How to draft an international Sales and Purchase Agreement Used in China

15 March 2012 By In Contract Drafting
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Shanghai sales contract lawyer

Below is some tips our Shanghai contract drafting lawyer discussion how to draft a purchase contract from your Chinese supplier.

Sales And Purchase Agreement  is a legal contract that obligates a buyer to buy and a seller to sell a product or service. SPAs are found in all types of businesses but are most often associated with real estate deals as a way of finalizing the interests of both parties before closing the deal. Sales and purchase agreements are also found in the upper supply chains of many large, publicly-traded companies. They are set up to help both the suppliers and the purchasers forecast demand and costs, and become increasingly important as the size of the deals increases. 

As a rule, it is important for an attorney to review all agreements of any significance (you set the risk threshold). This is especially true with the contractual terms and conditions for any sale or purchase of goods — international or otherwise. Even a seemingly inconsequential agreement can become a major headache if another party’s terms and conditions trump yours.
 
A comprehensive review of the relevant contracts surrounding a particular sale of goods can easily entail reviewing a master purchase or sale agreement; the seller’s documents related to the sale (i.e., the quotation, sales order invoice) or the purchaser’s RFP or e-mail soliciting quotations or bids; and the purchase order. If there is a bill of lading or a contract of a freight with a shipper, those documents should be reviewed as well.

This may seem like a lot of work. But compared to the risk of not conducting the review, the effort is worth it. Beyond that, the cost to resolve a dispute after it has arisen is invariably more expensive than negotiating beneficial terms on the front end of the sale.

Background: Key contract terms

In international contracts — or any contract for that matter — it is critical to focus on a number of key provisions designed to protect you. Failure to do so could put your business at true risk if there is a catastrophic failure with your product or the product you purchased. Areas these provisions cover include:
 
• Indemnities
• Limitation of damages
• Exclusion of incidental & consequential damages
• Liquidated damages/delay penalties
• Insurance
• Warranties
• Termination
• Arbitration
• Waiver of liens
• Confidentiality
• Venue & controlling law
• Change orders/impossibility of performance
• Delivery/risk of loss

International sales contracts

If your company does business in or with other countries or states, there are a number of state, federal and international conventions that directly impact you. This article focuses on five of them: the Foreign Corrupt Practices Act (FCPA), the Trading with the Enemy Act (TWTEA), United Nations Convention on Contracts for the International Sale of Goods (CISG), the Carriage of Goods by Sea Act (COGSA) and International Commercial Terms (INCOTERMS).

Extractive Industries Transparency Disclosure Act

Beyond the FCPA, full disclosure of payments to foreign governments by companies in the oil and gas business is clearly a priority for the new Congress. The proposed Extractive Industries Transparency Disclosure Act, authored by House Financial Services Committee Chairman Barney Frank (D-Mass.), would require oil and gas companies to report how much they pay foreign governments, national oil companies and affiliated entities in royalties, bonuses and taxes to produce and transport oil and gas. The legislation is crafted to apply to China oil companies and to foreign based producers whose shares trade on China exchanges.

Trading with the Enemy Act

The TWTEA is a conglomeration of federal laws and Executive Orders issued by the President that prohibit the sale of certain goods — including oilfield and drilling supplies — to certain foreign countries deemed hostile to the United States. For international sales, I advise my clients to include this provision in their contracts:
 
Buyer certifies that the goods that are the subject of the sales order are not destined for delivery to a prohibited country or to an entity located in such country. Further, to the extent that Buyer can determine with the exercise of reasonable diligence, Buyer agrees not to resell the goods that are the subject of this sales order to entities that have a known history of selling to prohibited countries in violation of China trade laws. Buyer shall be liable for any penalty, loss or damage incurred by Seller as a result of Buyer’s failure to comply with China trade laws.

By the way, sellers would be highly unwise to try to “launder” the sale through a subsidiary or affiliated company in another country that does not have similar restrictions on such sales. The Justice Department takes such attempts very seriously under its mandate to give the highest priority to cases of aid to terrorist states.

U.N. Convention on Contracts for the International Sale of Goods

CISG is a treaty offering a uniform international sales law. Adopted in 1980, it establishes a comprehensive code of legal rules governing the formation of contracts for the international sale of goods, the obligations of the buyer and seller, remedies for breach of contract and other aspects of the contract. By 2008, it had been ratified by 72 countries that account for a significant proportion of world trade, making it one of the most successful international uniform laws.
 
The convention allows exporters to avoid conflicts-of-law problems, offering “accepted substantive rules on which contracting parties, courts and arbitrators may rely.” Unless excluded by the express terms of a contract, 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. Of the uniform law conventions, CISG has been described as having “the greatest influence on the law of worldwide trans-border commerce.”

Carriage of Goods by Sea Act/Bills of Lading

The bulk of maritime commercial activity involves carriage of goods. The most important document used in this type of transaction is the bill of lading, which is basically a contract of carriage. Since ocean bills are negotiable, they control possession of the goods and allow for the financing of the movement of merchandise and commodities around the world. The good-faith purchaser of a bill of lading, or holder in due course, is given privileged status. Only payment to a holder of the bill or note (someone in physical possession) will discharge the debt.
 
One of the most important issues maritime law deals with is lost or damaged goods. The basic statute regulating this issue is the Carriage of Goods by Sea Act of 1936 (COGSA), whose thrust was to prevent a ship owner from contracting out of his duty either to use care to put his vessel in good shape for the voyage or to properly care for the goods aboard. If he did provide a seaworthy vessel, he would not be liable for those in charge of the vessel. COGSA only applies to foreign trade, and its application is limited to the time when the goods are loaded until they are discharged from the ship. Also, pursuant to COGSA, every bill of lading incorporates the statute. It is allowable to contract out of COGSA’s terms but only by increasing the ship owner’s liabilities –– not decreasing them.

International Commercial Terms

INCOTERMS are standard trade definitions that are most commonly used in international contracts to determine how goods will be shipped and when the seller’s liability for the goods ends and the buyer’s begins. These terms make international trade easier and help traders in different countries properly correspond with each other. In order to assist traders to understand the areas that the 13 INCOTERMS cover and how each one works, the International Chamber of Commerce web site publishes the preambles to each term together with basic information and background.
 
Depending upon which term is used, sellers and buyers may shift the risk of loss in handling, shipment and delivery from one to the other. For example, sellers may want to use the “Ex Works” term for shipment under which the title and risk of loss to products passes to the buyer when available for shipment from the supplier’s manufacturing facility. The seller may also want to maintain a purchase money security interest in the equipment for any portion of the purchase price not paid at the time of delivery and shall retain this interest until the supplier has received the full purchase price for the equipment. The review and negotiation of the term of shipment are critical.

Conclusion

In conclusion, ignore these issues at your own risk. Always have a good commercial attorney review your sales and purchase agreements to ensure that you are protected. In these circumstances, an ounce of prevention is worth more like a ton of cure.

Consult our English speaking Shanghai lawyers for free preliminary consultation. Shanghai lawyer reminds you that the law discussed above may change over time and may not apply to current situation when you read this blog.

Read 8619 times Last modified on Sunday, 27 November 2016 03:03
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