Step #9 - 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
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 may 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 pitfalls of regulation and law 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 the "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.
You absolutely must, therefore, establish from the outset which law is the "proper law."
9.3 Contracts for the sale of goods
- 9.3.1 Transfer of title and the effects of transfer
- 9.3.2 Delivering the goods
- 9.3.3 Acceptance or refusal of goods
- 9.3.4 Unpaid seller's rights
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, 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.
9.3.1 Transfer of title and the 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 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.
9.3.2 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).
Unless otherwise specified, the place of delivery is understood to be your place of business.
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. 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
- 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.
Modify products in compliance with foreign regulations and cultural preferences to avoid conflicts.
9.4 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(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.
Be patient – pushing negotiations onto someone who isn't ready will be seen as rudeness, and that can greatly diminish the possibility of a sale.
9.6 Corporate Social Responsibility
Corporate Social Responsibility (CSR) is generally defined as the voluntary activities undertaken by organizations to operate in an economically, socially and environmentally sustainable manner.
Socially responsible practices can enhance the ability to manage stakeholder relations, prevent conflicts, mitigate risks and contribute to the sustainable development of communities, regions and countries.
Successful CSR activities are characterized by the integration of social, environmental and economic considerations into an organization's values and operations in a transparent and accountable manner.
9.6.1 Operating according to CSR principles
The Government of Canada encourages and expects Canadian companies working internationally to respect all applicable laws and international standards, to operate transparently and in consultation with host governments and local communities, and to continue to develop and implement CSR best practices.
There are good business reasons for implementing sound, ethical CSR policies and practices.
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 better staff morale
- Obtaining higher operational efficiencies and cost savings
- Improving access to markets and capital
- Maintaining better relationships with regulators
- Maintaining stronger compliance with local laws and regulations
CSR tools and practices can contribute to an organization's long-term business success by helping them to develop sustainable business practices that respect local needs.
9.6.2 CSR and corruption
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. 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.
9.6.3 Additional resources
For more information on integrating CSR into your business practices, see Corporate Social Responsibility: An Implementation Guide for Canadian Business, developed by Industry Canada.
More information on Canada's approach to CSR for Canadian companies operating abroad.
9.7 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 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 when you move into a new market.
The best place 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 standards published or under development by a specific technical committee
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 the 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 Foreign Affairs and International Trade Canada.
Additional SCC tools include RegWatch, a database of standards referenced in federal legislation, and Standards Alert!
9.8 Protecting intellectual property 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.
Patents, trade-marks, copyrights, and industrial designs are referred to as "IP rights."
- Trade-marks 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 intellectual property office, whose main responsibility is to administer their national IP system. Canada's intellectual property office is an agency of Industry Canada.
Visit the Canadian Intellectual Property Office (CIPO).
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' intellectual property assets
Note: Many of these steps would benefit from the guidance of an IP specialist.
Learn the basics of IP rules and laws 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 (WIPO) offers useful information and resources specifically for businesses.
Take stock of your IP assets. Don't make assumptions – get clear on the IP assets you actually hold. IP can provide a foundation for mergers, joint ventures or for research and development agreements.
Conduct "freedom to operate" searches on trade-marks and patent before commercializing products and services which may conflict with the IP rights owned by others in the marketplace.
Develop an IP Strategy. You will be in a better position to understand how intellectual property can support you in achieving your business goals.
Search IP Databases. Search international 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
Find a comprehensive list of national IP offices here.
Formally protect your IP rights. Seek professional advice for protecting your products and services as the formal IP system can be complex.
Properly mark your products and services. The following are some examples for indicating your IP rights on products and packaging.
- Trade-marks: Trade-mark owners often indicate their registration through certain symbols, namely, ® (registered), TM (trade-mark), SM (service mark), MD (marque déposée) or MC (marque de commerce). Although Canada's Trade-marks Act does not require the use of these symbols, it is advisable to use them. The symbols TM, SM or MC may be used regardless of whether the trade-mark is registered. The ®, or 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 article, its label or packaging.
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 trade-mark 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 trade-mark registrations
- Not using regional/international systems to streamline IP registration
- Using inappropriate local branding
- Applying for protection too late
- Disclosing information too early
Take advantage of expert services for searching and registering your IP as the realm of IP is a legal one and you would be ill-advised to go it alone or even ignore IP all together.
In addition, you may wish to consult the Canadian Trade Commissioner Service.
By slightly modifying a patented invention, I can go "around" the patent and sell my modified product without any worry.
WRONG: If a patent has been properly written and filed with the help of a registered patent agent, chances are it would stand as a solid defense.
My Canadian IP right protects me worldwide.
WRONG. IP rights are territorial — recognized and enforceable only within the country or region where they were granted
CIPO, through the Patent Cooperation Treaty (PCT), can concurrently seek patent protection in over 140 countries.
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
However, consultation with legal counsel in the jurisdiction of the contract is suggested in regards to 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 them.
Exporting is too risky
Exporting doesn't need to be riskier than doing business at home—it's just different. Letters of credit, export credit insurance, and reference checks through banks and international credit reporting agencies can help protect your business. Trade laws also tend to be straightforward and legal advice about them is easily available.