Not in Kansas anymore

Crossing borders

Jack sat frowning at his desk, thumbing through the pile of rejected PPE face masks with a knowing touch. Many years ago when he had spent his summer holidays playing in the sewing room of his father’s factory, an old Greek lady had taught him how to use an industrial sewing machine and put him to work sewing small bits and pieces – mainly to keep him quiet. He loved the powerful hum of the machine, and experimented with different fabrics: leather, polyester, heavy cotton and even high tech polymers. But those days were long gone, the factory had been dismantled and the workers made redundant.
These days, the PPE was made in China. Feeling the masks, he knew instinctively that something just didn’t sit right. When Jack looked at the technical report, it showed that some of the wefts of the mask fabric had been made with lower quality material and the thread was not the specification that they usually required. This would be a difficult decision: on the one hand, his company was suffering from the fall out from unhappy clients; on the other hand, his Chinese supplier had been a trusted partner for many years. His father had built the relationship over decades and had never had a problem- until now.

For many safety product suppliers, importing and relying on overseas manufacturing has been part of the business for years. Unable to compete with lower labour rates and access to technical expertise, Australian businesses have had to build relationships with overseas manufacturers, particularly in China, Taiwan, Indonesia and Malaysia. If built carefully and with cultural sensitivity on both sides, these relationships often flourish, benefiting both countries. But what happens when things don’t go according to plan?

In many Asian countries, conflict avoidance at all costs is the norm- and indeed there are few cultures that enjoy conflict for its own sake. This makes it difficult to find out what happened, how things can be improved and how the consequences can be fairly distributed between the safety product supplier and their overseas supplier. Trying to connect over the telephone with a supplier who is usually receptive and eager to please may be met with stalling techniques: all of a sudden, the managing director is “travelling”, or “in meetings” or is “away from the office.” When you do connect, you may be met with a series of embarrassed smiles and a fog of real or convenient language difficulties.  For most mature executives, litigation is the last resort to resolve a conflict of this nature. But when tactful conversations and discreet negotiations fail to bring a fair allocation of blame, sometimes there is no other choice.

Taking legal action against an overseas supplier is not something for the faint-hearted. First, you need to check the jurisdiction clause in your purchase order or terms and conditions. Does it say that the purchase is governed by an Australian jurisdiction or an overseas jurisdiction? Are you meant to go through mediation, arbitration or local litigation? If so, where are you meant to do this? The commercial laws of many countries allow parties to choose where they want to resolve disputes and often parties choose a neutral third party country to ensure no one has a “home turf” advantage. Secondly, are you prepared to pay legal costs to bring an action against a foreign party? International trade disputes are never “no win, no fee”, so bringing a legal action may be costly and have a significant and unpredictable impact on your P&L. If translation is needed, this will add more to the cost and delay proceedings. Even if all the stars align, enforcing judgements across borders depends on whether the matter comes within the terms of the Foreign Judgements Act 1991 (Cth) or, for arbitration awards, both countries being signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (commonly known as the New York Convention). Enforcement proceedings themselves can be lengthy and costly. And obtaining a judgement or award in your favour then not being able to enforce it is nothing but a pyrrhic victory.

Clearly, relying solely on legal remedies does not make good business sense, although having a reliable legal document in place can serve as a sensible last
resort. Building a relationship takes time, but it also has to be maintained. Whether set in a legal document or in your annual calendar, make sure that you spend time with your overseas partner to ensure that you are both on the same page with respect to quality systems, processes and outputs. If you can work together on small difficulties, that can build the trust needed to jointly face larger difficulties. You may even find it useful to run mock emergency scenarios, similar to a fire drill. Finding local sources of support such as well-connected accountants, advisors or lawyers can also give you another avenue of communication to prevent as well as handle cross border difficulties. Do not underestimate the power of being able to speak the local language and work within the local power hierarchies and networks of influence.  Jack will need to have a carefully researched and managed conversation with his Chinese counterpart in person to ensure that they both understand what is at stake. If done well, there is every chance that the parties may come to the view that the relationship is a long-term one and come up with a solution that can keep both parties in business together.

“Coming together is a beginning. Keeping together is progress. Working together is success.” –Henry Ford

At Sharpe & Abel we understand that the legal fundamentals are important, but there are other essential elements that contribute to the smooth running of professional relationships across borders.  The law, on its own, may not deliver the outcome you are looking for.  That is why we also offer support and guidance to our clients who are looking for help in managing their professional relationships.  We also have a little black book full of contacts in the Asia-Pacific region so we can facilitate introductions to, or oversee discussions with, local advisors.  Please contact us if you would like to know more about our services or just talk through an issue.

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