International Commercial Agreements– What Matters When Your Counterparty Has a

Different Country CodeNCMA Boston Chapter

2d Annual International Contracts Forum

Dror Futter, Esq. dfutter@mccarter.com

©McCarter & English, LLP 2015 January 22, 2015

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Disclaimer

♦ Tell me you did not see this coming …♦ Disclaimer

– This presentation and these materials are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. The opinions expressed in this presentation are those of the author alone and may not reflect the opinions of the firm or any other attorney.

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International Commercial Agreement

♦ Same – International Commercial Agreements share 90%+ of the same terms you would find in a domestic agreement

♦ Different – International Commercial Agreements require additional/different terms to bridge differences in legal systems, address payment and enforcement concerns, and address additional logistics involved in cross-border transactions.

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Issues to Be Resolved

♦ What Will the Contracting Language Be?♦ Which National Law Will Govern?♦ Payment

– Currency– Currency Risk– Risk of Non-Payment

♦ How Will the Logistics of Transport and Export/Import Be Handled?

♦ How will the Contract Be Enforced?

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Contract Language

♦ Clear preference for English♦ Certain customers will insist on local language♦ Possible to have multiple language versions of

the agreement, but critical to be clear about which version is definitive in cases of conflict or ambiguity

♦ If the definitive agreement is not in English, critical to have the final version reviewed by someone fluent in the contract language and having a legal background

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Choice of Law/Venue

♦ Clear Preference for US Law/Venue– Does the Company have assets in the US to

enforce against?

♦ A small subset of customers will insist on local law. Often times it is possible to agree on arbitration in a neutral third country under that country’s law.– Europe – London, under English law– Asia – Hong Kong or Singapore, under local law

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Negotiating Under Foreign Law

♦ Often impractical to engage local counsel for the entire negotiation

♦ Alternative is to negotiate with your regular legal support and have a local attorney review the final draft to highlight country-specific issues

– Important that the other party understand ahead of time that this review will occur

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If You Are Under Foreign Law

♦ Since much of international commercial law is similar, sometimes local variations can be missed

♦ Local Differences in Application of Legal Concepts– What is “good faith”?– What are “best efforts”/”reasonable efforts”?– What kinds of damages can be limited or

precluded?

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Foreign Law

♦ Is government approval required for the transaction?

♦ Legal process rights may be different and responsibility for legal fees may vary

♦ Local law may be more tolerant of partial performance

♦ Business practices vary– In some countries insurance which is common

in the US can be unavailable or uncommon

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Regulatory Compliance

♦ Regulatory compliance may require customization for a particular jurisdiction, or a change to the product as a whole, such as:– Additional disclaimers on a web site or

packaging– Different consumer labeling requirements– Requirements for accessibility

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Complying with Foreign Standards

♦ Many foreign countries have import certification requirements or import conditions on issues such as: – product standards– certification requirements– electricity regulations– packaging and recycling laws– quality expectations– See: www.export.gov/%5C/regulation/eg_main_018220.asp

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Taxes

♦ Taxes, duties and fees vary widely– Most countries outside the US have some form

of Value Added Tax

♦ When both parties live under different tax regimes, makes it even more important to specify responsibility for the resulting payments

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United Nations Convention on Contracts for the International Sale of Goods (CISG)

♦ 83 Ratifying Countries– Major Exceptions: Hong Kong, India, South Africa, Taiwan, and

the United Kingdom– Some have ratified with reservations

♦ Similar to the Uniform Commercial Code in the US – provides default provisions in sales of goods transactions

♦ Unless excluded by the express terms of a contract, the CISG is deemed to be incorporated into (and supplant) any otherwise applicable domestic law(s) with respect to a transaction in goods between parties from different Contracting States.

♦ Interpretation of CISG can vary country-to-country

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Payment - Currency Risk

♦ In every international sale there is currency risk

♦ Commercial Agreement needs to allocate that risk

♦ If you cannot get the agreement priced and payment made in US dollars:– Greater importance for payment terms– Include mechanisms for periodic price

adjustments in response to currency swings

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Payment Terms

♦ International Transactions Increase the Risk Associated with Customer Credit– Significantly higher costs of collection for late payment– Significantly more difficult to assess credit worthiness

of many customers

♦ Responses– Upfront payments– C.O.D.– Letters of Credit

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Incoterms

♦ Standardized trade definitions♦ 3 Letters Each

– EXW, FAC, FAS

♦ Created and maintained by the International Chamber of Commerce

♦ More than 120 member countries♦ Most Recent Version – 2010

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Incoterms - Applicability

♦ Incoterms rules Do Not– apply to contracts for services– determine how title to goods will transfer– protect seller or buyer from risk of loss– define contractual rights' other than for delivery– specify details of the transfer, transport, and

delivery of goods– define remedies for breach of contract

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Incoterms - Applicability

♦ Incoterms Do allocate responsibility for: Export customs declarations Transport to port of export from seller Loading/Unloading at ports of export and import Transport from port of export to port of import Transport from port of import to buyer Insurance Import customs clearance Import taxes

♦ Incoterms specify location of activities

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Incoterm Variations

♦ Group 1. Incoterms that apply to any mode of transport are:♦ EXW Ex Works ♦ DAT Delivered at Terminal♦ FCA Free Carrier ♦ DAP Delivered at Place♦ CPT Carriage Paid To ♦ DDP Delivered Duty Paid♦ CIP Carriage and Insurance Paid To

♦ Group 2. Incoterms that apply to sea and inland waterway transport only:

♦ FAS Free Alongside Ship♦ FOB Free on Board♦ CFR Cost and Freight♦ CIF Cost, Insurance, and Freight

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Incoterms – International Commercial Terms

Incoterm 2010

Export customs

declaration

Carriage to port of export

Unloading of truck in

port of export

Loading on vessel in port of export

Carriage (Sea/Air) to

port of import

InsuranceUnloading in

port of import

Loading on truck in port

of import

Carriage to place of

destination

Import customs

clearanceImport taxes

EXW Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer

FCA Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer

FAS Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer

FOB Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer

CPT Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer

CFR(CNF) Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer

CIF Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer

CIP Seller Seller Seller Seller Seller Seller Buyer/Seller Buyer/Seller Buyer Buyer Buyer

DAT Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer

DAP Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer

DDP Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

http://en.wikipedia.org/wiki/Incoterms

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Incoterms – Revenue Recognition & Taxes

♦ Revenue Recognition typically requires– Delivery– Transfer of Title

♦ Selection of Incoterms will determine when/where delivery has taken place

♦ Location of delivery may also impact where the sale is deemed to have occurred for purposes of local taxation– For example, utilizing EXW origin supports claim that

seller was not doing business in the buyer’s location

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♦ Limit to Workmanship and Materials

♦ Specify period

♦ Exclusions

♦ Limit to repair or replace

♦ Who pays shipping?

♦ What are timetables for repair or replacement?

Warranties

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♦ International Transactions Raise the Likelihood of the Occurrence of What are Often Termed Force Majeure Events:

– Government actions

– Changes in laws

– Military Actions/Political Unrest

– Labor Unrest

♦ Explore Possibility of Insuring Such Risks – such as Political Risk Insurance

Force Majeure

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♦ Export Regulations

♦ Foreign Corrupt Practices Act

– UK Bribery Act of 2010

♦ Office of Foreign Assets Control

♦ Anti-Boycott Regulations

Export Laws/Regulations

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♦ Discuss your international sales plans with your insurance broker. Existing policies may limit coverage or exclude it entirely.

♦ Consider other corporate changes to support international sales.

– Will you be opening a sales office?

– Will your personnel be traveling abroad frequently?

Insurance

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Dror FutterMcCarter & English, LLP

4 Gateway Center, 100 Mulberry Street, Newark, NJ 07101Email: dfutter@mccarter.com

Dror Futter is a partner in McCarter & English’s Technology Transactions and Venture Capital and Emerging Companies practices.

Previously Dror was General Counsel to Vidyo, Inc., a videoconferencing company, where, among other things, he negotiated and documented sales agreements for both direct and indirect channels, purchase agreements, software licenses, service agreements and strategic agreements in the US, Asia and Europe.  Before Vidyo, he was a partner and General Counsel of the New Venture Partners LLC venture fund.  While there, he helped to form funds, and advised multiple start-ups and corporate spin-offs in the information technology and telecommunications industries, as well as serving as the venture fund’s legal counsel.  He also advised portfolio companies with respect to commercial, mergers and acquisitions, employment, Internet/ecommerce and intellectual property law matters.  In addition, during his tenure at New Venture Partners, Dror negotiated, structured and documented strategic alliances with British Telecom and Philips and handled the acquisitions of assets of over twenty ventures from companies including British Telecom, Philips, Intel, IBM, Boeing, Freescale, Unilever, IDEO, Maxim and Telstra..

Dror is a graduate of Columbia University Law School and Princeton University.

Speaker Biography