Step-by-Step Guide to Exporting - The Fine Print: Understanding The Legal Side of International Trade
"It takes years to build a market, but only days to lose it." Canada Export Award Winner
Page Index
Understanding international contracts
Once you and your client have agreed to the deal, you'll need to draw up a contract to cover the transaction. In essence, this means that one party makes an offer and the other accepts it. The arrangements governing this exchange constitute the contract and can be legally enforced.
In international trade, however, contractual arrangements can be much more prone to complications than domestic ones. You and your customer are usually from different countries. Language barriers may cause misunderstandings. Cultural and geographical impediments may crop up. Words may have different meanings in different places.
Most important, you both may be used to different laws and business practices. This is why international business contracts must be precise, specific and all-encompassing. This will go a long way toward reducing misunderstandings, misconceptions and disputes.
For further protection, it would be a very good idea to find a legal professional who specializes in international trade. This will help you sidestep pitfalls of regulation and law and, if necessary, resolve disputes. You, yourself should try to acquire some knowledge of international conventions, the business laws governing your target market, and trade agreements that may exist between this market and Canada.
Export Myth
Exporting is too risky
It doesn't have to be, because you can reduce risk to a safe level. Letters of credit will ensure that you get paid. Export credit insurance programs can protect you against customers who default on their loans. Reference checks through banks and international credit reporting agencies can detect a potential for fraud. Trade laws tend to be straightforward and legal advice about them is easily available. Exporting doesn't need to be more risky than doing business at home - it's just different.
Tip
Canadian Commercial corporation (CCC)
CCC offers Canadian exporters unique business solutions to access government procurement markets world-wide and export contracting expertise. Since 1946, CCC has worked with Canadian companies to close export sales on the best possible terms and conditions. From business leads to contract negotiations and contract management, CCC provides solutions to help grow exports. See www.ccc.ca.
Understanding the "proper law"
Certain basic issues are common to all international contracts, but the most fundamental principle is that of the "proper" law of the contract.
Problems in international business contracts 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. You absolutely must, therefore, establish from the outset which law is the "proper law."
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; and
- enforcing foreign judgments.
Resolving disputes formally through the legal system can be costly. If possible, settle out of court.
Tip
The Corruption of Foreign Public Officials Act, adopted by Parliament in 1999 makes it a criminal offence to bribe a foreign public official in the course of business. For more information visit the Department of Justice website at canada.justice.gc.ca/en/dept/pub/cfpoa/guide5.html
Meeting international standards
There are 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 are in compliance with those of your intended target market.
Adopting international standards will bring you at least three major benefits. First, it will increase your competitiveness in the global marketplace, which translates into faster, easier access to foreign markets. Second, compliance with standards will make it simpler for you to exchange technical information with experts in other countries. Third, you'll avoid the cost and bother of testing and recertification when you move into a new market.
The best place to learn about standards is the Standards Council of Canada (SCC) at www.scc.ca. The SCC manages Canadian contributions to the two chief international standards forums, the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC), which publish standards in a wide variety of fields.
Standards are constantly changing and exporters need to be up-to-date on these changes. The SCC can help you through its Export Alert! program, which provides you with automatic email notification of proposed regulatory changes in global markets. Two other SCC tools that you may find useful are RegWatch, a database of standards referenced in federal legislation, and Standards Alert!, which allows you to monitor Canadian, ISO and IEC standards and get automatic notification of changes. For more information, refer to www.scc.ca/en/index.shtml.
Contracts for the sale of goods
A contract covering the sale of goods involves you (the seller) transferring or agreeing to transfer goods to the buyer, in return for a sum of money. The actual transfer of the property is important, because it distinguishes the sale of goods from other transactions such as leases or property loans.
The term "goods" includes all movable things, excluding real estate, and such intangibles 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.
Transfer of title and the effects of transfer
Several things 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 it has occurred, transfer of title may preclude your buyer from rejecting the goods, despite valid complaints regarding quality, quantity or description.
Price - Once your buyer takes title, you can sue 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.
Delivering the goods
You must deliver the goods to your buyer in one of two ways:
- Physically, by delivering a legal document of title, such as a bill of lading; or
- 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 such International Commerce (INCO) terms as Cost, Insurance and Freight (CIF) or Free on Board (FOB).
Note that if the contract does not specify the place of delivery, then the place of delivery is understood to be your place of business. In this case, the delivery is considered complete when you deliver the goods to a carrier.
Pitfall
Rigid practices - the exporter balks at modifying products in compliance with foreign regulations and cultural preferences.
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. But 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; or
- by 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 has taken place, the buyer can no longer refuse the goods, even if you have breached a condition of the contract.
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, such as a written guarantee or a mortgage against real estate. The most common method is to reserve title or to take a secured interest in the goods.
Contracts for the 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 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; and
- procedures for resolving disputes.
Tip
If you export intellectual property, be aware of those countries that don't uphold intellectual property laws. Taking legal action against violators in such countries can be very difficult. For details, consult CIPO at www.cipo.gc.ca, or a professional specializing in IP issues.
Protecting intellectual property rights
Intellectual property (IP) is a collective term used to refer to laws that protect new inventions, designs, writings, films, and so on, which are protected by copyrights, patents, industrial designs, trade-marks or integrated circuit topographies.
Always protect your creations. Even if you already have secured protection for your intellectual property in Canada, you should consider seeking similar protection in your target market or where you will find manufacturing competition. Intellectual property laws, however, can be complex, so you should obtain the advice of professional legal counsels and/or IP agents.
If selling or using your IP outside of Canada, learn about the laws in the countries of interest. To protect your IP rights in Canada, you should establish ownership with the Canadian Intellectual Property Office (CIPO) at www.cipo.gc.ca. Links to foreign IP Offices can also be found on the site.
The cost of securing and maintaining foreign patents is high. However, because Canada is a member of the Patent Cooperation Treaty (PCT), you can use just one patent application, filed in Canada, to file applications in over 100 member countries.
Here's how you can protect key elements of your intellectual property:
- Patents - for inventions (and new or improved technology), protection in Canada extends up to 20 years from the date the application is first filed. You can receive a patent for a product, composition, machine and/or process that is new, useful and inventive.
- Copyrights - literary, dramatic, music, artistic, performer's performance, communication signals, and sound recordings are protected for, in most cases, the life of the author plus 50 years. Copyright is automatic and acquired upon creation, so registration is not mandatory. However, registration of copyright provides presumption of rights if there's a court dispute.
- Trademarks - these are words, designs, or a combination of them that you use to distinguish your wares and/or services from those of others. A trade-mark registration gives the owner the right to its exclusive use in Canada. Protection can be renewed for 15-year periods. If you're starting a business, you should ensure that no one else has registered, is awaiting registration, or is using a trade-mark or trade name similar to yours.
- Industrial designs - protection is for the visual features of shape, configuration, pattern, ornamentation, or a combination of these, of a finished manufactured product. Unless you have a registered industrial design, you cannot make a claim of ownership or protect the design against imitations. Registration gives you exclusive rights for up to 10 years.
- Integrated circuit topographies - protection is for the three-dimensional configuration of the electronic circuits used in microchips and semiconductor chips. Registration offers exclusive rights for up to 10 years on original circuit designs. Protection can extend to the layout design as well as to the finished product.
Tip
When you set up a Web site, you first have to register its URL (such as exportsource.ca) which you can do if nobody else has registered it. However, simply registering the URL doesn't necessarily give you secure ownership. To make sure your use of the URL isn't challenged by another party, the best thing to do is file for a trademark as soon as you've made your choice.
Online intellectual property information
In addition to CIPO, several Web sites offer information on intellectual property issues. Check the CIPO web site for links to other informative IP sites. Three of them are:
- the World Intellectual Property Organization at www.wipo.org;
- the Intellectual Property Institute of Canada at www.ipic.ca; and
- the World Trade Organization at www.wto.org.
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