ONE FAMILY’s “BUSINESS” IN UKRAINE

By David Stephan, UKRAINEBUSINESS2014

In most of the world family business means orderly multigenerational creation of economic value, In Ukraine over the last four years «Family Business» meant something completely different, as it came to be identified with the total and complete usurpation of power, corruption and unjust enrichment.

Viktor Yanukovich could have single-handedly altered the course of Ukraine’s economic development. Such chances are very rare and are only accorded to lucky few.

It so happened, that after the Orange Revolution of 2004, the country, although slowly, was inching forward. Thus it was not difficult for Mr. Yanukovich to win the election of 2010 against the leaders of the Orange revolution who by 2010 were absorbed in their own infighting. All the future president had to do was to assure stable and predictable environment to the country’s business interests, as well as prospective foreign investors, and promise increase in living standards to the majority of the population. READ MORE

When Expanding Overseas, it is ALL About Commitment and Risk Mitigation

As I read the article below, I could not help, but shake my head. Presumption by the authors that international sales should somehow be less challenging, just because more businesses are now exporting, simply does not make sense.

International business has and will always be challenging and fraught with peril. Not only the risk of not getting paid is there, but there are also numerous other risks to worry about – from political upheavals, customs, shipping and currency devaluation, to fraud, corruption and intellectual property infringement. The list is by no means exhaustive. Yet anyone doing business domestically also faces a myriad of risks. The trick is to understand the risks and be able to mitigate them. A risk of non-payment for instance is just as real in domestic business, as it is in exporting. The reason businesspeople here do not consider it to be such major challenge is that they learned to use the tools available in the U.S. such as credit reports, references and legal system to mitigate this particular risk.

When it comes to exporting, a different set of tools is needed and such a set is fully available to any exporter. Thus in order to successfully export,  businesses either need to become fluent in foreign risk or hire someone who can manage their exports for them.  For those wishing to do it themselves a number of tools, such as credit insurance that is available through the Export-Import Bank of the United States (US EX-Im), or  from private carriers. International Company Profiles (ICPs) on potential business partners are available from the U.S. Commercial Service. Of Course, letters of credit and prepayments remain as perennial options.

But it is not only about getting paid, it is about exporters’s commitment to international business. Over the last 25 years of international business in over 35 countries, we have seen multiple situations where US companies failed or succeeded based on their ability to understand and mitigate risks.

For those who don’t want to commit, but still want international sales, we offer complete Export Management Services. For those who want to understand foreign risks and ways to mitigate them we developed entire Fluent In Foreign Business program complete with the eponymous Book, Fi180 Global Business Atlas and Fi3 Export Appeal Index™ rating ease of exporting to 180 countries. Like any other serious activity preparation is key. For those who prepare, exporting can become one of the most profitable and enjoyable activities in their business.

In addition to the article, this post also includes an excerpt from the Fluent In Foreign Business

The Cost of Expanding Overseas

As More Small Businesses Sell Goods Abroad, They Encounter Challenges—Like Getting Paid

By RHONDA COLVIN, WSJ.com

Selling goods and services abroad is getting easier for small U.S. businesses, but they still face challenges.

Just last week President Barack Obama signed an executive order accelerating the process of getting government approval to export U.S.-made cargo. The goal is to create a new International Trade Data System eliminating some of the paperwork required in sending cargo abroad. In theory, such a system could speed the shipment of products overseas, cutting approval wait times to transport goods to minutes from days.

Small companies comprise the majority of U.S. exporters. Businesses with fewer than 500 employees accounted for 294,589 of 301,238 U.S. exporters in 2012, or about 97%, according to preliminary data released by the U.S. Census Bureau in December. Just over half were small manufacturers and wholesalers, and together they generated $460 billion in foreign trade, a $10 billion increase from the previous year, or about 34% of total U.S. exports, according to the data.

While paperwork is a headache for some small companies, it’s not their biggest concern, according to a survey of small businesses fielded in 2013 by the National Small Business Association and the Small Business Exporters Association. Asked to identify what they consider to be the largest challenges to selling goods and services to foreign customers, 41% of respondents selected “I worry about getting paid.” That’s up from only 26% of respondents in 2010 who said payment was an issue for them.

“I think the biggest issue is getting a staff up” overseas, as well as the cost of business travel, and of communication with far-flung clients, said Chris Coccio, chief executive ofSono-Tek Corp. SOTK 0.00% , a Milton, N.Y., developer of ultrasonic spray coating technology. His primary overseas clients include contract manufacturers for electronic companies and medical firms. He said about 60% of his roughly $10 million in annual revenue comes from sales to non-U.S. markets.

Chris Coccio, CEO of Sono-Tek, remains an advocate of exporting. Meredith Heuer for The Wall Street Journal

Mr. Coccio said Sono-Tek exports widely in Europe as well as many parts of Asia including China, Japan and the Philippines. His products can also be found in Mexico and Brazil. About 80% of the company’s sales and marketing budget is spent on international sales, “so there clearly is extra cost per sales dollar,” he said.

When considering potential international markets, such as Russia or expanding his business with electronics in Japan, Mr. Coccio said “we re-evaluate our success rate” after one or two quarters and “decide if we want to stay the course.” On the whole, he remains an advocate for exporting. Without it, “we would be one-third of our size,” he said. Receiving payment is a regular concern when exporting goods, he said, but “to deal with this our payment terms are front-end loaded with most of the payment prior to shipment.”

Laurel Delaney, a marketing consultant based in Chicago and author of the upcoming book “Exporting: The Definitive Guide to Selling Abroad Profitably,” said if a company is already exporting, it should “continue down that path.” She also said business owners should routinely evaluate if they have enough capital to continue exporting, as small-business owners often have much less to fall back on than larger firms.

Larry Lieberman, the owner of Vision Quest Lighting, a 30-employee decorative lighting company in Long Island, N.Y., said during the recession, sales to foreign markets including much of Europe, China, and Japan were a lifeline. “If we only had domestic sales we would have been in big trouble in 2012,” he said.

Vision Quest Lighting reaped the benefits of exporting during that time because a fair amount of revenue came as the company provided lighting for several national brands, such as Limited Brands, LB -0.88% Ann Taylor and Abercrombie and Fitch,ANF -2.96% as they expanded their international presence.

Mr. Lieberman is currently working on exporting solar-powered trailers to Haiti and South Africa and estimates that project will bring in $10 million to $20 million of revenue within the next two to three years.

However, he said his main concern for the year ahead is managing business in some foreign markets, specifically China. Fred Hochberg, chairman and president of Export-Import Bank of the U.S., an export credit agency, said: “The financial reporting is not the same as Western companies or the United States so it’s hard to evaluate the creditworthiness of companies [in China].”

Leah Martin, the co-owner of Corona, Calif.-based FireBlast Global, just started exporting her products last year. The 40-employee company, which makes equipment used in fire-training demonstrations, markets its goods to local governments and commercial airports in China, Japan and South Korea. Ms. Martin’s main concern this year is “making sure that the product can get delivered appropriately through the different exporting channels.”

Like others, Ms. Martin said she has had concerns about getting paid but worked with her bank to secure letters of credits that would act as surety bonds for payment of her company’s goods.

FireBlast is now planning to expand into Middle Eastern markets. Ms. Martin said it is too early for her to assess what impact exporting has had on her company’s growth, but she looks forward to growing the business. “I think it will be a completely significant increase in revenue based on what we’ve seen from our competition,” she said.

—Angus Loten contributed to this article.

Write to Rhonda Colvin at rhonda.colvin@dowjones.com

EXCERPT FROM FLUENT IN FOREIGN BUSINESS

Chapter 1

Why Go Global?

For any business in today’s world (and I am not talking about mom and pop shops here), not to expand internationally is practically a sin. Not only does global expansion provide diversification and additional revenue, it exposes one to different methods of doing business. In addition, the U.S. business back home can benefit from increased cultural sensitivity, competitive intelligence, new opportunities and better management.

International markets vary politically, economically, and socially. Depending on the market context, non-state market actors like multinational corporations and NGOs (non-governmental organizations) offer financial, networking, information exchange, advocacy and protection resources that can help a business of almost any size create a solid framework for entering a foreign market. What’s more, many of these resources are either free or nominal in cost.

One of the obvious reasons to expand overseas is diversification. Although we live in a global economic society and cross-border slowdowns affect us all, different countries are at different stages of their economic development. Markets that are ultra-competitive and mature in the U.S. are either still emerging, or don’t even exist yet, in many countries. This disparity allows businesses to become less dependent on their country’s economic situation and affirmatively exploit their own competencies in emerging overseas markets.

Another reason, of course, is a company’s financial growth. Foreign markets offer one of the best sources for revenue and profit margin expansion. It is no secret that the emerging markets of Brazil, China, Russia, India and Africa offer enormous business potential for all kinds of businesses and industries.

A lot has been written about the BRIC economies and their enormous populations and growing purchasing power. Today, expanding into these markets requires significant resources and a very strong competitive advantage.

The same can be said for the Western European countries and the markets of Australia and South Africa. Although numerous opportunities still exist in many existing or emerging market segments, businesses that are only now thinking of international expansion, especially those companies that are small to medium in size, would be well advised to consider beginning their international foray with smaller markets in countries such as Vietnam, Ukraine, Romania, Bulgaria, Poland, Hungary, Turkey, Kazakhstan, Georgia, Turkmenistan, Costa Rica, Panama, Chile, the Caribbean Basin and the region of Sub-Saharan Africa.  The list is long and each country can provide additional revenue and profits to any U.S. company that takes the time and effort to study the markets and carefully enter them.

At this point you may be asking, “How do I choose the right markets?” “How many countries can my company enter at once?” “What financial, human and administrative resources will we need?” “What would be our return on investment if we do this?” These and similar questions are absolutely normal.

I have seen businesses enter foreign markets completely opportunistically, for example after meeting someone from a country at a trade show or being contacted by a foreign customer. I have also seen companies do it thorough systematic analysis and marketing research prior to their market entry. Somewhere in the middle is the right way to go. Developing an effective market entry strategy requires information and a thorough analysis of local, regional and global market forces. But the perfect opportunity for your organization can be missed if you don’t exploit the real life chance opportunities.

Perhaps most importantly, you must have a high level of commitment to break into a foreign market. It will take time, persistence and serious resources. Once you decide to expand internationally, commit to and the expansion process and introduce it into your organization’s culture. That’s when things will start to happen and overseas business opportunities will open up. The challenge will be to separate the wheat from the chaff and to eliminate unscrupulous buyers and tire kickers. Once you identify an opportunity, make sure you thoroughly understand the proposed transaction while you manage the expectations of all the parties involved.

Look in the mirror. Ask yourself whether you really want it and whether your company is ready. International expansion can be exciting, cool, and profitable. But if you or your organization lacks patience, commitment, a desire to learn, and a strong value proposition, international expansion can be a most painful and costly undertaking.

As with any significant operation, you must set realistic goals. Ask yourself why you want it and what are you hoping to accomplish for yourself and for your organization. Quantify your objectives in terms of additional revenue and market positions, both short- and long-term. Will expansion affect your present operations? If yes, how? And how will you finance the undertaking? Understand your expectations. Are they realistic? A good rule of thumb is to triple any “realistic” timeframe you come up with. Things always take longer overseas, and in some countries they take much, much longer.

Are you ready for multiple, grueling flights, jet lag, bad hotels, unfamiliar food (sometimes amazing and sometimes inedible), and unpaved, hazardous roads? Is your company prepared to commit the human and financial resources to developing and implementing its international strategy? If you responded with a convincing “Yes” to the above questions, then pack light and enjoy the trip.

Want to know more write info@fluentinforeign.com

“Heavenly Hundred”- Monument to Commemorate those who gave their lives at Maidan, to be installed in Princeton

SPECIAL ANNOUNCEMENT!

PRINCETON COUNCIL ON WORLD AFFAIRS in ASSOCIATION WITH FLUENT IN FOREIGN ACADEMY, BROAD STREET CAPITAL GROUP and NUMEROUS INDIVIDUAL AND CORPORATE PARTNERS IS ANNOUNCING AN INITIATIVE TO CREATE a

“HEAVENLY HUNDRED” (НЕБЕСНА СОТНЯ) MONUMENT

TO COMMEMORATE THE LIVES OF THOSE WHO PAID THE ULTIMATE PRICE FOR DEMOCRACY IN UKRAINE. THE MONUMENT, ONCE COMPLETED, WILL BE INSTALLED IN THE PRINCETON, NJ AREA, WITH THE FAMOUS GROUNDS FOR SCULPTURE MUSEUM SELECTED AS THE PRIMARY LOCATION.

WE ARE HEREBY ARE  CALLING ON THE SCULPTORS AROUND THE WORLD TO SUBMIT THEIR DESIGNS FOR THE PLANNED MONUMENT. THE SUBMISSIONS WILL BE ACCEPTED THROUGH MARCH 30th, 2014.  WINNING DESIGN WILL BE ANNOUNCED ON APRIL 27th, 2014.

TO RECEIVE MORE INFORMATION ABOUT DESIGN SUBMISSION DETAILS PLEASE REGISTER:

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Those individuals and organizations wishing to support this project, please email rsigalus@fluentinforeign.com

The stories of 10 of EuroMaidan’s slain ‘heroes’ (VIDEO)

 Print version

 Photo — by Daryna Shevchenko, Olena Goncharova

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Davyd Kipiani, native Georgian. Kipiani lived in Kyiv during the last year and was a member of Mikheil Saakashvilli’s party back in Georgia. He died in an ambulance of two gunshot wounds he suffered on Maidan Nezalezhnosti on Feb. 20. Kipiani’s 1-year-old son lost his father.
© http://www.facebook.com/vakhtang.kipiani

By: Daryna Shevchenko, Olena Goncharova, Kyiv Post

As police bullets and tear gas rained down on protesters at Independence Square just after dawn on Feb. 20, the bloody body of one of the first victims of the violence was laid out with a candle memorial near the western barricade on Khreshchatyk Street.

A priest prayed over the body. A woman wept. A man, shaking his clenched fists in the air, shouted: “They are killing our heroes!”

 

Another man draped a Ukrainian flag on the man and then placed a sign above his head with a warning for Ukraine’s president: “Yanukovych, you’re next.”

Central Kyiv became a war zone just after breakfast time on Feb. 20, shattering a truce reached the night before by embattled President Viktor Yanukovych and opposition leaders. Either police and protesters weren’t listening, or they had different orders.

When the bodies were counted, the victims’ total for the day had reached at least 50 people while the total number of fatalities since the start of the EuroMaidan protests is nearly 100 people dead.

In the days since the Feb. 20 bloodbath, funerals have been held, tears have been shed and a collective grief has set in throughout Ukraine with schools and other events cancelled, as well as businesses closed.

Ex-Prime Minister Yulia Tymoshenko, newly freed from nearly three years in prison, urged the tens of thousands of people on Kyiv’s Independence Square on Feb. 22 to never forget EuroMaidan’s “heroes” because the bullets that killed them were meant for everyone.

Read the full story here.

Heavenly Hundred

Why the Civil Unrest in Ukraine Matters to Small Business [in the US]

 

 BY YURIY BOYKIV, Inc.com

Yuriy Boykiv, the founder of an advertising agency and a Ukrainian immigrant living in New York City, explains the stake entrepreneurs have in the outcome of the turmoil plaguing the European nation.

Ukraine is my homeland; it’s the country where I spent my childhood and most of my young adulthood. It provided me with a unique background, and it played a large role in shaping me into the person I am today.

When I came to the U.S. at the age of 19, I still had hopes of going back to Ukraine one day. Unfortunately, recent events have proven to me that Ukraine is on the brink of collapse. Rather than operating as an independent nation, Russia wants Ukraine to be its satellite state; the larger country is using its natural gas supply as a bargaining chip to get Ukraine to join the Russian version of the free trade zone.

However, the European Union wants Ukraine as a new member. This move would enable the EU to sell European goods to 45 million Ukrainians. The Ukrainian government supports Russia, but an oppositional force that supports the EU is thriving. Neither side hesitates to use violence to get its point across, leaving civilians sandwiched in the middle. Many people fear martial law–and a civil war–is on the horizon.  READ MORE 

 

Brazil’s Economy Seen in a Major Downturn – time to look beyond the BRICS?

Although so-called BRICS have still have massive expansion potential, entering those countries today is fraught with additional risk and the rewards for direct investors may be more elusive than ever.

Over the last 12 months the Broad Street Capital Group and Fluent In Foreign Business, have guided their clients to expand into a number of attractive new smaller emerging markets. So far the predictions have been dead on and we still continue to maintain that for those seeking interesting international opportunities, it’s time to look at the next wave of emerging smaller markets around the globe.

New Data Suggest Growth Weakened Over Past Two Quarters

By PAULO TREVISANI in Brasilia and LORETTA CHAO in São Paulo, WSJ.com 

Brazilian President Dilma Rousseff giving a speech on Monday Agence France-Presse/Getty Images

Brazilian data released Friday suggest economic growth has weakened over the past two quarters, illustrating how far a country once considered the darling of emerging-market investors has fallen.

The central bank’s economic activity index fell 1.35% in December from November, dented by a drop in industrial production and weak retail sales. Economists say the data mean the government is likely to declare that economic growth declined in the year’s last quarter after contracting 0.5% in the third period, suggesting the country had entered a technical recession.

Although preliminary data suggest the economy will grow again in the first quarter, a dip into a recession would be a major turnaround for an economy that grew 7.5% in 2010. As China’s growth has slowed and prices for commodities like the soy and iron ore that Brazil exports have cooled down, the country has found itself without an external engine for its economy.

Brazil’s economic performance today is a far cry from its emerging-market peers China and India, which are still growing strongly despite their slowdowns. The collective cooling of the markets has been an unexpected setback for many, particularly consumer companies that invested heavily in these countries in recent years, relying on them as a cushion as demand slowed in developed markets.

 Economists now expect Brazil’s economy to grow as little as 1.5% this year, less than the 2.3% estimated growth for 2013.

The contraction comes as President Dilma Rousseff gears up for a re-election year amid challenging economic conditions at home and abroad. Mass street protests over rising prices and poor public services racked the country in June and have continued on a smaller scale in the largest cities as the country is struggling with preparations to host the soccer World Cup this year.

“My company laid off 12 people last month. We’re almost closing our doors. A lot of stores here have already closed because people can’t make rent,” said Angela Marques, 39, manager of an electronics wholesaler in downtown Rio de Janeiro. She isn’t hopeful that the World Cup will turn things around.

Ms. Rousseff’s popularity has rebounded after falling sharply during the protests, which were sparked by a decision to raise bus fares. But the slowdown adds pressure on her administration, which won popularity by continuing her predecessor’s policies, including expanding social welfare and granting billions of dollars in loans through government banks, fueling consumption.

Consumption remains a growth driver, but even so, retail sales grew only 4% in 2013 from 2012. That is the worst performance since 2003, leading economists to believe Brazil will no longer be able to depend on consumption to drive growth.

Geraldo Mello, manager of a large mall in Brasilia called Brasilia Shopping, said sales grew 20% to 35% each year until 2008, but only 10% last year.

Consumers “accumulated debt with mortgages, new cars and other items and now their budget is tight.…They are insecure about the future, so they hold off on spending,” Mr. Mello said.

Investments are expected to disappoint as well. A recent survey by Brazil’s National Confederation of Industry showed that private investment intentions have fallen to the lowest level since 2010.

Meanwhile, government investment will be limited as Brasilia comes under pressure to cut spending and Brazilian banks tighten lending after a credit expansion in the past decade.

“Brazil will struggle to see growth of 2% this year,” said Robert Wood, a Brazil-focused economist with Economist Intelligence Unit in New York. “Consumption will be less of a driver for growth and there are no signs that investment is picking up.”

Bruno Roval, a São Paulo-based economist at Barclays, BARC.LN -1.33% said the latest data make it likely he will lower his outlook. “The negative influence will be carried over into 2014. We were expecting a GDP expansion of 1.9% But there is a real chance we will revise that downwards after the GDP results for 2013 and the fourth quarter are released at the end of February,” he said.

Industry has been one of the weakest points of the economy in recent years as output has stagnated, and Brazilian manufacturers have struggled to compete with international rivals.

“The ongoing situation in Argentina may have a substantial impact on Brazilian industry, as over three-quarters of Brazilian exports to Argentina are manufactured goods,” said economists at Nomura Securities in a note.

The silver lining for Brazil is that unemployment rates remain at record lows and wages are growing. Unemployment in six of Brazil’s largest metropolitan areas dropped to an average of 5.4% in 2013, from 5.5% in 2012, according to the Brazilian Institute of Geography and Statistics. Average monthly wages rose 1.8% in real terms.

But persistently high inflation continues to squeeze Brazilian consumers. Last week, Brazil said annual inflation in January was 5.59%, above the central bank’s target of 4.5. As a result, the central bank has gradually raise interest rates, a move that could slow growth even more. The central bank has raised its base interest rate to 10.5% from 7.25% in the past year.

“The main problem I see is not a cooling of the economy,” said Davi Alves, 24, the sous-chef of a high-end restaurant in São Paulo. “The problem I see is of high prices. Everything, from cars to homes, is expensive.”

—Rogerio Jelmayer, Paul Kiernan and Matthew Cowley contributed to this article.

 

Qatar and Australia tie for top ranking in the newly released Fi3F Index of most desirable countries for Franchisor expansion

as released by PRNewswire

NEW Fi3F INDEX™ RANKS APPEAL OF 180 NATIONS FOR WORLDWIDE FRANCHISE EXPANSION OPPORTUNITIES

Qatar and Australia tie for top ranking, followed by S. Korea and Singapore;

Additional Fi3 indices to rank country appeal for exporters and direct investors

NEW YORK, NY—Feb. 13, 2014–  Fi3F™, a new proprietary and forward-looking index that measures the attractiveness of 180-nations for franchisors seeking to expand internationally, is being introduced today by Fluent in Foreign™ LLC, a New York City advisory group that guides companies as they seek to establish or expand their franchise business abroad.

Fluent in Foreign is headed by Alexander Gordin, author of the international business guidebook “Fluent in Foreign Business,” which was published last summer by the Princeton Council on World Affairs.  The Fi3F franchising index is the first in a planned series of three indices The other two – Fi3E™ and Fi3I™ – are geared for Exporters and direct foreign Investors, respectively.

The Fi3F Franchisor Country Appeal Index™ evaluates each nation on 100 point scale using proven factors that include proprietary data combined with information obtained from the World Bank, United Nations, Transparency International and several U.S. government agencies.  The index looks at factors that include each country’s GDP growth, population size, education, availability of franchise financing, political risk insurance, corruption, investor protection and legal framework for contract enforcement and IP protection.

The top spot on the list is shared by the tiny Persian Gulf state of Qatar and Australia with each attaining the score of 85.7 out possible 100 points. In descending order, others on the top 10 list are: South Korea, Singapore, U.S., Malaysia, Canada, China, Mongolia and New Zealand. To get the full 180 country Fi3F list click Subscribe button on this page, or register your interest at http://www.fluentinforeignacademy.com .

International Dispute Resolution – A Business Primer

By: Gene M. Burd, Partner at Arnall Golden Gregory

Business people are reluctant to discuss potential disputes when the deal is only at the inception stage.  They may feel that discussing the potential dispute is counterproductive and could be a deal breaker.  However, disputes do happen and deals sometimes do go bad even if all parties have the best intentions.  The chances are that a legal action ensues which could be lengthy and expensive.  Therefore, the issue of how to make resolution of the potential disputes more expedient and less costly is a valid issue to be raised at the outset of any deal.

In the context of international business, be that a franchise, project finance, or a trade deal, the aggrieved party may have an array of options for a claim.  For example, if the franchisor is in Minnesota, franchisee’s corporate office is in Delhi, and the business is in Mumbai, legal proceedings could be commenced in at least three different places.  The situation may become even more complicated if the deal, as it is often the case, involves third parties such as brokers and financial institutions.

It would be expected for the claimant to file the case in the location which favors its interests.  Relevant factors include geographical proximity, familiarity with proceedings, perceived or actual friendliness of the forum, and the costs.  However, the respondent or respondents could have differing opinion on the better forum, which could lead to objections resulting in delaying the proceedings and making them more expensive.  The objections could even result in the dismissal of the claim.

To gain more certainty and to reduce the cost of a potential dispute, the parties may agree on how the dispute is resolved as part of their contractual understanding.  The agreement often addresses two principal issues: which law applies and which body will resolve the dispute.  Many factors play a role in making an appropriate selection.

Applicable Law.  In a cross-border transaction, the applicable law is often an uncertainty.  In the example above, the laws of Minnesota or India could apply to the franchising agreement.  There is a misconception that the laws of the place of contract apply.  This used to be the rule in many jurisdictions but is no longer the case.  Courts apply complex conflict of laws analysis to determine governing law.  Depending on which law is chosen, the contract could be interpreted differently or even voided altogether.  Therefore, it is crucial to agree on the applicable law.  But which one?

The answer depends on the type of transaction and the parties involved.  For example, Delaware has a well-developed corporate law, New York law has often been used in leasing and financing deals, English law is popular in the maritime community.  Laws of other countries, such as Switzerland, France, or Sweden have also been used in international transactions.  In sale and purchase transactions, parties may elect application of the United Nations Convention on the International Sale of Goods, which is an international treaty ratified by 80 countries.

The choice of law agreement may apply narrowly to disputes based on contracts or more broadly to those based on torts.  For example in a recent case, Abu Dhabi Inv. Auth. v. Citigroup, Inc., 2013 U.S. Dist. LEXIS 30214 (S.D.N.Y, 2014), the parties agreed that transaction will be governed by the laws of New York applicable to contract but failed to specify the law for non-contractual claims.  That allowed the plaintiff, Abu Dhabi Investment Authority, to assert that the more favorable law of Abu Dhabi applies to the fraud-based claims.  Although the court eventually rejected that claim, Citibank could have been held liable for billions of dollars in damages just because of uncertainty in the applicable law.  This case illustrates the importance of careful drafting of the choice of law clause.

Arbitration v. Litigation.  Another choice to make is whether to arbitrate or litigate the dispute.  Arbitration is, in essence, a private court.  Parties appoint arbitrators to resolve a specific matter.  Arbitrations can be administered by established arbitration bodies or by the parties themselves.  The former is called institutional arbitration and the latter is ad hoc arbitration. 

There are numerous international arbitration bodies with different arbitration rules such as the American Arbitration Association, International Center for Dispute Resolution, Court of Arbitration of the International Chamber of Commerce, Swiss Chambers of Commerce, Stockholm Chamber of Commerce, International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and many others.

What is better litigation or arbitration?  There is no simple answer to that question.  Generally, when deciding between arbitration or litigation, parties should consider the following:

Time.  Arbitration is normally more expeditious than litigation.  This is true even in cases with multiple parties and cross-border disputes. However, in some instances, court proceedings could be more efficient because of some court’s strict internal scheduling guidelines.

Confidentiality.  Arbitrations are normally confidential and the awards are not published.  Arbitration hearings are private as opposed to the court proceedings that are open to the public.  Therefore, disputes could be resolved without unnecessary publicity which could be harmful for business, especially if the parties have an ongoing relationship.

Cost.  Traditionally, arbitrations were considered as a lower cost alternative to litigation.  However, this is not always the case..  In arbitration, the parties are responsible not only for the costs of their legal representation but also for the fee of the panel of arbitrators which may include three expensive lawyers or retired judges.  The parties are also required to pay administrative fees if there is an institutional arbitrator.  However, arbitration often wins the cost battle because of a more limited discovery, which represents a major portion of litigation costs.

Discovery.  As noted above, discovery, a compulsory disclosure of relevant documents and witness depositions, is one of the most expensive parts of the litigation.  In a complex commercial case, discovery may result in the production of the thousands of documents and depositions of dozens of witnesses.  In today’s age of electronic communication, discovery of Electronically Stored Information (ESI) could be even more intrusive and expensive.  In contrast, discovery in arbitration, especially in international arbitration, is normally limited and focused on the documents.

Appeal.  Closely related to the timing and cost is the possibility of appeal.  Court judgments are fully appealable on the issues of law and underlying facts.  Arbitration awards can only be set aside based on a limited number of grounds.  The Federal Arbitration Act, U.S. law governing arbitration, only allows appeal where (1) the award was procured by corruption or fraud; (2) the arbitrators were impartial or corrupt; (3) the arbitrators committed some type of misconduct such as refusing to consider material evidence; and (4) the arbitrators exceeded their powers.  There is some uncertainty in the law whether an arbitration award could be appealed based on the manifest disregard of the law by the arbitrator. However, practically speaking, the “manifest disregard” appeals rarely succeed in international commercial arbitrations.

       Enforcement.  International arbitration awards are enforceable pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) in 149 countries.  The grounds to deny enforcement under the New York Convention are limited and do not include the merits of arbitration awards.  In contrast, the enforcement of court judgments is more complicated.  The United States is not a member to any treaty for recognition of court judgments.  That is not to say that a court judgment issued in another country cannot be recognized in the United States or a judgment of the U.S. country cannot be enforced in another country.  The process for enforcement of judgments is generally more cumbersome and less certain.

Not surprisingly, a knee jerk reaction in considering the above factors could be to choose arbitration rather than litigation.  That, indeed, would make sense in many cases, especially in the international context.  However, under certain circumstances, litigation could be more advantageous and effective tool to protect party’s interests.  For example, broad U.S. – style discovery could benefit a plaintiff who claims fraud and misrepresentation.  Witness deposition may reveal key information crucial to the case.  Documents obtained from the third parties, may provide additional supporting evidence.  Moreover, broad discovery reveals strong and weak sides of each party’s position, which encourages early settlement of disputes, thus, resulting in overall cost savings compared to arbitration in certain cases.

In conclusion, consider all the factors, both advantages and disadvantages, before making the decision.  Likewise, do not rush to agree to the dispute resolution clause and the choice of law proposed by your counter-party just to make the deal go through.  Remember, dispute avoidance begins with the careful planning of the resolution mechanism.

Think Global, Act Local.

A New Jersey Chamber of Commerce and its leading members set an example on how to develop international business relations.

Rebecca Proske, CFP – A Charles Schwab Financial Representative hosts an international workshop for Life Financial Group visitors

Last Wednesday, normally quiet and domestically focused financial sector of the Western Monmouth County in New Jersey, was rocked by an arrival of a twenty person international delegation from Russia’s major banking and financial services enterprise. The visitors from the distant shores arrived on a mission of trying to understand how our best regional banks and financial advisors in the suburban settings practice their craft. READ MORE

When It Comes to Finesse In Foreign Relations, New York Rules and Boston Drools!