Frequently Asked Questions on International Transactions – A Regulatory View 


October 2011

The following is the first part of a two-part paper presented at the "International Practice Boot Camp - Nuts and Bolts of Commercial Transactions", a program at the American Bar Association, Section of International Law Fall Meeting in Dublin, Ireland on October 14, 2011.
Q. What are some special considerations that must be taken into account when the international transaction involves the shipment of goods? 

When counselling clients in cross-border transactions involving the international sale of goods, special attention must be taken to ensure that the goods are not subject to export control licences. In analysing the potential returns of a transaction, parties should be advised to take into account the impact of customs, anti-dumping and countervailing duties. 

"Export controls" refers to the broad category of laws and regulations imposed by state government controlling the exports of certain sensitive goods. Controlled goods generally include defence articles and services by aerospace and defence industries. It also includes encryption and other products and technologies that could have both a military and non-military use (commonly referred to as "dual use" products and technologies). Export controls also refer broadly to the trade restrictions imposed by a country on exports to sanctioned countries or persons.

Until recently, companies involved in the international sale of products often discounted the importance of export controls on the belief that they only affected companies involved in weapons related goods and technology. That has changed. The range of export controls and economic sanctions has grown to capture the export of a wide range of dual use technology and products, including the extraterritorial transfer of sensitive technical data.

In the event that an international transaction involves the sale or transfer of specialized goods, equipment or technology, it is important to turn your mind to whether these might be subject to the export control laws of the state of the vendor/exporter. If they do, most jurisdictions will require that the exporter/vendor obtain an export license. In order to do so, most jurisdictions will require it to produce a credible certificate from its importer/purchaser that it will be the end user, and that it will not subsequently transfer the subject goods. Even with an end user certificate, an export license may still be refused if the export control regulator has reason to doubt the credibility of the purported end user.

Determining whether a good is subject to export controls is often not an easy proposition because it not uncommon for export controls regimes to be byzantine. In the US, for example, there are several different agencies administering and enforcing export controls (Bureau of Industry and Security, Directorate of Trade Control, Office of Foreign Assets Control, Commerce Department, State Department and Treasury Department) pursuant to a host of rules, statutes and other free standing regulatory instruments (including the Export Administration Regulations, International Traffic and Arms Regulation, Title 31 of the Code of Federal Regulations and Commerce Control List). 

Getting the answer right is important. A breach of export controls regulations usually involves significant fines and potential criminal liability. Non-complying companies could also find themselves "debarred" and prevented from obtaining future export licences.

In addition to important export control questions, lawyers advising parties to international transactions involving the shipment of goods must also take into account customs duties. Customs duties are the duties and other trade restrictions imposed on the importation of foreign goods into a country. While multilateral and bilateral trade agreements have sought to reduce the scope and quantum of customs duties, it remains that customs duties can be significant, depending on the type of good, the country of import and the country of export.

It is important when advising clients to assess the potential impact of these duties on the importer of the goods (who is responsible for the payment of customs duties). In order to do so, the "origin" of the good must be established. The assessment of the country of origin of goods sounds simple enough, but in an era of diversified and complex supply chains, the assessment can be complicated and can involve the analysis of sophisticated trade agreements and domestic legislation. In addition to the origin of a good, the level of custom duty will depend on its classification (usually in relation to a tariff classification system in the country of import) and the valuation of the good for custom purposes. Again, the issues of classification and valuation can be quite tricky. Failure to get it right can add significant costs to the transaction. 

In addition to the payment of custom duties, exporters and importers need to verify if goods are subject to anti-dumping and countervailing duties ("AD" and "CVD"). These are temporary duties imposed on specific goods from certain foreign states when they are found to be injuriously dumped or subsidized. The rate of AD and CVD can be quite high (sometimes more than 200% of the export price of a good) thus increasing the importance of determining whether such measures are in place in the country of importation in relation to the specific goods being shipped. 

Customs regimes not only impose the payment of duties, they often include a requirement to pay administrative monetary penalties (AMPs) if customs declarations accompanying imported goods are improperly filled out. Again, these can be significant, particularly if mistakes have been widespread and over a long period of time. As a result, when an international transaction involves the acquisition of a foreign business, it is important to include, as part of the due diligence process, a review of the target company's import and export practices to ensure that there is no outstanding liability for export control violations, unpaid duty, or unpaid AMPs. 

Q. How do I minimize the risk that an international transaction is sidelined by a foreign regulator? 

In all commercial transactions, it is important to account for the possibility that a form of governmental approval or regulation critical to the deal may be required to give effect to all, or part of, the transaction. These regulatory approvals, which can include the grant of a specific licence to carry on the business contemplated in the deal, the authorization to conclude the transaction (particularly in the case of a foreign investment or takeover) or transfer an important asset, or the inspection and approval of imported products, can often only be obtained after a transaction is completed. As such, government approvals are not unlike a force majeure, because both have the potential to completely derail a transaction.

Given the potential impact of regulatory approvals, it is important to include a government approval clause in commercial agreements. When dealing with an international commercial arrangement, and the potential requirement to obtain of approval of an unfamiliar foreign government, it is even more important to have a properly crafted government approval clause.

To be effective, government approval clauses should, to the extent possible, identify the specific government approvals which will impact the transaction. The clause should identify the party or parties whose responsibility it is to bear the legal costs, filing costs and any other costs for obtaining the government approvals in question. The clause should identify the extent to which the parties must exercise best efforts to obtain the approval (for example, by negotiating changes to the structure of the agreement, or complying with information or inspection requests from regulators).

The clause should also identify the consequences of non approval. In particular, it should address whether parties are required to bring (and pay for) a legal challenge to a negative governmental decision. Ultimately, the governmental approval clause should specify the circumstances when the failure to obtain a specific governmental approval triggers the termination of the agreement. In some cases, the need for a regulatory approval may be so important to a transaction (particularly involving the acquisition of all, or part of, a foreign business) that it requires parties to hold separate their assets until such time as the approval is obtained, given the difficulties of trying to "unscramble the egg" after the fact.

Q. How do I protect my client in the event of non-performance or breach of an international contract? 

Parties typically enter an agreement confident about the future of their business relationship. Notwithstanding this, it is essential that international commercial agreements contain clearly drafted dispute resolution and choice of law provisions. Without such clauses, a party to an international agreement could see its rights and obligations under the agreement defined in an unfamiliar foreign court based on unfamiliar foreign laws.

The most common approach to dispute resolution in international commercial agreements has been the inclusion of a mandatory arbitration clause, on the theory that it leads to a binding, quick and efficient result, in an informal, private process by a decision-maker who is an expert in the area at issue. 

An arbitration clause can, and often does, form part of the international commercial agreement itself, though it can also be in a separate stand alone agreement. When the clause forms part of the agreement, it is "separable", that is to say that it is viewed as a distinct agreement, separate from the remainder of the agreement that survives if the agreement is terminated or rescinded. 

In drafting the terms of the dispute resolution clause, parties should keep in mind the four essential functions of an arbitration clause:
  1. it must produce mandatory consequences for the parties;
  2. it must exclude the intervention of state courts in the settlement of the conflict, at least before an award is issued;
  3. it must empower the arbitrator to settle the dispute likely to arise between the parties; and
  4. it must allow for the most efficient and rapid procedure leading to an award that is judicially enforceable1. While these principles are helpful, they provide only a starting point for drafting an effective clause. 
Arbitration clauses can be a basic, comprehensive or complex. A basic clause, which is usually used for routine commercial arrangements, will contain, at a minimum, a provision that makes clear that arbitration is the model to resolve disputes. It should also make clear that the arbitration is final and binding, which means that national courts should give effect to the arbitral award but that they cannot hear matters that are within the scope of the arbitration clause. 

The basic clause should then also set out what is arbitrable. If the intention is to limit arbitration to the interpretation of the contract, this narrow scope should be set out. This is usually achieved by stipulating that only disputes "arising out of" an agreement are arbitrable. If, instead, the intent is to have the parties submit all disputes resulting from the business relationship, including tort claims, broader language indicating that all disputes "in any way related to" the agreement are arbitrable.

Finally, in a basic clause, the parties should determine whether the arbitration will be subject to an institutional process such as that administered by the International Chamber of Commerce ("ICC"), London Court of International Arbitration ("LCIA"), American Arbitration Association, ("AAA") or Stockholm Chamber of Commerce ("SCC"). The other alternative is to be subject to an ad hoc arbitration process. Choice of an institutional arbitration benefits from the availability of an institutional structure and pre-established and tested rules of procedure, but there are expensive fees to pay. Ad hoc arbitrations are cheaper but there no institutional quality controls. If opting for ad hoc, it is important to establish the applicable rules of procedure, (usually the ICSID rules, which are not tied to a specific arbitration institution). Otherwise, the procedural rules will be determined by the law of the country where the arbitration takes place.

Beyond these basic provisions, comprehensive arbitration clauses go further and deal with practical considerations such as the method of appointment and number of arbitrators, the location of the arbitration, the requirement that arbitrators be impartial and independent and that they have certain professional qualifications (if necessary). While the wording "final and binding" is usually sufficient to allow a Court to enter a judgment based on an arbitral award, it is useful to have a specific clause stipulating that courts can do so, particularly if enforcement in the U.S. is contemplated. Finally, the issue of costs and interest payable on arbitral awards can be spelled out. 

Complex arbitration clauses may cover such additional issues as the rights to discover the other party, confidentiality of the documents and pleadings exchanged, and the procedure for multi-party arbitrations.

Distinct from the arbitration clause, which governs the who, how and where of arbitrations, an important element of the dispute resolution provisions of an international contract is the choice of law provision. The choice of law provision establishes the law which will be applied by the arbitrator in determining the substantive issues in dispute. Choice of law provisions work best when they simply and unequivocally state the governing law.

Q. How do I ensure that getting involved in an international arrangement does not expose my client to penalties under anti-corruption laws?

Despite all the recent attention to surrounding anti-bribery enforcement, anti-corruption legislation is not new. The U.S.'s Foreign Corrupt Practices Act (FCPA) is one of the oldest and the most known, mainly due to its far reaching impact. It prohibits U.S. companies and citizens, foreign companies listed on a U.S. stock exchange, or any person acting while in the United States from corruptly paying or offering to pay, directly or indirectly, money or anything of value to a foreign official, a foreign political party or official, or a candidate for foreign political office for purposes of influencing any act or decision (including a decision not to act) of such official in his or her official capacity, inducing the official to do any act in violation of his or her lawful duty, or to secure any improper advantage in order to assist the payor in obtaining or retaining business for or with any person, or in directing business to any person. 

The United States is far from alone in targeting corrupt practices. The UK Bribery Act came into force on July 1, 2011. The UK Bribery Act is stricter than its quarter-century old US counterpart, in that it reaches beyond dealings involving foreign officials and applies to conduct between private individuals and businesses. Also, those who accept bribes are equally liable as those who offer bribes. Unlike the FCPA, there is no exception for money paid to facilitate the performance by a foreign official of a routine government task.

Generally speaking, anti-bribery laws are meant to be given wide scope. The FCPA contains broad third-party payments provisions by which the actions of foreign subsidiaries and other third parties (such as agents, consultants, distributors, joint venture partners, etc.) can result in FCPA liability to a parent company or the entity engaging the third-party. In other words, companies are not immune from FCPA liability by doing business abroad through others. Moreover, the target of the payment need not be a government official. The FCPA has been applied recently to include state owned enterprises. Moreover, enforcement activities are not limited to dealings with officials in "third world" countries. Recent enforcement activities have focussed on emerging economies such as China.

Given this broad scope, companies dealing internationally should create or revise compliance programs and ensure foreign sales agents are properly trained to guard against corruption. To avoid a potential prosecution, businesses should continually review accounts for unusual payments, inflated invoices, high commissions, and general lack of transparency. Foreign sales agents should be monitored in practice and consideration should be given to the history of corruption in a country and the reputation of a particular consultant. When possible compliance problems are found, they should be reported to the appropriate regulator in order to attract leniency should penalties be assessed. Similarly, a whistleblower policy should be place to promote self-reporting within an organization.

In additional to internal measures, when a business enters into a relationship with a foreign party, the agreement should acknowledge the applicability of the appropriate anti-corruption law. These compliance representations should be put in all agreements, contracts and renewals of contracts with all foreign agents and distributors. Rights to conduct audits of the foreign party's books and records to ensure compliance with representations should also be included. Should a party breach anti-corruption laws, the non-offending party should ensure it has the right to terminate the business relationship. Care should also be taken at the outset to have pre-screening and due diligence procedures for foreign agents as well as a review of what is being done to maintain third-party relationships.

By Martin Masse

"La clause d'arbitrage pathologique", Commercial Arbitration Essays in Memoriam Eugenio Minoli, U.T.E.T. 1974 at 130 as cited in Robert M. Nelson, Nelson on ADR (Carswell 2003).