Although every company might like to do business without encountering disputes with their counterparty, it is not always possible to avoid situations where the importer and exporter disagree. Global business disputes can be time consuming and costly, but they are also a reality of doing business. While most trading partners enter in a contractual agreement with the best of intentions, disputes do happen and can have serious consequences. Disputes can result in the importer delaying or defaulting on the payment or the exporter violating the contractual terms of delivery.

Two main types of disputes can occur between parties engaged in international trade finance. Financial disputes arise when counterparties disagree on the amount outstanding amongst themselves. Contractual disputes arise when the counterparties disobey signed contractual agreements.

4 Common Causes of International Trade Finance Disputes

1. Payment Terms

Offering payment terms as part of contract negotiations enables a company to be competitive. In many situations, the benefit of winning a contract by offering payment terms comes with the risk of being unable to collect the receivables from importers.

When offering payment terms, an exporter requests minimal advance payment, leaving a portion of the contractual amount to be collected at a future date after the delivery on the contract has been completed. Importers can obtain payment terms that are long enough for them to receive the goods and inspect them.

In some situations, an importer can argue that the quality of the products or services provided do not meet the standards promised in the contract.

Disputes in contracts are not only caused by the quality of the goods and/or services provided, but also could be due to:

• Delays on contract completion.
• Modifications to specifications without consent of all parties.
• Failure to comply with verbal agreements that were not signed for on the contract.
• Non-shipment or blockage at port due to change in laws or government.

2. Letter of Guarantee

While negotiating the contract, counterparties may require the issuance of letters of guarantees and letters of credit as a method to secure themselves against non-compliance on contractual terms.

Disputes can arise in situations where the seller is performing as per the contractual terms, however the buyer drew on the letter of guarantee to obtain additional funds for liquidity purposes. This is known as a wrongful call.

Want to learn more about how to keep your buyers and customers happy in a conflict-free manner? Check out the FITTskills International Trade Finance online course.

3. Foreign Exchange Rates

In the international market, counterparties sign contracts in currencies other than their home currency. In these situations, the buyer and/or the seller face foreign exchange (FX) risks. The foreign market is unpredictable and swings in the FX rate are not uncommon.

Every percent move of the FX rate can result in an increase/decrease of the profit margin on the contract. Disputes arise in situations where the currency of the buyer depreciates in value, resulting in the buyer to pay significantly more in converted currency than anticipated on the contract.

4. Documentation Error

Documents in trade such as the letter of credit, letter of guarantee, forward contracts, futures, and others, can be subject to errors. A letter of credit, for example, is issued by the bank of the importer and is used as a payment instrument. It has multiple conditions that must be fulfilled by the exporter and verified by the bank prior to releasing the payment to the exporter.

An error on a letter of credit can have a direct impact on the bank releasing the payment. Such discrepancies must be rectified so that the exporter receives payment when it completes the performance on the contract. Resolving such discrepancies involves issuance of amendments to the letters of credit.

Drafting Contracts to Avoid Disputes

Commercial disputes can be lengthy and costly. It is impossible to foresee all the issues that could turn into a dispute but taking proactive measures to prepare should not be overlooked in the stages of negotiations.

It is important to determine how potential conflicts will be resolved. Having a clear and definitive dispute resolution plan can reduce the time and cost involved in international litigation. It can also reinforce confidence in the success of the transaction because it reduces uncertainties that make investors nervous.

Most often, disputes will arise from misunderstandings of contract terms. The key to minimizing complications is to draft an arbitration agreement at the onset of negotiations, before a conflict arises.

Dispute Resolution

While litigation has been the traditional way of dealing with disputes, there are strong reasons to consider alternative dispute resolution (ADR), such as reduced costs and decreasing the time to reach a resolution. As a best practice, parties frequently enter arbitration agreements to predetermine the details of how to resolve potential future disputes. Much attention is being turned to solving international trade disputes using ADR methods.

Alternative Dispute Resolution Methods

Alternative dispute resolution offers a means of settling disputes without resorting to commercial litigation, aiming to resolve disputes in a way that is less expensive, faster and more predictable than adversarial litigation processes.

Arbitration

In arbitration, a neutral third party known as an arbitrator works toward a resolution of the dispute. As with a contract, the result of arbitration binds both parties and is enforceable by a court. The benefit of arbitration is that it can be faster and cheaper than litigation. It is also likely to be more participatory and easily understood than a court hearing.

Arbitration becomes international when the parties in conflict have their place of business in more than one country, when most commercial obligations are conducted in another country or if the arbitration itself takes place in another country.

Conciliation

A conciliator helps conflicting parties avoid litigation by meeting with the parties separately to determine each party’s dispute and needs. Conciliation is often seen as the middle ground between arbitration and mediation. The conciliator’s goal is most often to restore goodwill or repair a working relationship, usually through concessions.

Unlike arbitration, conciliation findings are not binding, no awards are offered and the conciliator has no authority to call witnesses or request evidence.

Mediation

A mediator, with no vested interest in the outcome of the mediation, facilitates discussions and settlement between the parties. Unlike conciliation, in which the conciliator offers solutions, a mediator is more of a facilitator. The mediator avoids offering proactive decisions, choosing instead to help disputing parties come to a realistically acceptable agreement.

As with arbitration clauses or agreements, to proactively prepare for the risk of disputes, entrepreneurs can draft mediation clauses into contracts. Unlike arbitration or court litigation, mediation is non-binding—there is no winner or loser, and the parties are not bound by any decisions made by the mediator.

Benefits of Alternative Dispute Resolution

Besides the cost and time advantages of ADR, there are additional benefits. It offers a less formal and simplified forum in which conflicting parties can negotiate, and it presents the possibility of a more flexible or creative decision.

Selecting the right ADR institution

If an organization is seeking an ADR institution to specify in a contract, they must pay attention to the procedures and techniques they offer. Many international law experts will offer services in these areas. Some can offer procedures and techniques such as negotiation, mediation, conciliation and arbitration, whereas some may only offer services for arbitration.

In addition, some ADR organizations specialize their services for specific industry sectors. Use care when choosing the right kind of organization to represent the services an organization needs. Deciding those who will have experience and expertise in its area of business requires the same care.

Dispute resolution is an issue that parties may not like to think about when beginning a business endeavour however, disputes can and do still arise. Negotiations are the most effective means to mitigate the risks of international disputes. In the event of a dispute, solid contracts that clearly outline the rights and obligations of trading parties will save a company time and money.

Contracts including choices for dispute resolution methods can salvage the business relationships which parties have worked so hard to cultivate. When disputes arise from international trade transactions, ADR methods such as arbitration, conciliation and mediation are an option.

ADR is frequently a much cheaper way to resolve disputes than litigation. Its methods are also faster, involve more intense resolution of the disputes and can often be resolved by more creative settlements that those offered by litigation.

The post 4 Causes of global business disputes and how to avoid them appeared first on Trade Ready.

Taking your business abroad can be a great way to expand your customer base, increase market share and lower production costs.

Although the benefits of an international business venture are plentiful, they are accompanied by a significant amount of risk, which, if not properly mitigated, can far outweigh the rewards.

Due diligence is your best ally in risk mitigation, even more so when it comes to international contracts.

The contract is king

Your contract, whether national or international, is always the first point of reference when a dispute arises between two commercial parties, and will guide an arbitrator or judge in determining your respective rights, obligations and remedies.

If you are conducting business internationally, an airtight contract is by far the best way to ensure predictability and efficiency in your business transactions, and properly protect your interests in the case of a disagreement.

An international contract can take on many forms, but all solid contracts have this one thing in common: they clearly outline the detailed rights and obligations of the parties involved.

Unfortunately, it’s common for entrepreneurs, in a rush to close a deal and get their business up and running, to neglect taking the proper time to review the agreements that will govern their business relationships, much to their detriment.

Although your contract is unique in that it will reflect your company’s specific needs and goals, there are at least two provisions which you should always include in your agreement:

(1) governing law; and

(2) dispute resolution. 

In my experience, these are the clauses that are most often overlooked, and that have the potential to cause the most damage when not properly addressed in your contract.

Clearly identify the jurisdiction of authority in your “Governing Law Clause”

Governing law, otherwise known as “choice of law”, is a fundamental component of an international contract.

What this means is that somewhere in your contract, you should clearly state the mutually agreed upon law of a jurisdiction that will apply to and govern the terms of your contract in the event of a challenge.

An example of what this would look like in your contract is:

1.1 Governing Law – This Agreement shall be governed, construed and enforced in accordance with the laws of the Province of Ontario. Any dispute arising between the parties shall be dealt with exclusively in the courts of that Province.

In international trade, the contracting parties are typically able to choose the law that will govern their contract. Whether it be U.S. law, Ontario law, or Shari’a law, the choice is open to the parties. You are not limited to choosing the domestic law(s) of one of the contracting parties.

For instance, if your business is in Ontario and you are contracting with a Japanese company for the supply of widgets, you can choose to have Ontario law, Japanese law, or the law of any other jurisdiction apply to govern your contract, that might be advantageous to your situation (i.e. U.S. law).

Avoid a geographical headache

If a dispute arises without a clearly defined choice of law clause in your contract, you will face additional time and expense in determining which country, state or province has jurisdiction.

It is therefore imperative that that all parties to the contract properly negotiate and mutually agree on the governing law at the outset, so that there are no surprises down the line and expectations are clear.

Litigation? Arbitration? Choose the best option in your “Dispute Resolution Clause”

A dispute resolution clause is important in any international contract because it clearly defines the methods and procedures for the resolution of disputes between the parties, whether it is through arbitration, litigation, or any number of other available options.

Although you may have an established business relationship with a partner you can trust, disputes, although not intentional, can still sometimes arise.

Simply put, having a dispute resolution clause is somewhat comparable to having an insurance policy on your car. You don’t expect to have an accident, but if you do, you’re protected.

Similarly, in the contract scenario, you don’t anticipate having any issues with your partner, but if you do, you are both aware of what process you will follow and what remedies are available to you.

Including a clear dispute resolution plan in your contract will reduce both the time and the cost of international litigation.

More and more international contracts provide for arbitration as an effective and efficient way to resolve disputes between contracting parties.

An arbitration clause could read something like this:

“All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”

You will also want your clause to address the governing law to be applied to the arbitration, the place and language of the arbitration, and the number of arbitrators to be involved.

Avoid a referee headache

A strong dispute resolution clause that is enforceable and clear is a critical step in the conclusion of commercial conflicts. Always keep in mind that your contract is what governs the relationship between you and your commercial partners.

A contract is not something to be taken lightly and not something that you will have an opportunity to correct retroactively.

Do your due diligence, and engage experts, when necessary, to make sure your contract properly protects you and your interests.

Have you ever missed a step in a contract that ended up costing you? What other items are crucial to a fair and protective contract?

The post Nail down these two international contract clauses to save yourself future legal headaches appeared first on Trade Ready.

The trend toward using alternative dispute resolution (ADR) methods as a means of settling disputes without resorting to national or regional court systems began in the U.S. in the 1970s.

Commercial litigation is lengthy, costly, hard to enforce and, because of the adversarial nature of the proceedings, will often damage business relationships beyond compare.

ADR aims to resolve disputes in a way that is less expensive, faster and more predictable than adversarial judicial proceedings.

Assessing your options

There are several forms of ADR:

1. Arbitration

This is a legal form of ADR. The disputing parties refer the problem to an arbitrator or an arbitral tribunal and agree to be bound by its findings.

2. Conciliation

This is a form of ADR in which the disputing parties use a conciliator, who meets with each party separately to determine their issues and help resolve their conflicts. It is different from mediation because the main goal is to conciliate, usually by seeking concessions.

3. Mediation

This is a process that sues a neutral third party to help the disputing parties resolve their disagreement. The mediator assists communication between the parties and generates options that might help resolve the conflict. A mediator helps the parties form their own solution, rather than making a decision.

4. Fact finding

This form of ADR uses an impartial group of experts to determine what the facts are in a dispute. The fact finders might be requested to investigate or evaluate the matters under dispute and present a report that establishes the facts. In some circumstances, the fact finder might also be asked to prepare a situation assessment or a recommendation for resolution.

Fact finding is often a valuable form of ADR because many international trade disputes arise from different understandings of the facts by the parties involved.

Save money, time and business relationships

Besides the cost and time advantages of ADR, there are additional benefits.

It offers a less formal and simplified forum in which conflicting parties can negotiate, and it presents the possibility of a more flexible or creative decision.

For example, parties can agree to settle a dispute over the cost of production materials where the manufacturer wants the materials at a lower price than the supplier is willing to pay.

Through mediation, the supplier concedes on the promise of a future contract commitment. Not only does this ADR please the manufacturer who gets materials at lower cost, while avoiding the possibility of costly litigation, but the ADR means that the business relationship has been salvaged, enabling future trade.

Arbitral awards and damages are often easier to enforce than those ruled in foreign courts. There are a number of international, national and regional AFR institutions whose goals are to educate entrepreneurs about the advantages of ADR and to provide professional ADR services.

Find the best option for your business

If an organization is seeking an ADR institution to specify in a contract, attention must be paid to the procedures and techniques they offer. Many international law experts will offer services in these areas.

Some can offer procedures and techniques such as negotiation, mediation, conciliation and arbitration, whereas some may only offer services for arbitration. Also, some ADR organizations specialize their services for specific industry sectors, such as mining, oil and commodities.

Care must be taken to choose the right kind of organization to represent the services an organization requires, as well as those who will have experience and expertise in its area of business.

For a complete list of national and regional ADR institutions, please visit https://www.worldbank.org/.

How can your business relationships be improved by using ADR to resolve conflicts?

The post How to avoid going to court with international business disputes in foreign markets appeared first on Trade Ready.

Ongoing TTIP trade deal negotiations between Washington and Brussels may not be reached in 2015 as originally anticipated, EU officials admitted in late March.

“We have to do our best to get an agreement but we don’t want to reach an agreement just for the sake of it,” Latvian Foreign Minister Edgars Rinkevics stated on March 25. Latvia currently holds the EU presidency.

[quote type=center]We are aiming to conclude this under the Obama administration…but I cannot give you a date.[/sws_blockquote_endquote]
Obama’s term will end in January 2017.

Negotiations have been in progress since June 2013, and were originally expected to be completed in 2014. The deadline was pushed to 2015 when it became clear that issues would not be resolved before then; the European Commission froze trade talks in January 2014.

What’s holding up the deal?

The biggest obstacle to locking down a deal is investor-state dispute settlements (ISDS). This portion of the proposed deal is causing an uproar throughout the EU, as it will allow corporations to take governments to international arbitration tribunals, instead of local courts, to resolve investment disputes.

Germany – which is arguably the economic driver of the EU – has come out vociferously against the measure, followed by Austria and France.

Germany’s deputy chancellor, Social Democrat Sigmar Gabriel, stated in late March that he is resolutely against the ISDS measure, fearing its impact on the EU’s stringent regulatory laws.

[quote type =”center”]We won’t lower any social, environment, or consumer production standards,[/sws_blockquote_endquote]

Gabriel told Sueddeutsche Zeitung. “And we will not – I am completely sure of this – see any privatization of arbitration.”

Opposition to the measure has pushed the European Commission to launch a permanent court, which will oversee and decide cases between foreign corporations and governments

However, EU Commissioner for Trade Cecilia Malmström is committed to creating a court which will not only have the power to adjudicate on TTIP matters, but also future trade agreements; she argues that a multilateral court would be a better use of resources and will be more legitimate.

The biggest concern opponents have about the current ISDS clause is whether or not international corporations would be able to sue governments for altering environmental or regulatory measures post-investment.

Malmström told members of the European Parliament that she sees other alternatives for dealing with this issue,

Our idea is a clause that says investment protection rules offer no guarantee for investors that the legal regime under which they have invested will stay the same

She also suggests limiting the amount of appeals that corporations will be able to make against the findings of national courts, by either forcing them to choose to work with national courts or the ISDS framework, or to cease suits launched in national courts once ISDS arbitration begins.

Decreasing appetite for trade deal

When the EU-US trade deal idea was born in 2011, the EU was reeling from a debt crisis which led many to question whether the economic arrangement could be maintained. Trade with major players was seen as an elixir to restore the continent to economic health.

But now that economies have rebounded sufficiently, state governments are bristling at conceding too much to potential trade partners.

The overall estimation of how much the EU stands to benefit from the signing of the trade deal has also changed. German industry federation BDI initially said the EU could expect to generate 100 billion euros per year as a result of the deal.

BDI was roundly criticized for the numbers, while the Center for Economic Policy Research for the European Commission published its own, more conservative number: EU GDP is expected to grow 0.5% in 10 years as a result of the deal, or 119 billion euros by 2027.

With growing opposition and a less-rosy picture of what the EU may gain from the accord, negotiators are facing serious challenges in bringing the deal to fruition.

Should the EU create a separate court to handle ISDS cases?

The post The one big obstacle that has brought the TTIP deal negotiations to a stand-still appeared first on Trade Ready.