What To Do, What To Avoid, Basic Procedures For Successful Transactions
Introduction:
You probably already engage in international business. If you do not yet, you probably will in the next few years and you can be certain your competitors will.
The state of the current world economy is such that almost no business transaction involves purely domestic materials or services. Most of the clothes you wear, food you eat, cars that are driven, or electronics that are used stem from foreign sources. If you are a manufacturer, many of the raw materials you use and the market for your product will often involve entities existing abroad. If you offer services, your customers, seeking to engage in business or transactions within the United States often stem from abroad or will engage in their own transactions abroad.
Even consumers engage in international transactions on a daily basis, buying products either made abroad or sold by entities owned by conglomerates with foreign owners or control. The Internet is not a "national" exchange but an international one and the simple fact is that any business with a web page is actually showing its presence in every nation in the world.
This trend is likely to expand, mostly due to the ease of sales on the Internet, but also because such nations as Russia and China, with massive populations wishing products made in the West, will find themselves seeking to import more and more products and services and sell into those markets to reach the richest markets in the world. It is a fact of American business that vast markets exist in increasingly affluent nations outside of the United States and that just as imports cause the United States business to adjust to increased competition, so the markets and raw materials in other nations can be a boon and opportunity to the United States business.
The availability of foreign products keeps costs down and vastly increases choice of service and product. What it also creates is increased competition for the typical business and compels business people to learn the basic procedures and dangers of engaging in international transactions, be they transactions on the Internet, or based on a transaction from a locale outside of the home country. Whether you sell to markets abroad, or buy products from abroad for resale, it is incumbent upon the American businessperson to learn the basics of international transactions.
This article shall list some of the basic areas that should be of concern to the business seeking to engage in business outside of its home locale. The field is a large one, the issues complex, but this introductory article should give the reader a check list of the most important tasks that should be accomplished by the neophyte to international business transactions.
1. PERFORMANCE OF DUTIES: MONEY AND ASSURANCE OF PAYMENT
Assuming you are a business and you either sell or buy a product or service and the transaction goes wrong for any reason, your relief is well known and relatively easily accomplished in the United States. You sue for the money or for failure to deliver, receive damages, and collect your judgment with a writ of attachment which allows seizure of bank accounts, assets, etc. While the procedure requires an attorney and may take a year or two, it is well known to the average businessperson and the mere fact that such remedies are available acts as a constant deterrent to those who would otherwise breach the transaction.
Further, definitions of what is acceptable performance and what statutes apply to determine appropriate product or services are also well known. Thus, if meat that is tainted or service that is negligent is delivered, criteria is firmly settled by the local statute or courts and both sides are aware of the performance criteria that must be met.
With a few notable exceptions, none of the above exists in international transactions. Unless the parties are wise enough to agree in writing to mutual terms to resolve all these areas, quite often the law (or lack of law) of the defendant’s locale will determine what relief, if any, is available, and certain huge markets, such as China, Russia, much of the Middle East, Indonesia, Eastern Europe and most of Africa, neither have effective legal remedies or enforcement of judgments obtained elsewhere.
Assume you sell fifty thousand dollars worth of equipment to a company located in Kiev, in the Ukraine, or perhaps Lagos in Nigeria. Assume that the receiving party fails to pay, claiming lack of adequate performance in that your goods were "defective." First, minus appropriate written terms and conditions agreed to by both parties, you will have to sue in the distant locale subject to their laws, and will be required to hire an attorney located ten thousand miles away. Selecting legal counsel, appearing in court, obtaining expert witnesses who can testify as to quality of product in that distant locale will be expensive and perhaps impossible.
But the problem is even worse than inconvenience and expense of seeking relief. Both of those court systems are notoriously slow and subject to remarkable corruption. The United States Federal Corrupt Practices Act makes it a crime for you or your agents to bribe any foreign official-but in that locale any business person or lawyer in those systems will quickly advise you that if you do not pay certain officials the expected monies "under the table" that you will either never get a day in court or will lose the trial regardless of how legitimate your claim. If you decide to sue in the United States, somehow claiming proper jurisdiction here, you would still have to go to those countries to obtain collection of your judgment and would still either violate United States law by bribing the officials...or fail to get effective relief.
The same scenario would apply if you purchased fifty thousand dollars worth of merchandise from abroad and it arrived defective or incomplete. In both cases, your reliance on the legal system would result in little chance of effective relief.
So, does this mean that large parts of the world are off limits for the enterprising businessperson. Of course not. The key way to protect yourself is in the formation of written documents and procedures that assure performance and payment without recourse to foreign systems of law or foreign governments.
What documents are required?
While it depends on the actual nations involved, the following is the usual minimum documentation and procedure that should be utilized by the experienced and intelligent business either buying or selling from abroad.
1. Written Purchase Order or Invoice with Terms and Conditions, executed by both buyer and seller, with Irrevocable Letter of Credit, said documents providing, at a minimum:
- Criteria for proper performance both in terms of specifications and timeliness as well as specified periods to make appropriate complaints. Criteria for how the complaint must be made and how substantiated.
- Terms of payment with an Irrevocable Letter of Credit being posted before delivery and release of the Letter of Credit being based on inspection of the goods by an impartial observer. (A letter of Credit is a document in which a third party, usually a bank, promises payment based on certain performance, the Letter of Credit acting, effectively, as a cash deposit in third party hands since the bank will not issue same until receiving the money in hand. It is roughly equivalent to a deposit of money into an escrow and most international banks have such documents available for purchase on a regular basis. The Letter of Credit (or sometimes-called "LC") must be irrevocable so that the buyer cannot revoke same after receiving the goods.
- Terms as to how to return and get credit for unacceptable goods or services.
- Terms providing for private arbitration of all disputes concerning the transaction in a neutral third country, usually under the auspices of the International Chamber of Commerce, subject to their rules both as to procedures and as to performance criteria. Agreement that the award of the arbitrator shall be enforceable in either country and binding on the holder of the LC.
- Terms and conditions providing that attorneys fees and costs are awarded to the prevailing party.
- Terms and conditions as to ownership of any intellectual property and remedies if any pirating of goods or products occurs.
- Terms and conditions providing that any alteration of any type must be in writing and signed by both parties.
The above is only minimal, of course, and good legal advice must be obtained before substantial business is undertaken. And the above must be in writing signed by the parties...oral contracts are virtually useless. The reader is invited to read the web articles on Contracts, on Arbitration and, in the Retainer Site for the retainer clients, on Terms and Conditions on Invoices.
Some nations have internal laws seeking to impose restrictions on the above, but said nations are few and far between and the Letter of Credit should make such local laws a matter of small import.
The International Chamber of Commerce ("ICC") as well as the United Nations have issued comprehensive and written procedures, assumptions, and methodology for commercial transactions as well as dispute resolution which can be adopted in Toto in the Terms and Conditions and, depending on the nature of the transaction, and the nations involved, such procedures are at times automatically incorporated into international transactions. Unfortunately, those procedures still require enforcement in often hostile or inefficient jurisdictions and none of them replace the Irrevocable Letter of Credit coupled with objective inspection of goods and arbitration as optimal means to resolve disputes.
Of course, if you are purchasing product or services from abroad, it is vitally important for you to have full and reasonable inspection of the products before release of your monies. The LC protects both sides and serves to create means for objective and expert investigation of the products is important and should be part of the terms and conditions.
Recall also that time of performance, location of delivery, and completeness of performance are equally vital terms. Many nations make excellent products but have different concepts of what is truly timely performance. Firm dates must be contained in the documentation and specific criteria for specifications, including adherence to the local statutes that may apply.
One of our clients bought furniture at an excellent price made abroad but failed to denote the degree of fire resistance necessary. Customs refused to release such dangerous products into the United States and the Seller, outraged and pointing out that the furniture was considered perfectly safe in the country of manufacture, insisted that the problem was not his, but the Buyers. All this could have been avoided by appropriate terms and conditions.
Specification of currency and date of computation of exchange rates can be vitally important as a term. Recall that some nations have inflation in the hundreds of percent a year and a delay of delivery of two months can wipe out half the value of the product or transaction. Such factors are not isolated to third world or small nations. Russia, South Africa, Indonesia, Malaysia, all major players in international trade, have had radical alterations in their exchange rates in the last several years.
Good legal advice and, at times, advice of local counsel in the country of origin, is probably worthwhile for any transaction of a substantial amount.
2. CULTURAL PROTECTIONS FOR PERFORMANCE
Much of the world does not use executed written contracts to engage in business and, indeed, would be insulted if such documentation was insisted upon. This writer has even been told by a client that the only reason Westerners are so fixated on written contracts is that Westerners are dishonest, prone to breach their commitments, and must rely on such crude tools to avoid the chaos inherent in doing business with disreputable people. He pointed out that the United States courts are full precisely because Americans, if given a chance, will cheerfully breach a contract and seek to obtain an unfair advantage.
It is true that American business methods have become the dominant method of business in the world, mostly due to the remarkable power of United States economy. Every nation wants entry to the American market with its relatively wealthy citizens and most nations wish to emulate the economic success of the Untied States economy. It is important to realize that the American economy, even during a recession, outstrips in performance almost every other economy in the world. Business people abroad who wish to be successful in international business learn English as a matter of course and while they fear and at times loathe American courts, foreign nationals are well aware that engaging in business in the United States requires the use of written contracts more often than not. The larger the economy, the less personal interaction is available and the more formal and "objective" written documents are required for American transactions. If most business people know each other or know friends of friends, they must seek to abide by the contracts to protect future relationships. In an economy the size of the United States, such criteria is seldom a factor and written agreements become a necessity.
But when one seeks to engage in business in other countries, one finds that the American methods may be considered inappropriate, even an insult, and to insist upon your standard terms and conditions may very well end the negotiations immediately. The wise American businessperson will take time to learn the traditions and business methods of a foreign locale to determine if local methods may actually allow the risk of the transaction to be minimized. For instance, in much of Asia, it is useful to have a local agent or sponsor who, for a fee or for return services from you, will ensure that the parties involved are reputable and likely to perform. Depending on the nature of the transaction and the country involved, certain local businessmen are so powerful that if they are allied with your transaction, breach by another party would be considered economic suicide.
In China or Japan, Indonesia or Malaysia, such connections often take the place of formal written agreements and the extent of breach of contract is far less than in the United States. China, one of the world’s economic powerhouses, has a court system that is virtually unusable for most business people with the Chinese government itself bemoaning the sorry state of its own judiciary. Other nations, such as Japan, have good court systems, but a culture that views litigation as inappropriate for business people except under extreme situations. While the international business people in those countries may be used to American ways of business and you may rely on acceptance of your written terms and conditions, if you travel to markets not used to Americans you may find remarkable, if subtle, resistance.
In some nations, to insist upon United States methods of doing business will immediately destroy any type of transaction since the local people may consider the need for written documentation as an insult. Even in those nations, (perhaps especially in those nations) one can obtain means of security by use of escrows or third party go betweens who will "guaranty" performance. The alternative, which is to "take a chance" can never be recommended. That is not business-it is pure gambling. Business people all over the world expect parties to protect themselves in some manner and while seeking such protection often requires different procedures in different cultures, rest assured that there is an acceptable way in every culture and if any party on the other side refuses to offer appropriate security– walk away from the deal.
Of course, one reason the United States economy is so powerful is that it is an "open" economy, namely that anyone, whether they have "contacts" or not, may use written contracts and the courts to engage in relatively secure transactions without having to rely on the local elite. That openness allows free entry into our markets with corresponding benefits.
But such openness is the exception in much of the world and the average businessperson must consult with other business people or knowledgeable legal counsel to discover whether the market in question requires adequate connection to the local elite for effective enforcement of business requirements. Note that this in turn can lead to other problems, described below.
3. FEDERAL CORRUPT PRACTICES ACT
As indicated above, some nations that seldom use the courts, may nevertheless have little risk of fraud or breach of the contract IF the right local people are involved in the transaction either as agents or partners. For instance, Indonesia, a nation noted for courts that seldom work, is an entirely safe nation for business if a local powerful family is connected to your side of the bargain. The United States government, however, has passed laws that impose criminal and civil liability on a person who transfers benefit to a local government official to achieve business ends. The law applies to any American business and it applies to actions that occur outside of the United States and applies even if the local jurisdiction does not consider such payment as illegal or even unethical. This law is commonly known as the Federal Corrupt Practices Act.
And the threat to the business person is real. People have been jailed and companies, both large and small, have faced criminal and civil prosecution and paid substantial fines. An entire department of the United States Attorney General’s office is dedicated to prosecuting such "crimes" and it is not unusual for a foreign competitor to utilize the law to harm its American rival...and to do so without risk since many nations do not consider such "bribery" as criminal.
What is truly remarkable about this law is that is applies to acts of Americans that may occur outside the jurisdiction of the United States and which may not be illegal in the locale. Essentially, if the company is based in whole or part in the United States, it is subject to the Federal Corrupt Practices Act regardless of the locale of the bribery.
The Act essentially prohibits payments of any kind to any governmental official to obtain benefit or advantage in a transaction. It exempts from this classification small payments to lower level officials but does apply to any official who truly has any power. It applies to any act which an agent of the company performs, even if not specifically directed by the company, even if the company did not know the act was taking place IF the company reasonably should have known that such wrong doing was occurring. One cannot ignore the situation or "turn a blind eye."
Clearly, in many nations this makes it almost impossible for the American business to compete successfully with local companies or foreign competitors, a point made again and again by those American companies seeking to enter various markets. In response, the American government has been seeking to influence other nations into passing similar laws and there has been some progress in the past in having many nations, by treaty or otherwise, create similar legislation though few nations are moving forward with any alacrity or enthusiasm and their enforcement is often lax.
Additionally, many nations deeply resent the "arrogance" of the United States in seeking to impose American ethics and business practices on local customs as if the American laws are somehow universal. Such "bribery" is not seen as bribery by these countries, but as part of the pay that the usually underpaid official receives for performing duties, an unofficial tax used to compensate a civil servant. It must be admitted that it is relatively unique for a nation, be it the United States or not, to impose its criminal law on acts committed in other jurisdictions. Nevertheless, it remains the law and the United States business which ignores the Act does so at its peril.
As such, the local influence broker or agent must be strictly controlled by the United States business since his or her activities may very well involve the United States company in breach of the law though the agent is acting in what he considers entirely appropriate methods.
4. PROCEDURES FOR NEGOTIATIONS
Every nation has its own cultural methodology for engaging in relationships, be they personal or business, and the wise businessperson will take time to understand the culture of the other party before engaging in any significant business. This is not difficult in most cases. Consultants, Accountants, Attorneys, and numerous publications are available for advice and information and local chambers of commerce or consulates are an excellent source of information. Keeping in mind the need for written protection provided above, the American businessperson will be wise to learn as much about the local business conditions and culture before venturing into the market since the personal interaction during the negotiations may do much to prepare the other party to accept the written documentation required for the transaction.
It is axiomatic, even in this day of Internet transactions, that personal contact often assists both in successful culmination and performance of transactions. Most cultures wish a personal meeting to cement a transaction and the cost of a business trip is normally a fraction of the cost of disputes that may arise otherwise. One wise businesswoman once told this writer that a week in a country is worth five years of transactions over the telephone in determining what matters to that country and its people. The same applies to hiring local counsel or accountants. To engage in business without visiting a country and personally meeting the various involved persons is to operate under a very real handicap.
No matter how informal and friendly the other party, no matter how charming the accent or the entertainment provided, the cold hard facts of the transaction should be run by experienced legal counsel and tax consultants. Americans are notoriously fond of foreign accents and exotic locations and calm and experienced business people often engage in the most absurd transactions under the influence of a evening dining near the Eiffel Tower or gazing at the bay in Hong Kong. NEVER close a deal during the trip. Never close the deal until it is reviewed by the kill joys back home who, without jet lag or the emotional effect of the charming salesperson, look with cold eyes at the hard figures. The business trip is usually for negotiations and getting to know the other party, NOT for closing the deal-that is for fax and telephone calls days later back at home, despite the movie version of what international transactions are about. .
Such things as jet lag and the need to recover from same must be factored into negotiations. It was a well known "trick" of one Asian nation about fifteen years ago to wine and dine westerners arriving directly off the aircraft, keep them out late, then arrange for the first negotiating session to occur early the next morning. Not wishing to offend the anxious hosts, the westerners would appear at the session nearly incoherent and would find themselves attending yet another late dinner the following evening, etc. (Solution if that trick is tried on you– Indicate you have an important conference call to make from your hotel immediately upon arrival, apologize and state that you will be delighted to meet them for dinner the following night. Once at your hotel, once they telephone you to suggest a late dinner after your call, indicate you are a little ill and must go to sleep. They will know what you are doing...you will know what they are doing...and that subtle communication will actually increase the respect they have for you and your ability to negotiate an intelligent deal.)
Some nations (mostly in Asia) require small gifts to be exchanged before negotiations can take place. (Again, make them token but tasteful...be aware of the Federal Corrupt Practices Act.) Some nations are insulted if such an apparent "bribe" is offered. (Most nations in Europe; Canada or Australia.) All nations are flattered if one attempts to learn at least some of the language, enough to carry on at least the rudiments of polite greetings. All nations are flattered if you ask their advice as to restaurants, local sights, and the history of their nation. Some nations do not wish you to inquire as to their family or their wives (in the Middle East) while other nations feel you are cold and arrogant if you "stick to business."
Women engaged in business encounter far more problems than men, though American businesswomen have become relatively famous throughout the world and few nations are shocked to encounter a woman executive. Nevertheless, to demonstrate outrage or condemnation of local customs is both pointless and counterproductive when engaged in business discussions. One should carefully search one’s own moral conscious and determine at what point one will draw the line and discuss such issues with business people or attorneys experienced in those locales to determine if business there is possible for you.
Luckily for Americans, English has become the dominant language of international business and the American method of business is at least known, if not accepted. While nations may not like it, and while your business relationship may not be as smooth as it would be if you learned the local culture, the simple fact is that any experienced international business person in that nation will probably know more about American methods of doing business and the English language than you know about their nation, if for no other reason than the prevalence of American movies throughout the world.
But this very awareness of American culture by our foreign colleagues can often lead to laziness and unconscious arrogance by the American businessperson and the courtesy you demonstrate in learning local customs may be the most intelligent business negotiation tactic that you ever develop.
5. CUSTOMS, TARIFFS AND LOCAL REGULATIONS: THE EFFECT OF THE INTERNET
One of the great advantages of the Internet is the immediate and up to date access to United States Customs and other Import and Export regulations and restrictions that may be placed on importation of products or services (check out the Federal Government website or the United States Chamber of Commerce website). For other nations, many have websites, some do not, but it is incumbent upon you to determine the various customs and legal restrictions that may be placed on your product or service, whether bought or sold.
Most government consulates have pamphlets that give relatively up to date information, but by far the safest route is to contact either an agent in the country that provides such information, or local accountants or attorneys. Customs are merely taxes placed on the importation of various products and the world is witnessing a reduction of these restraints on trade. Nevertheless, both to protect local industries, and, at times, for national security reasons, nations often impose customs or actual prohibitions on import or export. Ignorance is no excuse and the wise businessperson will determine what customs and laws apply before engaging in negotiations.
And do not think that such restrictions are one way. The United States is famous for remarkable restrictions and regulations applying to imports (consider fire proofing of clothes and furniture, inspection of fruits and vegetables, restrictions on software involving encryption, banning the export of Generation 3 Night Scopes outside of the United States, etc. Violation of these laws is often a crime with severe fines and even imprisonment).
Religious issues may also arise concerning export to certain countries and it is vital to remember that what is considered subversive in Russia or China, or pornographic in Saudi Arabia or Pakistan, will subject the American businessperson to severe penalties regardless of the opinion as to such matters at home. Viewing certain Websites in China is considered a crime. Importing certain books or magazines is a crime in many, many nations. Learn the local regulations and customs before entering the market and do NOT expect your negotiating party to advise you of the dangers. They may be negotiating with a neophyte such as you precisely because they cannot find local parties to violate local laws.
The law concerning Internet sales is in its infancy and the issues confronting those nations wishing to control or tax purchases over the web is in flux. Even within the United States the law has not finalized as to which state can tax which transaction or in which jurisdiction a sale occurred when the Internet is involved.
While treaties will ultimately be signed to clarify these matters, the approach taken within the United States essentially provides that merely having a Website does not constitute doing business in the jurisdiction in which the Website is viewed: BUT if there is a manner in which the viewer may order products or services via the Website, this can impose jurisdiction over the party creating the Website. Thus, if your customers can order product from your Website, you are probably engaging in business in every jurisdiction in which you are viewed!
The ramifications of this for both taxes and liability are most unclear at this early stage of the revolution but the recent passage of Congress of law allowing culmination of legal obligations by e mail alone is a significant step in the direction of international business by Internet. It would make sense for the wise businessperson to place on the Website various terms and conditions by which the User is bound by the law of the Website creator and agrees to the types of terms and conditions listed at the beginning of this article. Whether this would provide effective protection is only a guess at this time, but such precaution certainly seems warranted until the various international treaties concerning Internet business are concluded and become effective. The reader is invited to read the other articles on this Website regarding Contracts and Arbitration of Business Disputes and our retainer clients are advised that there are other relevant articles on these subjects on the Retainer Website.
CONCLUSION
A wise old businessman, known to this writer, while exclaiming over the remarkable effect on business of the fax machine, stated, "Business always exploits any new development to the utmost." The technological innovations, starting with the fax, and moving through the Internet to the new wireless technologies, eliminate much of the barriers once posed by distances and borders. The opportunities for the businessperson who realizes the new markets and sources abroad are vast and the advantage of working within an efficient system such as the United States gives the American business an added edge in the market.
But technology cannot replace common sense or doing your homework in learning the basics of International Business. It is not that much harder than doing business domestically.... but it is different and to engage in those transactions without proper preparation is to court disaster. It is true that without risk there is no gain...the point made here is that the risk can be minimized by following the guidelines above.
To ignore the vast markets and products available abroad is no longer a viable option for the American businessperson since one may be sure that if you do not investigate those areas, your competitor will. Americans are no longer inclined to repeat that grievous error made by Detroit in the 1960s, when they ignored, to their injury, the exploding markets and competitors of the Far East. Large American businesses eventually learned their lesson, globalized their outlook, and benefited accordingly. With the new technology, the same dangers-and-opportunities now exist for all American businesses.