(Article appeared in the 1995 Custom House Guide)
All Rights Reserved
Importers frequently attempt to control their import transactions and protect their interests by using a purchase order subject to terms and conditions expressed on the back of the purchase order andor by using a payment term subject to various performance requirements. Both these methods present potential problems for the importer and do not achieve the importer's objectives.
Purchase OrdersPurchase orders typically bear only the importer's signature and designate state law as the governing law, i.e. the law which will be used to interpret the purchase order in the event of a dispute. State law is generally based on the Uniform Commercial Code (UCC) and under the UCC, a contract dealing with the sale of goods must be in writing and must be signed by both parties if it is intended to bind both parties. While the ideal situation with regard to an importer is to have the exporter accept the importer's purchase order by signing it, it is also in order for the exporter to accept the importer's purchase order in a separate document which refers to the importer's purchase order and which bears the exporter's signature. There are exceptions to these requirements, but regardless of the relevance of such exceptions, a purchase order signed only by the importer or not referenced in an acceptance signed by the exporter does not bind the exporter.
Furthermore, the selection of state law does not necessarily mean that state law will be applied. The United States is a signatory to the United Nation's Convention on Contracts for the International Sale of Goods (CISG). Under the provisions of the CISG, the CISG automatically applies in transactions between parties located in countries which are signatories to the CISG, unless the parties specifically state that the CISG does not apply. Consequently, a purchase order which declares state law to be the governing law and does not override the application of the CISG will not prevent the CISG from being brought to bear in the case of a controversy.
The application of the CISG does not produce wholly undesirable results for the importer, however. In fact, with regards to a purchase order signed only by the importer, the CISG produces a more favorable result than the UCC. The CISG does not subject sales contracts to any requirements with regard to form. Thus, the purchase order signed only by the importer and the terms and conditions found on the back of the purchase order will bind the exporter under the CISG when the exporter accepts the purchase order. The only instance when this result will not be achieved is when the exporter responds to the importer's purchase order and states terms and conditions which materially alter the purchase order and its terms and conditions. CISG views such a response from the exporter as the exporter's rejection of the importer's terms and conditions and the offer of new terms and conditions. In this case, therefore, neither the purchase order and its terms and conditions nor the exporter's counter offer will bind either party. The importer should keep in mind, however, that the CISG does not require a written document to bind parties to a transaction. Therefore, the importer and exporter could in fact be bound to one another in a transaction via oral contract. The importer should also be aware of the fact that the CISG establishes rights and obligations for the importer and the exporter and that these rights and obligations will be given effect in a transaction, unless they are specifically altered or excluded in an agreement between the parties.
Payment Terms
Payment terms are frequently linked to performance requirements established by either the importer or the exporter.
Letters of credit are laden with performance requirements established by the importer. An importer prescribes such requirements in an application for a letter of credit. In issuing the letter of credit in favor of the exporter, the importer's bank makes the importers's performance requirements known to the exporter and promises to pay the exporter if and when the exporter complies with the importer's performance requirements.
Collections, on the other hand, are generally laden with performance requirements established by the exporter. The exporter's requirements are prescribed in the collection letter which the exporter forwards to his bank. The exporter's bank makes the importer aware of the exporter's requirements and requires the importer to perform accordingly in order to receive the title documents to the exported product.
The performance requirements that are attached to letters of credit and collections revolve around making and receiving payment. Other issues are not covered. Thus, importers who rely solely on payment terms to control their import transactions and protect their interests do not accomplish their objectives. Importers who combine the use of payment terms with a purchase order subject to terms and conditions are in a better position, but they still can not be certain that their objectives will be achieved.
Purchase Agreement
Importers are more likely to succeed in controlling their import transactions and protecting their interests when they enter into a formal purchase agreement with their exporters. Purchase agreements should deal with product related issues, procedural matters, dispute resolution mechanics and legal issues.
Product related issues include:
1. product specifics: description of product, quantity of product, quality of product;
2. purchase price: currency, amount, explanation of what is included in purchase price, validity period of purchase price;
3. packaging, marking and labeling requirements: governmental requirements, and importer specific requirements;
4. product shipment: port of shipment, timing of shipment, method of shipment, special handling requirements during shipment, insurance of product during shipment;
5. product delivery and acceptance: port of delivery, timing of delivery, process for the importer's acceptance of the product, process for signaling non-acceptance by importer, exporter's responsibility with regard to non-acceptance by importer, remedies available to the importer in the event of non-acceptance;
6. product warranty and servicing: warranty specifics, servicing procedures;
7. product indemnities related to buyer's use or buyer's resale.
Procedural matters include:
1. order placement procedures;
2. inspection rights and inspection mechanics;
3. payment for product: method, timing, currency, and routing;
4. documentation requirements: exporter country requirements, importer country requirements and importer specific requirements;
5. responsibility for costs and expenses
Dispute resolution mechanics include:
1. dispute resolution method: conciliation, mediation, arbitration or litigation;
2. dispute resolution forum;
3. law to be applied during dispute resolution;
4. language to be used during dispute resolution.
Legal issues include:
1. definition of non-performance under the agreement
2. excuses for non-performance under the agreement;
3. results of non-performance
4. purchase agreement construction: amendment, waiver, and severability.
The purchase agreement drafted by the importer can be either an individual purchase agreement intended to govern a specific transaction or it can be a master purchase agreement intended to govern repetitive import transactions. No matter which form the purchase agreement takes, however, it should state full details. This is because terms which are omitted or undefined will either be added, defined or deleted in accord with the practice of the agreement's governing law. While both the UCC and the CISG interpret agreements in context, i.e. by looking at what the parties have written, by examining the parties' conduct and by reviewing general customs and usage, it is still always safer for the importer to prescribe all details in the purchase agreement, rather than risk the application of unintended details or the deletion of intended details. The purchase agreement should be given both an effective date and an expiration date and it should be signed by both parties.
While there are no guarantees that a purchase agreement will be acknowledged or given effect by an exporter's country, it offers importers the surest means available to control their import transactions and protect their interests.