There are legal considerations aplenty when a business decides to export, says Michael Hatchwell of Davenport Lyons
In January 2014, the UK saw its trade deficit hit a 19-month high and exports fall to their lowest level since June 2012. In an attempt to rebalance the economy, the government has indicated that it wants UK exports to reach £1tn and for 100,000 more UK companies to be exporting by 2020.
“I want the message to go out that we are backing our exporters – so that wherever you are around the world you can’t fail to see Made in Britain,” George Osborne proclaimed as he revealed the details of this year’s budget, which saw the government place additional resources behind UK businesses to help them invest more in exports.
Within a relatively flat European economic environment, more and more businesses are seeking to trade abroad to meet their business growth objectives. Smaller companies now have to do business overseas like never before to remain competitive. Therefore, getting exporting right is crucial to business success.
However, it presents its own set of legal implications for businesses to consider. The following should provide some useful guidance on how to go about tackling them.
1) It is important to understand the market you are seeking to enter and what regulations or laws may impede access to the consumer. Are there any legal requirements in the target market relating to product standards or restrictions relating to marketing and labelling of products? Are your products illegal or do they require, in advance, an import licence from the authorities? In some cases, your business may need to obtain an export licence from the UK authorities.
2) Insurance should be carefully considered to protect against risk of non-payment and to cover against damage or loss and any product liability claims. In some jurisdictions strict liability will be imposed.
3) Selling goods without receiving payment is not good business. Knowing your customer is a key mantra and the result of extensive local research should dictate how you interact with different customers. Money up front is always best or payment by a letter of credit from a reputable bank is just as good, although inevitably more costly.
4) Take advantage of UK Export Finance’s (UKEF) Direct Lending scheme, an export finance scheme which aims to support buyers from overseas. The scheme supports UK exports by providing loans of up to £50m direct to British exporters. It provides financial security when the exporter’s customers are having difficulty securing their own finance from other sources, which allows the customer to pay in instalments. Following the budget announcement interest rates on this loan have been cut by a third, making them a competitive option to help finance your exporting business.
5) I would strongly recommend establishing the credit risk of potential customers by obtaining a letter of credit from their bank and checking with other exporters to see if they have experience of dealing with the customer.
6) A customer’s financial standing is also key, so it is important to understand where a customer has assets if something goes wrong – ie where will enforcement of a judgement be productive.
7) When negotiating sales contracts or terms of business, ensure that you do the following:
- Define the goods to be supplied
- State the price to be paid
- Be clear about the method of payment
- State which party takes responsibility for the goods at each stage of delivery, including who will pay for insuring the goods and paying customs duties
- Include a retention of title clause to ensure that you retain ownership of the goods until you have been paid in full
- State what rights the customer has so that you can use your Intellectual Property (IP) including trademarks and patents
- Agree how any disputes will be handled and by which jurisdiction
- Include a force majeure clause to allow you to terminate the contract in the event that it becomes impossible to perform
- Clarify what will happen in the event of faulty goods or non/late delivery
8) Keep the wording of any sales contract clear, concise and simple. You must take local legal advice to check that your contract is enforceable in your target market (even if a different law is chosen to govern the contract) and to help avoid any translation issues.
9) Your IP may be more valuable than the goods themselves. Protect your IP by appropriate registrations in the country that you are exporting to. This is exceptionally important. Checking that you are not infringing someone else’s IP is a step that is frequently forgotten.
10) VAT is a tricky area that has many special applicable rules. VAT may need to be charged to buyers of your goods in another country. Products exported outside the EU or sold to a VAT-registered purchaser in the EU can be zero-rated, provided you follow strict rules.
11) Import duties, such as customs and excise duty, vary depending on the country and your product. Ensure that you specify the party responsible for paying any import taxes and importation formalities in the sales contract.
Going it alone can be daunting and there are many good alternatives. Agency, distribution, franchising and licensing agreements, as well as entering into joint ventures, offer real solutions to successful exporting. Using reliable local partners with local knowledge can help you avoid many pitfalls as there should be a common interest. Take advantage of organisations such as UK Trade & Investment (UKTI) and UKEF which specialise in supporting overseas trade.
Exporting can be very financially rewarding and, following the 2014 budget, there has never been a greater opportunity for UK entrepreneurs and small businesses to expand their business overseas. So get the stamps at the ready.