How to handle (and avoid) 5 of the most common types of trade disputes

In business, foresight always outdoes hindsight – and so it is in international trade. But that’s easier said than done.

Operating across borders routinely exposes businesses to complex legal and regulatory friction – friction that can lead to disputes. Trade disputes create substantial risks for supply chain integrity, the ability to meet customer expectations, and for profitability.

Reactive attempts at resolution are rarely a good idea.

In this article, we will explain how companies that trade internationally can resolve and, even better, proactively mitigate common types of international trade disputes.

Jump to:

• Contract disputes
• Intellectual Property disputes
• Tariff, origin, customs disputes
• Distribution, franchise, or joint-venture disputes
• Investor-state conflicts e.g. expropriation or regulatory disputes

How does an international trade dispute arise?

An international trade dispute is a formal disagreement between entities operating in different legal jurisdictions. These disputes arise when one party considers that there is a breach of contract, treaty, or regulation – and when that breach negatively impacts their commercial interests.

Triggers vary from operational failures (such as late delivery, non-payment, or quality issues), through to complex regulatory conflicts involving tariff classifications or rules of origin.

Intellectual property rights can also come into play, while it’s not uncommon to see claims by foreign investors of unfair treatment or expropriation by a host state.

5 common trade disputes – and how to solve them

If you want to effectively manage trade dispute risk, you need to understand the potential conflict zones and their specific remedies. Here, we examine five prevalent types of international trade disputes – including actionable strategies both for mitigation and for resolution in each scenario.

1.     Contract disputes in cross-border transaction

These disputes arise when one party to an international contract fails to fulfil its obligations. Think about late delivery beyond contractual terms, late or non-payment, and quality discrepancies. It can be exacerbated by external factors such as currency fluctuations or force majeure events.

For example, consider a South American soybean exporter that faces a dispute after contracting to supply a Chinese buyer. When China imposed new tariffs, the exporter attempted to invoke a force majeure clause on the contract while the buyer refused the shipments at the new price, creating a conflict over which party bore the financial risk of the new regulations.

The soybean exporter should try to resolve matters according to pre-agreed mechanisms. Their international contract should specify governing law and jurisdiction, prioritizing alternative dispute resolution (ADR) methods such as ICC arbitration or mediation, over potentially lengthy foreign litigation.

The risk of cross-border contractual disputes can be mitigated by:

• Precise drafting: Contracts must clearly specify governing law, jurisdiction, and currency terms.
• Use of international commercial terms (incoterms): Clearly define delivery obligations and the exact moment risk transfers between parties, as defined by the International Chamber of Commerce (ICC).
• Continuous monitoring: Discovering divergence from contractual terms early on allows for implementing a fix before there is serious damage to commercial outcomes or the contractual relationship.
• Secure revenue: Mitigate non-payment risk by requiring advance payments or using secure instruments like letters of credit.

It’s also worth including force majeure and change-of-law clauses to allocate risk for unforeseen regulatory actions.

2.     Intellectual property disputes

It’s not uncommon to see an organization in another country infringing on your trademarks, patents, copyrights, or trade secrets.

Whether it’s misuse of IP or improperly licensing these trademarks across borders, there is a unique challenge here: different jurisdictions maintain varying levels of IP protection and enforcement standards.

We often see major disputes that arise even at the WTO level, such as the United States of America accusing China of inadequate IP enforcement, leading to formal complaints to the WTO.

Resolution often involves complex litigation in the infringing party’s local courts or, for systemic issues, state-to-state dispute settlement through bodies like the WTO. Preventative action against intellectual property disputes is better:

• Comprehensive registration: Register trademarks and patents in all relevant jurisdictions, not just the home country.
• Protective agreements: Utilize strong Non-Disclosure Agreements (NDAs) when sharing sensitive technology or designs.
• Proactive monitoring: Actively monitor foreign markets for unauthorized use or counterfeits to enable early enforcement.

It’s also worth ensuring that licensing agreements clearly define rights, territories, duration, and termination mechanisms.

3.     Tariff, origin, and customs disputes

Cross-border tariff and customs disputes are disagreements with national authorities over the classification of goods: including the place of origin, applicable customs duties, or import/export restrictions.

For example, a common operational dispute occurs when customs authorities at the port of entry reclassify imported goods under a different harmonized system (HS) code than declared, triggering unexpected duties and holding up supply chains.

Resolution is possible, but it involves formal administrative appeals to customs authorities – complaints that rely heavily on a verified audit trail of the goods’ journey and transformation.

Complaints can take substantial time to resolve, at best frustrating the end customer, and at worst leaving goods such as perishables unsellable. It’s a type of international trade dispute to avoid at all costs:

• Meticulous documentation: Maintain detailed records of production, value-added, and input origins to substantiate claims for free trade agreement benefits.
• Regulatory monitoring: Actively monitor applicable HS codes, duties, and regulatory changes in both exporting and importing jurisdictions.
• Risk allocation: Include specific contract clauses that allocate the financial risk of potential reclassification or new duties.

Another useful measure is to utilize trade compliance partners to build robust traceability into your entire supply chain, protecting your trade flows against regulatory disputes.

4.     Distribution, franchise, or joint-venture disputes

Cross-border partnership models such as distributor agreements, franchising, and joint ventures can often lead to flashpoints such as termination rights, exclusivity clauses, control issues, and conflicts between majority and minority partners.

Consider a manufacturer that triggers a dispute because it’s trying to terminate a contract due to a lack of delivery. The foreign distributor may benefit from local indemnity rights not explicitly addressed in the original contract, thereby blocking contract termination.

Resolution typically hinges on the governance frameworks established at the outset. Well-defined exit strategies and dispute resolution clauses are essential:

• Clear agreements: Draft contracts with precise roles, performance metrics, exclusivity terms, and termination rights.
• Upfront governance: For joint ventures, agree upfront on reporting rights, exit strategies, and protections for minority partners.
• Due diligence: Conduct thorough due diligence on a potential partner’s reputation and the local regulatory environment before committing.

As always, the most damaging disputes emerge from unsatisfactory relationships that remained that way for too long, so it’s worth maintaining regular communication and formal review mechanisms to monitor partner performance.

5.     Investor-state conflicts e.g. expropriation or regulatory disputes

Disputes with another nation-state are high stakes: whether it’s unfair treatment, breached investment treaties, or expropriated assets without compensation.

A notable example is the Methanex case, where the corporation launched a claim against the United States following California’s ban on a specific gasoline additive. The company argued that the regulation constituted expropriation of its business interests.

Investor-state cases are typically resolved through specialized international arbitration tribunals. Which tribunal is usually stipulated in investment treaties or trade agreements. It’s a long and expensive process worth avoiding:

• Treaty protection: Structure investments to benefit from applicable investment treaties that specify investor rights and protection against expropriation.
• Risk assessment: Conduct rigorous political and regulatory risk assessments of the host country before investing, focusing on stability and the history of regulatory changes.
• Dispute clauses: Include clear dispute-settlement clauses in contracts, specifying the arbitration body and seat.

Trust is at the core of dispute-free international trade, so always maintain transparent operations and good relationships with local authorities – full compliance with environmental and social laws should be a given.

Best practice as risk mitigation

Effectively avoiding the risks of international trade disputes is predicated on proactive risk mitigation. Following best practices and using practical steps will significantly reduce your exposure:

• Every international contract should define the governing law, the seat of arbitration, and the language of proceedings.
• Contracts should explicitly require the use of alternative dispute resolution (ADR) mechanisms such as mediation or arbitration before resorting to formal litigation; ADR facilitated by the ICC is one example.

 

• Keep meticulous documentation, certificates of origin, quality inspection reports, and communication logs as evidence for use in defending claims.
• Establish early-warning systems to monitor key indicators such as delayed shipments, payment delays, regulatory changes, and currency fluctuations.
• Be acutely aware of currency/exchange-rate risk and potential payment risks in cross-border transactions. Consider secure payment instruments like letters of credit.

By implementing these best practices, trade professionals can create resilient agreements, identify potential conflicts early, and structure their operations to minimize the probability and impact of complex international trade disputes.