Introduction and the Basic Approach:
Terms and conditions are provisions in commercial documents, often accompanying shipments, which provide for the contractual relationship of the parties as to the buying or selling of the goods. While we have created some basic provisions below for consideration, it is essential for the international business to realize that before you simply include them, you understand why they are so necessary in international business.
If the business owner does not create a full understanding on the part of appropriate staff as to WHY the forms have to be obtained in just the right way, it will soon be discovered that they are only done correctly half the time…and invariably not when you really need them. You have to make sure your staff understands that this is not a technicality but the very essence of how to avoid massive losses.
WHAT ARE TERMS AND CONDITIONS IN TERMS OF CONTRACT LAW?
Whether on an invoice, a shipping receipt, a bill of lading, or a purchase order, or wherever, terms and conditions are simply the commercial term for the business contract that parties enter into and are fully binding on the parties. Absent written agreed terms and conditions, the UCC (within the US) and the CISG (internationally) impose various terms automatically but it is to be remembered that internationally certain nations do not agree to be bound by CISG terms or have contrary local laws that refuse to enforce the terms.
Further, at least a third of the Courts in the world are either so corrupt or so weak that a judgment there can not realistically be expected to be enforced even if terms and conditions are agreed upon. Thus, international transactions MUST utilize far more complete and written terms and conditions uniquely designed to vest law and jurisdiction in a manner to protect the parties or the terms and conditions are often an illusion.
Our web site articles page has an article on just that issue and should be read in conjunction with this memo. See the article on International Business Transactions.
Each and every commercial transaction is actually a contract between the Seller and Buyer and minus a writing expressing the terms, it becomes an oral contract with all the problems inherent in proof and expense that oral contracts necessarily entail. (See the Article on the Web Site relating to Binding Contracts and Legal Actions Predicated on Breach of Contract.) Put simply, it will be a question of veracity as to who the judge or jury believes in any dispute as to what were the terms of agreement and such uncertainty is precisely what businesses must avoid.
Even in the United States, attorney’s fees are not awarded to either party absent a written agreement so specifying. Further, arbitration can only be imposed if the parties so agree. With court cases sometimes taking years to get to trial, and with attorney’s fees often equaling tens and sometimes hundreds of thousands of dollars, Sellers often discover that it is cost prohibitive to attempt to collect for sums owed unless they have appropriate ways to avoid the expense and delay of American courts.
For that reason, whether within the United States or not, any sophisticated business will utilize standard terms and conditions of sale for each and every transaction and normally create a standard form with multiple copies created by carbon of different colors, two of which are sent with the product with directions to the shipper not to release the product until the Buyer signs the shipping document which includes written terms and conditions which are binding on the parties. The form, often called a Shipping Form, Purchase Order or Invoice, itemizes the products or services rendered the price and delivery terms, and most importantly, a set of written terms and conditions pertaining to the sale. When the Buyer receives the products from the Shipper, the Buyer signs for the products and a copy of that form is left with the buyer with the signed copy being returned to the Seller. That becomes a binding written agreement and allows the Seller to effectively and efficiently enforce the terms.
Alternatively, a Seller can insist that the Buyer provide Seller, before shipment, with a fully executed PO which binds the Buyer and which provides that the PO cannot be altered at a later date.
A vital aspect is to have a signed copy of the terms and conditions in your file BEFORE the goods are delivered and released to the Buyer.
THE STANDARD TERMS AS APPLIED TO YOUR BUSINESS
Below are standard generic terms and conditions which our office recommends to International Sellers though they would have to be honed for a particular business. You know your business better than we do so you would have to integrate in particular clauses for the unique requirements of a particular industry. A lawyer, however, should see the final product before it is printed.
Certainly such issues as product liability, specifications, safety issues and allowed tolerances, etc, etc. would have to be addressed. From the legal point of view, it is important to include terms that eliminate ambiguity as to duties and description of services and also that allow effective and inexpensive means of enforcement via arbitration or Small Claims court (if the amount in controversy is small enough), NOT the courts if at all possible.
Arbitration is a private forum and, again, check our website articles page Arbitration of Business Disputes for a full description of that method. Businesses do not need courts which are expensive and time consuming. Arbitration is the appropriate business forum and, in terms of sales to Asia, Africa, any former Soviet Republic, Russia and parts of Eastern Europe, arbitration is often the only practical means of enforcing terms and conditions. Minus arbitration, even the best terms and conditions are useless in places described above and, indeed, in much of the Middle East and much of South America. A typical arbitration takes six months (compared to two to five years in court) and cuts costs by perhaps half.
With arbitration occurring locally and with either a letter of credit or some type of security outside of the country, it should be possible to avoid being pulled into a hostile jurisdiction, perhaps far from your locale.
Note that there are two requirements to make this work:
1. Agreeing to arbitration in a neutral or friendly locale.
2. Having a way to enforce the award which usually means assets of Buyer outside of hostile jurisdictions.
The latter requires security that is reachable such as a Letter of Credit outside of the hostile system. If you sell into China and we have arbitration in, let us say, Singapore, we will get a fair judgment, yes, but not be able to enforce it. We would need that Letter of Credit or security outside of China to collect the money due. The terms and conditions protect us from claims of nonperformance and the like; the Letter of Credit or security allows us to collect what the arbitrator awards.
One must also be aware that many sophisticated Buyers have their own terms and conditions on their Purchase Orders or Confirmations which they seek to enforce and quite often there is the “battle of the forms” in which both sides have form terms and conditions on their contract papers and each include clauses which claim that the others’ terms and conditions are superseded by their own forms. Normally, courts will refer to the standard terms and conditions of the Uniform Commercial Code or ICC to determine which clause will prevail as well as determining who was the last to execute which document, often finding that the last document executed is the binding one. Each case is decided on a case by case basis and the safest course of conduct is for the Seller to carefully review the Purchase Order before shipping and simply indicate to the Buyer that absent a written waiver of their Purchase Order, no shipment will occur.
It is also vital to train personnel to carefully review all documents received from a Buyer and make sure such later terms are not slipped in AND NOT TO EXECUTE ANY DOCUMENTS RECEIVED FROM THE BUYER after your terms and conditions are accepted.
The limitations on warranty clauses are often not enforceable against consumers but often can be enforced in transactions between merchants...and, at the least, give some defense to the Seller.
And the attorney’s fees clause often stops any trivial or invalid refusals to pay since most Buyers will hesitate before putting themselves in the position of having to pay not only their own attorney’s fees, but those of the opposing party! It is the type of provision which may stop costly litigation before it begins.
TERMS AND CONDITIONS: THE BASICS
The terms below should be integrated with the ones you need for your particular system before being sent to the printer for inclusion in the contractual documents used in the commercial setting. BE SURE TO HAVE AN ATTORNEY REVIEW YOUR DRAFT BEFORE HAVING IT PRINTED OR BEGINNING TO USE IT REGULARLY.
Remember, the numbers below are for illustration only…such as Net 30 which could be whatever your industry normally allows…or, in the case of international transactions, by Letter of Credit. Italics are alternative terms to consider using.
TERMS AND CONDITIONS
I. TERMS OF PAYMENT
Letter of Credit before Delivery. (Or Net 30 days on all invoices.) In addition, Buyer shall pay all sales, use, customs, excise or other taxes presently or hereafter payable in respect to this transaction, and Buyer shall reimburse Seller for any such taxes or charges paid by __________________ or its principal (hereafter “Seller.”)
II. PAYMENT, PRICE, TRANSPORTATION
Buyer shall provide an irrevocable Letter of Credit to Seller prior to shipment for the good ordered herein. (Or…Seller shall have the continuing right to approve Buyer’s credit. Seller may at any time demand advance payment, additional security or guarantee of prompt payment.) If Buyer refuses to give the payment, security or guarantee demanded, Seller may terminate the Agreement, refuse to deliver any undelivered goods and Buyer shall immediately become liable to Seller for the unpaid price of all goods delivered & for damages as provided in Paragraph V below. Buyer agrees to pay Seller cost of collection of overdue invoices, including reasonable attorney’s fees incurred by Seller in collecting said sums. F.O.B. point shall be point of SHIP TO on face hereof.
III. DELIVERY, TOLERANCES, WEIGHT
Upon due tender of goods for delivery at the F.O.B. point all risk of loss or damage and other incident of ownership pass to Buyer, but Seller retains a security interest in the goods until purchase price is paid. All deliveries are subject to weight at shipping point shall govern. Tolerances are as follows: _______________________.
IV. WARRANTIES
Seller warrants that goods sold hereunder are merchantable UNLESS manufactured in conformance with Buyer’s particular specification, and that Seller conveys good title thereto. IN NO EVENT WILL SELLER BE LIABLE FOR CONSEQUENTIAL DAMAGES EVEN IF CUSTOMER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR THE EXPRESS WARRANTY STATED IN THIS PARAGRAPH IV, SELLER GRANTS NO WARRANTIES, EITHER EXPRESS OR IMPLIED HEREIN, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND THIS STATED EXPRESS WARRANTY IS IN LIEU OF ALL LIABILITIES OR OBLIGATIONS OF SELLER FOR DAMAGES INCLUDING BUT NOT LIMITED TO, CONSEQUENTIAL DAMAGES OCCURRING OUT OF OR IN CONNECTION WITH THE USE OR PERFORMANCE OF ANY GOODS SOLD HEREUNDER. Seller specifically does not warrant the accuracy of sufficiency of any advice or recommendations given to Buyer in connection with the sale of goods hereunder.
V. DEFAULT
Buyer shall be liable for Seller’s damages including loss of reasonable profits, caused by Buyer’s default hereunder. If Seller, upon Buyer’s default, repossesses or retains any goods sold hereunder, Seller’s damages shall be the contract price of the goods plus freight, storage, handling & all other disposal costs incurred, less the then-current reasonable scrap value of the goods.
VI. REMEDIES
If goods supplied are not merchantable, Seller at its option may replace them or refund the purchase price upon their return. Buyer shall not return goods until Seller has had reasonable opportunity to investigate goods, and then only after receiving Seller’s written shipping instructions. THIS SHALL BE BUYER’S EXCLUSIVE REMEDY. Buyer waives all claims arising from breach by Seller unless Seller receives written notice of breach from Buyer within 30 days after Buyer receives goods. In no event shall Seller be liable for any special consequential or contingent damages resulting from Seller’s Breach of Warranty, delay or performance or any other default hereunder. Buyer further agrees that Seller will not be liable for any lost profits nor for any claim for demand against Buyer by any other party.
VII. FORCE MAJEURE
Seller shall not be liable for any damages resulting from: any delay or failure of performance arising from any cause not reasonably within Seller’s control; accidents to, breakdowns or mechanical failure of machinery or equipment, however caused; strikes or other labor troubles, shortage of labor, transportation, raw materials, energy sources, or failure of usual means of supply; fire; flood; war, declared or undeclared; insurrection; riots; acts of God or the public enemy; or priorities, allocations or limitations or other acts required or requested by Federal, State or local governments or any of their sub-divisions, bureaus or agencies. Seller may, at its option, cancel this Agreement or delay performance hereunder for any period reasonably necessary due to any of the foregoing, during which time this Agreement shall remain in full force and effect. Seller shall have the further right to then allocate its available goods between its own uses and its customers in such manner as Seller may consider equitable.
VIII. PATENT INDEMNITY
Seller shall defend and hold Buyer harmless for any action against Seller based in a claim that Buyer’s sale or use of goods normally offered for sale by Seller, supplied by Seller hereunder, and while in the form, state or conditions supplies constitutes infringement of any United States letters patent; provided Seller shall receive prompt written notice of the claim or action, and Buyer shall give Seller authority, information and assistance at Bay’s expense. Buyer shall defend and hold Bay harmless for any action against Bay or its suppliers based in a claim that the manufacture or sale of goods hereunder constitutes infringement of any United States letters patent, if such goods were manufactured pursuant to Buyer’s designs, specifications and /or formulae, and were not normally offered for sale by Seller; provided Buyer shall receive prompt written notice of the claim or action and Seller shall give Buyer authority, information and assistance at Buyer’s expense. Buyer and Seller agree that the foregoing constitutes the parties’ entire liability for claims or actions based on patent infringement.
IX. WAIVER, MISTAKE
Seller’s waiver of any provision herein or any breach thereof, shall not constitute a waiver of any subsequent breach thereof, nor of any other provision herein. Seller may correct any errors herein, on any invoice issued to Buyer, or on its published price sheets and such correction shall operate to amend this Agreement.
X. CHOICE OF LAW
This contract is deemed to be made in the United States of America. Buyer and Seller expressly agree this Agreement is to be governed by the Uniform Commercial Code as enacted and construed in California, United States of America and is subject to Arbitration as provided herein. The Parties agree not to contest in any manner the right of the other party to enforce these terms as provided herein.
XI. CONFLICTING PROVISIONS
Buyer expressly WAIVES all provisions contained in any of Buyer’s correspondence or forms involved in this sale which negate, limit, extend or conflict with provisions herein and agrees that this Agreement constitutes the entire contract between Buyer and Seller except as expressly negated, limited or extended by Seller IN WRITING and signed by an officer of Seller. No subsequent writings may alter these terms and conditions unless executed by an authorized agent of SELLER.
XII. ARBITRATION FOR CLAIMS EXCEEDING $2,000.00
Any and all disputes relating to this Agreement or its breach in which the amount in controversy exceeds Five Thousand ($5,000.00) Dollars shall be settled by arbitration in San Francisco, California, in accordance with the then current rules of the American Arbitration Association, and judgment upon the award entered by the arbitrator may be entered in any Court having jurisdiction hereof and shall be enforceable in any nation in the world. Costs of arbitration, including reasonable attorney’s fees incurred in arbitration as determined by the arbitrator, together with any reasonable attorney’s fees incurred by prevailing party in Court enforcement of the arbitration award after it is rendered by the arbitrator, shall be paid to the prevailing party by the party designated by the arbitrator or Court. The arbitrator is directed to strictly apply the law of the State of California.
Should one party either dismiss or abandon its claim or counter-claim before hearing thereon, the other party shall be deemed the “prevailing party” pursuant to this Agreement. Should both parties receive judgment or award on their respective claim, the party in whose favor the larger judgment or award on their respective claim, the party in whose favor the larger judgment or award is rendered shall be deemed the “prevailing party” pursuant to this agreement.
This provision shall in no way effect or limit any rights Seller may have to enforce any security granted by law including but not limited to statutory right to repossession, warehouse man’s lien, mechanic’s liens, personal guaranties of BUYER’s principles, etc.
XIII. SERVICE CHARGE
A service charge of 1% per month (12% per year) will be made on past due accounts.
XIII. Put here the various clauses and terms that exist in your existing forms that you consider necessary…such as payments in Euros, etc.
TYPES OF FORMS
Assuming the terms and conditions are on the back of your PO or invoice form, place at the bottom of the form, SUBJECT TO TERMS AND CONDITIONS ON THE REVERSE and make sure that is large enough to be easily seen. Your signature line should be below that warning.
Your terms and conditions must be identical in each form. The important thing is that you do not release for shipment or delivery until you have, in hand, a signed copy with your terms and conditions on them without alteration.
Ideally, you use a Letter of Credit wherever and whenever you can. It may not always be possible…but in certain nations such as China, Russia, the former Soviet Republics, Brazil (!), Greece, any of the Middle East, any nation in Africa with the possible exception of South Africa, you must insist on a Letter of Credit or this protection is minimal. (I happen to think South Africa is as bad as the rest of Africa but some disagree with me there.)
If a letter of credit can not be obtained, try for personal guaranties with arbitration clauses of the owners…so at least you do not have to worry about limited liability entities being gutted so you cannot collect.
If you get a form back, even after they signed yours, with different terms and conditions, you must act immediately. You must fax them that you reject their terms and conditions, consider the already existing ones as binding, and if you can halt shipment until they agree.
Conclusion
Perhaps the most exciting aspect of business in this era is the fact that it is almost all becoming international. Due to the internet, if you have a web site, you are engaging in international business quite often.
For businesses in the United States, long used to an expensive but effective legal system, Terms and Conditions are important but do not necessarily become the most important part of any transaction.
But once engaged in international transactions, failure to achieve good terms and conditions as described above make every transaction a tremendous gamble and one should recall that even a single failed payment can eliminate the profit on a dozen other successful transactions.
Or, as a client once commented to the writer, “It all comes down to common sense. If I can’t get them to even agree on reasonable terms and conditions, what will happen if something goes a little wrong in the delivery date or product? The terms and conditions I submit to them are my first test of whether these are people I want to do business with. If they refuse to sign, that’s really all I need to know.