A contract can be your best friend

As a lawyer who spends a lot of time advising business owners on exporting, there is one phrase that sends a shiver down my spine: “What contract?! I’m a handshake kinda guy!”

 As a lawyer who spends a lot of time advising business owners on exporting, there is one phrase that sends a shiver down my spine: “What contract?! I’m a handshake kinda guy!”

I have heard that doozey from more than one prospective exporter grappling with the idea that having proper legal documentation to support his or her export relationship is as important as attending trade shows and marketing.

International trade law can be defined as a set of loosely connected rules governing trade between two countries.

With the breaking down of trade barriers between countries and the advent of international trade organisations in the 1960s such as the UN and the World Trade Organisation, we now have a system of more uniform rules of international trade in the form of international conventions/treaties.

The “Vienna Convention” which governs the international sale of goods is one such convention, and important to know about when you are exporting. The problem is that many exporters believe that international trade law will cover them in any situation and therefore they don’t need a contract.

So why do you need contracts even if you have conventions?

Conventions don’t cover everything – the Vienna Convention doesn’t cover the following:

• Sale of services, skill or labour.
• Contracts for processing of goods (one of your most important relationships will be with your manufacturer).
• Legal issues such as the validity of the contract (if you haven’t signed it, is it still valid?).
• Legal issues regarding the effect of passing of property (so when does the importer take title?).

You can exclude the operation of conventions

Not every country ratifies the same conventions. For a convention to apply, the country ratifying the convention must also draw it down into their domestic law. Sometimes this doesn’t happen, but also sometimes countries change definitions when incorporating conventions into domestic law.

It is important to tailor contracts to reflect the particular terms of your relationship with the importer.

If you’re still partial to the handshake deal, think about this…

Contracts will clarify those deals you are making over the email or phone at 2am with an importer that speaks little English and the only words you know in French, are “Bonjour, je m’appelle John”.

What have you promised the importer in that sleep-deprived window of opportunity? Did they understand what you meant? Remember that for there to be a valid contract you must have “offer” and “acceptance”, and it is safest to get this in writing.

Contracts clarify your rights and obligations – what type of agreement are you entering into? Are you appointing a distributor or an agent or are you licensing your intellectual property to the importer and letting them run the show? Different types of export relationships give rise to different legal rights and obligations, so you must be clear on what that relationship is.

Contracts clarify other rules such as “Incoterms”. You may have heard of FOB, EXW, CIF – these are recognised international trade terms that govern the liability of each party in relation to delivery of goods, insurance and liability for the goods. They tell you what your price covers and it is crucial that you stipulate which Incoterm you are trading under. Go to www.icc.org for more information on Incoterms.

Contracts clarify when and how you will be paid and what happens if you don’t get paid.

And if that still isn’t enough to convince you, let me share a couple of real life stories from my X-Files (X for exporter!) with you…

A handbag designer had her handbags manufactured in Hong Kong. She didn’t seek legal advice because she thought it was too expensive. She had very original designs.

A couple of months into the relationship, she saw her bags rebadged with the manufacturer’s own label being advertised in a global trade journal!

As it turned out, the manufacturer had no concept of the laws of copyright (they thought that for them not to be allowed to copy the bags, the designs had to be trade marked).

They also did not understand that the designs provided to them were confidential. The manufacturer subsequently agreed to enter into a formal agreement with the required restraints in relation to intellectual property, but much trauma and potential lost sales could have been avoided by this being done at the outset.

A fashion designer got one big order from a large department store in Britain. There was no contract in place.

The department store kept ordering for a while, but in time the designer was replaced by “the next big thing”. The department store stopped ordering. The designer, who had relied on the assumption that the department store would keep ordering, manufactured 10,000 garments in advance and was left with stock piled high in their warehouse.

Did they have any recourse? No. The absence of a contract saying otherwise meant that each order placed by the department store had been a separate deal and they had no obligation to continue ordering.

So next time you’re tempted to accept a “gentleman’s agreement” remember Export = Contracts! And, no they don’t have to be 80 pages long and so full of legal jargon they scare your importer back to the plane before you can say FOB.

But they must be properly drafted (preferably by an experienced lawyer with an understanding of export and of your business), clear, formal and cover all the crucial clauses such as payment, minimum order quantities and intellectual property, to name a few.