INTERNATIONAL TRANSACTIONS : MITIGATING RISKS

International commercial transactions are between two companies which have establishments in two different countries, involving namely the transport of goods between different countries.

Although International commercial transactions bear many advantages in terms of business development potential, they bring their share of risks. In fact, the distance separating the parties makes it difficult to verify the solvency of the other party, to ensure the conformity of the goods, in addition to having to manage the risks and costs associated with the transport of the merchandise.

Each country has its own laws and determining the applicable law to international commercial transaction is a complex issue that can be the subject of debate. One thing remains: the contract remains the law between the parties. Therefore, the parties have every advantage in intelligently planning the arrangements that apply in order to secure themselves.

This article briefly describes two fundamental tools applicable to international commercial transactions, namely the International Commercial Terms (“Incoterms”) as per the International Chamber of Commerce, as well as the principle of payment against documents.

INCOTERMS

INCOTERMS are a set of rules derived from customs and are published by the International Commercial Chamber. They apply to international commercial trades. Each type of transaction bears the name Incoterm and includes terms covering the transfer of risks, the obligations of the seller and the buyer at delivery, the completion of customs formalities, the communication of documents as well as the responsibility to insure the goods and enter into a transport agreement. Some countries also have their own terms applicable to trade.

Incoterms 2000 were interesting in their categorization, in that they explained the differences between the four main categories of Incoterms, namely E, F, C and D. Incoterms 2010 and 2020 are rather divided by method of transport, maritime or multimodal. Investissement Québec summarizes each category as follows:

• E: Departure: The seller places the goods at the disposal of the buyer, at the agreed place, generally in its own premises.
• F: Main transport unpaid: The seller is invited to deliver the goods to a carrier designated by the buyer.
• C: Main transport paid: the seller must conclude the transport contract without assuming the risk of loss or damage to the goods or the additional costs, due to costs post embarkation or shipment.
• D : Arrival: the seller must assume all costs and risks involved in the delivery of the goods to the country of destination.

There are thirteen Incoterms in Incoterms 2020. The choice of the applicable Incoterms to the transaction lies with the parties involved in the international transaction.

Payment against document

Payment-against-document is a mechanism that promotes the execution of international commercial transactions. On the one hand, the buyer only pays upon receipt of documents portraying the quality, conformity and proper shipment of the goods. On the other hand, the seller is confident that payment will be made before transmitting the bill of lading with prejudice.

Payment against document must be used properly: a clear payment-for-document clause must be drafted, as well as a list of representative documents.

This mechanism is governed by the principle of strict compliance. If the documents are not complete, in accordance with the requested list and consistent therewith, the buyer is entitled to reject the documents and terminate the sale, without the defect being an essential element of termination.

It is important to understand this method of payment as the financial partners of the parties involved in the international transaction will also comply therewith. For example, this is the case for documentary credit and stand-by credit. However, caselaw on document fraud teaches us that the buyer must also ensure the conformity of the documents since it cannot depend on the bank to refuse payment automatically in the event of fraud.

To enter into international transactions with peace of mind, contact AVENS Montreal lawyers to structure your international purchase/sale contract accordingly.