INTERNATIONAL PURCHASE TRANSACTIONSACC, Iowa Chapter 2nd Annual Corporate Counsel ForumOctober 30, 2015

CHRISTOPHER J. CURRAN

LANE & WATERMAN LLP

SCENARIOS

Purchase goods from non-US seller Sell goods to non-US buyer Purchase services from non-US seller Sell services to non-US buyer Foreign subsidiary set up in US US company set up in non-US country In this presentation, focus will be on purchase of goods to be

exported to the United States.

CONSIDER ISSUES THAT ARISE

TO PROVIDE FRAMEWORK

Efficiency closing these deals Understanding and mitigating risk Getting best deal Provide a roadmap for the numerous issues that

arise and how they work together

QUESTIONS WHEN PRESENTED WITH INTERNATIONAL

PURCHASE TRANSACTION What are you buying? Goods? Services? Both? How will the goods get here? How will services be

provided? (where, by whom?) Who handles import/export? Is freight forwarder or

customs broker involved? Is software being provided? Is data hosted by supplier?

INTERNATIONAL PURCHASE TRANSACTIONS CHECKLIST

I. What are you buying? II. What is the agreement for purchase?

Goods Services Both Software

UCC CISG Seller’s governing law Dispute resolution

III. What is the applicable Incoterm?

EXW F term C term D term

INTERNATIONAL PURCHASE TRANSACTIONS CHECKLIST

IV. What are the terms for transportation of the goods?

V. Supply chain risks

Check Incoterm Ocean – COGSA Truck – Carmack Rail – Carmack Broker involvement Customs broker – import Freight forwarder – export Himalaya clause

FCPA/anti-bribery Export controls Human trafficking

regulations Conflict minerals Cloud issues Data exchange Indemnification Audit provisions

SECTION 1PURCHASE/SALETRANSACTION

INCOTERMS

International Commercial Terms Not sales law (see CISG, UCC) Default applicability in international trade deals; can agree to

apply to U.S. transactions International sales terms which are often incorporated into

contracts for purchase and sale of goods Created and maintained by ICC Updated every 10 years – currently Incoterms 2010

INCOTERMS

Functions:1) Allocate shipping responsibilities and costs

Export packaging and clearance

Pre-carriage (inland transportation on seller’s side)

Main carriage

On carriage (inland transportation on buyer’s side

Drayage from port to buyer’s factory

Import clearance

INCOTERMS

2) Clarify when delivery takes place

3) Clarify when risk of loss transfers Only two Incoterms deal with insurance

Focus here on delivery and risk of loss issues

INCOTERMS(Delivery and Risk of Loss)

Risk of loss transfers when delivery occurs

Title transfer is not affected directly by Incoterms

However, contract often refers to risk of loss in relation to title transfer

Seller – recognition of revenue

Buyer – when do assets go on books?

Which party is in the better position to get lowest price on freight charges?

Do you have insurance for ocean transportation? If no, then if you are buyer get a D term. See limitations of liability with ocean transportation.

INCOTERMS

EXW FCA CFR DAT

FAS CIF DAD

FOB CPT DDP

CIP

INCOTERMS

Group E – Departure terms

Group F – Main carriage unpaid (buyer pays)

Group C – Main carriage paid (seller pays)

Group D – Arrival terms

FAS, FOB, CFR, CIF – Marine restricted

EXW, FCA, CPT, CIP, DAT, DAP, DDP – Omni-modal

INCOTERMSDelivery

EXW, C Terms, and F Terms – seller’s side of the ocean

D Terms – buyer’s side of the ocean

INCOTERMSEXW – Ex Works

Minimum obligation for seller “Delivery” occurs when seller places goods at

buyer’s disposal at seller’s premises for buyer to load Risk of loss transfers from seller to buyer when seller

“delivers” goods to buyer

INCOTERMSFCA/FAS/FOB

More obligations for seller than EXW “Delivery” occurs:

FCA - when seller delivers goods to carrier or named place FAS – when seller places goods alongside vessel at

shipment port FOB – when goods pass ship’s rail at shipment port

FCA/FAS/FOB = Shipment Contracts

INCOTERMSCFR/CIF/CPT/CIP

Shipment terms “Delivery” occurs:

CFR – when goods pass ship’s rail at shipment port CIF – same as CFR CPT – when seller delivers goods to first carrier CIP – same as CPT

INCOTERMSDAT/DAP/DDP

More obligations for seller than EXW, F terms, and C terms “Delivery” and Risk of Loss Transfer:

DAT – when seller delivers goods to named destination terminal on buyer’s side, packaged appropriately and unloaded

DAP – when seller delivers goods to buyer at named place on buyer’s side, appropriately packaged but not unloaded

INCOTERMSDAT/DAP/DDP

“Delivery” and Risk of Loss Transfer (cont’d): DDP – when seller places goods at buyer’s disposal on

transport arrival at destination place Seller is not required to unload goods but must clear goods

for import DDP puts most obligations on seller (compare to EXW), but

is expensive for buyer.

INCOTERMS

Only DDP puts import clearance obligation on the seller. If buyer, who is your customs broker?

CISG Basic Elements

UN Convention on the International Sale of Goods UNCITRAL developed in 1980; first in effect in 1988 U.S. adopted in 1989

CISG Basic Elements

CISG applies between parties in different countries where those countries have ratified the CISG 83 countries have ratified CISG Notable absentees: United Kingdom, South Africa, India

Treaty of the United States Trumps state law of sales (UCC) via Supremacy Clause

CISG Basic Elements

Parties can opt out, but must be explicit. Standard governing law provision is not enough to opt out.

Sample opt out clause:“The United Nations Convention on the International Sale of Goods, and any local implementing legislation shall not apply to the Agreement.”

Generally reviewed as pro-seller → important differences exist relating to breach and remedies

UCC vs CISG

UCC CISG• Pro-buyer • Pro-seller

• Willingness to find that a contract is formed

• No contract by conduct

• No oral contracts • Allows oral contracts

• Generally accept provisions not objected to

• Generally ignore provisions not agreed to

• First shot rule • Last shot rule

UCC vs CISG UCC Battle of the Forms

2-207 eliminated “mirror image” rule This transfers bargaining power to buyer Similar to first shot rule, the party who sends first

form (PO) is “master of the offer” and binds subsequent transaction.

UCC vs CISG UCC Battle of the Forms

554.2207 Additional terms in acceptance or confirmation

(1)A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

UCC vs CISG UCC Battle of the Forms

554.2207 Additional terms in acceptance or confirmation (cont’d)

(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

a. the offer expressly limits acceptance to the terms of the offer;

b. they materially alter it; or

c. notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

UCC vs CISG UCC Battle of the Forms

554.2207 Additional terms in acceptance or confirmation (cont’d)

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this chapter.

UCC vs CISG UCC Battle of the Forms

Key language for buyer:

“This Purchase Order is expressly limited to, and expressly made conditional on, Seller’s acceptance of the terms and conditions of the Order and the attached Purchase Order Terms and Conditions. Buyer objects to any different or additional terms.”

Is there a contract on the writings? Is there a contract by conduct? Best case scenario → parties execute negotiated document

UCC vs CISG UCC Battle of the Forms

Under 2-207(2) between merchants, the additional terms in the acceptance become part of contract unless: Offer limits acceptance; Terms materially alter contract; or Buyer has objected

See above language

UCC vs CISG UCC Battle of the Forms

Possible outcomes

1) Seller’s form is acceptance and have written contract

2) No contract on documents – seller acknowledgement conditions acceptance on buyer accepting seller’s terms and conditions

3) Contract on writings per 2-207(2)

UCC vs CISG UCC Battle of the Forms

If Contract on the Documents

Terms are:1) Provisions between forms that are agreed to/the same

2) Additional terms if not material/material additions not accepted

3) Different terms are knocked out

Seller’s protective terms out and buyer wins the battle

UCC vs CISG UCC Battle of the Forms

If no contract on the documents, then look at 2-207(3) – contract by conduct

Terms that are negotiated (“terms on which the writings of the parties agree”) and supplementary terms under the Act

The UCC gap fillers are pro-buyer Implied warranties No limits of liability Consequential damages

Under 2-207(3), buyer wins the battle

UCC vs CISG CISG Battle of the Forms

CISG considered pro-seller Adopts limited form of mirror image rule – a reply to an

offer that contains material additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer

Additional or different terms relating to price, payment, quality, quantity, delivery, liability are considered material → alter terms of offer → counter-offer

UCC vs CISG Battle of the Forms

Buyer likely to reject seller’s additional or different terms, so likely no contract on the writings → unless parties work diligently to come to terms

In this scenario, there is no contract and either party can walk away.

But, if seller ships, then upon acceptance (if not rejected by buyer), the contract is based on the last document exchanged. This is typically seller.

UCC vs CISG Battle of the Forms

In practice, both parties try to get the “last shot” under CISG, but this typically favors seller.

Buyer could reject goods, but typically need for speed makes this an unattractive option.

SECTION 2INTERNATIONAL

TRANSPORTATION ISSUES

HOW ARE GOODS TRANSPORTED?

Ocean – COGSA Road – Carmack Amendment (in U.S.) Rail – Carmack Amendment (in U.S.) Himalaya Clause Is broker involved?

COGSA

Carriage of Goods by Sea Act Ocean carriers move over 90% of U.S. trade Typical container ships carry from 1,000 – 3,000

containers that are interchanged with truckers for surface movement or with railroads

COGSA is the U.S. version of the Hague Rules

COGSA

Only applies to international shipments, not purely interstate shipments

Imposes duties on carrier – seaworthy vessels, properly equip and man, make holds safe, secure, etc.

If carrier follows the duties of due care, then protected by Section 4(1) of COGSA

COGSA

Carrier’s liability is limited to: $500 per package, or $500 per customary freight unit if not shipped in

packages No definition of “package” → bill of lading is critical in

determining what parties intend “package” to mean

COGSA

“Package” limitation originated before containerization – courts generally apply $500 package limitation to smallest unit of packaging declared on bill of lading.

Shippers have to be vigilant in confirming bill of lading. Get cargo insurance as contingent policy. If shipper provides pro-forma bill of lading to carrier, be

sure to check actual bill of lading issue by carrier, because they may change and shipper will be bound.

COGSA

Watch Himalaya clauses Rotterdam Rules have been developed by UNCITRAL

to address the outdated “package” limitation and to synthesize the various liability schemes throughout the world. Like CISG, this is a treaty.

The ABA has approved resolution supporting ratification, but not ratified at this point.

CARMACK AMENDMENT

In U.S., the “Carmack Amendment” governs motor carriers, freight forwarders (surface), and railroads.

Carmack divided into two sections Motor carriers – 49 USC § 14706 Rail – 49 USC § 11706

CARMACK AMENDMENT

Purpose to provide a uniform system of carrier liability to give certainty to both carrier and shipper by enabling the carrier to assess risk and predict potential liability for damages.

Preempts shipper’s state and common law claims for cargo loss or damage.

CARMACK AMENDMENTMotor Carriers

Shipper entitled to “actual loss or injury to the property caused by the carrier.” 49 USC § 14706(a)(i)

Market value is prevailing measure of damage Any salvage value? Consequential damages possible, but difficult

CARMACK AMENDMENTMotor Carriers

For carrier to set limit of liability, the carrier must: Maintain a tariff with ICC Give shipper reasonable opportunity to choose

between two or more levels of liability Obtain shipper’s agreement as to choice of carrier

liability limit Issue a bill of lading prior to moving shipment

CARMACK AMENDMENTMotor Carriers

9-month notice from shipper to carrier setting forth claim

2 years to sue from date of denial.

CARMACK AMENDMENTBroker Liability

Carmack does not apply to brokers Is broker really a broker? If truly a broker, then

Carmack does not apply “Broker” is “a person other than a motor carrier…

that as a principal or agent sells… or holds itself out… as selling, providing, or arranging for transportation by motor carrier.” 49 U.S.C. § 13102(2)

CARMACK AMENDMENTBroker Liability

This can be a gray area. If you have a cargo claim and get the “mere broker” defense, do some more digging to make sure the entity is actually acting as a carrier. Check www.safersys.org to see how the company is described.

HIMALAYA CLAUSES

$500 per package limitation of liability only applies to a “carrier” of goods by sea.

But beware of “Himalaya clause” E.g., “All defenses of the Carrier shall inure also to the

benefit of Carrier’s agents, servants, and employees and any independent contractor performing any of the Carrier’s obligations under the contract of carriage or acting as bailee of the goods, whether sued in contract or in tort.”

HIMALAYA CLAUSES

If door to door bill of lading, this may apply to surface carriers (i.e., drayage carriers) and rail carriers.

Consequence: COGSA limitations of liability may flow through to truck or rail transportation.

IMPORT/EXPORT RESPONSIBILITY

Customs Broker - Import Freight Forwarder – Export What is the Incoterm? Only DDP puts import clearance obligation on the supplier If supply agreement has goods purchased DDP, the

supplier is Importer of Record and the obligation to clear customs and pay duty is on seller.

WHEN GOODS REACH UNITED STATES

Importer of Record is responsible to clear goods through customs.

Importer of Record responsible to obtain and maintain customs bond and file entry documents at port of entry

Cleared when released by U.S. Customs and Border Protection and estimated duties paid

WHEN GOODS REACH UNITED STATES

Key is for importers to provide accurate and complete information to Customs

Civil penalties or seizure of goods Key areas: classification, valuation, country of origin,

payment of duties If Incoterm has buyer of goods as Importer of Record,

work with supplier to get key information.

CUSTOMS BROKERS

Files import entries on your behalf Usually subject to their standard terms and

conditions Customs broker does not verify correctness of data

provided Rely on vendor/supplier for origin and value

information

CUSTOMS BROKERS

Direct or indirect representation? Direct – company liable for customs debt Indirect – broker jointly and severally liable for

customs How to best check accuracy of declarations,

recordkeeping, etc? Audit?

SECTION 3THIRD PARTY RISK

ISSUES

EXPORT CONTROLS

Who is the “exporter”? What is the product? Who is responsible for getting license? How is the product classified?

EXPORT CONTROLS

As buyer, key issues are: Does supplier notify you of control status of their

products? Do they warrant it is correct? Did supplier obtain necessary license(s)? In supply agreement, re-export is critical issue. If

purchased product will be incorporated into your end product, need to know how classified and ensure proper license obtained.

FCPA; ANTI-BRIBERY ISSUES

15 U.S.C. § 78dd-1 The FCPA prohibits issuers and domestic concerns (and

their officers, directors, employees, agents, etc.) from corruptly offering, authorizing, or giving “anything of value” to foreign officials, foreign political parties or their officials, or candidates for public office for the purpose of obtaining or retaining business for or with, or directing business to, any company.

FCPA; ANTI-BRIBERY ISSUES

Include provision that supplier is aware of, and agrees to, comply with all applicable anti-bribery laws

Analysis of what supplier is providing; be particularly aware for: High risk countries Dependence on third parties to work through government

bureaucracy (licenses, building permits, customs clearance) Doing business with state-owned entities

HUMAN TRAFFICKING

California Law – California Supply Chains Act of 2010 Retailers and manufacturers who do business in

California with annual gross receipts that exceed $100,000,000 to disclose their efforts to eradicate slavery and human trafficking from their direct supply chains

HUMAN TRAFFICKING

Federal Acquisition Regulation (“FAR”) and Defense Federal Acquisition Applicable to government contractors and subcontractors.

Requires compliance program, due diligence on supply chains and certification that neither it, nor its agents or subcontractors have engaged in any prohibited activities.

Consider applicability and adding clause to your standard supply agreements, PO terms and conditions, and supplier code of conduct.

CONFLICT MINERALS

Ensure supply agreements address supplier’s obligations and use of conflict minerals – tantalum, tin, tungsten, and gold

Applies to publicly traded companies pursuant to Dodd-Frank Act.

Requires those companies whose products contain conflict minerals to conduct due diligence and report on source and chain of custody

CONFLICT MINERALS

Sample provision:

“Supplier hereby represents and warrants to Buyer that no Conflict Minerals will be contained in or necessary to the functionality or production of any of the products, parts, or materials delivered to Buyer under this Agreement. Supplier shall provide Buyer with such documents, information, and other evidence of the accuracy of the foregoing representation and warranty as Buyer shall from time to time request. Supplier agrees to immediately inform Buyer in writing if it learns or has reason to believe that the foregoing representation and warranty is untrue with respect to any products, parts, or materials that have been delivered to Buyer hereunder.”

CONFLICT MINERALS

Sample provision (cont’d):“As used in this section and in the Conflict Minerals Law, the term “Conflict Minerals” means (1) columbite-tantalite (coltan), cassiterite, gold, wolframite, and their derivatives (which derivatives are currently limited to tantalum, tin, and tungsten); and (2) any other mineral or its derivatives, the exploitation and trade of which is determined by the U.S. Secretary of State to be financing conflict in the DRC or an adjoining country.”

QUESTIONS

Feel free to contact me with any questions.

Christopher J. Curran

Lane & Waterman LLP

220 N. Main Street, Suite 600

Davenport, IA 52801

Email: ccurran@l-wlaw.com

Phone: (563)333-6649