Risks and Challenges for Overseas Biodiesel Projects

By Rich Weiner | November 20, 2007
Many U.S. biodiesel companies see enormous potential in selling their biodiesel plants and equipment to overseas customers. What they often fail to see are the legal risks and challenges of developing biodiesel projects in foreign countries. There are, of course, many legal challenges to conducting business operations abroad. It can be especially true for companies involved in biodiesel projects.

Many factors affect overseas business ventures. The first is foreign government approvals. Unlike the United States, foreign governments often regulate the sale of biodiesel plants in their countries. In some countries, the project's customer must be a government agency or an entity affiliated with the government. In others, the customer must be examined and approved by that country's government before it may purchase a biodiesel plant or biodiesel 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 biodiesel plant or equipment be approved by the foreign government before equipment importation or plant construction begins.

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 of their officers who violate it. A U.S. biodiesel 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. Therefore, it is important that the U.S. biodiesel company know about and control the actions of its foreign suppliers, subcontractors and representatives. The U.S. biodiesel 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 jail time in the United States.

As with many products shipped overseas, a foreign government may assess a customs duty or tariff on biodiesel 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. biodiesel 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 its government before the government will release the equipment. The application process for an import license can be costly and time-consuming, depending on the customs laws of the country into which the biodiesel equipment is to be imported. In any case, the U.S. biodiesel company must determine whether its foreign customer will require an import license to import its equipment, and if so, how long it will take to obtain one. Otherwise, the U.S. company will be unable to establish a meaningful delivery schedule for its foreign customer.

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 is not the case. The U.S. biodiesel 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 or product name, and seek intellectual property protection in the foreign country. The U.S. biodiesel company should seriously consider filing patent and trademark applications in the foreign country before shipping its equipment there in order to prevent such theft. 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 biodiesel plants and sell biodiesel equipment using the U.S. company's designs, technology and know-how.

The U.S. biodiesel company that agrees to build a biodiesel 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 includes, 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. biodiesel company in connection with the project, and 4) complying with the foreign country's environmental laws regarding the operation and maintenance of biodiesel plants. The U.S. biodiesel company must learn about all of the foreign country's laws that are applicable to biodiesel plants before it embarks upon a biodiesel project in that country.

A U.S. biodiesel company assumes that it will be paid without government interference for the biodiesel projects that it develops and the equipment it sells in the United States. In some foreign countries, however, a customer is not entitled to make payments abroad without prior authorization from its government. This means that a foreign customer must sometimes apply for and receive approval from its country's monetary authorities before it can make payments to the U.S. biodiesel company. In some instances, it may take weeks or months for the foreign monetary authorities to grant approval for the customer to remit payment to the United States. The U.S. biodiesel company must investigate whether the foreign customer's country has such restrictions on the payment of funds overseas. If it does, the company must assess the risk that it might not be paid for the project without undue delay.

A dispute between the U.S. biodiesel 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.

However, the consequences of such a dispute need not be scary. A well-drafted contract between the U.S. biodiesel company and its foreign customer that addresses 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. biodiesel company in a foreign trial. The U.S. biodiesel 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 developing biodiesel projects and selling biodiesel equipment overseas can be fraught with pitfalls and mine fields. However, understanding the risks and challenges involved is essential to avoiding problems and to successfully concluding projects that are beneficial to both the U.S. biodiesel company and its foreign customer.

Richard Weiner is an international biodiesel lawyer in the energy law department of Fredrikson & Byron P.A., a leading law firm assisting energy clients. Reach Weiner at [email protected] or (612) 492-7009.

The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of
Biodiesel Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).
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