Legal Aspects of an International Trade Business

(Or How to Succeed Without Worrying, Thanks to a Good Lawyer!) By Daniel C. Fleming, Esq.


For the uninitiated, international trade can be daunting and overwhelming. The purpose of this seminar is to give you confidence therapy. Armed with my brilliant ideas, I have no doubt that each of you will succeed in international trade and become famous. Many beginners incorrectly believe that their business is too small to compete on a global level. Not so! Maybe they fear the field is too dangerous and risky a business venture for an operation without a formal international trade division or the capital to open foreign offices and develop a foreign market. However, these perceived fears are actually far from the reality of the international market today.

The international market is waiting to be plundered by you. It is ripe with opportunities and potential profits for anyone willing to invest time and effort more than anything else. Take, for example, the current growth pattern of the world’s population. The population of the United States comprises little more than four percent of the world’s population and is growing at a comparatively slower rate. The population of developing countries is growing at exponential rates and this huge global market is largely untapped. One statistic estimates that 85% of the United States’ exports come from only 250 companies!

Even for small businesses, this huge global market has a relatively open field. It is a new world economy where trade barriers are slowly beginning to crumble and technology and communication are leveling forces. These global demographic and economic changes make it an especially opportune time for a domestic business or even a single entrepreneur to venture into international trade.

The small business has a distinct advantage over mega-companies in breaking into this field. Self-anointed global guru John Naisbitt calls this the “global paradox.” According to Naisbitt, small companies are better suited to do business in the new world marketplace since they are more flexible, less bureaucratic, more dynamic and often more innovative. In fact, the solo player, even novice solo player in international trade, can fare just as successfully as the larger import/export businesses with the aid of some technology, contacts, research, and of course, a good lawyer! Clearly, this is an opportune time for any small business or small player to venture into international trade and to reap the many advantages of the field such as travel, networking and enormous profit potential.

 Getting Started in the Global Market

There are two basic issues to consider when getting started in import/export: (1) business structure and (2) business contacts. Business structure generally refers to and is tremendously determined by your role in the importing and exporting of goods. In the simplest terms and for our purposes, the four major players are defined below:

(1) Importer – person or entity that brings in foreign goods or services into the country for its own use, but more often for resale.

(2) Exporter – person or entity that sells their own goods or services to foreign buyers.

(3) Import/Export Merchant – person or entity who buys goods or services from one country for the purposes of resale in another country.

(4) Import/Export Management Company (IEMC)- essentially a person or entity that serves as the middleman in deals between importers and exporters. The person or entity may serve as an import management company (IMC) by setting up deals between domestic businesses and foreign suppliers. Alternatively, the person or entity may serve as an export management company (EMC) by setting up deals between domestic suppliers and foreign buyers. Finally, this person or entity may serve as an import/export management company (IEMC) by setting up deals in both directions.

Of the four structures/roles listed above, the IEMC offers advantages particularly for the small business or solo player since there is little need to spend huge amounts of capital to purchase goods first, and then to tie up the capital waiting to sell these goods. The IEMC functions exclusively as the middleman in deal negotiations and profits only when a deal is closed. In this respect, the IEMC must be knowledgeable about trade, good at negotiators, and have an extensive contact list.

Once the business structure is determined, the second basic consideration is business contacts, which is especially important for IEMC’s and others just starting out in this field. There are four major and preliminary contacts to be established by the IEMC:

(1) Customs Broker – This contact is particularly important to establish for importers since the broker’s job is to have special professional knowledge about customs regulations and tariff schedules and to file the necessary paperwork, and as such to ensure that imported goods pass through customs with minimal tariffs, delays and problems. Granted, it is not essential to retain a customs broker for an IMC, but by doing so the burden upon you to have this special knowledge is lessened and shifted to an expert.

(2) Freight Forwarder – This is an in-house person at a manufacturer, independent shipper, or contracted shipping line company whose job is to ensure that the delivery of goods arrives intact. The freight forwarder must have special knowledge of shipping options and prices. Again, it is not essential to have such a contact, but highly beneficial since it once again saves you time and relieves you of this burden.

(3) Commercial Bank – It is essential to establish a banking relationship with a commercial bank that has familiarity with international trade, deal structuring, and deal financing. Make sure your bank has a letter of credit department. A special consideration for businesses specializing in trade with one specific region is developing a banking relationship with a bank in that region since they will already be familiar with that market and have open lines of communication in that region.

(4) Manufacturer’s Representative – For importers, they function essentially as independent salesmen who promote and sell your imported good to retailers. Manufacturer’s representatives function more so as their name implies in exporting. Often, these people representing domestic manufacturers seeking to expand into the international market will approach exporters.

All of the above contacts are especially beneficial, and virtually essential for any individual or small business getting started in the field. By establishing and maintaining these contacts from the onset, you save time and hassle by leaving the legwork and details to experts.

 General Overview of International Trade Financing: Letters of Credit

A letter of credit substitutes the credit of a bank for the credit of an applicant. Specifically, it is a written instrument issued by banks stating that payments will be made on behalf of applicants to beneficiaries, provided that the beneficiary fulfills all of the conditions described in the letter of credit. The typical bank customer for a letter of credit is someone engaged in international trade and who is a purchaser of international goods. According to the Uniform Customs and Practices for Documentary Credits (the “UCP”), a letter of credit is “an arrangement, however named or described, whereby the issuing bank acting at the request and on the instructions of its customer (the applicant for the credit): is to make payment to or to the order of a third party (the beneficiary) or is to pay or accept bills of exchange (drafts) drawn by the beneficiary, or authorizes another bank to effect such payment, or to accept and pay such bills of exchange (drafts) or authorizes another bank to negotiate against stipulated document(s), provided that the terms and conditions of the credit are complied with.”

The parties involved

A letter of credit is three-dimensional since it traditionally involves three parties: a bank (the issuing bank), a customer on whose behalf the letter of credit is issued (the applicant), and a person to whom payment from the letter of credit will flow (the beneficiary).

How letters of credit work

The bank receives fees for issuing and handling letters of credit. In issuing the letter of credit, the bank becomes entitled to reimbursement from the applicant for any payments that the bank makes. The applicant may provide collateral to the bank to secure the repayment of the reimbursement obligations, or the bank may use the customer’s line of credit with the bank to obtain reimbursement.

A typical letter of credit applicant is an importer of goods who has been requested by the seller to provide a letter of credit, usually covering a specific order. The applicant’s bank issues a letter of credit at the applicant’s request within a line of credit held at its disposal. The letter of credit constitutes the bank’s irrevocable obligation to pay the seller (beneficiary) at sight against documents stipulated by the applicant. The documents usually include shipping documents that enable the importer to take delivery of the goods. The issuing bank incurs a contingent liability until such time as documents conforming to the letter of credit terms are presented.

The letter of credit is forwarded to the beneficiary directly or through a correspondent bank in the beneficiary’s country (the advising bank). It is a self-contained instrument, and compliance is determined solely by whether the required documents appear on their face to conform to the stated terms. Accordingly, the beneficiary can determine before shipment whether a letter of credit must be amended to conform to the underlying commercial contract and request such an amendment.

Usually, a required document would be a transport document (ocean vessel bill of lading, airway bill, or parcel post receipt) consigned to the issuing bank. This way, the issuing bank has control of the goods at issue at the time it has to make payment on a draft.

Federal banking authorities have set forth the following five standards for banks to follow when issuing letters of credit:

(1) Each letter of credit should be conspicuously entitled as such.

(2) The letter of credit should have an expiration date.

(3) The bank’s undertaking should be limited in amount.

(4) The bank’s obligation to pay should only be on the presentation of specified documents and should not involve the bank in disputes of fact or law between the account party and the beneficiary.

(5) The customer should have an unqualified obligation to reimburse the bank for moneys paid under the credit.

Documents, not merchandise or performance

The bank deals in documents only, not merchandise or performance. Therefore, the bank cannot ensure that the underlying transaction has been fulfilled to the satisfaction of the applicant. In letter of credit transactions, banks are concerned with representations, not with ultimate truth. When all stipulated documents are presented, the issuing bank must pay the beneficiary. Therefore, the applicant (the bank’s customer), cannot rely on the letter of credit for protection from the beneficiary’s performance problems.

The bank’s responsibility is only to examine documents with reasonable care and to ascertain that they appear to comply with the requirements of the letter of credit. Thus, once the letter of credit is issued, the applicant faces the risk that the letter of credit may be paid through improper and even fraudulent actions of the beneficiary. The bank, however, cannot refuse to pay on the letter of credit based on such actions unless those type of actions are stipulated as conditions on the letter of credit instrument itself.

This is often a source of confusion for the unsophisticated importer, who may ask the bank not to pay on a letter of credit due to disputes with the exporter/beneficiary, or due to the fact that they changed their mind about the transaction. As much as the bank may want to cooperate with the importer, it cannot do so. Its role is confined to the review of documents. Although many large companies are quite familiar with the letter of credit process, the smaller businesses will be very dependent on the bank’s letter of credit department for expertise in international trade. Again, however, the bank’s sole role is to determine whether presenting drafts are accompanied by the documents required by the letter of credit and whether all conditions set forth in the letter of credit have been satisfied.

Restriction on amendments to issued letters of credit

Once a letter of credit is issued, any suggested amendment must be accepted by all parties to the transaction (in other words, to the issuer, applicant, and beneficiary). Otherwise, a court will construe the amendment as unilateral and completely unenforceable. For this reason, letters of credit are considered to be irrevocable.

Commercial Letters of Credit

Commercial letters of credit are trade related and they are used to carry out specific trade transactions involving the sale or purchase of goods. Sellers want to know that if they deliver the goods that they will be paid. A letter of credit from a commercial bank gives the seller (the beneficiary), the assurance that payment will be made. By providing this assurance, the bank takes on the credit risk, instead of the buyer of the goods. This kind of letter of credit creates a contingent liability for the issuing bank since it is the only party that is liable to pay when the required documents are presented.

In order for a seller-beneficiary of goods to claim payment under a letter of credit, the beneficiary’s documents must conform exactly to those required by the letter of credit. The letter of credit sets forth many details including the description of the goods, insurance and form of notification. Every letter of credit will also specify two key dates: the expiry date and the payment date.

A. Expiry Dates

Every letter of credit has a date of expiration. In the absence of other set dates for shipment or presentation, the expiration date is the last possible date by which the beneficiary may ship goods and present document to the specified bank for payment. Generally, a commercial letter of credit should expire within 120 days (4 months) of issuance. There may be cases, such as a letter of credit covering the payment of goods shipped from different overseas ports for an unusual item, in which the time needed to complete and ship the goods is more than 120 days. However, this will be unusual and when it does happen, the bank should view the longer shipment period as a warning sign of a possible problem.

B. Payment Dates

Most of the time, requests for payment under a letter of credit are made via a “draft” form and any other required documents sent by the beneficiary to the issuing bank. The draft is an order to pay and is a specific type of demand for payment. The letter of credit will often specify payment at “sight.” This means that upon receipt (sight) of all conforming documents, the bank will immediately pay the draft and debit the applicant for the amount at issue.

C. Pros and Cons of Commercial Letters of Credit

For beneficiaries, commercial letters of credit are a very useful form of protection. Sellers of goods can open new markets without worrying about the financial strength of new customers, and they do not have to investigate the credit of smaller customers. The prospect of fraud by a beneficiary always exists. A beneficiary might decide not to ship the goods at issue and simply present fraudulent documents to the issuing bank to receive payment.

Notwithstanding the fear of a fraudulent beneficiary, the commercial letter of credit is a useful tool to applicants, as well. Applicants may be able to purchase certain goods only through a letter of credit. The applicant can also control the shipment date and lot size of the goods through the letter of credit. Quality, however, is something that is beyond the scope of a letter of credit.

For the bank issuing a letter of credit, the following are risks that should always be analyzed:

(1) Credit Risk: The bank will be underwriting the applicant’s credit risk unless the letter of credit is secured by cash.

(2) Issuance Error Risk: If the bank prepares a letter of credit with terms that are different from those set forth in the application for the credit, the bank will face financial exposure for departing from the application. The solution is to merge the letter of credit with the application; in other words, make the applicant sign off on the letter of credit.

(3) Payment Error Risk: If the bank fails to properly check documents, the bank may make an error in paying against documents. The most common area for this kind of error is in the description of the goods. As an example, if the letter of credit describes the goods and says the goods are yellow in color, but the invoice does not state a color, the bank will be liable for the applicant’s loss if it pays on this letter of credit.

(4) Discrepancies: There is almost always something wrong with every letter of credit that would justify the bank in refusing to honor a presented draft. However, unless the bank wants to risk compromising its relationship with customers and correspondent banks, it is best if the bank notifies the beneficiary to cure the deficiency before the letter of credit expiry date. Also, the applicant may nevertheless waive the discrepancy, and such waivers should be made by the applicant in writing to protect the bank.

D. Types of Commercial Letters of Credit


1. Documentary Letters of Credit

This is the most common form of commercial letter of credit. The letter of credit, as discussed above, will usually require that drafts presented under the credit be accompanied by certain documents. Payment is made to the beneficiary as soon as the draft and the appropriate conforming documents are presented to the issuing bank.

2. Clean Letters of Credit

If the letter of credit conspicuously states that it is a letter of credit or is conspicuously so entitled, the beneficiary’s draft must be honored without the presentation of documents if the letter of credit does not specify that documents have to be presented.

3. Banker’s Acceptances

A banker’s acceptance exists when a letter of credit is drafted with time payment terms, instead of sight terms. Banker’s acceptances create a much higher risk for banks than documentary letters of credit. Standard commercial letters of credit, as mentioned above, create contingent liabilities for the bank. Banker’s acceptances, however, create actual liabilities for the bank.

If a letter of credit states that payment is due “90 days on sight,” this means that payment is not made to the beneficiary until 90 days after the bank receives conforming documents. This is different from the practice under a standard documentary letter of credit, where documents are presented by the beneficiary and inspected by the bank. The is automatically paid by the bank assuming all conforming documents are presented, and the applicant must automatically reimburse the bank.

When the letter of credit contains time terms for payment, known as a banker’s acceptance, the series of events that unfold is different. As in the standard documentary letter of credit practice, the beneficiary presents to the bank all conforming documents and the bank inspects those documents. However, unlike the standard documentary letter of credit practice, assuming that the documents are conforming, the bank stamps “accepted” on the face of the beneficiary’s draft order for payment. The bank is now obligated to pay the face amount of the draft to its holder (commonly the beneficiary) at maturity. The maturity date of the accepted draft (now a “banker’s acceptance”) will conform to the payment terms specified in the original letter of credit. In other words, if the letter of credit payment terms were “90 days sight,” the maturity of the draft will be 90 days after the documents are presented and accepted. Following acceptance of the draft, the documents (and thus title to the goods) are released to the applicant. However, the applicant has no obligation to pay the bank for the goods that have been released to it until one day prior to the maturity of the draft.

The main reason for using a banker’s acceptance is to take advantage of the delayed payment mechanism. The applicant can obtain release of the goods and then sell them before having to pay for them. The beneficiary seller likes the banker’s acceptance because it provides more flexibility to its customer, the applicant, without compromising the guarantee of payment from the commercial bank issuing the letter of credit. Virtually all of the downside to a banker’s acceptance deals with the bank’s risk. In effect, the bank is making a 100% advance on inventory by surrendering the goods to the applicant before reimbursement is made on the letter of credit. One way of protecting against this risk is to obtain other collateral from the applicant.

4. Revolving Letters of Credit

These are similar to but different from revolving lines of credit. If an applicant plans to make multiple purchases from one beneficiary, a revolving letter of credit may be used. The bank sets a maximum amount covered under the revolving letter of credit and the beneficiary can then make multiple shipments up to the limit of the revolving letter of credit. As shipments arrive and the applicant reimburses the issuing bank, new availability opens up that the beneficiary can ship against.

5. Partial Shipments

Here, the letter of credit does not prohibit or limit partial shipments. As a result, the beneficiary may ship goods as they become ready and may obtain payment for whatever portion of the goods that are shipped.

6. Installment Letters of Credit

Under an installment letter of credit, the applicant controls the number and size of partial shipments. The letter of credit specifies the installment of goods that must be shipped. If the beneficiary misses the deadline for one shipment, the remaining installments are canceled.

7. Back-to-Back Letters of Credit

The main function of a standard letter of credit is to ensure payment. However, in a back-to-back letter of credit, the main purpose is to provide financing. This is a high-risk transaction. By way of illustration, the bank’s customer may have a letter of credit under which he is the beneficiary. The bank’s customer then applies to the bank for a letter of credit, using the first letter of credit under which he is the beneficiary as collateral for the repayment of letter of credit for which he is the applicant.

8. Export Letters of Credit

With an export letter of credit, the bank becomes an advising bank, and the bank’s customer becomes the beneficiary (exporter). The bank receives a letter of credit from a foreign correspondent representing the applicant. The bank then authenticates and mails to the customer the original letter of credit and a cover memo stating that a letter of credit has been established in his favor for the export of the goods. Once the beneficiary, the bank’s customer, has a draft and the documents are in order, as specified in the letter of credit, the documents will be negotiated and sent to the foreign issuing bank for examination and payment. Once the funds are collected, a deposit will be made to the customer’s account. The beneficiary should be informed of the deposit immediately.

9. Bills of Exchange and Trade Acceptances

Bills of exchange are similar to but different from sight drafts drawn under commercial letters of credit. In a bill of exchange, there is no letter of credit (in other words, the bank does not guarantee payment) and the draft order for payment represents an obligation of the importer only.

Extended terms can also be arranged through bills of exchange that convert to trade acceptances when accepted by the importer (again, there is no guarantee by the bank). In these cases, the bill of exchange is drawn under time terms, just as banker’s acceptances are. Instead of the bank accepting the documents and guaranteeing payment, however, the trade acceptance represents an obligation of the importer only. Trade acceptance financing is much cheaper than banker’s acceptance financing and may be acceptable to the seller (exporter), provided the seller has a great deal of confidence in the buyer (importer). The bank can obtain fees for processing documents, referred to as foreign collections.

E. Standby Letters of Credit

The difference between commercial letters of credit and standby letters of credit can be reduced to one word: default. Commercial letters of credit typically involve payment under a contract of sale. Payment is made upon presentation of conforming documents purportedly evidencing the movement of goods, the satisfactory performance of the beneficiary. The shipping documents triggering payment are standardized and enjoy nearly universal acceptance and use. In contrast, however, standby letters of credit can take the form of a surety device. Specifically, they become payable to the beneficiary upon the assertion of the applicant’s nonperformance. The beneficiary of a standby letter of credit can trigger payment simply by making an assertion that a breach of performance has occurred. It is very difficult to draft a standby letter of credit in such a way that gives the applicant any protection against having the letter of credit drawn upon.

Commercial letters of credit are expected to be paid by the issuer. Payment is consistent with normal performance. With a standby letter of credit, however, the bank does not expect to pay. Payment demands under a standby letter of credit usually mean that something is wrong. Because the standby letter of credit is only paid when there is a problem, it is probably true that the applicant does not want the standby letter of credit paid.
Commercial letters of credit usually follow a pattern with the same documents accompanying the draft in case after case. The standby letter of credit follows no such pattern. A standby letter of credit is in substance a loan by the bank issuing it. However, it poses much more danger than a loan agreement presents. With a loan, a bank can immediately move against collateral once an event of default has occurred. With a standby letter of credit, the bank may have to wait until the standby letter of credit is drawn upon by the beneficiary before moving against any collateral. This is so even if the bank knows that the applicant’s financial condition has deteriorated to the point where there soon may be nothing left.

Trade Finance

Trade financing under letters of credit are usually self-liquidating. This means that as the goods move from inventory to the ultimate buyer, payment received by the applicant is used to repay the bank. Typically, the applicant reimburses the bank on the letter of credit payment by an advance on a revolving credit agreement. By the time the applicant has received payment on the goods brought in under the letter of good that he sells to his ultimate customer, the advance on the revolving credit agreement that was used to reimburse the bank is due.

Protecting Your Intellectual Property

A. Defining Intellectual Property

Entry into the global market warrants special consideration for intangible goods, more commonly known as intellectual property. Just as tangible goods and products are protected by trade regulations against wrongful trade and resale, intellectual property is also protected against abuse and piracy.

Before any discussion of the trade related aspects of intellectual property, it is important to define intellectual property. Unlike tangible real and personal property, intellectual property is intangible, however, like real and personal property, the name itself implies ownership of some sort. With intellectual property, ownership takes the form of authorship, creation and invention. And so intellectual property encompasses many things such as trademarks, corporate or business names, patents, copyrights, trade secrets and designs.

B. Types of intellectual property and protected works

Copyrights – literature, art, music, choreography, maps and technical drawings, photography, audiovisual work, (cinema), and often computer programs.

Patents – inventions, trademarks, service marks, industrial designs, living organisms and protection against unfair competition.

Unfair competition

Acts that cause confusion;

Discrediting and false allegations;

Misleading allegations, especially related to the manufacture, quality or quantity;

Acts that unlawfully acquire, use or disclose trade secrets

Acts that weaken the impact of another’s mark.

Copyright, Patent and Unfair Competition law gives owners of intellectual property important rights. For example, copyright protection permits only authorized uses of a work from the owner of the copyright like the right to copy, distribute and/or rent copies, perform in public and adapt a work. An owner, author, creator, inventor, or designer of intellectual property is afforded control of the use, sale, licensing, or transfer of this property at his/her own discretion, just as the case with real property.

Almost all nations have some sort of laws and regulations preventing the wrongful use and sale of intellectual property, as well means to enforce these laws and remedies to redress a violation of law within its own borders. There is no such thing as an international copyright or international patent, or uniform international laws pertaining to intellectual property rights. Protection of intellectual property varies from country to country; however, several international treaties and agreements exist that offer basic international protection to its member states. You will find that many third world countries are not signatories to these treaties and that they are the worst violators of intellectual property rights.

C. Berne and Paris

There are two fundamental international agreements that address both copyrights and patents, the Berne Convention for the Protection of Literary and Artistic Works (“Berne”) and the Paris Convention for the Protection of Industrial Property (“Paris”), respectively. Both agreements were adopted in the late 19th century, but have since been amended many times. Today, more than 100 member nations have signed each of these agreements, forming what is known as a “Union.”

A nation is sovereign and has its own copyright laws and regulations to protect its own citizens; however, this same protection may not be offered in foreign states. Berne established protection of intellectual property rights regardless of country, so long as the foreign country is also a member of Berne. Unique to Berne is its undergirding principles of national treatment, automatic protection, and independence of protection. National treatment refers to a policy of non-discrimination regardless of reciprocity. Simply put, copyright owners in a member nation must be granted the same level of protection as native copyright owners in a foreign member nation when seeking protection abroad. For example, an American copyright owner seeking protection in Canada must be granted the same protection as Canadian copyright owners. The second principle of Berne is automatic protection. Protection cannot be dependent upon any formality of registration; it must be automatic. Finally, independence of protection is the third principle of Berne, meaning that the member state will make its own determination independent of what other foreign states might do with the same information.

With respect to patents and trademarks, the Paris Convention is the landmark international agreement offering international protection. Like Berne, Paris is based upon the same principle of national treatment and thus ensures that foreign patent holders are granted the same protection as native patent holders. Similarly, Paris also offers independence of protection. If one member state issues a patent to an applicant, other member states are not obligated to also grant a patent. Conversely, a patent cannot be denied on the basis that it was denied earlier by a different member state. Trademarks are likewise independent. Trademark application abroad cannot be denied because its registration was denied or expired in the originating country. If such an application has been filed in the originating member country, its registration abroad must be granted upon request. However, unique to Paris is the principle of right to priority. Under this right, a patent application filed in one member state is given priority in other foreign member states. Filing in one state creates a grace period of twelve months in which the applicant may file applications abroad. If filed within this twelve-month window, the subsequently filed applications are deemed to have been filed on the date of the first original filing. Thus, any competing applications filed by another applicant in this time frame are denied since priority is given to the first filer.

D. Agreement on Trade Related Aspects of Intellectual Property Rights

Both Berne and Paris formed the basis for many subsequent international agreements, particularly by establishing the principle of national treatment. One prominent succeeding international agreement is the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). This agreement expands upon the framework constructed by Berne and Paris, but its two most significant features are its more comprehensive guidelines for enforcement against infringement and the principle of material reciprocity. While adhering in spirit to the notion of national treatment, TRIPS opens the door for material reciprocity. Thus, it benefits a country to grant a foreigner the same protection as its nationals if this country demands the same treatment in return. According to some policy makers, this feature allows for greater international protection since protection is implicitly mutual and reciprocal between member states. Because of the greater protection, international trade of intellectual property increases.

This connection between protection of intellectual property and international trade is a remarkable feature of TRIPS. In fact, the stated objective of TRIPS is based upon the belief that “the protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and user of technological knowledge in a manner conducive to social and economic welfare, and to a balance of rights and obligations” (TRIPS, Article 7). This connection between protection of intellectual property, innovation and international trade must be considered for any person or entity doing business abroad even if on a small scale. Protection of intellectual property affords the owner greater control as to the sale, resale, use, distribution and licensing of its goods, which in turn encourages transfer of technology, international trade and investment, and economic development; which in turn encourages further innovation.

Resolving International Disputes 

In spite of the new provisions of TRIPS that described guidelines for enforcement, international disputes and questions of control and ownership and transfer of intellectual property rights will inevitably arise. At times, the civil and criminal procedures outlined in TRIPS may offer sufficient guidance for dispute resolution, however, there may be instances where court administration is undesirable. In addition, businesses involved in international trade may become embroiled in disputes over payment, delivery and the like. In such cases, the International Chamber of Commerce (ICC) can serve an important role.

The ICC is a world business organization with a membership of more than 7,000 companies and associations and over 130 countries. Its purpose is to promote international trade and investment and the market economy system, but one unique function of the ICC is to serve as world’s foremost institution in the resolution of international business disputes through the ICC’s own International Court of Arbitration. The Court of Arbitration is not actually a court, but the administering body who ensures adherence to the ICC’s Rules of Arbitration and Rules of Conciliation.

Arbitration and conciliation are two forms of alternative dispute resolution (ADR). ADR seeks other means to resolve disputes apart from traditional court proceedings and litigation and is increasingly an attractive option since it is almost always cheaper and less time consuming than litigation and perceived to deliver better results. In fact, international arbitration by the ICC is especially appealing since its arbitral awards are granted more international recognition than traditional national court judgments. Conciliation does not even resort to an arbitrator, but relies wholly on the cooperation of the disputing parties with the conciliator to reach a settlement, rather than an arbitral award.

A. International Court of Arbitration

In ICC administered arbitration, the ICC Court of Arbitration serves the following nine major functions:

(1) Determine if there is a legitimate reason for arbitration;

(2) Determine the number of arbitrators;

(3) Determine who will serve as arbitrator(s);

(4) Determine the location of arbitration;

(5) Determine the time frame for such arbitration;

(6) Settle challenges against the arbitrator(s);

(7) Ensure that the arbitrator(s) are adhering to the guideline of the ICC Rules of Arbitration;

(8) Determine arbitrator(s) fees and expenses; and

(9) Examine arbitral awards.

B. International Court of Arbitration and Conciliation
ICC administered conciliation differs from arbitration in that it is less formal, overseen by a conciliator, and is meant to reach a settlement or compromise. Also, the role of the ICC Court of Arbitration is smaller in conciliation since it only entertains requests for conciliation, appoints a conciliator and determines in advance the fees and expenses for such conciliation.

Though the role of the ICC Court of Arbitration is smaller in conciliation, the conciliator plays a larger role than an arbitrator does. The duties of the conciliator is to:

-Determine the place of conciliation;

-Hear the respective arguments for the disputing parties;

-Oversee the conciliation process at his/her own discretion;

-Request additional information, if needed, from either of the disputing parties;

-Provide the ICC Court of Arbitration with the final settlement agreement or a report stating that conciliation attempts failed.

Foreign Corrupt Practices  

Besides enforcing the terms of your contractual agreement, those wishing to do business abroad must remember the extraterritorial effects that American laws have upon United States citizens and United States businesses. The Foreign Corrupt Practices Act (FCPA) is a federal law that prevents any person or company in the United States from making a corrupt payment to a foreign official to obtain or keep business. In other words, bribery is as illegal overseas as it is in this country for Americans. Any company officer, director, employee, agent of the company, or any stockholder acting on behalf of the company in the United States must abide by the FCPA.

Corrupt Payment to Foreign Government Officials

Corrupt payment is bribery. The anti-bribery provisions of the FCPA prohibit paying, offering, or promising to pay or authorizing to pay, offer money or any kind of consideration to foreign officials. The person making the payment must have a corrupt intent, and the payment must be intended to induce the recipient to misuse his official position to wrongfully direct business to the person offering payment. The FCPA does not require that a corrupt act succeed in its purposes. The offer of a corrupt payment can constitute a violation of the statute.

Penalties for Violations of FCPA: Jail and Substantial Fines

Companies, individual employees, and company officers can pay large penalties for violating the FCPA. Companies who violate the FCPA’s anti-bribery provisions pay fines of up to $1 million, while individuals who act on behalf of the company may pay fines up to $10,000 and serve prison terms of up to 5 years. Fines imposed on individuals may not be paid by their company. The government can also seek civil penalties and an injunction against any act or practice of a firm that violates the anti-bribery provisions.

A person or firm found in violation of the FCPA, or merely indicted, can be barred from doing business with the federal government, and may become ineligible to receive export licenses.

Many American Competitor Nations Must Also Now Enforce Anti-bribery Laws

In 1977 the United States was one of the only countries in the world enforcing a law even similar to the FCPA. However, on November 20, 1997, the 29 member nations of the Organization for Economic Cooperation and Development (OECD) and five nonmember signatories (Argentina, Brazil, Bulgaria, Chile, and the Slovak Republic) adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Convention on Combating Bribery). This convention requires that each signatory enact “effective measures” to deter and prevent their citizens from bribing foreign public officials for business advantages.

The Convention on Combating Bribery is a remarkable victory for the United States. Since 1977, when the FCPA became law, American companies had lost billions of dollars in contracts every year to competitors from other developed countries which paid bribes for business advantages. Foreign governments privately snickered at the self-imposed American business morality that, in their view, approached a corrupt world as though it were a church. While the Convention on Combating Bribery is not perfect, it does put American businesses on a more level playing field with its prime competitors.

Note: The Convention on Combating Bribery has three areas which it fails to address: (1) the failure to include political party officials and other key individuals as bribe takers for purposes of its proscriptions; (2) the failure to require signatory countries to amend their tax laws to prohibit the taking of business tax deductions for government bribes; and (3) the failure to proscribe financial reporting requirements, the absence of which heretofore has enabled some foreign companies to keep their corruption secret.


 Avoiding Possible Violations by Inquiring from the Governmen

The Department of Justice (DOJ) has an Opinion Procedure by which any party may request a statement of the DOJ’s present enforcement intentions under the anti-bribery provisions of the FCPA regarding any proposed business conduct. Under the Opinion Procedure, the Attorney General is required to issue an opinion in response to specific inquiries from a company within 30 days of the request. It is important to note that the 30-day period does not begin until the DOJ has received all the information it requires to issue the opinion.

Conduct for which the DOJ has previously issued an opinion stating that the conduct conforms to its current enforcement policy will be entitled to a presumption, in any subsequent enforcement action, of conformity with the FCPA. Businesses wishing to make such inquiries of the DOJ are best advised to consult with an attorney to facilitate in the inquiry procedure.


Business in the Caribbean Basin

Every subject that has been mentioned in this package also pertains to business in the Caribbean Basin. However, there are certain international trade treaties and agreements that have made doing business in the Caribbean Basin countries more favorable than it has been in the past for American companies.

The Caribbean Basin trade preference is the centerpiece of the Caribbean Basin Initiative (CBI), proposed by the United States in 1982 as a comprehensive program “to promote economic revitalization and facilitate expansion of economics opportunity in the Caribbean Basin region.” The preference and some other less comprehensive benefits were enacted in 1983 by the Caribbean Basin Recovery Act (CBERA). The CBERA has been amended several times, most substantively by the Caribbean Basin Economic Recovery Expansion Act of 1990 (CBI II), which made the CBERA program permanent.

The enactment on January 1, 1994, of the North American Free Trade Agreement (NAFTA) eliminated the advantage that the beneficiaries of the CBERA had enjoyed in trade with the United States relative to Mexico. To mitigate, if not eliminate, the adverse effects that the NAFTA had on CBERA countries, legislation was introduced in the past four Congresses to authorize that imports from CBERA countries receive tariff and quota treatment that is identical with or very similar to that accorded to Mexico under NAFTA. On May 4, 2000 a formal conference report on H.R. 434 was passed in both the House and the Senate and was authorized through implementation by Presidential Proclamation 7351 of October 2, 2000. However, the preferential treatment provided by presidential proclamation became effective with respect to each of its individual beneficiary countries upon determination by the United States Trade Representative. Determination as to whether particular countries have satisfied the customs requirements for duty free treatment is published in the Federal Register. The Federal Register should be checked on occasion because eligibility for duty free treatment may be suspended under the import-relief provision of the 1974 Trade Act or the national-security provision of the 1962 Trade Expansion Act.

What CBERA Means to Importing Businesses

What all this means is that importing businesses may find that many goods receive duty-free treatment, or reduced or preferential duty rates. To be accorded the duty free or reduced-rate preference, an eligible article must be a “product of” (as defined in the U.S. general rules of origin) a CBERA beneficiary country and imported directly from it, and at least 35% of the article’s import value must have originated in one or more CBERA beneficiaries. In this context, Puerto Rico and the U.S. Virgin Islands are counted as CBERA beneficiaries, and up to 15% of the 35% of the article’s qualifying import value may be accounted for by value originating in the U.S. customs territory (other than Puerto Rico).

Duty-free importation of sugar and beef products is subject to a special eligibility requirement that the beneficiary country submit and carry out a stable food production plan to insure that increased production of sugar and beef for foreign consumption will not adversely affect the overall food production of the country. Not part of CBERA, but applicable only to CBERA beneficiaries, is a provision under which any articles (other than textiles, apparel, and petroleum and its products) assembled or processed in a CBERA country entirely from components or ingredients made in the United States may be imported free of duty or quantitative restrictions.

Although textile apparel is ineligible under the CBERA for preferred tariffs, a special access program (SAP) is in effect for apparel assembled in a CBERA country and imported under the “production sharing” tariff provision (i.e., with regular duty rates applied to a duty-based excluding the value of United States origin components) provided it is assembled from fabric formed, as well as, cut in the United States. Such apparel may be imported from CBERA countries in quantities above the regular quotas up to the bilaterally agreed “guaranteed access levels” although not providing a reduction in the duty rate. Guaranteed access levels are in force with Costa Rica, Dominican Republic, El Salvador, Guatemala, and Jamaica.

What CBERA Means to Exporters

Although the CBI was initially envisioned as a program to facilitate the economic development and export diversification of the Caribbean Basin countries, U.S. export growth to the region has been a welcome development. In 1998, U.S. exports to CBERA countries totaled $19.2 billion, up 12.2% over 1997 levels. The United States has run a trade surplus with CBERA beneficiaries every year since 1985. In 1998, the United States trade surplus with CBERA beneficiaries was $2 billion, a 68% increase in 1997. For the first six months of 1999, the U.S. trade surplus with the region was $830 million. Taken together, the countries of the region absorbed 3% of total United States exports in 1998, up from 2.7% in 1995.

Two Sectors of Trade Particularly Geared to the Caribbean

As an American Exporter to the Caribbean Basin there are two areas of prime importance: (a) high technology/ intellectual property products, and (b) United States agricultural products.

(a) High-tech/intellectual property products

CBERA countries, like many other trading partners of the United States are obliged to protect intellectual property rights and prohibit government broadcast of copyrighted material without the express consent of the copyright holders. The CBERA beneficiaries offer a growing market for such exports, as well as high technology. When the CBERA was enacted in 1984, private sector complaints against the potential beneficiary countries were principally directed to the unauthorized interception and retransmission of United States origin signals. United States exports of copyrighted works are important to our balance of payments and are dependent on effective intellectual property rights enforcement.

The United States is placing increasing importance on the availability of adequate and effective levels of the protection for intellectual property rights with all its trading partners including the Caribbean Basin countries. The United States Trade Representative’s office (USTR) is ensuring that developing countries are abiding by the WTO’s TRIPS agreement. Reports on whether particular countries are currently abiding by its TRIPS obligations may be obtained through the USTR.

(b) United States agricultural products

The Caribbean islands imported over $1.5 billion in food and beverage products from the United States in 1996. With more than 18 million land-based tourists, and 21 million permanent residents, the Caribbean islands are quickly becoming a major market for United States food and beverage exporters. In order to engage in the export of agricultural or food products to the Caribbean Basin countries, agricultural exporters are advised to contact the Caribbean Basin Agricultural Trade Office in Miami. The Caribbean Basin Agricultural Trade Office is the focal point for the promotion of U.S. food, beverage, and agricultural exports to the Caribbean region. As part of the Foreign Agricultural Service of the United States Department of Agriculture, their goal is to help companies market United States agricultural, food and beverage products in the Caribbean.

Copyright © 1999 Wong Fleming, P.C.