Protecting interests when entering into contracts with foreign suppliers
From the October, 2014 print edition
The world has become more interconnected. Through advances in technology and transportation, it has become increasingly easier and, in many instances, cheaper to seek suppliers from outside of Canada. With these global supply chains, purchasers are faced with various challenges. Many involve business issues including finding a reliable supplier, transportation logistics and duties that may be associated with importing certain goods. Another concern faced by Canadian purchasers is how to document this complex global relationship in a contract. Purchasers will want to ensure, amongst other things, that the risk of transportation of the goods is placed on the appropriate party, that protection is placed on any payments and that disputes are resolved in a practical and cost effective manner.
While price and quality are always essential terms of a contract, the risk for delivery of goods becomes increasingly important when your supplier is located on another continent. Often international contracts for the supply of goods will rely on International Commercial Terms or Incoterms. Incoterms are a series of pre-determined commercial terms published by the International Chamber of Commerce. These three-letter trade terms are intended to clearly communicate which party bears the responsibility and risks during the shipment of goods. For instance, FOB stands for “Free on Board”. When this term is used in a contract, the seller pays for the transportation of goods to the port of shipment and the buyer pays the cost of freight transportation, insurance, unloading and transportation costs from the arrival port to the destination. There are 10 other terms that are widely used through international supply contracts. Being familiar with Incoterms and the various ways they affect the risk in a contract is essential when negotiating contracts for the delivery of foreign goods.
As with most contracts, the amount and type of payment for the delivery of goods is a key term. When dealing with international suppliers with unknown reputations and reliability, it is often prudent for Canadian purchasers to protect payments made and require proof of delivery (including quantity and quality) prior to payment. However, suppliers will often want payment in advance or some guarantee of payment. One common method used to reduce these concerns in international transactions is a letter of credit. A letter of credit provides the seller with a guarantee by the purchaser’s bank that payment will be made if the goods are delivered. Purchasers and suppliers will want to do their due diligence to ensure that the issuing bank and its jurisdiction do not create additional issues.
It is important to recognize that in international supply agreements disputes can often be difficult and costly to resolve. While negotiating the contract, Canadian purchasers have the ability to reduce such risks. Through the supply contract, the parties have the opportunity to establish what law applies and where and how disputes will be resolved. Laws vary significantly across the globe and it is prudent to consider whether the law chosen by the contract will be beneficial or at least neutral to the parties. Another factor to consider is whether disputes should be resolved by mediation, arbitration or court proceedings. Each process has different advantages and disadvantages that need to be carefully evaluated before being agreed to in the contract.
There are many other areas of concern that Canadian purchasers should attempt to address in their purchasing contracts, such as ensuring suppliers comply with laws relating to the corruption of foreign public officials, criteria for evaluating the performance of goods, the return of defective goods and the various types of insurances that should be taken by both purchasers and suppliers. Ensuring that international supply contracts address when risk passes during the transportation of the goods, protection of payments and resolving disputes in the most practical and cost effective manner are steps in the right direction. Due to the complexity associated with global supply contracts, businesses should consult with their lawyers prior to negotiating these types of transactions. B2B
This article is for information purposes only and may not be relied on for legal advice. Doug Sanders is a partner in the Vancouver office of Borden Ladner Gervais LLP. Reach him at [email protected] Bill Woodhead is an associate in the Vancouver office of Borden Ladner Gervais LLP. Reach him at [email protected]