Best Practices in International Business Contracting – Part 2
In a prior blog post, I began discussing best practices when contracting with another business that is outside of the United States. The most successful businesses forecast their potential business risks, discuss them early with their counterparts, include related provisions in their contracts addressing those risks, and then monitor the relationship on an ongoing basis. In international contracting, no news is not good news. Here are some additional considerations:
- International trade taxes and related payments can often be the source of great friction, especially if one contracting party is in a country that has a high likelihood of adding or modifying taxes, trade tariffs or other value added taxes upon international goods or services. Payments that are due under the agreement should be net of any sales tax, value added tax, customs, import or other duties that may apply to the transaction.
- Be aware of items that the US State Department, Treasury Department and Department of Defense are concerned with and include provisions addressing them (corruption of foreign officials, human trafficking, money laundering, and national security), as well as corresponding governmental units of the other party’s home country.
- What international treaties are in effect between the parties’ home countries? Should international rules apply, such as the United Nations Convention on the International Sale of Goods or the trade terms prepared by the International Chamber of Commerce (Incoterms)?
- The other party should make robust representations and warranties concerning the validity of its business operations and covenant to ongoing compliance with all applicable laws, including those in all jurisdictions in which it operates.
- Determine whether the agreement should apply to all future arrangements between the parties unless otherwise agreed in writing.
- Determine whether force majeure items should apply to a disruption in either the supply of goods or services or the other party’s payment under the agreement. Force majeure items could include governmental regulations or enforcement outside of the other party’s control.
- Clarify exactly how an order may be placed, confirmed and amended. For goods, indicate whether delivery may be made in more than one installment, how goods are inspected and approved and whether time is of the essence. If it is a contract for goods, determine when title to the goods changes hands, which is important for spoilage, shrinkage, shipping and insurance purposes. Even where risk for these items changes hands, ownership of the good should not pass until payment is received in cleared funds. The recipient’s goods should be kept safe, insured and separate from their own goods until ownership of the goods passes to the recipient.
- For goods, determine who is responsible for obtaining import licenses, governmental consents and other import-related processes, such as fumigation or other decontamination.
- For goods, the seller should receive an irrevocable license to enter the buyer’s premises where the goods are located to inspect, count and recover them.
- For goods, limit resale of products to third parties in other locations.
- Confirm that the contract does not create a partnership, agency or other legal relationship between the contracting parties.
Each of the above items is a potential risk factor in the international contracting context, and the relative risk of each item should be weighed prior to entering into an agreement with a foreign party. For more information, contact one of our qualified attorneys.