Doing business in foreign countries: issues that deserve your attention

• Compliance/Data Protection/ESG
• Contracts
• SME

Before entering a new market, a decision maker will consider carefully a number of issues. It is important to ensure that the business launch in foreign markets is well-planned and fully complies with applicable local regulations of particular countries and international law.

Various business models of conducting business abroad

• There are different models of conducting business abroad – with or without physical presence in a foreign country, for instance:
• direct export to local business partners,
• e-commerce,
• license agreements according to which local business partners in the target market have to pay for limited rights to a particular product or service (e.g. for the right to manufacture, promote and sell such a product in their region, for the right to use trademarks, production techniques or patents etc.);
• franchising agreements according to which foreign business partners have to pay for the right to operate an entire business under a particular brand;
• different types of partnership agreements, inter alia, co-promotion and third party promotion contracts,
• joint ventures,
• buying local companies, e.g. local distributors or retailers,
• establishing a daughter company or a representative office abroad, etc.

While choosing a model for conducting business abroad, all pros and cons, including tax consequences, should be weighed taking into account peculiarities of a particular business and local regulations. For instance, some decision makers opt the strategy of their products manufacturing localization in foreign countries in order to reduce logistics costs, gain public procurement contracts etc.

One should also remember that in certain cases business deals related to formation of a joint venture or acquisition of other companies are subject to merger control.

Background checks of business partners

It is recommended to conduct in-depth and detailed Due Diligence of a potential business partner before the launch of cooperation, as well as regular background checks of existing counterparties within the course of long-term cooperation. It is important to check not only a company being a business partner, but also its ultimate beneficiaries, CEO and signatories of the contract.

There are different tools to screen business partners, inter alia sanctions lists (i.e. lists of individuals and legal entities which are subject to sanctions), state registers of the respective country (for instance, the state registers of legal entities and private entrepreneurs, tax registers, registers of debtors, registers of court decisions, registers of persons who have committed corrupt offenses, etc), the embassy in the respective state, publications in Internet, social media, legal partners in the respective country, etc. Of course, the set of instruments, which are available to conduct background check of individuals and legal entities, varies in different countries.

We would also recommend to constantly monitor updates of sanctions lists adopted in respective countries, inter alia in Switzerland, the EU, the US, Canada etc. On 29 June 2022 Switzerland also adopted new sanctions in line with the EU’s latest package of sanctions.

Essential conditions of contracts

It is important to specify in the contract all essential conditions, for instance, its subject matter, price, terms and conditions of the products supply / rendering services, payment conditions, obligations of the parties (inter alia, which of the parties is responsible for obtaining necessary government licenses or approvals), the intended term of the contract, liability of the parties for violating their obligations under the contract etc.

A contract on international sales of goods should specify, inter alia, the INCOTERMS rules (i.e. International Commercial Terms) which will apply to this contract in order to establish:

• the duties of the seller (exporter) and the buyer (importer),
• which of the contracting parties shall bear the costs associated with the shipping of goods from one country to another (i.e. the costs of transport itself and the insurance costs), as well as
• when the seller’s risks are transferred onto the buyer. 

In order to avoid any misunderstanding, it is vital to make it clear in the contract which Incoterms version (for instance, Incoterms 2020 or Incoterms 2010) shall be applied. By mutual consent, the contracting parties choose one of the Incoterms conditions, for instance: EXW (Ex Works [place]), CPT (Carriage Paid to [place]), DAP (Delivered at Place [place]), DDP (Delivered Duty Paid [place]), etc.

Sometimes a correct choice of Incoterms conditions of products supply helps to avoid even unpredictable additional costs and losses. For instance, in our practice there was a case when one company supplied food products to a foreign company under the terms of CIP (Carriage and Insurance Paid ) to a sea port. However, these products were not accepted by the foreign business partner (the buyer) at the sea port as he went bankrupt. The administration of the sea port stored the container with the products for a quite long period of time, and then started to demand from the seller to pay for this long-term storage of the products at the port, as well as to take back the food products which became spoiled during this time. As a result the CIP conditions of the products supply, which were clearly specified in the contract with the foreign buyer, became an only legal argument which helped the seller to avoid both paying for the storage of these products, as well as taking back spoiled products (including costs for such logistics and waste management related to the spoiled goods).

Antitrust & Competition compliance

While negotiating commercial terms and conditions with business partners, it is essential to keep in mind risk zones and red flags of potential antitrust violations in order to be able to identify and assess antitrust risks in time, as well as develop proper risk mitigation tools.

• For instance, a number of antitrust risks may arise in case of:
• resale price fixing (agreements regarding fixed or minimum prices),
• application of discriminatory and non-transparent approach to selection of business partners,
• commercially sensitive data exchange,
• application of territorial restrictions (market sharing),
• restrictions of sales of competing or non-competing products,
• exclusive distribution,
• selective distribution,
• application of incentives (e.g., discounts, compensations, bonuses, credit limits, special payment terms, etc.).

Each particular case should be analysed taking into account applicable regulations of a relevant jurisdiction as well as relevant law-enforcement practice.

Anticorruption compliance

Each country has its own anticorruption regulations which are aimed at combatting bribery. For instance, according to the Swiss legislation a company is criminally liable for an active public or private bribery, despite of the criminal liability of an individual who committed corruption, if such a company failed to take all reasonable organizational measures which are required to prevent a corruption offence committed in favour of its commercial activities. In such a case a fine for the total of up to CHF 5 million may be imposed.

Besides, anticorruption legislation of some countries (for instance, the US Foreign Corrupt Practices Act (the FCPA), the UK Bribery Act and the French Sapin II) have the extraterritorial force, i.e. also apply to foreign companies. For instance, in the year 2020 a fine for the total of $2.1 billion was imposed on Airbus SE, a company based in France, for the US FCPA violation, i.e. for using third-party business partners to bribe government officials, as well as non-governmental airline executives in different countries.

Thus, it is vital to include into contracts proper wording of anticorruption clauses, taking into account requirements of both applicable local anti-corruption laws, as well as extraterritorial anticorruption laws (i.e. the US FCPA, the UK Bribery Act, the French Sapin II). Such clauses, inter alia, should provide for termination of the contract in case of the corruption offenses.

Personal data protection

Personal data protection and international trade in goods and services are closely connected, especially in the current times of digital commerce.

A lot of countries have their own legislation regulating personal data protection. Besides, the General Data Protection Regulation (GDPR) of the European Union is the most strict privacy law in the world. GDPR imposes a number of obligations on companies operating in any country (even outside the EU), if they target or collect data related to people in the EU.

Besides, the fines for violating the GDPR are very high and may reach EUR 20 million or 4% of global revenue (whichever is higher). Moreover, the data subjects may demand compensation for damages. Thus, if a company processes the personal data of the EU citizens or residents, or if it offers products or services to such people, such a company must ensure its compliance with the GDPR even if it is incorporated in a country outside the EU.

Intellectual property rights protection

If a contracting party intends to transfer intellectual property rights, the contract should include a well-developed clause on the parties’ intellectual property rights, including the grant of any licenses (i.e., exclusive or nonexclusive), etc.

For instance, in case a distribution agreement is concluded, a number of issues related to the intellectual property rights protection may arise, e.g:

Governing law for the contracts

The governing law (so called “choice of law”) of a contract with a foreign business partner is quite important as it will govern the interpretation and enforcement of the contract.

As a rule, companies try to impose the law of their own jurisdiction as the governing law for contracts. Sometimes such approach may entail long negotiations between the counterparties. This issue should be settled taking into account peculiarities of each particular case. For instance, it is recommended to choose the same governing law to both a contract with a customer and a contract with a critical sub-contractor.

In case a counterparty does not agree to choose the law of another country as a governing law for the contract, other risk mitigation tools may be applied, for instance, carefully drafted payment and delivery terms and conditions of the contract etc. in order to mitigate commercial risks.

In some cases application of the United Nations Convention on Contracts for the International Sale of Goods may be a good mitigating tool for product supply contracts. In such a case it is important to check:

• whether the contracting parties are incorporated in the countries which ratified the abovementioned Convention, as well as
• declarations and reservations which were made by the respective countries while joining this Convention.

Dispute resolution

As a rule, parties to international business contracts prefer disputes to be settled by reputable international arbitration tribunals rather than by local courts. In any case, it is important to specify the dispute resolution mechanism in the contract correctly.

For instance, arbitration clauses shall have clear wording with indication of the governing law, the desired international arbitration institution, its specific rules (e.g., year, edition or version of the rules), place and language of arbitration, number of arbitrators.

Conclusions

It is to ensure that the business launch in foreign markets is well-planned and fully complies with applicable local regulations of particular countries and international law.

While choosing a model for conducting business abroad, all pros and cons, including tax consequences, should be weighed taking into account peculiarities of a particular business and local regulations.

We would also highly recommend conducting Due Diligence (background checks) of both potential and current business partners (including their ultimate beneficiaries, CEO and signatories of the contracts).

While conducting negotiations and drafting agreements with business partners, it is vital to keep in mind risk zones, identify and assess all potential risks, as well as develop proper risk mitigation tools.