Doing Business Overseas: The Trust Thing

As a business lawyer who specializes in international transactions, I spend about half of my time working on legal strategy with my clients. I describe legal strategy as figuring out what the right way is to get from A to B, and those are often separated by international borders, vast oceans, and language and cultural barriers, on top of the regular uncertainties and struggles of doing business. When looking to do any sort of overseas business, trusting the company with which you will be doing that business is paramount. It is paramount because if something should go wrong between your company and that company, securing a legal remedy will almost always be more difficult than it would be for an entirely domestic dispute. I always encourage my clients to be fair and even generous in their business relationships but plan that at some point the relationship will deteriorate to the point where they need to start rereading their contracts, focusing on rights, remedies, and enforcement terms.

Establishing your international business relationships on trust

Every solid relationship requires trust, even if you don’t particularly like the people on the other side.  (I happen to like doing business with people I like, but that is not how everyone does business.) When looking at establishing your international business relationships on trust, what should you trust about the foreign company? The “trust” that you must discern usually involves the following:

  • Can you trust their intentions?
  • Can you trust their ability?
  • Can you trust their judgment?

Can you trust their intentions?

Intentions. Will the foreign company plan to fulfill the terms of your contract or not? Do they think they can make more money with you than without you? Are they honest and reliable? This is the most basic type of due diligence you should undertake on the foreign company. Find out if it pays its taxes, whether it gets fined by the government for how it conducts business (including how it treats its employees) and, most importantly, whether it always or almost never is involved in litigation with others. You should ask them for references from past satisfied customers or partners and check them carefully.  Be sure you are discussing the same individuals, not just the same company. You will need to make value judgments about the people giving you the references, so don’t cut corners here.

I am a big fan of using an already vetted contract to gauge the bona fides or good faith of a foreign company. For instance, my law firm has been using roughly the same NNN Agreement (these are agreements that will protect your registered and unregistered IP against the foreign company with which you are doing business) for so long that we can usually assess the intentions of a foreign company by how it reacts to it. Silence? Hesitation? Excuses? All bad. If they then provide you a version of their own NNN Agreement, that’s usually a very good sign, but you still need to read it carefully.

Can you trust their ability?

Ability. There are plenty of companies and consultants that are completely honest, completely likable, and completely incompetent. Good intentions do not mean a thing if the person with whom you are negotiating lacks the ability to do the job for which you plan to use them.

It is not uncommon for companies in emerging market countries to underestimate the complexity of the task they are agreeing to do or to misunderstand the standards you expect them to meet. You should get very specific very fast about what exactly it is they have done in the past and what you require. Make sure you are clear about their experience. Did they actually do the work you are discussing, or were they a small part of a team that did it? Beware of generalists when you need a specialist. Talk very specifically about deadlines and schedules and prices and be on guard for unrealistic estimates. Find out what they will not or cannot do. Good experienced companies know their limits and will not take on something they cannot handle. The follow-on to this is finding out who will be on the team that is completing the work or producing the products you require. Is the foreign company outsourcing? Are they above board with you about that outsourcing?

At the same time, it is important you know what abilities are even possible with the product or in the country with which you are dealing. If every widget manufacturer in Mexico or South Africa requires at least 45 days turnaround time, your insisting on 20 days will not reveal anything except your unrealistic expectations, which will not further your business relationship.

Can you trust their judgment?

Judgment.  Standards on everything vary widely by country and even within the same country, and your conception of high standards may be very different from that of your potential partner. You need to establish a “meeting of the minds” on this with your potential overseas partner, and this means you need drill down to the details. Starting with a term sheet or a letter of intent (LOI) is a good idea, and it should be as detailed as possible. Once you get to the stage where you think the lawyers will be impressed with the amount of detail you have considered, then it’s time to have your law firm turn the term sheet or LOI into a binding agreement.

In many emerging market countries you will find yourself spending massive amounts of time getting to know those with whom you are contemplating doing business, but time does not necessarily correlate with answers to the questions that really matter to you — I would contend there is actually an inverse correlation. Being wined and dined can be fun, but that honeymoon stage of the business relationship needs to give way to solid relationship fundamentals undergirded by concrete, verifiable details.

Keep digging for specifics, especially if anything you are being told does not sound completely right. One of my international colleagues loves to say that what seems clear and easy at the beginning of a business relationship can quickly become difficult and confusing after the deal is done. Details, details, and more details will help you keep your head and your negotiating position clear for the duration of the business relationship.