Don’t Let Your Contract Let You Down
Any good contract protects you and your customer when you do business together. But when you start selling abroad, you have to think about your sales agreements in a different way. In this post, we’ll look at six strategies for writing solid contracts that will help you avoid problems with foreign customers and governments.
Get the language right
Make sure you and your customer agree on the language to be used in the contract and on the meaning of each clause. If the contract is in English, but your customer wants a native-language translation, both contracts must specify which version has legal precedence. If the non-English version is to take precedence, have your legal counsel verify that the intent of the translated contract agrees exactly with the intent of the English one. If there’s a dispute, you don’t want your customer to claim that a clause wasn’t properly translated.
Check for compliance with laws and taxes
You’ll be asking for trouble if you don’t have your contract reviewed by legal counsel familiar with local laws and taxes. For example, suppose you send personnel abroad to install products you’ve sold to a foreign customer. Because you’re working in the customer’s country but your firm is non-resident there, you could get hit with large, unexpected taxes when it’s time to get paid. So be sure to get competent advice on local tax laws before you finalize your contract, and include clauses that will protect you. The same applies to laws and regulations related to things like customs clearance, labour codes and technical standards.
A Canadian company sold an automated production system to a buyer in a Latin American country and sent a team to install it in the buyer’s plant. Because the company didn’t clearly understand how the country’s tax laws applied to non-resident firms, its contract didn’t allow for the fact that the mandated 30% withholding taxes would be applied to the total contract value, not to the net profits of the sale. As a result, the company not only failed to turn a profit but lost much of what it had put into the deal.
If you get into a serious disagreement with a foreign buyer, do your utmost to avoid litigation in a local court, since this will usually put you at a severe legal disadvantage. You’ll be much safer if your contract specifies that any disputes will be sorted out through arbitration. Your contract should also state that arbitration will take place in a neutral country. This is to ensure that the arbitrators won’t be swayed by local interests.
Don’t deliver to the door
In most overseas markets, you should deliver your goods only to the port of entry and no farther. If you agree to move them within the buyer’s country, you’ll be at the mercy of unfamiliar and possibly unreliable logistics systems, and will be responsible for damaged goods or late delivery. In addition, your customer should accept full responsibility for getting your goods across the border, including dealing with customs, obtaining import licences and paying all taxes and duties.
Nail down “acceptance”
In any sale where customer acceptance—and thus payment—depends on the product’s specifications or performance, put a “deemed acceptance” clause into your contract. This should tie the acceptance of the goods to specific conditions or events, never to something as vague as “customer satisfaction.” That kind of ambiguous wording can give some buyers an excuse to keep you dangling because they’re not “satisfied.”
A Canadian company sold a process control system to a new buyer in Southeast Asia. The contract stated that “the acceptance certificate will be issued on the satisfaction of the buyer.” When the job was completed, however, the buyer expressed dissatisfaction at the system’s performance, even though the Canadian firm protested that it was within specifications. Ultimately, the company had to install expensive upgrades before the buyer would issue the acceptance certificate, and it consequently lost a significant amount of money on the deal.
Protect yourself from contract risks
What if a customer cancels your contract without just cause? Or a buyer goes bankrupt? Or your key import permits are revoked? To protect yourself from risks like these, you can use insurance solutions from Export Development Canada (EDC). EDC’s solutions can cover all these hazards and more, from a customer’s refusal to accept your goods to a political upheaval in your foreign market. The bottom line: with the right EDC insurance in place, you’ll get paid even if your customer doesn’t come though.
Want to learn more about managing contract risk? Visit EDC’s web site to download your copy of ABCs of International Contracts and watch a video with EDC’s Mélanie Carter and Dominique Bergevin.