Global legal considerations

Going Global Responsibly: Practical Legal Considerations

Michelle J. RozovicsManaging Partner, Rozovics & Crawford LLP

263 King Street, Crystal Lake, IL 60014815-479-9733 [email protected]

Comprehensive Legal Advice for Growing Businesses

www.RozovicsLaw.com

mailto:[email protected]

Summary

- Goods bought by U.S. companies from abroad, or sold by U.S. companies to foreign individuals or entities are subjec to a myriad of laws, regulations and restrictions- Like everything else, advance planning can save you thousands

of dollars and many headaches in your business deals

- Many roles are assumed by non-legal professionals- Business Managers- Bankers - Accountants- Insurance agents- Trade specialists, eg freight forwarder, foreign sales agents, foreign

distributors, export trading companies, export management companies

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Comprehensive Legal Advice For Growing Businesses

Summary

- Role of legal counsel is to determine what laws apply - both here and abroad- How can compliance with these laws be achieved?- Who is responsible for achieving compliance?- How will risk be allocated for non-compliance?- How can enforcement of non-compliance be ensured?

- Clearly the QUESTIONS are similar to those of a domestic sales contract

- The ANSWERS, however, require clients and their legal counsel to implement a completely different way of approaching the transaction

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What Legal Resources Apply to Cross-Border Contracts

Country-Specific Laws • National/domestic laws which may apply to the substantive law of the contract, or

the remedies sought– In U.S., UCC Article 2 – In foreign state, applicable civil code, case law, etc. • This is called “localizing” a contract – making sure it does not violate the local

laws of the country that the performance will take place in.• Your initial research about the law of the country you are doing business with can

be performed through English language resources; however, any opinions regarding substance of foreign law must be obtained through local counsel

• Be particularly careful – merely choosing U.S. law to apply to a contract does not mean that no foreign laws apply; they may still prohibit what the parties are trying to do (eg in Germany, no private contract can prevail over public civil code, including tariffs and nontariff barriers)

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Some Resources to Consider When Working With Cross-Border Transactions

• Conventions and Treaties, eg United Nations Convention on Contracts for the International Sale of Goods• Soft Laws, eg International Institute for the Unification of Private Law (UNIDROIT) and Principles of

International Commercial Contracts• Customary International Business Laws, eg International Chamber of Commerce Uniform Customs and

Practices for Documentary Credits addressing Letters of Credit• International Commercial Arbitration Decisions, which are based on the application of international

commercial law, eg International Centre for Dispute Resolution (ICDR), London Court of International Arbitration (LCIA), China International Economic and Trade Arbitration Commission (CIETAC)

• Doing Business Guides (as secondary resources to determine application of treaties, laws and other country conditions affecting trade)

• International Organizations (United Nations, World Bank)• Government Agencies (export.gov, buyusa.gov)

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Commonly Overlooked Aspects of International Contracts

• THERE IS NO SUCH THING AS A BOILERPLATE INTERNATIONAL CONTRACT!!Everything will change depending on your parties, your location, your risk,

and what it is you are most afraid of going wrong with this transaction.• Start with the Choice of Law – the content of the contract will be dependent

on this. • Acts of God Provisions – can be very sensitive depending on beliefs• Force Majeure clauses - Don’t think these things will never happen.

Allocating risk is very important in international contracts (e.g., foreseeability vs. unforeseeability, impossibility of performance vs. increased cost and complete excuse of performance vs. delayed performance required.)

• Severability Clauses - Determine and define “essential” provisions.• International Arbitration – Benefits and drawbacks of ADR in international

transactions; special considerations with government parties; neutrality of venue and arbitrators significant considerations.


• Currency (do NOT assume USD; consider exchange rates and convertibility of currency)

• Payment (cash in advance/wire transfer; documentary letters of credit; documentary collection procedures; drafts or bills of exchange; credit)

• Official Language (do NOT assume English)• Designated Holidays (very significant for computation of business days and notice

provisions)• Effects of customs duties and tariffs• Export and other necessary international transaction authorizations from pertinent

governments» Don’t forget incorporating an Addendum to prevent violation of Foreign

Corrupt Practices Act if someone is your agent!!!!• Cultural/Business attitudes and practices, particularly at signings and closings• Time Zones


• U.S. Tax rules: IRC; Treas. Regs; IRS rulings; cases; Federal excise taxes; State and local income, sales & franchise tax rules

• Foreign Income Tax rules: national and provincial taxes & exemptions; “in lieu of” income tax rules; withholding tax rules; VAT or sales taxes; caution about “permanent establishment” rules

• U.S. Double Taxation Treaties: Treaties with most industrialized countries; define scope of each country’s tax rules for cross-border transactions; establish withholding rules; establish procedures to resolve conflicts between tax authorities

• EU Directives: Most favored country provisions; Arbitration of transfer pricing disputes

Commonly Overlooked Aspects of International Contracts – Intellectual Property

BE VERY CAREFUL – These treaties do not give you international protection merely if you have a U.S. registration. They are a vehicle to give you priority filing, and streamlined filing, in other countries. Understand these rights thoroughly BEFORE YOU STEP A TOE OUTSIDE THE U.S. – OR IT MAY BE TOO LATE AND YOUR PROTECTION MAY BE LOST!!

Patents– International protection under Paris Convention & Patent Treaties (PCT)Copyrights – International protection under Berne Union & Universal Copyright ConventionTrademarks– International protection - Paris Convention, Madrid AgreementTrade Secrets – No international convention• Trade secrets should be listed clearly in a contract; or, an agreement can state that trade

secrets must be kept secret, and subsequent correspondence containing such secrets can be marked as ‘confidential’.

• U.S. Practical Tip – for small and mid-size companies, know-how and trade secrets can be their most valuable assets. These can and should be protected.

Intellectual Property

• WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)– • “National Treatment” – signatories must treat IP rights of other WTO

members no less favorably than their own– • “Most-Favored Nation Treatment” – any IP right granted to party of another

WTO member must be granted to all– • Enforcement by host nation courts

• World Intellectual Property Organization (WIPO) UN agency established in 1967– Led to adoption of Patent Law Treaty– Joint initiative with TRIPS to assist developing countries comply with TRIPS

commitments

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Intellectual Property Provisions

• Protection varies widely, depending on the jurisdiction

U.S. Practical Tip: Keep in mind that if you do not create and properly register your IP in the U.S., you will have nothing to protect abroad. Take the time here first to properly register TM, Copyrights and Patents. Understand how to protect trade secrets, and have processes in place to guard them.– If your local agent needs to promote, advertise or manufacture your products,

they are going to need a Trademark and Patent License from you. • You can’t grant them a license abroad if you don’t have registration in the U.S. • You can’t grant them a license abroad if you don’t have registration in the foreign country. • You need to do your registrations properly abroad – and don’t wait or a foreign agent or

competitor may register them for themselves.

– You should have provisions in your contract that makes the sourcing agent responsible for policing your rights

• At a minimum, to alert you if they become aware of any incidents of infringement

• Even though a contract may state patents and trademarks are the property of the U.S. purchaser, this may not be a enforceable argument

Intellectual Property Provisions

So What Can You Do To Protect Your Intellectual Property Abroad?

Always Remember -- NNN

Non Disclosure Agreements – in addition to normal NDA terms, you also need to prevent internal disclosure within the contracting party’s network of subsidiaries and subcontractors

(disclosures to entirely unrelated third parties is much less of a risk)

Non-use Agreements need to prevent “copycat” manufacturing, eg the Chinese party uses the U.S. company’s product design to create a same/similar product which directly competes

with the U.S. company (produced under a Chinese trademark)This is especially important for products that are not covered by patent or other IP registrations.

Non Circumvention Agreements -- prevents the foreign party from approaching the U.S. company’s current or future clients, saying they are the company making the product and

soliciting them directly, eventually cutting out the U.S. business

Combine the above contractual protection with the appropriate international and foreign national filings to protect your patents, trademarks and copyrights – this is our “belt and suspenders”

method of protection.

Choice of Law

Most, but not all, countries’ courts will honor a contractual provision specifying governing law agreed upon by parties.

Parties may choose from:• Law of a particular country/state• General principles of law• International law

The choice of law may apply to the entire contract or to parts of contract.

Choice of law provisions cannot be invoked to defeat a choice of forum stipulation.The law chosen will incorporate the state’s arbitration laws unless the parties specify otherwise.

This is probably the most important provision in the contract because every provision is impacted by its choice. Know and understand the applicable law BEFORE negotiations begin.

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Key Issues Regarding Choice of Law

KEY CONSIDERATIONS IN MAKING A CHOICE OF LAW

1. What are the potential areas of conflict which you might cause?2. What are the potential areas of conflict which you fear the other party might

cause?3. Which laws are most favorable to you, in either preventing you from being found

in breach (on #1) or finding a breach by the other party (on #2)?4. What kind of remedies might you, as the buyer, need most in the event 1. or 2.

occurs?5. What does the foreign country, Illinois, the U.N. Convention on the International

Sale of Goods, and any other potential governing laws say about these topics?6. Which one is best for your purposes? Will it matter?

Key Issues Regarding Choice of Law

U.S. Choice of Law– Complicated body of law, varies between jurisdictions (individual states and federal);

however, you are free to choose own governing law. Suggest do so “without regard to conflict of laws principles.”

– Note that the Convention on the International Sale of Goods will preempt the UCC when it is applicable, because it is a self-executing treaty with the preemptive force of federal law.

– U.S. jurisprudence is clear that the only way to truly get around the CISG is to explicitly disclaim it in a contract

• “PURSUANT TO ARTICLE 6 OF THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS (UN CONVENTION), THE PARTIES AGREE THAT THE UN CONVENTION SHALL NOT APPLY TO THIS AGREEMENT.”

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United Nations Convention on Contracts for the International Sale of Goods

• CISG (UN Convention on Contracts for the International Sale of Goods) was an international response to calls to standardize country differences in contract law, similar to Article 2 of the UCC’s standardization across the 50 states (with some retained individual state variation)– negotiated in 1980 became effective in 1988– 74 countries have ratified; there are some significant exceptions to

industrialized countries

• For certain international sales contracts, and international convention, the CISG will determine the legal interpretation and implementation of the contract, even if it is an oral contract, UNLESS the parties explicitly make its terms INAPPLICABLE to the contract.– It is noteworthy that many important industrial, developed and

trading nations are NOT parties to the CISG, including Japan and the United Kingdom.

Applicability of CISG

• Commercial sale of goods – Between parties whose places of business are in different countries– Unless the parties opt out under Article 6 of the Convention

• The places of business are in countries that have ratified the CISG– You should always look at reservations and declarations of the country

where the contracting party resides, as it limits applicability

• As self-executing treaty law, it takes preeminence over state laws and equal to federal laws in U.S.

• Parties may exclude its application, or any particular parts thereof.

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Transactions Excluded from the CISG

• Consumer goods• Auction• Stocks• Vessels, aircraft, ships• Contracts predominantly for labor or services• No product liability for death or personal injury

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Differences Between UCC and CISG

• The CISG's rules closely follow Article 2 of the Uniform Commercial Code ("UCC"), and therefore U.S. practitioners will be familiar with most of its terms and rules.

• However, several important distinctions between the UCC and the CISG should be highlighted. This can help practitioners determine whether they should select CISG, or disclaim CISG when drafting a contract, or if they should argue about this issue during litigation.

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UCC v. CISG – Key Areas of Comparison

• Writing• Parole evidence• Custom practice and trade usage• Battle of the forms• Disclaiming implied warranties• Remedies for breach• Specific performance

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• You CAN verbally commit under the CISG, unless the country has a reservation on this issue. If that is important to you, you may want the CISG to apply instead of a knee-jerk reaction to apply U.S. law. If you want no part of a verbal commitment, you need the disclaimer of the CISG to be clear.

• CISG: need not be in writing ( but some countries, eg Russia, have elected writing requirement)

• UCC: contracts for the sale of goods $500 or more must be in writing to be enforceable– However, there are

many exceptions

Must Contract be in Writing?Must Contract be in Writing?

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Parole EvidenceParole Evidence

• UCC: If contract is final written expression, then parole evidence is not admissible to contradict– Only resort to parole

evidence if contract terms ambiguous

• CISG: Court may consider all relevant circumstances.

• Are you a businessperson with horrible recordkeeping? Someone whose obligations are likely to be on a cocktail napkin, a half a dozen emails, and a couple of conversations? Then you may be someone who likes to apply the CISG instead of the UCC, if your goal is to enforce an obligation of another party.

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Custom Practice and Trade UsageCustom Practice and Trade Usage

• UCC: Allow past practice and industry practice to fill in the gaps.

• CISG: limited to those which parties agree to or past dealings or those usages that the parties ought to have known are observed in trade or industry

• Are you always saying this jerk should have known that we in (fill in the blank industry) do not do (fill in the blank activity that you find offensive). If so, you are likely to prefer a choice of UCC over the CISG, and will need to disclaim application of the CISG to your sale of goods contract.

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Battle of the FormsBattle of the FormsUCC: written confirmation

is acceptance even though additional terms unless acceptance is conditional on assent

Special rules for merchants: new terms become part of contract unless – materially alter

terms, or – notifies of

objection within reasonable time, or

– purchase order expressly limited to terms in order

CISG:Acceptance containing new terms that do not materially alter becomes part of the contract unless there is a prompt objection

If the terms materially alter then it is rejection of the offer and a counteroffer (not a contract without the new terms)– Include such things

as arbitration clauses, other terms significantly changing parties’ obligations

Are you constantly proposing changes to the purchase order terms that others give you? Are you afraid this might kill the deal? Then UCC is your body of law, and CISG should be disclaimed

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AvoidanceAvoidance

• UCC: perfect tender rule (performance must match specifics of contract perfectly)

• CISG: buyer can avoid only if fundamental breach

• Buyer need not take delivery - avoid the contract

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Remedies

Specific Performance

• more prevalent internationally

• Under the UCC - only allowed where money damages are inadequate (eg if goods are unique)

• Under the CISG - allowed without conditions

– Based on the civil law traditions– Exemption for countries that do not have such a provision under their own

law

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Liquidated Damages

• Easily allowed under international laws

• UCC less receptive

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Excuses for PerformanceExcuses for Performance

• Impossibility - supervening illegality• Frustration of purpose (rare)• Commercial impracticability• CISG - impediments beyond control exemption• Force majeure: unforeseen events beyond control of

parties, act of God

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Forum Selection Clauses

• Forum Selection is different from Choice of Law!!!!– Domestic courts of one of the parties vs. a neutral court (country/state).– Foreign parties prefer to avoid US courts when possible.– US parties should recognize that foreign jurisdictions have substantially

different procedures.• Disputes should be resolved fairly, quickly, economically and without disrupting the

business relationship.– Courts v. Arbitration – Mediation is encouraged – most international disputes are resolved by

negotiation amongst the parties

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International Dispute Resolution

• International business transactions vs domestic transactions– • different nationalities;– • different cultures and methods of doing business;– • different commercial and legal systems.

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Arbitration

• Arbitration allows parties to resolve disputes fairly, quickly and economically.• • Institutional vs. ad hoc• • Scope of arbitration• May also be bilateral treaties between U.S. and country in question• New York Convention- incorporated in the Federal Arbitration Act at 9 U.S.C. §§

201-208 (signatory states - US and all major commercial countries).– The purpose of the New York Convention is to encourage the recognition and

enforcement of commercial arbitration agreements in international contracts and to unify the standards by which such agreements are observed and the awards rendered are enforced by the signatory states.

– An arbitration award is final and its enforcement is reliable.– A judicial proceeding is necessary to enforce an arbitration award.

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Enforcing Foreign Judgments

• Enforcement of Judgments and Arbitral Awards• American courts historically have recognized and enforced foreign judgments• Foreign judgments may be enforced if:

– There is a final judgment;– The foreign court had subject matter jurisdiction;– Proper and timely notice;– Defendant had opportunity to present a defense;– Regular proceedings and impartial tribunal.

• But – enforcement of U.S. judgments in foreign courts is not certain– US creditors face burdens and uncertainties

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Overview of Export Administration Regulations

- Code of Federal Regulations, 15 CFR 730-774- www.bis.doc.gov- www.access.gpo.gov/bis/ear/eardata.html

- Bureau of Industry and Security is part of the U.S. Government responsible for implementing and enforcing laws which regulate the export and re-export of most commercial items.

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http://www.bis.doc.gov/

http://www.access.gpo.gov/bis/ear/eardata.html

Questions to Ask Yourself Before Every Shipment

- What is my item (what is the Export Control Classification Number (ECCN))?

- Where is it going?- Who will receive it (keep in mind that a release to a

foreign national within the U.S. Borders can still be considered a « deemed export » and subject to regulations)?

- What will be the end use?

Your answers will determine whether you need an Export license or license exception

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General Prohibitions 1 – 3List Based, Part 736

- You may not without an Export License or License exception:- Export or re-export controlled items to listed countries- Re-export foreign made items incorporating more than de

minimis amount of controlled U.S. Content (eg software or technology)

- Re-export foreoign produced direct product of U.S. Technology and software

- There are License Exceptions in Part 740 that supersede these prohibitions.

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General Prohibitions 4-10Part 736.2(b)

- Denial Orders- Knowledge of end use and end user controls- Embargoed Countries- U.S. Person support of proliferation- Transit through certain countries- Terms or conditions of licenses- Knowledge of a violation

License exceptions under Part 740 are generally not available for these General Prohibitions.

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License Exceptions

- An authorization that allows for export or re-export of items requiring a license under certain stated conditions:- Cannot be used:

- When authorization has been suspended or revoked- Crime control items tomost destinations- Most missile technology control items- Embargoed destinations

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License Exceptions

- Country Group B- Civil End Users (non-military)- Limited Value Shipments (splitting orders not allowed)- Technology and Software Related (written assurance

from consignee required)- Temporary Imports, exports and Re-exports- Service & Replacement of Parts and Equipment- Technology & Software Unrestricted

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Embargoed and Sanctioned Countries

- Iran- Cuba- Syria- North Korea- Sudan

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Foreign Corrupt Practices Act

- Anti-Bribery Statute that has extra-territorial application- Prohibits U.S. Company, individual or foreign subsidiary

from - Offering or authorizing payment of money or anything of value

- Stock, entertainment, gifts, discounts on products or services not readily available to the public, Charitable donations, offers of employment, assumption or forgiveness of a debt, travel expenses, personal favors

- Knowing that some or all of the payment will go, directly or indirectly to a foreign official- Either because of direct knowledge or lack of due diligence in

investigating the issue

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FCPA (continued)

- For the purpose of influencing any official act or decision- To obtain or retain business- Directly or indirectly (ie through an agent or

intermediary)- With a corrupt intent or improper motive- To a foreign official, political party or candidate

FCPA has serious civil and criminal liability, both for companies that violate it and for officers of the company that violate it. Its reach is NOT limited to publicly traded companies, and the enforcement trend has been towards smaller private companies.

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FCPA

- Note: small payments which are considered necessary to obtain routine government action (so-called « grease payments »), such as processing permits or visas or inspections, are still potential violators of FCPA if they are not accurately reported and documented.- Other country’s laws (UK, Germany, Italy) do not have

exceptions for grease payments, so be aware of other laws where your company is subject to laws.

License exceptions under Part 740 are generally not available for these General Prohibitions.

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FCPA (cont’d)

- Know your vendors- Check www.bis.doc.gov to see if they have been placed on a

debarred list or are denied persons

- Need a Compliance Program in Place- Ensure proper written procedure is in place for vetting

contractors, vendors, agents, distributors, suppliers- Make it clear that no foreign parties you do business with can act

in a manner to violate the FCPA, and ensure your employees and all foreign agents who can cause liability for you have attested to their awareness of your policies and compliance with same.

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http://www.bis.doc.gov/

Question & Answer Session

. . .Thank you for your attention

Michelle RozovicsManaging Partner, Rozovics & Crawford

[email protected]

Phone: 815-479-9733 Crystal Lake, Illinois

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