Understanding Legal Aspects of International Business

16 Understanding Legal Aspects of International Business

To have a good gasp of international business, an understanding of legal aspect matters. Any business operates in an environment that is legally bound and this applies very much to international business. When companies operate overseas, they should be compliant with all legal implications like the nature of the business, the legislation binding such type of business, the type of partnership or agreements reached between the company and its overseas subsidiary along with all legal requirements concerned with the employment of foreign nationals. It is common to assume that there will be certain barriers to trade along with conflicts that can occur between the company and the foreign partner or between one country and another one. The legal aspect of international business is vast and this chapter aims at providing certain illustrations of legal requirements in such circumstances.

Firstly, the nature of international business is described paying attention to the creation of the World Trade Organisation in the post-GATT period that augurs better trade, more exchanges with fewer restrictions and tariffs for all countries. Under the new trade status known as the Most Favoured Nation (MFN) status, emerging economies have the possibility of developing wider trade opportunities internationally. So far, this is not legislation but it pertains to a clause in international trade that should be complied among countries that are signatory members of the WTO. It is important to note the entry of China in WTO and how this emerging nation has shaped business differently since its creation in 1995.

Certain particular legal aspects of business are described namely patents, intellectual property, copyrights and trademarks. Since businesses operate across borders, they must be conversant with such requirements as certain businesses that might practice unethical activities might get involved in the infringement of copyrights and intellectual property. Very often, genuine and original products are bound to suffer from the acceptance and trade of imitation and counterfeit products that might cause major harm to partners involved in genuine trade.

At a further level, international trade and litigation are discussed. Given that there are violations in trade agreements and that one partner goes against the fair trade agreement with another partner, litigation might exist. This is common practically everywhere and multinationals are bound to bear the consequences of being filed for unfair business. Along with litigation, there is also the issue of arbitration that involves settling disputes in a less formal way. An important concern might be child labour that is exploited in emerging economies while children are indirectly involved in manufacturing products for top multinationals. Child labour is subject to serious penalties if this is practised and where violations of children’s’ rights are clearly illustrated.

Issues on conservation are briefly discussed in this chapter whereby organisations need to be more cautious about biodiversity and the natural environment. They might be producers of goods or exporters of finished goods while they might be directly or indirectly involved in the destruction of habitat. Some businesses might be directly involved in pollution while some others might negatively contribute to the protection of the natural environment. In today’s cause for a sustainable future, it is imperative for companies to be up-to-date with ethical and sustainable trade practices.

Perspective

Conflicts in International Business

International Trade is expanding day by day, small and big countries of the world are engaged in transfer of huge quantum of goods and services. The mutual contact between the parties, at time, creates legal problems. They arise from the first act of offer made by a trading partner and its acceptance by the other trading partner. The contracts created between the traders are generally binding on the parties.

Goods are sold against letter of credits, guarantees, and post arrival payments or through barter trade. All these segments of trade processes create legal bindings. Where the legal instruments are properly made nothing happens, but where there are mistakes errors or shortcomings in the type of business undertaken, the trade instruments, these may lead to dispute and litigation. These disputes create problem of jurisdiction, applicability of law, enforcement of judgments obtained and the interpretation of actions of the parties in arriving at trade contracts.

The issues not only relate to individual parties but also include conflict with States on the issues relating to promises made by the States before the investment was made by the investor. Generally, such conflicts are related to legal aspects of business transactions and are settled through legal mechanism either through municipal course or through international tribunals. These disputes may be settled through arbitration or through International Chamber of Commerce where the States agree to settlement and arbitration. Particular reference is invited towards Bilateral Investment Treaties (BIT’s). There are many such treaties between different countries which govern the rules for Foreign Direct Investments (FDI).

As regard private parties, the emerging issues are generally governed by conflict of laws where the principle of ‘lex domicili’ determines the issue of jurisdiction. The general principles of international law do become applicable. The transactions between the parties suggest that which country and which Court have the jurisdiction to settle the dispute. That is why; the trading parties should be more vigilant in respect of their international business transactions. It is suggested that merchants should be careful while agreeing to the terms and conditions of the contract specifying the jurisdiction and the applicable law to settle the disputes.

Points to ponder

Where the legal instruments are improperly made, they may lead to dispute and litigation. Generally, most conflicts are related to legal aspects of business transactions and are settled through legal mechanism but country-to-country disputes may be settled through arbitration or through International Chamber of Commerce where the States agree to settlement and arbitration.

Current economic issues in International Business

The World Trade Organisation (WTO) is the only international governing body that World Trade Organisation replaces General Agreement on Tariffs and Trade (GATT) which was created in the year 1948. The WTO has emerged as a world’s most powerful institutions for reducing trade related barriers between the countries and opening new markets. The General Agreement on Tariffs and Trade (GATT) was replaced by the World Trade Organisation (WTO) which is the world’s global leading body in the year of 1995, in the day when Uruguay round took effect. The purpose was to ensure that global trade starts and goes on smoothly, freely, and in all likelihood. The other purpose of WTO was to strengthen the GATT mechanism of settling trade disputes.

Benefits

The WTO serves as an international organisation that deals with the trading process has eventually created some benefits toward the world in such aspects:

First of all, WTO promotes the establishment of world trade liberalisation and economy globalisation. WTO facilitates implementation, administration and smooth operations of trade agreements between the countries. After WTO was established, the world market has experienced decline in tariff levels and WTO members experienced an average of 40% decline in tariff rate. In addition, The WTO has favoured better prospects in agriculture, textile trade, anti-dumping and countervailing, investment, trade in services, intellectual property and other aspects of the operation mechanism.

The WTO system has been developing peace among countries. The WTO created system that helps the trade process to go on smoothly and providing countries a constructive and fair outlet for dealing with disputes between countries over trade issues.

The WTO favours a decrease in cost of living is one of the benefits of WTO. Earlier, protectionism increased the cost of the goods, in terms of production, raw material, and so on. Lower trade barriers mean less or no tariff will be imposed to the goods, therefore price of the goods will be cheaper, and it leads to decrease the cost of living.

Case Study: Emerging nations benefit from new international trade agreements

The creation of the World Trade Organisation (WTO) has provided tangible benefits to developing countries. First of all, a rule-based system actually governs the international trade that these developing countries involved, and ensures that they would get the greatest benefits throughout the international trade. Unlike industrialised countries, developing countries do not have strong negotiating power in international business and only follow the pricing adopted in the developed countries. WTO came out with a Most Favoured Nation (MFN) principle, which aimed at market liberalisation between any two members that was further extended to all members of WTO.

Secondly, the benefit to developing countries is intellectual property rules. The agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) offers a benefit for emerging economies by creating a policy framework that helps in promote technology transfer and foreign direct investment. The purpose is to include non-discrimination and equal application by all members of minimum standard of protection of intellectual property rights. This agreement also protects developing countries as the owner of intellectual property rights, especially those having a high technology sector.

The third benefit is the preferential treatment for the emerging economy. Most of the developing countries relied on the special preferential access to the global market under the Generalised System of Preferences (GSP). This concept is the enabling clause of WTO legal basis to ensure that developed countries offer non-reciprocal preferential treatment to emerging economies, and vice versa.

What is the purpose of the Most Favoured Nation Status in international business and how might this favour developing nations? How is the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) beneficial for emerging economies? How might a Generalised System of Preferences (GSP) benefit an emerging economy in international business?

Concerns within the new trade agreement

The current legal issues in International Business must focus mainly on the types of trade done among the countries. The first economic consideration here is that the post-GATT period means that competition will be made tougher as there will be the globalisation of the world economy. Every country will have access to more liberal transactions than before. The issue of post-GATT arises from the fact that many countries were subject to quota and trade barriers and this created to some extent unfair competition. Therefore, the post-GATT is more in favour of an open-market economy. Another important issue is about the end of the Multi-fibre agreement. This now allows more countries producing textile products to enter competition. No market will be secured as such and there will exist a cut-throat competition.

Current legal issues

Intellectual Property is a basket of different rights. There is no precise definition of intellectual property but it can be divided into the areas of trademarks, patents, copyright, database rights, designs and confidential information. Intellectual Property is important to businesses as they are intangible assets that can be financially exploited because like physical property, it can be sold or licensed. Every business possesses such assets whether they are aware of it or not. When a business is establishing its presence in the marketplace, protecting and managing its intellectual property is critical as it can mean the difference between success or failure.

Intellectual property

Many emerging economies have signed the Universal Copyright Convention of the Berne Convention and the Trade Related Intellectual Property Rights Agreement (TRIPS), one of the key elements under the agreement of the World Trade Organisation.

One element of the treaty reads as follows:

‘States party to the Berne Convention and TRIPS Agreement whose international copyright laws do not mention computer programs among protected works would be well advised if they would complete their laws accordingly’.

The international context

Patents, copyright and trade marks

In order to encourage new inventions and original works and to protect those who have built up a business law gives statutory protection to patents, designs, copyright and trademarks. In Britain, these rights are covered by Copyright, Designs and Patents Act 1988 and the Patents Act 1977. The economic tort of ‘passing off’ prevents a person from conducting himself so that customers will mistake his goods, services or business for that of someone else. This branch of law is known as Intellectual Property Law.

Patent

A patent is the name given to a bundle of monopoly rights which give the patentee the exclusive right to exploit the invention for a given period of time. It is the right to stop others, an inventor does not need a positive right to exploit his own invention.

International application procedure

The Patent Co-operation Treaty provides for the filing of a single application designating the countries for which the applicant seeks protection. A single research is carried out and the application is sent to each of the designated countries for separate examination as a national application according to their local laws. The European Patent Convention provides for an application to be filed at the European Patent Office in Munich. The application is searched and examined at the European Patent Office. If the application is a real invention, then separate national patents are granted for the specified countries.

Patentability

Patents must fulfil the following requirements specified in the Patents Act 1977.

A product must be a patentable invention which is capable of industrial application.

A list of things are not patentable inventions:

Discoveries, scientific theories or artistic work.

  • Literary, dramatic, musical or artistic work.
  • Rules or methods for performing a mental act, doing business or programming a computer.
  • The presentation of information.

    Novelty. The invention must be new, it must not be available before to the public anywhere in the world.

    Inventive Steps. An invention involves an inventive step if it is not to a person skilled in art.

Ownership, assignment and licensing

  • A patent, or an application for a patent, is personal property, but it is not a chose in action.
  • An assignment must be in writing and signed by both parties, otherwise it is void.
  • Licensing is a method of developing a patent whereby the patentee gives permission for the sale or manufacture of the patented article, subject to express conditions.

    Coca-Cola, Pepsi Cola, KFC, are produced, among others, under licence in most emerging economies. The local producers must however pay, under expressed terms, the owner’s patent rights and a percentage commission upon the units produced.

The patents issue at international business level

This is quite a sensitive issue because certain countries can just use the invention of another one and commercialise the invention. Countries where the Patents Act are not strict take advantage of such a situation. E.g. The electric hair brush had a U.S Patent but the product is made in China as well as a low and very competitive cost.

In 2018, Huawei Technologies of China was the top PCT applicant among the business sector, for the fourth time since 2014. With 5,405 published PCT applications, Huawei Technologies became the first company to have had more than 5,000 PCT applications published within the period of a year. With 2,812 published PCT applications, Mitsubishi Electric Corporation of Japan moved up two spots to rank second thanks to an increase of 291 published applications compared to 2017. These two companies were followed by Intel Corporation (2,499) and Qualcomm Incorporated (2,404), both U.S.-based companies.

Copyright

Copyright protects the independent skill, labour and effort which has been expended in producing work and prevents others from helping themselves to a too large proportion of that skill, labour and effort. Unlike a patent, a copyright is not a monopoly. Copyright is acquired by bringing a work into existence. There is no requirement of, nor provision for, registration. Most countries offer some sort of copyright protection for an author’s work. In dealing with foreign works, most countries have agreed to one or more international copyright treaties and conventions, such as the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention, the World Intellectual Property Organisation (WIPO) Copyright Treaty, the WIPO Performances and Phonograms Treaty and the Agreement on Trade-Related Aspects of Intellectual Property Rights. Other countries rely only on protection under their national laws. Only three countries, Eritrea, Turkmenistan and San Marino, are said by the U.S. Copyright Office to have no copyright protection either for authors within their borders or for foreign works.

The Copyrights issue at international business level

This is another important issue. Since, copyright claim does not need to be made in a Court, other countries may copy the work of its author. However, countries which have signed the TRIPS treaty are obliged to abide by the requirements of the Act. Computer-based organisations, reputed international music houses, are reluctant to move to countries which violate copyrights. The USA was keen to apply economic sanctions to China which did not strictly follow intellectual property requirements.

Collective licensing at an international level

In many countries, copyright collective management organisations, also known as collecting societies or ‘collective management organisations’ (CMOs).

  • license large-scale use of works on behalf of large numbers of rights holders
  • collect royalties for those uses
  • distribute these royalties back to rights holders

There are collective management organisations that specialise in different categories of works and creators. In the field of text and image-based works these organizations are called Reproduction Rights Organisations (RROs). They typically deal with the licensing of secondary uses of books, journals, newspapers and magazines – in both their paper formats AND their online or digital formats – and in some cases also with visual content such as motion pictures, photographs and illustrations.

Trademarks

  • A trade mark is a mark used in relation to goods or services so as to indicate a connection in the course of trade between goods and some person having the right to use a mark.
  • ‘Mark’ includes a device, brand, heading, label, ticket, name, signature, word, letter, numeral or any combination thereof.
  • The commercial purpose of a trade mark is to distinguish the goods or services of a company from those of its competitors.
  • The legal purpose of a trade mark is to prevent others from using the mark.
  • Life patents, trademarks constitute ‘industrial property’.

Trademarks related to international business

For the international registration of a trademark, a broad international filing can be done through the Madrid Protocol, a group of 86 countries, including most of the major industrial nations in the world. Through this process, a company can file a mark in the home country and then extend the filing later to other jurisdictions throughout the world. Although businesses still have to pay the fee in each country, this is still a smart and relatively inexpensive option, since they will save time and money from the administrative costs of having to fill out an application multiple times. It is important to remember that other countries can still choose to reject that mark. Companies should run a clearance before applying for a trademark. This allows them to determine if another party is using an identical or confusingly similar trademark. Adopting an identical or similar trademark to others can lead to legal disputes and fees, brand confusion, and lost revenue.

Trademarks represent another important issue at International Business level. France is very insistent on trademarks as the country has companies which produce top quality products namely, Chanel, Dolce and Gabbana and Lacoste, among others. It is against countries that infringe trademarks and very severe penalties are imposed such as long years of imprisonment, confiscation and destruction of goods.

Ethical Issues in international business

If copyright and intellectual property issues are essential in considering effective and rightful international trade, ethical issues do matter. These might not be directly concerned with the Judiciary of a country but might be well considered under international conventions. The protection of the natural environment, the exploitation of child labour, endangering natural species under the threat of extinction, could be important aspects to consider. Unethical aspects would mean violation to such important aspects at work and might compromise the choice between profit-making and sustainable environment. Issues on child labour and the natural environment are debated in the coming sections.

Exploitation of child labour

This is one of the latest legal issues affecting international business. The International Labour Organisation (ILO) is against the exploitation of child labour in business activities. Many European partners were formerly importing good that were produced by children from third world countries. Companies in the developing world employ child labour because of its relative cheapness and facility for employment. Countries like Brazil, India, Pakistan among others exploit child labour by paying them a very meagre salary and making them work for long hours. This has led foreign buyers to think that it is morally unfair for them to use such products for commercial purposes.

Worldwide, an estimated 211 million children aged under 15 work. Child labour is widespread throughout Africa, Asia, Latin America and the Caribbean, though there are also some 2.5 million working children in developed economies. Asia has the largest number of working children, accounting for 60 per cent of the world’s total.

In India, one of the world’s fastest-growing economies, the UN estimates that child labour contributes 20 per cent of gross national product. The government has banned child labour, but with even the lowest official estimate of children engaged in hazardous occupations standing at 12.6 million, India still has the largest number of child labourers under the age of 14 in the world.

Children can be found working in many export-oriented industries, including garments and footwear, glass manufacturing, leather tanning, stone quarries, and gem stones. Many work unacceptably long hours, often in unsafe conditions or with minimal respect for their rights.

Exploitation of natural and endangered resources

Delegations from the Americas met on 10 October 2018 in London to commit to future engagement on Illegal Wildlife Trade, including poaching, in the Americas and assess the potential for further coordinated action in the region. Participating countries recognised that Illegal Wildlife Trade is a major issue in the Americas, should be treated as a serious and organised crime that affects the economy, security, indigenous communities and ecosystems in the region, and decided to work collaboratively to tackle the trafficking of flora and fauna, including poaching, on a regional and international scale. To affirm this intention, all delegations recognised the need for regional collaboration on this issue.

Kenya

Kenya will strengthen its resolve to eradicate illegal wildlife trade, to build coalitions and to find solutions to better protect its wildlife. To this end, Kenya has identified five critical areas that require support from wildlife conservation partners to enhance law enforcement capacity to deal with illegal wildlife trade.

These areas include:

  • enhancement of forensic laboratory capacity to support law enforcement leading to successful prosecutions.
  • improvement of stockpile management.
  • enhancement of law and law enforcement at ports of entry and exit.

    human/wildlife conflict mitigation.

  • establishment and distribution of pangolin which is fast emerging as a highly traded species.

Wildlife

Many companies are paying attention to environmental and ecological issues. Let us consider the issue of wildlife. In our contemporary world, it can be said that many species are being forced to extinction mainly by poaching (illegal killing). A few endangered species are outlined in the table below.

Because the products that could be made from endangered species are still being demanded by people in the affluent countries, companies have been encouraged to make use of synthetic fibres and products that could be a near perfect imitation for animal fur, cosmetics or decorative products.

Effluents and Toxic materials

Toxic materials and dangerous effluents may be used in the production process. By the way, the use of chemicals and dyes are toxic substances used in the production of garments. For the time being, not much effort has been done in this sense but international legislation has paid consideration to such an issue. Toxic substances used in the production of clothed may be dangerous and harmful to people as these can create allergy and contamination. The degree of toxicity may be accounted for and, if it is viewed that certain companies do not respect the level of tolerance, legal actions may be taken against them. However, this can be a double-side issue as the buyers themselves might be paying little concern on to the degree of toxicity with reference to materials.

River pollution in India

Around the world as countries are struggling to arrive at an effective regulatory regime to control the discharge of industrial effluents into their ecosystems, Indian economy holds a double edged sword of economic growth and ecosystem collapse. The present experimental data indicates that there is a high level of pollution along many rivers in India. The experimental data also suggests a need to implement common objectives, compatible policies and programs for improvement in the industrial waste water treatment methods. The existing situation, if mishandled, can cause irreparable ecological harm in the long-term.

International business conflicts

International disputes are, by definition, major disagreements between two or more countries on matters such as territory, maritime rights, and human rights, to name just a few. These disagreements may also be over business, considering how trade and business has joined the globalisation bandwagon.

International disputes, however, are not limited to two or multiple parties disagreeing actively, because they may also arise from declarations made unilaterally by one country that are not acknowledged or accepted by other countries.

If these international disputes are not addressed and resolved, they could lead to bigger problems of global proportions, such as enmity and hostility among nations, tense international relations, or possibly the threat of conflicts and war. International business conflicts arise from the fact that one country or trading partner feels embarrassed by the other one. Conflicts occur frequently in business life and methods must be adopted to resolve such conflicts at international level.

Arbitration and Litigation

Arbitration and litigation are common in international business. In arbitration, two or more businesses enter a civil case where the matter is debated. In litigation, the case is dealt in a Court where the offense is liable for criminal pursuit. Litigation cases are common if both parties mutually sue each other for infringement, breach of contract or impingement of legislation.

Litigation

Litigation means that some warfare has been officially declared among trade partners because of unfair trade practice. Such a matter is quite common in business at international level. The matter can be raised in major judicial instances as well as at the United Nations. Litigation depends on the nature of the dispute. If it concerns business matters which are mainly at company level, then the dispute might be brought in front of an International Law Court. Problems affecting territories can be voiced and arbitrated at United Nations level.

Nationalisation of energy sector in Venezuela

When ConocoPhillips invested in major heavy-crude projects in the Orinoco basin, no one expected that Venezuela would subsequently restructure its entire energy sector, nationalising the assets and denying the company its anticipated return. Nor could they have predicted the protracted dispute that ensued, a complex arbitration with a $30 billion claim at stake .

Marine exploitation territory

This is a major issue for many countries and leads to confrontation and disputes. Each country has an exclusive territorial zone of 200 miles whereby it can exploit its marine resources both for personal consumption and commercial purposes. Mauritius has suffered a lot in this context. Quite often, it had been in conflict with the Seychelles concerning the Saya de Malha bank which is an important fishing area. In the past, Mauritius had problems from the ex-USSR which exploited its marine resources namely the Tuna fish and it had poor economic relations with the super power.

Arbitration

Arbitration means that an international arbitration authority will decide upon the issue of litigation affecting two countries. When two parties in dispute agree to go into arbitration, both agree to be bound by the ruling or decision of the arbitrator, who is the one who will hand down the decision on how to settle or resolve the dispute. He hands down his decision, and the dispute is resolved. In short, he acts as a judge, which means that sometimes his decision may also be contested.

There are two types of arbitration:

Institutional arbitration

These days, there are now a lot of arbitral institutions in place, all with the objective of providing arbitral services or administering arbitrations that are related to international business and commercial disputes. They play an active role in an institutional type of arbitration.

Ad hoc arbitration

This type of arbitration is carried out without an institution or specialist administering the proceedings. The parties are the ones to organise the proceedings, including the selection of the arbitrator or arbitrators.

Levels of cross-border trade and investment are on a rising trend across the global economy, particularly following the demise of the former Communist bloc and the rising levels of economic activity in parts of the developing world, including China and India. The evidence strongly suggests that, as a result, the resolution of disputes via the mechanisms of international arbitration will continue to grow in prevalence over the coming years. Partly as a result, leading businesses are thinking about ways of enhancing the existing mechanisms and practice of arbitration. This field of dispute resolution, practically unknown even 20 years ago, is set to form an ever-larger part of boardroom agendas in the coming years.

Comparison between Arbitration and Litigation