Exporting goods overseas is a good way of increasing a business’ customer base. However, it is not without risks and if a business has not exported outside of the United Kingdom before, then there are a number of legal issues and factors they should consider.
In this post I detail the following for you:
- Route to market
- Logistics - getting the goods to where they need to be
- Local product standards
- Getting paid
- Value Added Tax (VAT)
- Intellectual property protection (patents, trademarks, etc)
Route to market
The first consideration is the exporter’s route to market; for example, will they be supplying to end-users directly (whether via the internet, local trade shows or opening up a local subsidiary and office incorporated and set-up in the territory) or through a local intermediary such as an agent, a distributor or a licensee or joint venture partner.
Many exporters prefer to connect with a local intermediary and exploit their local knowledge and connections rather than sell their goods directly into a new territory.
Options include the use of a:
- Distributor. Here the exporter sells their goods to a distributor and they then sell them on locally, usually in a defined territory, adding a margin to cover their own costs and profit. In this scenario, there is no contract between the exporter and an end-user as the involvement of the distributor means there are different levels in the supply chain. This means that United Kingdom and European competition law can be relevant within the European Union. Competition law impacts upon what terms in a distribution contract are enforceable and the inclusion of certain blacklisted terms (which can include certain pricing provisions) can potentially render an entire contract void and unenforceable. As such, it is important to receive suitable legal advice.
- Agent. An agent sells the exporter’s goods on the exporter’s behalf, or introduces them to potential customers. In both cases, this is usually in a defined territory and in exchange for commission. Agents usually require more supervision than distributors, simply because they may be in a position to contractually commit the exporter as their principal. Under the law of England and Wales, and elsewhere throughout the European Union, agents are given quite significant legal protection, including the right to compensation when their appointment is terminated. Whilst it is not legally permissible to exclude such rights, with suitable legal advice exposure to such claims can be mitigated.
- Licensee or joint venture partner. An exporter may wish to join forces with a local business under a licensing or joint venture arrangement and get a share of the business and the profits.
The route to market will in turn impact upon the type of contractual protection the exporter should be looking to put in place.
Any business embarking on exporting, whatever its route to market, should ensure that it puts contractual protection in place with its buyers and partners, as the case may be. Any contract with a buyer should cover:
- Delivery - Where to, by when and using what method.
- Risk mitigation, limitations of liability and insurance cover
- Payment - How much, method and currency.
- Customs charges and clearance - Usually the exporter is responsible for United Kingdom customs procedures and their buyer looks after customs at their end.
- Dispute resolution - What happens if there is a dispute – including what laws will be applicable and what courts will have jurisdiction to hear disputes. It is important to provide for this in order to avoid being bound by Conventions on choice of law and jurisdiction. If the laws and the courts of England and Wales are to be referenced, then solicitors in those countries can advise and assist. However, if foreign laws and courts are to apply then local legal advice will need to be retained in any such jurisdiction. The choice of law will also impact upon the liabilities which may be lawfully limited or excluded under the contract.
Logistics (getting the goods to where they need to be)
If the exporter is going to assume responsibility for delivering the goods, rather than requiring collection by a buyer from its warehouse, then it will need to consider how to best get the goods to where they need to be. There are four methods of transporting goods; rail, sea, road and air. An exporter outsourcing its logistics requirements will need to decide which is the most appropriate method in the circumstances and their choice may be impacted upon the type and size of the goods, how quickly they need to reach their destination and how much they can afford to pay for the transport bearing in mind how much they can in turn recoup by way of delivery charges.
When exporting goods, it is quite likely that the routing of the goods to their ultimate destination will not be straightforward. For example, the goods might be picked up from the exporter’s warehouse by a haulier, driven to a port and loaded onto a ship, unloaded at the destination port and then driven to their final destination. All parties which the exporter engages to provide its logistics solution will be seeking to contractually limit their risk and exposure for such matters as time delay and damage to the goods in transit and these are areas which the exporter will need to consider negotiating or insuring against. In turn, these are areas which will impact upon the kinds of contractual protection which the exporter will need to put in place in respect of its contracts with its buyers.
There are also likely to be customs duties to be paid as well as port duties and taxes and, depending on the type of goods, both import and export licences may be necessary. No matter what form of transportation is used when exporting goods, some form of waybill will be required. For example, if exporting by sea, a Sea Waybill or Bill of Laden will be required. If the exporter is utilising outsourced logistics solutions, then their chosen freight forwarder may well deal with all required documentation and procedures and the exporter should make sure they know whether or not this is the case.
A division in responsibility for delivery may be the exporter’s preferred route, rather than it assuming total responsibility for delivering the goods. For example, they might agree that they will deliver the goods on board the ship and the buyer will arrange shipment and onward delivery from the destination port.
To delete the number of detailed provisions required in a contract between the exporter and their buyers regarding logistics, it is possible to make use of the trade terms defined by the International Chamber of Commerce. These are known as Incoterms.
Each Incoterm is a shorthand way of stating how responsibilities are divided. For example, EXW (Ex Works) means the goods are collected by the buyer from the exporter’s warehouse, FOB (Free on Board) means the exporter will place the goods on board a ship nominated by the buyer, and DDP (Delivery Duty Paid) means the exporter will be responsible for delivering the goods right through to the nominated destination.
Local product standards
Notwithstanding the choice of law chosen in any contract between an exporter and a buyer, the exporter’s goods will need to comply with any mandatory local products standards within any territory it exports to. As such, it is inevitable that local advice is likely to be required at some stage and this is one reason why working with a local intermediary is a common route to market.
An exporter may be used to giving credit to trusted customers in the United Kingdom but they will probably need to be more cautious when exporting goods, particularly if exporting outside of the European Union. Even if their buyer is in the European Union and their contract with their buyer is subject to the laws and jurisdiction of England and Wales, they will face the additional costs of enforcing a judgment from their home court in the foreign court where the buyer is based in the event of non-payment. There is also always a risk of the buyer becoming insolvent.
Therefore, unless they have a good trading relationship with the buyer or trust its creditworthiness, they will need to consider obtaining payment before delivery and retaining legal ownership of the goods until delivery. Under a Bill of Lading, control of the goods can be retained until the Bill of Lading is released to the buyer and this can be resisted until payment has been received.
Opening a Letter of Credit may be a suitable alternative approach. This involves the buyer’s bank guaranteeing that payment will be released to the exporter once all the agreed paperwork (for example, a Bill of Lading) is shown to the bank. An alternative form is a Standby Letter of Credit, under which the bank simply guarantees that if the buyer does not pay, then it will. However, Letters of Credit do incur an additional cost and this may need to be factored into the exporter’s pricing strategy.
Value Added Tax (VAT)
The exporter will need to discuss Value Added Tax with its accountant as the treatment of this tax on exports is different when compared to domestic sales.
Intellectual property protection
An exporter will need to put appropriate intellectual property protection in place for each country they plan to sell into, as registered intellectual property rights such as patents, trade marks and design rights are only recognised in the countries in which they have been registered. They will also need to consider registering local domain names and undertaking due diligence to ensure that they are not likely to infringe the intellectual property rights of a third party by exporting into a new territory.
If you would like to informally discuss whether any of the issues addressed above affect you or are relevant to your business, then please feel free to contact me on 01908 660 966 or by e-mail at Christopher.Buck@franklins-sols.co.uk