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International Sales Contracts: Common Myths And Misconceptions, Part II

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 second 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 #2:  We are adequately covered by requiring that all sales disputes be arbitrated.  As explained in Part I, an arbitration award is quite often more useful than a court judgment when foreign counterparties are involved.  However, if the parties have merely agreed to arbitrate they are only at the starting line.  Admittedly, most arbitration clauses go beyond this but the parties often fail to consider the many facets and approaches to the arbitration process.

Disputes can be arbitrated using institutional arrangements, or handled on an ad hoc basis.  If institutional arbitration is desired, several institutions might be suitable based on needs and budgets.  The American Arbitration Association is often a logical choice for U.S. parties, while the London Court of International Arbitration, International Commerce Commission or the Hong Kong International Arbitration Centre are good options depending on the location of the counterparty, the nature of the transaction, and other factors.  Structured arbitration is also offered by various trade associations to resolve disputes involving their members and which relate to their trade rules.

The applicable rules will dictate whether fees will be charged at an hourly rate or based on the amount in controversy, so costs can vary significantly from one situation to the other.  Institutional rules can also vary on issues such as confidentiality, joinder of third parties, and selection of arbitrators.  In other words, the rules can have a significant impact on the nature and outcome of the arbitration proceedings.

The parties may, alternatively, agree to arbitrate using a set of ad hoc rules.  These rules might consist of those available from the United National Commission on International Trade Law (UNCITRAL), or devised from scratch depending on the situation.  Under an ad hoc approach the parties arbitrate without the guidance or support of an institution.  While this might (at least in theory) be more cost effective, the lack of a recognized institutional award raises the risk of unenforceability.  Whether institutional or ad hoc arbitration is selected, the designation of a sole arbitrator, or a tribunal, will have an obvious effect on cost.  It might also be desirable or even necessary to specify the language in which the proceedings will be conducted.

Another facet of arbitration is the site of the proceedings.  Needless to say, this can have a profound impact on costs, logistics, and mere convenience for one or both parties.  If site has not been addressed in the arbitration clause, then it will be determined by the arbitrator(s) or the institute under the applicable rules.  However, if neither the rules nor the arbitration clause address situs, or fail to authorize the arbitrator to make this determination, then the validity and implementation of the clause can itself become a contested matter with the outcome being dependent on the applicable law.  If contested in the U.S., arbitration provisions in commercial transactions will be enforced under the Federal Arbitration Act, with state law often filling in the blanks as to location and basic procedures.

Don’t despair if all of this sounds too complex to address in a sales contract.  Once the parties have decided on the rules of a particular arbitration institution, one or two sentences are adequate.  The institution itself usually suggests language for this purpose, such as this sentence from the American Arbitration Association:  “Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration administered by the American Arbitration Association in accordance with its International Arbitration Rules”.  The parties can also add any or all of the following: (a) “The number of arbitrators shall be (one or three)”; (b) “The place of arbitration shall be (city and/or country)”; and (c) “The language of the arbitration shall be _______________”.

Next Up:  Can INCOTERMS be utilized to address all aspects necessary to convey goods abroad?