Embarking on Manufacturing Projects Overseas
By: RICHARD E. WEINER
Many U.S. companies see enormous potential in selling manufacturing plants and equipment to customers overseas. What they often fail to see are the legal risks and challenges of taking on manufacturing projects in foreign countries. There are, of course, many legal challenges to conducting business operations abroad, and this is especially true for companies involved in manufacturing projects overseas.
I. Foreign Government Approvals
Unlike in the United States, foreign governments often regulate the sale of manufacturing plants in their countries. In some countries, the project’s customer must be a government agency or an entity affiliated with the government. In other countries, the customer must be examined and approved by the foreign government before it may purchase a manufacturing plant or manufacturing equipment. Some countries even require that the contract between the U.S. company and its foreign customer be reviewed and approved by the appropriate ministry of the foreign government before the contract may become effective. Still others require that the manufacturing plant or manufacturing equipment itself be approved by the foreign government before importation of the equipment or construction of the plant may begin.
II. U.S. Foreign Corrupt Practices Act
Several U.S. laws make it illegal for an American company or any of its foreign suppliers, subcontractors, or representatives to make any payment or give anything else of value to any agency or official of a foreign government in order to gain approval for a business project overseas. Most notable among these is the U.S. Foreign Corrupt Practices Act, which imposes monetary penalties on U.S. companies and imprisonment on their officers who violate the Act. Since a U.S. manufacturing company can become liable under the Act for payments and gifts made by its foreign suppliers, subcontractors, or representatives to foreign government officials or agencies that may be involved in approving the U.S. company’s business dealings in the foreign country, it is important that the U.S. manufacturing company know about and control the actions of its foreign suppliers, subcontractors, and representatives. The U.S. manufacturing company that remains ignorant of these actions does so at its peril. It may find that it has unknowingly and inadvertently violated the Act, thereby subjecting the company to fines and its officers to imprisonment in the United States.
III. Foreign Customs Laws
As with many products that are shipped overseas, a foreign government may assess a customs duty or tariff on manufacturing equipment that crosses its borders before it will release the equipment to the foreign customer. The customs duty or tariff is typically a percentage of the purchase price of the piece of equipment that the foreign customer has purchased from the U.S. manufacturing company. It is the responsibility of the customer to pay the customs duty or tariff in order to obtain the equipment from the foreign government.
However, in some countries, simply paying the customs duty or tariff is not enough. In certain instances, the foreign customer may be required to apply for and receive an import license from the foreign government before the government will release the equipment. The application process for an import license may be costly and time-consuming. This will depend upon the customs laws of the country into which the manufacturing equipment is to be imported. In any case, the U.S. manufacturing company must determine whether its foreign customer will require an import license to import its equipment, and if so, how long obtaining an import license will take. Otherwise, the U.S. company will be unable to establish a meaningful delivery schedule for its foreign customer.
IV. Foreign Intellectual Property Protection
Many U.S. companies believe that if they have protected their intellectual property rights in the United States by obtaining patent and trademark approval for their equipment from the U.S. Patent and Trademark Office, then their intellectual property rights are protected overseas. This simply is not the case. The U.S. manufacturing company that ships its equipment to a foreign country must assess the risk that someone in that country, perhaps even its own customer, may try to steal the company’s designs, technology, know-how, company name, or product name and the company should seek intellectual property protection for them in the foreign country. The U.S. manufacturing company should seriously consider filing patent and trademark applications in the foreign country before it ships its equipment there in order to prevent such theft from taking place. Failure to do so could result in the U.S. company’s intellectual property being pirated and knocked off. In such instances, the U.S. company may find that another foreign company is offering to build manufacturing plants and sell manufacturing equipment using the U.S. company’s designs, technology, and know-how.
V. Foreign Laws
The U.S. manufacturing company that agrees to build a manufacturing plant in a foreign country must abide by all of the laws of that country during the construction, installation, operation, and maintenance of the plant. This will include, for example, complying with the foreign country’s laws regarding (1) sending Americans to the site to work on the project (including obtaining the appropriate visas for the Americans to enter and work in the foreign country), (2) hiring and paying local employees to work on the installation and operation of the plant, (3) paying any taxes assessed by the foreign country on the U.S. manufacturing company in connection with the project, and (4) complying with the foreign country’s environmental laws regarding the operation and maintenance of manufacturing plants. The U.S. manufacturing company must learn about all of the foreign country’s laws applicable to manufacturing plants before it embarks upon a manufacturing project in the foreign country.
VI. Repatriation of Funds
A U.S. manufacturing company simply assumes that it will be paid without government interference for the manufacturing projects that it undertakes and the manufacturing equipment that it sells in the United States. In some foreign countries, however, a customer is not entitled to make payments abroad without prior authorization from the foreign government. This means that a foreign customer must sometimes apply for and receive approval from the foreign country’s monetary authorities before it can make payments to the U.S. manufacturing company for the equipment that it has purchased. In some instances, it may take weeks or even months for the foreign monetary authorities to grant approval for the customer to remit payment to the United States. The U.S. manufacturing company must investigate whether the foreign customer’s country has such restrictions on the payment of funds overseas, and if it does, the company must assess the risk that it might not be paid for the project without undue delay.
VII. Foreign Dispute Resolution
A dispute between the U.S. manufacturing company and its foreign customer may have frightening consequences for the U.S. company. The company may be required to appear in a foreign country’s court under a legal system that it does not understand. Or the U.S. company may have to participate in arbitration proceedings in front of a foreign country’s arbitration tribunal in a foreign language.
However, the consequences of such a dispute need not be so scary. A well-drafted contract between the U.S. manufacturing company and its foreign customer that addresses the issue of foreign dispute resolution can often serve to mitigate such dire results. Most foreign countries’ laws will allow the foreign customer to select a neutral location for the resolution of disputes or will provide for special procedures that ensure the rights of the U.S. manufacturing company in a foreign trial. The U.S. manufacturing company must become acquainted with the options provided by the foreign country’s laws in the event of a dispute with its foreign customer.
The legal landscape of taking on manufacturing projects and selling manufacturing equipment overseas can be fraught with pitfalls and minefields. However, understanding the risks and challenges involved is essential to avoiding the pitfalls and minefields and to successfully concluding projects that are beneficial to both the U.S. manufacturing company and its foreign customer.