International business risks - contracts, payments and IP by Reed Smith on 27-Jun-2013

Intellectual property theft is a fast-growing concern for business leaders with an increasing number expecting to end up in an international commercial dispute over IP over the next two years.

New research from global law firm Reed Smith, conducted by The Economic Intelligence Unit (EIU), reveals breaches of contract and payment defaults are the biggest causes of commercial disputes for companies operating overseas today.

However, business leaders expect IP issues to become one of the biggest areas of commercial dispute in the next few years, particularly as they expand into developing and emerging markets as highlighted in the report, Troubled waters: the risks of international commercial disputes. The EIU findings are drawn from a survey of more than 450 senior executives from multinational businesses worldwide.

Key findings include:

• One in four companies across all sectors have faced an international commercial dispute in the past two years, rising to three in ten of transport and shipping business.
• Three in ten (29%) European respondents have been involved in a dispute over the past two years, compared with one in five (21%) from Asia-Pacific and 25% from North America.
• Larger companies are more likely to face a dispute than smaller ones: 19% companies with annual revenues under US$250m have faced a dispute in the last two years compared with 34% of companies with revenues in excess of US$10bn annually.
• A quarter of respondents (24%) have faced an international commercial dispute due to payment defaults in developed markets and 23% in BRIC markets.
• Three in ten (31%) of companies identify breach of contract as the most common reason behind an international commercial dispute in developed markets, falling slightly to 28% in non-BRIC rapid-growth markets and 27% in BRIC nations.
• A third of businesses operating overseas expect to have an issue over IP theft in BRICs and other rapid-growth markets in the next two years.
• Three in ten (30%) of transport and shipping sector respondents have been involved in an international commercial dispute in the last two years.

The report also highlights the importance to companies of having clear routes to resolution when a dispute arises – and preparation for dispute resolution in advance rather than when required is vital. Businesses should conduct a detailed risk assessment and have a clear plan to resolve disputes rather than spend valuable time and resource solving when problems arise.

Often there are appropriate systems in place yet enforcement by authorities or government is an issue. Companies need to be aware of the enforcement problems they may face in different jurisdictions when conducting business across borders.

Charles Weller, Partner at Reed Smith, specialising in international arbitration in the shipping sector explains, "The main cause for an international commercial dispute is breach of contract. Particularly as technology evolves and negotiations are developed electronically, disputes can arise as to whether contracts have been concluded."

"Consequently, companies must consider the risks when expanding as cultural differences around whether a contract has even been made can impact on legal proceedings and mean that enforcement is not always a viable option for collecting in a contractual dispute."

Carolyn Pepper, Partner and an expert in intellectual property and dispute resolution said, "Companies which rely heavily on the value of their IP are increasingly worried about IP infringement and enforcement and don’t expect the situation to improve quickly, our report found. Many businesses will regard these perceived risks as an acceptable cost of conducting business in certain markets, but others won't."

"Unless strong messages are sent out on enforcement companies will continue to be wary and executives may think more carefully about investing in or doing business in territories where they do not think that the protection available for IP rights is as strong as they would like."

"BRIC nations need to be seen as attractive markets for long-term overseas investment," says Gautam Bhattacharyya, Partner specialising in international commercial litigation and arbitration. "In terms of IP, Russia and China have been one step ahead of India and Brazil as they modernised their IP systems by joining The Madrid Protocol - the international trade mark registration system - which is seen as a marker of economies which have arrived."

"India has taken a great leap forward this year by applying The Madrid Protocol from July 2013 which will, it is hoped, assauge concerns over IP rights and protection for foreign owners who would like to tap into the target English-speaking consumer market in the world. Brazil seems likely to follow at some stage, but that time does not seem to be near."

You can download a copy of the report, one of the Business Across Borders series.

For more information on Reed Smith, please visit: www.reedsmith.com

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