Loading Up Your Legal Toolbox
The nice thing about legal issues in your international
business is that you probably shouldn’t do the heavy
lifting: your main role should be to locate and work
with qualified professional advisors!
AS AN ATTORNEY, my first and most important piece of advice for you about international business is to consult with a professional who is specifically qualified to advise you on your proposed business model and the laws affecting your situation.
The ideal advisor will be well versed in the laws and culture of your home-base and target country, know a good deal about your planned activities (selling? buying? outsourcing? partnering?) and have worked with organizations of your size. Beyond these qualifications, this ideal advisor will be well connected, or else will be able to connect you with a suitable corresponding legal advisor in your target country. You may find her or her corresponding attorney invaluable in pointing you to others—bankers, managers or other talent, real estate brokers, etc. So read on, knowing that this section is only intended as a brief survey of the concepts involved to prepare you to ask good questions and develop a broad overview of what support is needed.
A grab-bag of international business
Naturally, your focus as an entrepreneur is mainly on your core business. This section places your business in its legal context as you venture abroad. Depending on your activity, you could run into challenges like these, or something entirely different—hence the need to be informed.
1. Business ownership. In China and most other communist countries, non-citizens are not allowed to own businesses. This requires even major companies like Walmart and Coke to partner with local companies and/or the government of the communist country.
2. Local business practices. What is considered normal business varies greatly from country to country. A standard business practice in one country may be illegal in another country. For example, the customs clearance process in many developing nations involves a series of payments to local officials that would be considered bribery in most industrialized countries.
3. Ongoing conflicts. As you know, many groups of people are involved in ongoing conflicts with other groups of people, based on past events, or on religious or tribal differences. You must factor these situations in when doing business with these groups. For example, companies in many of the Muslim countries will not do business with you if your products have any components manufactured in Israel.
4. Increased regulation by a foreign country. Some countries will substantially increase regulations or standards as a method of setting global policy. For example, most of the Norse countries (Sweden, Finland, Norway) enforce significantly higher environmental standards than are required by any international rules or by most other countries. To do business in these countries you must comply with their environmental standards.
5. Maritime laws. The law of the high seas is the original international law jurisdiction. This area is rife with unique examples and interesting cases. For example, most countries distinguish between cargo transport by a tugboat (push) and a towboat (pull) in terms of contract requirements, taxation and liability. Also, the “flag” a ship flies is the jurisdiction it has registered in, and that dictates the legal system that governs the actions of the ship. Visit any port and you will see international law in action.
An ounce of prevention is worth a pound of cure…
To understand the legal issues you may face in your international business operations, you (or better, your advisor) must do quite a bit of research before you finalize your plans.
• Start with a review of the laws of your business’s home country as they relate to international business dealings.
• Then review the laws and legal system of the foreign country in which you intend to do business.
• Next, review the specific laws or agreements between your country and that foreign country.
• Finally, review the international regulations or standards that may affect your business operations.
If your legal review doesn’t reveal insurmountable obstacles, that’s good news. If you identify problem areas, you’ll need to think through the degree of risk you feel you can take on. If you see opportunities but have reasonable doubts, you may find it worthwhile to reduce the risk through insurance products. Or if you see too many potential problems, be glad you didn’t run into them in day-to-day operations abroad, and perhaps consider a different target market. Just do your homework carefully.
Domestic laws affecting international business
These are the laws of your country that affect both domestic and international business. For example, if you are manufacturing a product in your home country to export for distribution and sale overseas, you will still be required to comply with your local labor and employment laws, such as overtime pay or working conditions, regardless of the laws in the foreign country in which you intend to sell your products. Even if goods or services are leaving your country, that does not release you from compliance with your local laws.
In addition to observing standard local business laws, you will need to verify whether your country places any additional legal requirements or awards special benefits on your particular industry. For example, many high technology products (nuclear energy, aerospace) may have limited international distribution due to national security concerns, while other areas such as food production (corn, coffee) or emerging and critical sectors (renewable energy, transportation) may have programs established to subsidize your business model and aid in the profitability of your business, if it is declared to be in your country’s national interest.
Types of legal systems throughout the world
You probably are quite familiar with the legal system where your company is based. But you may not know much about the system in your target market, and you need to. Each foreign country and region is unique, and each has individual legal systems designed for the benefit of their citizens. Take a moment to familiarize yourself with the basic systems, their strengths and weaknesses, and then identify which system you’ll be dealing with abroad.
Most legal systems fall into three main types:
• Common law
• Civil law
• Religious law
They may operate separately, or you may find or some combination of the three types. Regardless of what you discover, is important to understand the basics about the legal system of the foreign country where you are doing business.
Common law is a system of laws where the legislative branch of government sets out general principles of law and the primary interpretation and development of the specific law is done by judges through court or tribunal decisions. This system is viewed as more complex than the other systems in terms of determining the actual current law, hence the increased need for a qualified professionals. Common law systems cover about a third of the world. Originally developed by the British, it is primarily used by countries affiliated with the British Empire. The primary downside to the system is the research required to understand what the current law is; while the primary benefit of the system is its ability to grow with the times, through application of the general principles to situations that could not have been predicted when the law was originally created.
Civil law is a legal system where the government codifies very specific laws. The judicial branch reviews cases on an individual basis against the codes, but does not give any merit or weight to previous decisions. Civil law systems are generally viewed as easier to understand regarding the status of the current law. Developed in the Roman Empire, it is currently used, in some form, by approximately 150 countries, including China, Russia, Brazil, Argentina, France, Germany, Japan, Mexico and Indonesia. The primary downside is the lag between a new development or issue and its codification into law, while the primary benefit is the straightforward nature of legal understanding.
Religious law may vary with the nature of the religion it relates to. The most common religion-based legal system is Islamic law or Sharia, which is a system of laws based on the principles of the Islamic religion. The primary source for the laws are the Quranic verses and the teachings of Muhammad. For issues not covered, religious scholars and Islamic judges utilize reasoning by analogy to reach decisions. These systems are viewed as religious law, with a high level of variance between the different schools of Islamic belief. This system, or some form of it, is primarily used in the Middle East, North Africa and Muslim dominated countries. The primary downside to the system is the variance in application of the law, especially to non-Muslims, while the primary benefit of the system is the synchronization of the legal system with the belief system.
Civil and criminal law
It is critical to note that in each of these systems, there is a further distinction between the “Civil” and “Criminal” sectors of the law. The basic distinctions are:
• Who can bring the action
• What remedies, penalties, punishments or results can be ordered
Many events can fall into both sectors of the law. There is a great degree of variance between various countries as to how these distinctions apply.
The civil sector generally applies to disputes between individuals, organizations or businesses. The action is brought by a private party, usually the party that has suffered harm. The party must have stake in the outcome of the case. For example, you could not file a lawsuit for someone else on a matter that you are not involved in. The action may be brought against a single party or multiple parties. Generally the party that brings a civil action is called the Plaintiff or Petitioner, while the party on the other side is known as the Defendant or Respondent. The outcome may be decided by an individual, such as a judge or magistrate, or by groups, such as a jury, tribunal or panel. The outcome is stated in terms of liability, so the defendant will be found liable, partially liable or not liable.
The results of civil actions are most often financial, as with compensation for damages, but may also include orders to do or not do a some specific thing, e.g. you must sell your property or you must not sell a particular product. It is very important to note that incarceration is not available in most civil actions. Examples of civil matters include landlord/tenant, product liability, breach of contract or personal injury issues.
The criminal sector generally applies to events that have been deemed illegal or criminal by a governing body. The action is brought by the governing body, usually on behalf of the victim. The victim may not even be required to participate in the legal process. The action may be brought against a single party. Most systems will require that each party charged as an individual will have an individual case. The side bringing the action is known as the Prosecution or Government, and the party on the other side is known as the Defendant. The outcome may be decided by an individual, such as a judge or magistrate, or by a group, such as a jury, tribunal or panel. However, the procedural requirements and standards of proof are often much higher in criminal matters. The outcome is stated in terms of guilt, so the defendant is found guilty or not guilty of the crime they were charged with, or of a lesser crime. The results of a criminal matter may be financial or the use of incarceration or physical punishment. Examples of criminal matters include theft, assault, trafficking or murder.
Laws between countries
Now that you have a basic understanding of the concepts of the various legal systems that could be at play within your target country, let’s look the laws between countries. Generally, the laws governing actions between two countries and the people of each as they interact with each other are established by agreements between the sovereign states. They are known as treaties, protocols, conventions, pacts, etc. Treaties are essentially contracts between the countries. Just like the contracts that your business enters into, they can be specific or general, two-party or multi-party, binding or non-binding, modifiable or non-modifiable etc.
These agreements may be bilateral or multilateral. Bilateral treaties are agreements between two countries and multilateral ones involve more than two countries. The treaties can be very general, with very few actual requirements of action. For example, in the Convention on the Prevention of Marine Pollution by Dumping Wastes and Other Matter (LC ’72), the signing counties just generally agreed that they would discourage pollution through marine dumping and provided a general guide as a reference, but did not require any specific actions or interactions from the signing countries. In contrast, the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) has very specific and binding obligations for the reduction of greenhouse gases by signatory countries.
Please note that even though these agreements are between the individual countries, according to the United Nations Charter, all treaties must be registered with the United Nations (UN) to be valid and enforceable. Individual countries often also have individual processes for the adoption of a treaty into law. For example, in the United States, the executive branch negotiates the treaties, but then the legislative branch must give the final approval.
Finally, changes in the geopolitical climate can have significant effects on local business. One of the main reasons free trade agreements are so controversial is because of their effects on local business, whereby many low-end manufacturing jobs and plants are exported to the lower cost countries. Another example is punitive sanctions. Very often the sanctions are on the import, export or taxation of particular goods or services to the sanctioned country. Thus the imposition of sanctions is usually intended to disrupt business with a given country.
International laws and regulations
International laws are controlled by international intergovernmental organizations, such as the UN, the European Union (EU), World Trade Organization (WTO), International Monetary Fund (IMF) and the International Maritime Organization (IMO). Each of these organizations creates laws and regulations related to their specific purpose. Most of the intergovernmental organizations also create penalties for breaking the laws. However, the power to enforce punishments is limited by the authority conferred to the organization. All intergovernmental organizations derive their authority through the voluntary participation of the member countries.
The vast majority of these countries reserve the right to punish violations of international law, within their own country. Thus, even though there maybe international laws in place, the supposed violations may only be punished if the home country declares the actions to be a violation, then sentences and punishes the guilty party for the violation.
Common examples include certain fishing practices (e.g., drag netting) and whaling. While both have been declared illegal by international law, some countries, such as Indonesia (for illegal fishing practices), and Japan and Norway (for whaling), have specifically decided not to enforce these international laws against their citizens.
Enforcement can also be an issue between countries. Often less developed nations resist being held to same standards as industrialized countries. Typical issues include work conditions, labor laws and environmental standards. The less developed countries point out that the industrialized countries were not held to those same standards while their economies modernized, and that it is inherently unfair to enforce those standards against the currently developing nations.
Other international standards
There are also additional rules and regulations by International Nongovernmental Organizations (INGOs). These include industry-based regulations like trade federations or collectives, and also philanthropic organizations such as the International Red Cross and Amnesty International. These groups are self-regulating. Participation is often voluntary.
The final area of international law to consider in relation to your business operations are the prescribed international standards. These are often sent by INGOs, such as the International Organization for Standardization (ISO) or the International Electrotechnical Commission (IEC), for the purpose of producing technical standards available for use worldwide. The adherence to these standards is often voluntary, but compliance with these standards may also be a prerequisite for entry into major markets. By the way, ISO is something like a brand name. As the ISO website explains, “Because ‘International Organization for Standardization’ would have different acronyms in different languages (IOS in English, OIN in French for Organisation Internationale de Normalisation), our founders decided to give it the short form ISO. ISO is derived from the Greek isos, meaning equal. Whatever the country, whatever the language, we are always ISO.”
Additional considerations
Other considerations you may want to review are the distinctions between goods and services under the various laws you will be subject to in your business transactions. Under the various systems there may be very different standards for personal vs. business liability that you need to be aware of. You may want to consider the political stability of the foreign country that you are doing business with, since a change in the political landscape can lead to substantial business loss. Finally, you may want to consider the nature of rights granted to you and your business by the foreign country, as many countries do not recognize property rights of non-citizens or do not enforce intellectual property rights.
Is it worth it?
You might be wondering now, with all of this to think about, if international business is really worth pursuing. The answer is yes, international business can be worth it. The world as we know it is shrinking, and globalization is an ongoing process. Even a basic trip to your local grocery store will demonstrate this to you: Just look at the labels to see the locations where your produce was grown and harvested or where that sauce you love so much was made.
We measure risk vs. return in international business, just like in all enterprises. The risks and the returns can vary greatly. Many major companies such as Walmart, Coke and McDonalds draw a substantial portion, if not the majority, of their revenues from their international operations. There’s no reason your organization can’t share in that wealth with a well-planned international expansion.
Remember, you do not have to be an expert in international law to run an international business, but you do need to know when to consult experts. Together you can assess your plan’s odds of success.
M.R.M.