Understanding international Terms of Trade
A recent report from Dun & Bradstreet noted that 80,000 Australian firms had their risk profile downgraded in the first quarter of 2010. What does this mean to you, if you run a small business? It means some of your clients/customers could be on this list and you may struggle to get paid if these firms get into financial difficulty.
When a firm gets into financial difficulty they look for loopholes and reasons to justify delaying payment, or not paying at all. When a sale is made it’s great to celebrate, but we all know things don’t always turn out rosy down the track. One of the best ways to protect yourself and ensure you get paid is to have well prepared, clear and concise Terms of Trade between your business and those with whom you transact. Verbal and handshake agreements may be appropriate in some circumstances, but when things don’t go to plan you want to have something solid in writing to back you up.
I spoke with RP Emery & Associates, providers of contract templates for business. They told me why smart businesses need good Terms of Trade.
A manufacturer and purchaser worked well together for a year, but then a dispute arose over an overdue account. The manufacture claimed substantial interest and late payment fees. The case ended up in court, because it was unclear whose terms of trade applied, as there had been express agreement on who made and supplied the goods, but not as to the terms of payment. In this case the Court held that by going ahead and fulfilling the purchaser’s orders, the manufacture had effectively accepted the purchaser’s terms.
The expense and aggravation of having such a dispute resolved by a court is always stressful (and a distraction), so when you enter into an agreement, just make sure that your terms of trade are also signed by the other party.
Similarly, when it comes to licensing and distribution agreements, it is important to make sure that there is a clear understanding between the parties, as to what the intellectual property component really means. It is commonly thought that one can get around design, copyright, or a patent merely by changing the product by X percent, but that is folklore.
IP Terms of Trade
Just this year, Solitaire Homes won a landmark case in which an architect made what he thought were adequate changes to a Solitaire project home design. Once it was established that the architect had in fact based his drawings on the Solitaire design, he was guilty of copyright and trademark violation. So acknowledgement of your copyright and other IP in your terms of trade is critical.
Addressing matters such as these in your terms of trade will keep you out of court. Even the judge commented in the Solitaire case that after five years, the legal costs exceeded the cost of construction of the house, let alone the damages awarded!
Another very important issue is the question of personal guarantees. There was a case in which a company delivered industrial design services and did not get paid by the purchasing company. A magistrate held that, because a director of the purchaser used the word ‘I’ in a letter (rather than ‘the company’), there was an implied personal guarantee, and awarded judgement against the director. Now, the fact that this decision was clearly wrong at law is irrelevant: the director had to appeal to the Supreme Court on a matter of law, and it was cheaper to pay the bill rather than incur the costs of a Supreme Court appeal.
The lesson to be taken from that case is that the terms of trade did not exclude directors’ guarantees.
When it comes to international trade (import/export), the subject takes on an entirely different hue. For example, you need to be aware of roughly five kinds of commonly used international trade documents—government control documents; commercial (invoice) documents; banking documents; shipping documents; insurance documents—and any one of those can bring you undone if you haven’t done it right.
Also, we all understand the definition of ‘quality’ under Australian law, and the implications of the Sale of Goods Act. But do you understand the United Nations Convention on Contracts for the International Sale of Goods? This convention defines such things as ‘material breach’ and ‘minor breach’ of contract and these have a significant impact on how disputes are handled in the global arena.
This means that you must be across the requirements of establishing quality, and that may be through inspection: sample; grade and standard; and brand or place of origin. These issues bring into play the methods of payment (irrevocable L/C; mail transfer; demand draft; telegraphic transfer) and making sure that you understand the effects of the pricing methods (FOB; C&F; CIF; DAF), because these aspects all impact on the documentary collection and the rights and obligations of the banker at either end.
Sounds complicated? You betcha! It is, but in a global world, we all have to come to grips with these complexities.
Terms of Trade considerations
Other items to be considered in your terms of trade are:
- How will the goods be ordered?
- How will the orders be confirmed?
- Will buyer/seller be entitled to cancel orders?
- How is the price to be paid?
- Are there handling/admin fees?
- Are there penalties for late delivery/late payment?
- Can either party offset amounts owing against an order?
- How are credit facilities to be assessed/granted?
- What defines delivery/collection?
- Can orders be cancelled if not delivered by a certain date?
- Must seller notify purchaser if delivery date changes?
- Can goods/services be delivered in instalments?
- What are the consequences if purchaser fails to accept delivery?
- Can seller retain title until paid?
- Does retention of title outlive termination of agreement?
- Is confidential information being imparted, and how is it protected?
- Are there any Privacy issues?
- Should either party have the right to terminate without cause?
- What are the consequences of termination?
- Have warranty and liability issues been adequately addressed?
- Are there guarantors, and are the guarantee terms clear?
- The laws of which State apply?
As you can see there is a lot involved in the delivery of a service or product. It just might save you a lot of money to have a clear understanding by all parties from the beginning, rather than having to go to court and incur a lot of unnecessary legal fees to sort out a problem later.
—Sue Hirst is the founder of CAD Partners – CFO On-Call