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The road to export markets is fraught with potential legal potholes, from distribution contracts to IP protection, local rules and regulations to dispute resolution. Mary MacKinven went in search of some legal advice.
In business there’s no such thing as risk elimination – just risk management, points out senior associate at James and Wells lawyers, Gus Hazel.
Contract law is fundamental to managing risk. He describes three broad levels of contract protection:
• The gold standard contract costing about $5,000 to $10,000 where the parties’ lawyers refine the content over weeks – for big export deals;
•The ‘letter contract’ costing maybe $500 to $1000 where the lawyer encapsulates the exporter’s agreement to supply in a letter style that is sent to the other party for countersigning; and,
• Emails between the exporter and buyer confirming arrangements, which can be better than having nothing in writing. The ‘email contract’ can be useful evidence in disputes and even litigation, depending on the presiding country’s law.
Contract law crops up at many points including for the transportation of goods. Hazel says, “You might want a lawyer to review the contract a freighting company gives you to ensure you understand whose insurance covers losses, and where risk passes from you to the freighter or buyer.”
Hazel’s legal rule of thumb is: if an exporter engages in sound and fair trade practices in New Zealand and follows the same approach in other countries he/she is unlikely to go wrong. New Zealand is well governed and regulated, largely free from corruption, and with commercial laws broadly aligned with other Western industrialised countries.
Commercial contracts look similar worldwide, defining who is selling what to whom and how, and when they will get paid, says Kent France, partner and head of commercial practice at Wynn Williams Lawyers and president of Export New Zealand Canterbury. His basic advice is: “write a checklist of the key elements of the deal and make sure you cover them in the commercial contract.
“Sit down and discuss (with your buyer) what you can deliver them and what they expect from you – for example, technical specifications, your realistic delivery timeframes, after sales service and so on.
“Have the discussion – preferably face-to-face but it can be done by phone or email.”
France says sometimes exporters are so desperate to get the order they might avoid discussing problems. That approach leaves them in a weak position if things don’t go smoothly.
And exporters can choose not to have a written contract as long as they know the key parts of their deal.
Homework is required on each market’s regulatory standards, and useful sources can be a freightforwarder or New Zealand Trade and Enterprise staff that have practical experience.
“Get on the ground and talk to relevant agencies and retailers and people dealing with these products,” says France. “A good agent or distributor should be all over this. And if you have a good relationship with your purchaser they can be a useful source of information; but verify it.”
He says confidentiality agreements aren’t always necessary.
“In the first discussion with someone you have never met, the commercial reality is (not) ‘I want to talk to you about a product but you need to sign this agreement first…’. You can have some discussions without disclosing too much.
“Learn when to use a confidentiality agreement and be realistic about whether you will be able to enforce it.”
And be prepared for regulations to change. Kent France cites the example of a New Zealand company producing food in China to sell to America but the US Food and Drug Administration kept changing the rules on chemical levels allowed.
Business structures
Minter Ellison Rudd Watts partner Richard Wells describes optional business structures for a country market.
Options include an agent who sells on behalf; a distributor who re-sells (subtly different from an agent); a joint venture with someone who has a 50/50 stake; a licensing arrangement; or a franchise.
He then helps with contracts. “If there is no distribution agreement in place, it’s not unknown for a distributor to try to take off with your brand,” Wells says.
Terms of trade vary from country to country. For example, a distributor might insist on using their standard distribution agreement but it’s wise to get in-country legal advice on variables such as terminating the arrangement, liability limits, intellectual property ownership and restriction on selling in the market.
Intellectual property protection
An important part of researching a market involves checking for registered IP rights in that market to avoid infringing them, says Wells. Exporters with IP registrations in place often have stronger bargaining positions against competitors who claim breach; and some distributors will only back a product with registered IP rights sitting behind it.
Exporters need an address for service in the country where they are filing – advisedly a lawyer’s office.
Hazel says many new exporters think registering a business name in another country will protect their trademark or trading name but that might not be the case.
Kylie van Heerden, a commercial partner at Sharp Tudhope lawyers, adds that the distribution contract must specify IP rights and that the exporter is not giving them away.
Using a lawyer
France reminds exporters that they require a lawyer who knows about international trade and has contacts overseas to provide in-country legal advice about tax, warranties and consumer rights, for example.
All the lawyers quoted in this article belong to legal networks they can refer clients to overseas. A client of Kent France’s visiting Canada to check up on the machine they were having made there phoned him to say it wasn’t being built correctly or to schedule, and they needed a lawyer on the ground. France got them into a nearby Canadian lawyer’s office the same day.
When it comes to an exporter engaging a worker in the market, as an employee, consulant or agent, rules vary. For example, the EU has different rules from many jurisdictions about terminating contracts with commercial agents.
“This can be a nasty surprise.”
To avoid more surprises, freight terms need to align with insurance, financing and general terms of trade agreements.
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“A lawyer has the skill set to ensure they all match,” says France.
Businesses planning to export should consult a lawyer early on to avoid problems. Steve Rutherford, a partner at Rogers and Rutherford lawyers, says the time to consult is not the minute the business idea occurs but once negotiations with others look like they are going to happen.
He’s seen businesses spend six-figure sums on litigation over contractual defects that were avoidable.
“Clients are often unaware of the issues that can arise down the track.”
He says large distributors may hold the bargaining power and will generally want contracts to be prepared by their lawyers and for their country’s law to govern. A New Zealand lawyer can give overseas-generated contracts the once-over and address some issues, but often it’s not just what’s in a contract, but what’s not in it.
“People in the US, for example, can be brutal in business,” Rutherford cautions. “Be professional, friendly and obey the law, but cover your own back at every point.”
Operating by remote control increases the risk of others stealing your IP, or abusing their position in other ways. “Bigger markets are more hostile and competitive, so set things up correctly from the start.” Consider relocating to the market, he suggests.
And while some businesses alter their own template documents for different country markets to try to save on legal fees, Rutherford warns: “you can’t just cross out China and write Korea instead.”
For example, within Australia and the US there is federal law and variation between state laws.
“You can spend $1000 on some basic legal advice or $10,000 for detailed advice, depending on the money you have and the problems that are likely to arise,” says Hazel. “It’s horses for courses.”
Competition rules and fair play
Competition law normally provides traders with a level playing field. Hazel says there are often regulators overseeing such law, but businesses must still ensure competitors don’t cut corners on safety or production standards, or market their products in a misleading way.
Sometimes an exporter must inform a competitor “if you don’t comply with the regulations, we will have to report you to the regulator or take you to court”.
Kent France says labelling is critical: know the local rules about use instructions and warnings, and disclosing what the product contains – always taking in-country legal advice.
The risk of personal injury from using a product is stringently regulated worldwide – and New Zealand is the only country where consumers cannot take a civil claim for injury caused by a third party. Kent France says Australia is at least as tough as America and Europe (at enforcing safety).
Bribery is illegal in most countries including China but commercial and social realities can differ from the law.
“In some cultures that’s the way deals are done,” says France. “But know if you are being bluffed by ‘this is the way we do it here’. Ask someone you trust there if it’s normal business practice, and who will enforce the law if it is illegal.”
Resolving overseas disputes
Legal enforcement costs overseas are often more expensive than in New Zealand, especially in the EU and America where markets and busines’s budgets for legal spending can be huge. In fact it can be eye-watering, France says.
A large multi-national buyer will expect the law of their country to be applied.
Van Heerden aims to draft a contract to be governed by New Zealand law that prefers arbitration or mediation over court, but this needs to be agreed upfront and a court can override jurisdiction clauses.
If parties in different jurisdictions cannot agree on the governing law, an international mediation service is available.
Rutherford adds that in US courts the loser does not have to contribute to the winner’s legal costs, unlike New Zealand. “So in the US people may be more likely to bring and defend proceedings because they are not exposed to the other party’s costs if they lose.”
But Wells sums up, “It’s more than what’s strictly legal that determines whether an exporter succeeds (in business)!”
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