Step-by-Step Guide to Exporting - Step 9 - The fine print: understanding the legal side of international trade

Table of contents

1. Step 9 - The fine print: understanding the legal side of international trade
   1. 9.1 Understanding international contracts
   2. 9.2 Understanding 'proper law'
   3. 9.3 Contracts for sale of goods
   4. 9.4 Contracts for sale of services
   5. 9.5 Negotiating in other business cultures
   6. 9.6 Responsible Business Conduct
   7. 9.7 Meeting international standards
   8. 9.8 Protecting IP rights
   9. 9.9 Resolving disputes

9.1 Understanding international contracts

In international trade, contractual arrangements can be much more prone to complications than domestic ones. Language barriers may cause misunderstandings. Cultural and geographical impediments may crop up. Words often have different meanings in different places.

International business contracts must, therefore, be specific and all-encompassing. This will go a long way toward reducing misunderstandings, misconceptions and disputes.

Finding a legal professional who specializes in international trade will help you sidestep regulatory and legal pitfalls and, if necessary, resolve disputes. You should also acquire some knowledge of international conventions, the business laws governing your target market and existing trade agreements between that market and Canada.

9.2 Understanding 'proper law'

Problems in international business contracts can occur because of differences in the laws of the countries involved. When different laws are applied, results may be inconsistent and substantive rights may depend on whose law applies. For example, one law may require that a contract be written, whereas another may not. Or, under one law, persons who are not a party to the contract may have certain rights, whereas under another law they may have no rights.

9.3 Contracts for sale of goods

A contract covering the sale of goods involves transferring, or agreeing to transfer, goods to a buyer for a sum of money.

The actual transfer of the property distinguishes the sale of goods from other transactions such as leases or property loans.

The term "goods" includes all movable things and excludes real estate and intangibles such as debts, shares, patents and services. Furthermore, the fact that money changes hands distinguishes a sale of goods from other transactions, such as barter or counter-trade.

9.3.1 Transfer of title and effects of transfer

Several factors hinge on the exact legal moment when the buyer takes ownership of the goods (in formal terms, when title passes or is transferred from you to the buyer).

• Risk: The transfer of title affects the parties' rights in case of total or partial loss, damage or destruction of the goods.
• Rejection: Once the transfer of title has occurred, it may preclude your buyer from rejecting the goods, despite valid complaints regarding quality, quantity or description.
• Price: once your buyer takes title, you can take legal action against him or her for the full unpaid price, rather than merely for the lost profit.
• Rights of action: After taking title, the buyer can enforce his or her property rights through court action or other methods.

9.3.2 Delivering goods

You must deliver the goods to your buyer in one of two ways:

1. Physically, by delivering a legal document of title, such as a bill of lading; or
2. Symbolically, by delivering, for example, the key to where the goods are stored.

Your contract should specify where the delivery will take place. In international matters, this is usually defined by using terms as Cost, Insurance and Freight (CIF) or Free on Board (FOB).

9.3.3 Acceptance or refusal of goods

If you meet all the conditions of the contract, your buyer must accept the goods. Refusal to accept them without justification gives you the right to sue for damages. If you breach a condition of the sale, the buyer can legally reject the goods.

Upon request, you must allow your buyer to examine the goods. The buyer can accept or reject them by:

• conveying his/her acceptance to the seller
• acting in a manner that is inconsistent with the seller's ownership of the goods, e.g. by reselling the goods after they are delivered
• keeping the goods without notifying the seller that he or she has decided to reject them

Once any of these types of acceptance or rejection have taken place, the buyer can no longer refuse the goods, even if you have breached a condition of the contract.

9.3.4 Unpaid seller's rights

Your best protection as seller is payment in advance or upon delivery. Next is payment by confirmed letter of credit (preferably irrevocable). If neither is possible, then you should take out security for the unpaid purchase price. This can take several forms, but the most common method is to reserve title or to take a secured interest in the goods.

9.4 Contracts for sale of services

Service contracts can range from a handshake to pages of legal and technical specifications.

Whatever the form, both parties should have the same understanding of:

• the service(s) to be provided
• the personnel who will provide the service
• the facilities to be made available to the client
• the date on which the provision of service is to begin and end
• the payments to be made
• the benchmarks or dates when payments are to be made
• the circumstances under which the contract may be terminated and any implications in terms of completion of the work, handing over the work completed to date, partial payments, penalties, and so on
• the procedure in case the client is unable to provide the agreed personnel, information or facilities
• conditions for holdbacks
• conditions for the return of bid or performance bonds or guarantee
• procedures for resolving disputes

9.5 Negotiating in other business cultures

The usual Western business practice is to negotiate a transaction and then build a buyer-seller relationship around it. In the business cultures of many countries, however, this process is reversed. One starts out by building a personal relationship with a prospective customer and, once that relationship has been established and everyone is comfortable with it, the actual business negotiations can begin.

While the ultimate goal of all parties is to sign a contract, the immediate objective in a relationship-based business culture is to establish the personal connections. Your non-Canadian counterparts often see this as a necessary precondition for serious negotiations.

9.6 Responsible Business Conduct

Responsible Business Conduct (RBC) is about companies doing business abroad responsibly in an economic, social and environmentally sustainable manner.

RBC can enhance a company's ability to manage stakeholder relations, prevent conflicts, mitigate social and environmental risks and contribute to the sustainable development of communities, regions and countries.

RBC involves companies understanding the impact of each of their functions on the surrounding economy, community and environment, and adjusting their activities and operations to create value for themselves and other stakeholders.

In January 2018, the Government of Canada announced new measures to strengthen its approach to Responsible Business Conduct.

9.6.1 Operating according to RBC principles

The Government of Canada expects that Canadian companies will promote Canadian values and operate abroad with the highest ethical standards. They are expected to respect human rights and all applicable laws and to meet or exceed widely recognized international standards for responsible business conduct.

There are good business reasons for integrating RBC practices into operations and these are becoming increasingly important to companies' success abroad. Among them are:

• establishing a good corporate reputation
• improving management of social, environmental, legal, economic and other risks
• enhancing the company's ability to recruit and retain staff, and maintaining staff morale
• obtaining higher operational efficiencies and cost savings
• increasing access to markets and capital
• fostering good relations with investment partners and surrounding communities

RBC tools and practices can contribute to an organization's long-term business success by helping them to develop sustainable business practices, manage social risks and build strong relationships with a broad range of stakeholders.

For more information on how to prepare your business for international markets and questions related to potential RBC issues and risk mitigation, contact a trade commissioner to gain their knowledge of the local business context. Refer also to Canada's approach to RBC for Canadian companies operating abroad for useful resources and tools.

9.6.2 Dealing with corruption

No country is entirely free of corruption. But if corruption is established it can hinder economic growth and good governance, and decay the fabric of society. Corruption is an obstacle to sustainable development, with the potential to enlarge economic gaps and breed organized crime. Unchecked corruption leaves little room for democracy to flourish, little room for freedom to expand and little room for justice to prevail.

Significant gains have been made in the global fight against corruption. Better understanding of its economic, political and social costs has spurred on recent international efforts to fight corruption, encourage transparency and increase accountability. Canada strongly supports international efforts to combat corruption, regarding it as a good governance issue, a crime problem and a drag on economic, social and political development.

The reputation of Canada and Canadian companies as trustworthy business partners enhances the impact of TCS advocacy and makes Canadian businesses more attractive to local partners. In 2017, Canada ranked as the eighth least corrupt country in Transparency International's Corruption Perceptions Index and twelfth in the TRACE Matrix Country Rankings of Business Bribery Risk.

Canada, like many other countries, has passed laws against corrupt practices. The Corruption of Foreign Public Officials Act makes it a criminal offence to bribe a foreign public official in the course of business. This includes facilitation payments which are those made to foreign public officials to secure or expedite the performance of acts of a routine nature that are within the scope of the official's duties. Businesses convicted under the Corruption of Foreign Public Officials Act could face heavy fines and individuals could be sentenced to a maximum of five years in jail.

For more information, please see the Department of Justice's Guide to the Act. For a plain-language guide to this legislation, download EDC's pamphlet, Keeping Corruption Out (PDF format).

9.7 Meeting international standards

There are international standards for almost everything, from the ingredients in food to the certification of electrical equipment.

If you're an exporter, you need to ensure that the standards you use in your export product or service comply with those of your intended target market.

Adopting international standards will increase your competitiveness, make it simpler for you to exchange technical information with foreign experts and save you money and effort when it comes to testing and recertifying to move into a new market.

The best source to learn about standards is the Standards Council of Canada. The Council's website includes a section devoted to industry-related issues and provides a free information service that can help you:

• understand SCC's accreditation programs, services and activities
• identify applicable standards, regulations and conformity-assessment procedures that would apply to market acceptance of your product
• find competent standards authorities to contact in Canada or abroad
• identify Canadian, international or foreign standards in a particular area
• locate published or under development by a specific technical committee standards

For more information, contact an SCC information officer at 613-238-3222.

Export Alert! is a free service operated by the SCC that allows you to monitor regulatory changes and developments to trade-related regulations, including changes under the World Trade Organization Agreement on Technical Barriers to Trade, and under its Agreement on the Application of Sanitary and Phytosanitary Measures.

Learn about or subscribe to Export Alert!, which is available through the SCC with the support of Global Affairs Canada.

Additional SCC tools include RegWatch, a database of standards referenced in federal legislation and Standards Alert!

9.8 Protecting IP rights

Intellectual property (IP) rights are valuable tools to protect various aspects of innovative business activities. IP rights very broadly mean legal rights that result from intellectual activity in the industrial, scientific, literary and artistic fields.

Trademarks, patents, copyrights and industrial designs are referred to as "IP rights."

• Trademarks represent branding and goodwill
• Patents represent technology and technological improvements
• Copyrights represent all original forms of creative works and their expressions
• Industrial designs represent a product's shape, look and configuration

IP rights are "property" in the sense that they are based on the legal right to exclude others from using the property. Ownership of the rights can also be transferred. Like physical assets, IP assets must be acquired and maintained, accounted for, valued, monitored closely and properly managed in order to extract their full value.

Every country has an IP office, whose main responsibility is to administer their national IP system. The Canadian Intellectual Property Office (CIPO) is an agency of Innovation, Science and Economic Development Canada (ISED).

Registration of IP in Canada provides protection only in Canada. Similar protection must also be sought in targeted markets.

9.8.1 Protecting your business' IP assets

Enlisting the guidance of an IP specialist as you follow these steps will be beneficial.

1. Learn the basics of IP rules and laws, both where your business is based and in the major countries in which you intend to do business. IP knowledge within your target markets can help you save time and money.

   The World Intellectual Property Organization offers useful information and resources specifically for SME's.

2. Take stock of your IP assets. Don't make assumptions about which IP assets you actually hold. IP can provide a foundation for mergers, joint ventures or R&D agreements.

   Conduct "freedom to operate" searches on trademarks and patents before commercializing products and services that may conflict with the IP rights owned by others in the marketplace.

3. Develop an IP strategy and be in a better position to understand how intellectual property can support you in achieving your business goals.

4. Search international IP databases in the markets you are interested in developing to:

   • identify potential competitors
   • find possible partners and markets
   • anticipate changes in the marketplace
   • avoid possible infringement

   To find a national IP office in your target market, visit the Directory of Intellectual Property Offices.

5. Formally protect your IP rights. Seek professional advice for protecting your products and services as the formal IP system can be complex.

6. Properly mark your products and services. The following are some examples for indicating your IP rights on products and packaging:

   • Trademarks: Trademark owners often indicate their registration through certain symbols, namely, ^© (registered), TM (trademark), SM (service mark), MD (marque déposée) or MC (marque de commerce). Although Canada's Trademarks Act does not require the use of these symbols, it is advisable to use them. The symbols TM, SM and MC may be used regardless of whether the trademark is registered. The ^® and MD, on the other hand, can be used only if the mark is registered.
   • Patents: You may wish to mark your invention with "Patent Applied For" or "Patent Pending" and the patent application number. These phrases have no legal effect but may warn others that you will be able to enforce your exclusive right to make the invention, once a patent is granted.
   • Copyrights: You may mark your work with the symbol ^©, the name of the copyright owner and the year of first publication. Marking serves as a general reminder that the work is protected by copyright.
   • Industrial designs: The proper mark is a capital "D" in a circle and the name, or abbreviation, of the design's proprietor on the item, its label or packaging.
7. Preventing/remedying infringement. When conflict arises, it is preferable to attempt to reach a negotiated settlement. IP litigation, especially in foreign jurisdictions, should be taken as a last resort. With awareness and proper strategic planning, however, this outcome can usually be avoided. Ask for IP advice from a registered professional as early as possible.

IP professionals, like registered patent or trademark agents or IP lawyers, can help you avoid the common IP pitfalls made by exporters, such as:

• not covering IP issues in contracts with distributors or outsourcing partners
• infringing others' IP rights
• assuming laws are the same everywhere
• not checking trademark registrations
• not using regional/international systems to streamline IP registration
• using inappropriate local branding
• applying for protection too late
• disclosing information too early

Visit CIPO's website for a list of registered qualified agents for trademarks and patents.

Take advantage of expert services for searching and registering your IP. The realm of IP is a legal one and you would be ill-advised to navigate it alone or even ignore IP all together.

In addition, you may wish to consult the TCS.

9.9 Resolving disputes

Many issues can become controversial in international trade transactions. For example:

• Disputes with agents
• Collection of payments due
• Breach of contract or warranty
• Intellectual property rights
• Secured creditors' rights, e.g. seizure of assets
• Enforcement of foreign judgments

Consult with legal counsel in the jurisdiction of the contract should a dispute arise to explore options for dispute resolution.

In certain circumstances, arbitration could be an option. Also called alternative dispute resolution, arbitration uses a tribunal to consider the questions over which the parties are in conflict and to decide how to resolve the questions.

Both the ADR Institute of Canada and the American Arbitration Association are available to help with arbitration and offer plenty of resources for further information.