International Sales Contracts: Common Myths And Misconceptions, Part I
It seems that U.S. parties tend to misunderstand, or simply fail to consider, the legal implications of entering into international sales transactions. We have sometimes seen this evidenced by parties using the same form of purchase order (or sales confirmation) for both domestic and offshore dealings, without realizing the differences that might exist between the two types of transactions. Following is the first installment in a multi-part series that is intended to set the facts straight on several myths, misconceptions and potential traps involving international sales.
Myth #1: U.S. courts are ideal for resolving sales disputes with foreign parties. In a recent contract that we reviewed, the foreign counterparty had offered to resolve all disputes in federal court in New York. This might initially sound like a winning proposition to a party situated in New York or perhaps elsewhere in the U.S.; however, it quickly loses its luster upon closer review.
In considering this proposal one must assess the value of a U.S. court judgment. The first step is to determine whether, in the event such a judgment is obtained, the foreign counterparty has assets that can be attached within the U.S. If not, you will next want to determine where the counterparty’s assets are located and then assess the likelihood of that country recognizing and enforcing a U.S. court judgment. It is important to know that, from a U.S. perspective, there is no multilateral treaty that governs the enforcement of foreign judgments. Instead, a foreign court may consider public policy concerns, if jurisdiction existed in the original action, if notification was proper, and other factors in deciding whether to enforce a U.S. court judgment. In short, a U.S. court judgment is often of limited or no use when enforcement is attempted in a foreign jurisdiction.
Arbitration, however, presents a much more attractive alternative for resolving cross-border disputes. An arbitration award can be enforced in any country signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, more commonly known as the New York Convention. Currently there are about 140 such countries, including the United States (refer to www.uncitral.org for updated information). The U.S. is also party to the Inter-American Convention on International Commercial Arbitration, a treaty similar to the New York Convention to which several Central and South American countries are also signatory. It is therefore highly likely that a foreign trading partner would be subject to an arbitration award. While it is still necessary to have the award enforced by a court in the foreign country, the chances of collection are much greater than with a court judgment.
Next Up: Is your arbitration clause sufficient in the event of an offshore sales dispute?