LEGAL CONSIDERATIONS in RISK MANAGEMENT
International trade and commercial law are complex, vary widely between countries and trade agreements, and invariably differ in application between the letter of the law and the actual practice.
We always recommend that exporters retain expert legal council, however also emphasize the need to understand “how things are done” and ensure that risk management and operations planning are appropriately adapted.
Incoterms, international law and bilateral and other trade agreements define and constrain goods exports, however even in this relatively well controlled environment, the risk remains high for SME with respect to non-payment, contract compliance issues, and dispute resolution can be prohibitively expensive, painfully slow, and SME firms usually lose.
Exporting services from Canada is much more complicated, and ensuring contracts are valid across international borders, differing legal systems and a multitude of often conflicting, and/or mutually exclusive laws is difficult, expensive, and as experience has shown, frequently results in non-compliant clauses that can invalidate the entire contract.
In one study, we found that over 50% of international services contracts examined contained invalid clauses, and have seen examples where millions of dollars were lost due to relatively simple contract errors, or other examples where hundreds of thousands of dollars were lost in resolving minor procedural disputes between otherwise satisfied and friendly stakeholders.
In many countries, prior registry and approval of IP is a prerequisite for professional services contracts or where a subscription type sales model is utilized. Patented or copyrighted IP must (normally) be registered in each foreign jurisdiction, and the most cost effective and secure method is to setup a Foreign Affiliate, as it confers the ability to immediately respond to infractions, whereas working from Canada through trade agreements can delay effective intervention for months or even years, and is often prohibitively expensive.
Registered Corporate Capital: Key to Financing and Government Contracts:
In most emerging (civil law) markets, it is the quantity of registered corporate capital that determines the level of corporate liability, the amount that may be borrowed from a bank, but also what contracts the firm may participate in. Some countries require almost half a million dollars in registered capital to bid on even the smallest government contract, and several millions of dollars must be registered before participation on any infrastructure or other capital project is allowed.
In other words, access to government and other infrastructure projects are usually limited to firms with a Foreign Affiliates.
Establishing a Foreign Affiliate resolves most risk associated with cross border legal issues, as the company enjoys equivalent commercial rights and advantages of a domestic company, including the ability to issue contracts, obtain work visas, open bank accounts, import / export, hire staff, claim tax rebates, and comply to local content regulations in procurement.
As a Canadian controlled company, the Foreign Affiliate can also access all Canadian Government resources such as EDC risk management instruments, BDC, TCS, Go Global incentives and Consular assistance, and in some cases gain additional risk management advantage through its status as a foreign investor.
The risk management benefits of establishing a Foreign Affiliate are compelling and XPM has been helping clients work through the process, with qualified and registered legal experts in each country and sector.