The manufacturing sector supply chain by its very nature necessitates a high volume of cross border transactions. Most manufacturing businesses will engage with customers and suppliers in jurisdictions outside the country in which they are based on a regular basis.
Contracting internationally can lead to a multitude of issues and when things go wrong the costs associated with not having appropriate contracts in place can be significantly higher than in domestic arrangements. In such international contracts it is imperative that clear contractual terms are implemented to ensure businesses get the most out of their commercial arrangements and, perhaps more importantly, that they are adequately protected if things go wrong. This article explores some common issues which arise when supplying goods to international customers:
- Delivery terms: In long term supply contracts with customers located overseas, it is essential that the delivery terms and particularly the place of delivery is clearly identified. Failure to get this right could result in a business incurring significant costs associated with the carriage of goods which it is unable to pass on to its customer. One way of reducing this risk is to incorporate Incoterms 2010. Incoterms is a set of rules that describe the tasks, costs and risks involved in the delivery of goods. The rules are recognised internationally and well known to many businesses in the manufacturing sector. However, you should review the Incoterm selected carefully to ensure it is consistent with the commercial arrangement. (For example, where delivery will be made by rail or road do not select FOB which should only be used for sea or inland waterway transport).
- Payment: A key challenge where an agreement is cross border is ensuring that the currency of payment is clearly set out and that where a currency conversion is required the method for converting the price is stipulated. This will ensure that money is not lost due to currency fluctuations
- Local Law: Even if a business specifies in a contract the governing law that should apply, there may be local laws that will apply by default which cannot be excluded. Businesses should consider whether their standard form supply contract or terms and conditions should be reviewed from a local law perspective. Of particular relevance to the manufacturing sector are mandatory laws relating to health and safety and environmental issues. Seeking local law advice can be a costly process if goods are supplied to multiple jurisdictions. However, businesses could adopt a risk based approach and seek local law advice for high value contracts or in jurisdictions where they regularly do business.
- United Nations Convention on Contracts for the International Sale of Goods: This convention is a set of uniform rules which govern contracts for the international sale of goods and are designed to facilitate international trade. Where a contract is governed by English law, the convention will not apply, as the UK is not a signatory to the convention. However, if you agree to accept the law of a different jurisdiction there is a risk that this convention will be incorporated by virtue of that local law. You should consider whether this applies and if it ought to be excluded to ensure your position is adequately protected.
- Resolving disputes: Paying close attention to dispute resolution mechanisms is particularly important where contracting internationally. Where a dispute is resolved by the English courts, if the other party is outside England an application may need to be made in the country in which the other party is based in order to enforce the judgement against that party. This would not be required if the disputes were resolved via arbitration. Businesses should therefore consider whether the courts or arbitration is the most appropriate forum for resolving disputes.
The issues above may seem obvious. However, with international supply contracts the trick is to know what you know and recognise when you need to ask for help. Failing to adequately consider the issues set out above could turn a lucrative supply arrangement into a real headache which costs your business a significant amount of money.