal entity status (and therefore contractual capacity) through the incorporation documents of the country of incorporation.

Offshore jurisdictions typically provide that a company gains the status of a separate legal entity upon registration of its incorporation into the corporate registry of the relevant jurisdiction. This concept of separate legal personality is recognized throughout common law countries. It provides for the ability of the corporation (as opposed to its shareholders) to hold assets, make contracts, take on liability etc.

The usual method of verification of these matters by counterparties, bank officials, and regulatory bodies includes determining whether:

• The corporation has maintained its good standing status;
• Whether the directors have the necessary authority to conduct business;
• Whether the corporation is compliant with Anti-Money Laundering/ Know Your Customer (“AML/ KYC”) obligations; 
• And whether there exists adequate transparency regarding the ownership and control of the corporation.

Increasingly, international corporations are being required to undertake higher levels of due diligence under various global AML regimes and under beneficial ownership transparency initiatives. As such, the practical enforceability of a corporation’s rights may depend not only on corporate legality but also on whether the corporation’s structural characteristics enable it to pass the tests associated with both banking and regulatory compliance reviews.

Are Offshore Contracts Legally Enforceable?

Generally, “yes” is the answer as contracts from offshore companies will typically have an enforceable nature, if they fulfill basic requirements for legally binding agreements:

• The contract was entered into legally, per the governing law stated within it.
• It was properly authorized and executed by individuals who had the required authority to bind their respective companies.
• There were no restrictions placed on the authority of signers based upon the corporate structure of either party.

What Actually Affects Enforceability in Practice

While a contract may technically be enforceable because of its execution via an offshore entity, actual contract enforceability will typically depend on many other factors beyond just the characterization of the executing parties. In the end, courts, counterparties and banks will view the larger picture when evaluating contract enforceability. Therefore, transparency, consistency and documentation regarding the contracting parties’ overall structure are paramount.

If all of this is clearly understood and easily accessible to counterparts and potential litigants alike, then contractual enforceability will normally proceed smoothly. Conversely, should this not be the case, a valid contract could potentially experience considerable delay and/or increased scrutiny during litigation.

Key factors influencing enforceability include:

• Jurisdiction reputation (reputation of dispute resolution processes).
• UBO Clarity (transparency into beneficial owners) – i.e., how difficult is it to identify true ownership structures?
• Governing Law (i.e., which laws apply to resolving disputes?); and,
• Dispute Resolution Mechanism (e.g., court system, arbitration framework).

Typically, these various elements play a greater role in determining whether a contract is enforceable than does the offshore status of the contracting parties themselves.

Mini comparison table

A well-drafted contract under a recognized legal framework is usually enforceable regardless of whether the company is offshore or onshore.

Who Can Sign Contracts on Behalf of an Offshore Company?

After determining that a business is legally able to make contracts, you are then going to have to find out who may have the authority to sign those contracts.

The structure of how a company manages itself (internal governance) and authorizes its actions and decisions (authorizing structure), will play a significant role when dealing with a layered ownership/management structure common to many offshore companies.

Directors vs Shareholders

Just because someone owns shares in a company does not mean they can sign contracts.

• Directors generally manage day-to-day activities of a company and typically have the authority to sign contracts.
• Shareholders own the company; however, by law, there is no automatic grant of authorization to sign contracts.

Authorised Signatories

There are instances where the signing authority can be formally granted. This is usually accomplished through board resolutions, power of attorney documents, or other formalized mandates from the company that clearly identify who has been authorized to act on behalf of the entity.

Using these types of formalized mandates as evidence of signing authority will help prevent problems when dealing with banks, compliance departments, counterparties, etc. This frequently verifies the signing authority prior to processing a contract, especially if the transaction crosses international borders or is considered high risk.

Common Use Cases: Why Offshore Companies Enter Contracts

The majority of the time, you will not have an offshore entity contract with a third party due to something legally abnormal or complex. More likely than not, it is simply easier to use them to organize your international business dealings better and clean up your structures.

Offshore entities are commonly involved in the following types of contracts:

• Between holding and subsidiary companies
• IP licensing agreements 
• Cross-border service contracts
• Contracts relating to investments
• Intra-company contracts between related parties (i.e. members of a large corporate group)

The above structures are used primarily to segregate business activities into different segments. They also help to improve risk management, as well as identify clearly where the ownership interests and operations reside on a global basis.

Real-world examples

• Holding company licenses intellectual property to one or more of its “operating” subsidiaries.
• A trading company enters into contracts with suppliers located in multiple jurisdictions.

Using these types of structures can allow owners, risk managers, and operators to recognize the differences between their respective responsibilities in each jurisdiction.

Banking and Compliance: Where Most Problems Start

Most companies don’t realize this is where most of their problems lie in terms of banking and compliance. That is why many companies are unaware of how much banks care about their contracts.

Why Banks Care About Contracts

In addition to reviewing your company, Banks will also review your contracts to determine:

• What you really do for a living (i.e., what is the real business model?)
• How does the money move through the structure?
• Is this a legitimate and consistent activity?
• Does the structure match what was stated as the activities of the company?
• How certain patterns will flag your company for deeper scrutiny or rejection with a bank.

Red Flags That Create Issues

The following patterns of things may be looked at more closely by a bank or rejected if found:

• Generic or vague terms in a contract
• Contracts that appear to reflect an entirely different type of operation than that which was declared by the company.
• Counterparties who are either unclear or hidden from view in a contract
• Structures that seem artificial or too complicated

Jurisdiction Matters: Not All Offshore Companies Are Equal

The jurisdiction where a company is incorporated directly affects how contracts are perceived in practice.

Higher acceptance jurisdictions

• British Virgin Islands (BVI)
• Cyprus
• Singapore

These are widely recognised and generally easier for banking and counterparties.

Higher scrutiny jurisdictions

• Seychelles
• Belize

These jurisdictions are fully legal, but may face additional due diligence depending on the institution.

The same contract signed by companies in different jurisdictions can lead to very different banking or compliance outcomes.

Common Mistakes When Using Offshore Companies in Contracts

Many of the conflicts that arise regarding the use of foreign entities for contract purposes are not so much about legality as they are about failure to plan for the long term.

Some of the most common areas of conflict have included:

• Signing a contract prior to obtaining adequate evidence of the entity’s authority to enter into a binding agreement
• Not having consistent documentation of company detail, nor ownership
• Failing to give due consideration to the Governing Law provisions;
• Using generic template contracts that were not customized to fit the specific corporate arrangement
• Having contracts that do not accurately represent how your business operates in reality.

The reason it can be difficult to identify potential errors is that they will typically take time to become apparent. They normally will first appear when the company’s corporate arrangements are subject to a closer review (e.g., banking reviews or compliance audits) when the corporate structure is reviewed in greater detail.

Important Compliance Considerations

A company created in a foreign jurisdiction is a legitimate business structure as long as it has been properly registered and reported. However, an offshore company is not a vehicle for avoiding a country’s taxes or laws. 

Most countries have increased the level of enforcement regarding the use of offshore structures by implementing stricter cross-border compliance regimes, which include

• The registration of beneficial owners;
• Money laundering requirements;
• Reporting on income earned from international sources;
• And greater enforcement authority.

All businesses utilizing a foreign structure must confirm that such arrangements comply with the laws and tax regulations governing both where they do business (operate) and where their headquarters is located.

Practical Checklist Before Signing a Contract

Before entering into an agreement with another party, an offshore company should confirm the following:

1. That the other party is active and “in good standing”
2. That the signing authority of each party is clearly established
3. That the terms of the contract align with the actual business activities of each party
4. That all parties have a clear ownership structure which is properly documented
5. That they understand jurisdiction risks to their respective businesses.
6. That banking implications for both parties have been addressed.

The above checklist will help prevent problems from developing further down the line.

Conclusion

Offshore entities can certainly form contracts and function as a legitimate corporate entity from an enforceable standpoint.

The issue is not in forming contracts; the challenge is in having the proper infrastructure of your offshore entity support those contractual obligations with banks, regulatory bodies, and day-to-day business operations. If you properly set up an offshore company for global operations, it will be seamless. If the setup is poor, you could find yourself struggling to get your contract recognized by either financial institutions, or counterparty organizations.

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