The possibilities for exporting products and services present an important opportunity for many IJK businesses. From a legal perspective, agreements for sales to export customers are likely to need to take into account a number of factors which either do not arise, or are less likely to be an issue, when a business is dealing with customers in the UK. This note highlights some of the differences.
Export Documentation: Without seeking to distinguish between different countries or comment on the position in relation to the EU and without going into any detail, the movement of goods across borders generally is likely to require much documentation, which is not required in relation to domestic sales: for clearing customs, demonstrating the origin of and title to the goods, dealing with VAT and other shipping or transport documentation requirements.
Some useful guidance is available on the Government website, but unless a business has an in-house facility capable of dealing with all that is involved, it is likely to have to call on the services of a freight forwarder to assist in dealing with what is required to be compliant and successful when selling products into another country.
Incoterms: As between the business and its customer, transporting goods from one country to another involves deciding upon which party will bear the responsibility, costs and risks of: arranging transport to what location (for example the customer’s premises or a port of departure or destination from which the products are to be arranged to be collected by the customer); insurance for loss or damage in transit; arranging customs clearance and paying any duty on the goods.
Incoterms® which stands for International Commercial Terms are as set of internationally recognised terms developed by the International Chamber of Commerce. They provide a range of 11 alternatives which can be used by the parties to allocate tasks, costs and risks between them. As the choice can have significant cost implications for the parties, quotations for export customers should make clear on which Incoterm the quotation is based.
If a business is using standard terms of sale prepared for use with customers in the UK, it should also take care to ensure that any provisions in the standard terms, including those relating to delivery of products, which are inconsistent with the agreed Incoterm are excluded from the contract with the export customer.
Currency and Payment: Where the countries of the contracting parties have different currencies, the contract will need to include provisions regarding the currency of payment and the businesses will need to consider the risks of fluctuations in exchange rates and how they might mitigate the risks involved.
Where the value of the goods is significant and there is concern that the customer may not pay, the risks are greater when the customer is in another country and businesses may be unwilling to give credit terms. In such cases, the business may seek payment by means of a bill of exchange or an irrevocable confirmed letter of credit.
Risks: Risks of not being paid or, conversely, of not being able to supply exist and are important whether the customer is an export or UK customer, but some of the factors underlying these risks mean that the risk may be exacerbated where a customer (or perhaps also a supplier relied upon to supply a customer) is outside the UK.
With regard to the risks in relation to supply, this observation is made in the context of the many and diverse factors and uncertainties currently affecting or threatening supply chains: war; shortages in materials, labour and components; inflation; strikes; post Brexit arrangements and the pandemic to name but a few. Businesses will try to mitigate risks and put in place contingency plans, but it is not possible to mitigate adequately every risk and so it is important that contractual provisions are drafted with a view to limiting exposure.
With regard to the risk of non-payment, if it is not practical to agree a secure method of payment, there is also the possibility of insuring against this risk through the Export Credit Guarantee Department.
Intermediaries: Again, the use of intermediaries is by no means exclusive to export sales arrangements, but distributors or agents are more frequently appointed for sales into export markets.
The decision whether to appoint a distributor or an agent is an important one as the two are fundamentally different. Usually where an agent is in place, the agent negotiates contracts between the supplier and customer on the supplier’s behalf for a percentage commission on the sale.
A distributor buys products from the supplier on its own account for resale by the distributor to the customer for a mark -up on the purchase price paid to the supplier. In theory at least, the principal has more control over an agent than distributor, but an agent will not hold stock and arrangements with agents are more heavily regulated under the Commercial Agents Regulations which set out a number of rights for agents including a right, in most circumstances, to be compensated on the termination of the agency.
Another key question is whether the intermediary is to be exclusive or non-exclusive and whether or not the supplier will reserve the right also to be able to sell direct to customers in the territory. Intermediaries who are required to invest in selling a supplier’s products may demand exclusivity, but if the intermediary fails to perform granting exclusivity carries considerable risk for a supplier so an agreement with an exclusive intermediary needs to protect against this.
Governing law and Jurisdiction: When dealing with a UK customer, the contract with the customer will almost certainly be governed by English law. When dealing with customers in other countries which have their own, sometimes very different, legal systems it cannot be assumed that this will be the case. The choice of which country’s law is to govern the contract should be agreed and set out in the contract. Usually the courts of the country chosen will have jurisdiction to rule on disputes, but the jurisdiction does not need to be exclusive and it is sometimes agreed that proceedings can be brought or defended in the courts of a country applying the laws of another country.
Some caution is required, because even if the parties agree that English law should apply to their contract, it is possible that local law could affect the position.
Although usually matters of governing law and jurisdiction can be agreed between the parties, a business supplying products into another country will still always need to ensure that the products and all arrangements for the supply of the products conform with the laws and regulations of that country which may be different to UK laws and standards.
Sanctions: A supplier will also need to check that the supply of products to a customer or country does not breach any sanctions in force in its own country or require an export licence.
Language: Where two parties to a contract do not share the same language, the contract cannot be in the language of both of them. Even if a translation of the contract is prepared in another language, it should be made clear what the language of the contract is and also what language is to be used for any notices to be given under the contract.
This note does not address all of the issues relevant to export sales contracts or many of the important provisions which apply to sales contracts generally. It is provided for the purpose of giving general information only and is not intended to provide, and should not be relied upon as providing, legal advice. If legal advice is required, please contact a member of our corporate team on 08081668827.
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