The International Sale of Goods

Transcription

1 Chapter 2 The International Sale of Goods continue p. 32, Unidroit and CFR explanations In most cases, lawyers get involved in business transactions either at the beginning, when the transaction is being planned and the necessary contracts and other documents are being drafted, or at the end, after the transactions have gone wrong and the parties are going after each other for performance and/or damages. Obviously, it is much to be preferred, if the lawyers can review the relevant contracts and documents before they are being signed and any shortcomings in them are not easily changed any more. In the main chapters of the book, we will review, therefore, step by step the planning of the business transaction and the drafting of the corresponding documents, respectively the review by the other party of the drafts proposed to it. Issues related to the enforcement of rights and obligations after a breach of contract and a breakdown of friendly negotiations will be the subject of Chapter 10. Section 1: The Documentary Sale - an Overview The archetypical transaction we will use to explain the majority of legal issues recurring in the context of IBTs is the documentary sale. Rather than just the contract of sale, this analysis involves all major steps required to execute an international sale of goods or export-import business transaction. Four main contracts can be distinguished: i) the contract of sale between seller and buyer; ii) the finance contract between buyer and buyer s bank with seller as beneficiary; iii) the shipping contract or contract of carriage between seller and carrier with buyer as beneficiary; and iv) the insurance contract between seller and insurance company with buyer as beneficiary. The example assumes the use of Incoterm CIF, where the seller has to arrange for shipping and insurance. If the contract of sale stipulates FOB, the buyer herself has to take care of shipping and insurance, which changes the picture only marginally but is important for the passing of risk and the question of who may have to bear any loss or damage, see below, p.???. In addition to the four main contracts, a number of ancillary contracts may have to be concluded to complete a documentary sale. These include a non-disclosure agreement between seller and buyer, and an inspection agreement with an independent inspection company for pre-shipment inspection. If the seller does not bring the goods himself to the port for the maritime voyage and if the buyer does not collect the goods herself at the port after the maritime voyage, contracts with local shipping companies for truck or rail transport to and from the ports may have to be concluded. Alternatively, the parties can use an integrated logistics company that will collect the goods at seller s premises and deliver them at buyer s premises while also handling all required customs and other procedures along the way. Obviously, the latter alternative is convenient for the parties but comes at a price. The documentary sale can be broken down into 24 typical steps as follows. Depending on the particulars of a given transaction, the picture may vary in some of the details, for example who has

2 Version as of 20 September 2016 p. 2 of 183 to contract and pay for shipping and insurance and who has to take care of export and import formalities. Much of this will be discussed in the context of drafting the Contract of Sale and when we analyze the different Incoterms. #1 The first step is the communication of marketing material or other product information from the seller to the buyer. This could be at a trade fair, via catalogs and other print media, or simply via the website of the seller. On the basis of the material or information, the buyer gets interested in the goods offered by the seller. However, she may still want to compare the quality and price of the seller s goods with those of other sellers. #2 To understand in more detail what an offer from the seller might look like, to compare the quality and pricing details with those of competitors, and to check whether the bank will be willing to provide financing, the buyer requests a pro-forma invoice from the seller. As the name suggests, this is not a real invoice but a quote of what the seller is potentially willing to provide with regard to the kind and quantity of the goods, their weight, packaging and transportation charges, other services such as the procurement of insurance, inspections, export licenses, customs clearance, etc. and the price with and without tax. If the intended use of the goods on the side of the buyer contains proprietary information, the buyer will also ask the seller to sign a non-disclosure agreement. #3 The seller prepares the pro-forma invoice, potentially with several alternatives as regards quantity, ancillary services, and price, and transmits it to the buyer. #4 If the buyer has already requested a non-disclosure agreement, the seller signs and returns it with the pro-forma invoice. If the buyer has not requested one but the seller wants to protect proprietary information related to the goods, the seller will now ask the buyer to sign a nondisclosure agreement. #5 Once the buyer is reasonably sure that she want to purchase the goods from the seller, she contacts her bank and submits an application for a letter of credit to be issued for the benefit of the seller. Only after the bank has issued the L/C, can the buyer proceed to close the contract with the seller. Otherwise she might be stuck with a binding agreement to purchase the goods but no way of paying for them. If the buyer is confident about her ability to get the L/C, she may want to delay this step until after the contract has been concluded and all details regarding pricing etc. are known. The position of the seller is different, however, and he should ask to see a draft of the L/C before the contract is finalized to ensure that the terms of the L/C are acceptable to him. Once the L/C is issued, the terms cannot easily be changed. #6 Now that the buyer has the assurance that the bank will finance the transaction and she has at least a draft of the L/C, she can submit a purchase order to the seller, which is the offer to enter into a contract of sale ( UCC; Article 14 CISG). The purchase order moves the negotiations from the level of non-specific inquiries and/or negotiations with multiple potential suppliers to the contract formation stage. It may have been preceded by the exchange of specific offers and counter-offers of a less formal kind, in particular in a series

3 Version as of 20 September 2016 p. 3 of 183 of letters or faxes or oral conversations, that may already have led to a binding agreement which is only being formalized now. #7 In response to the purchase order, the seller produces a formal contract and submits it to the buyer. If the contract conforms to the purchase order, it is an acceptance. If the contract contains additional or different clauses, which is often the case because it is more detailed than the previous negotiations, it is a counter-offer. #8 Acceptance by the buyer, expressed as signature on the contract, has to be communicated to the seller to become effective. Since most contracts contain a merger clause (see below,???), acceptance by the buyer not only seals the deal but also ensures that the final written contract sometimes referred to as a fully or completely integrated agreement (see, for example, Restatement (Second) of Contracts, 210) supersedes all prior promises made and agreements reached in less formal communications. #9 Depending on the payment arrangements agreed upon in the contract of sale, the buyer now requests her bank to issue the L/C and send it to seller s bank. #10 Seller s bank authenticates the L/C and forwards it to the seller. If Seller s Bank is not merely an advising bank but also a Nominated Bank, the seller can later present his documents to this bank rather than having to make the presentation with the Issuing Bank = Buyer s Bank in buyer s country. If Seller s Bank is additionally a Confirming Bank, seller will get paid upon a complying presentation regardless of the approval of the Issuing Bank (see below, p.???). #11 Depending on the Incoterm agreed upon in the Contract of Sale, the seller or the buyer now conclude a Contract of Carriage with the shipping company or carrier. In most cases, the carrier will have a pre-formulated draft for the contract which becomes the Bill of Lading (BoL) when the goods have been handed over (for details, see???). #12 Depending on the Incoterm agreed upon in the Contract of Sale, the seller or the buyer now also conclude an Insurance Contract with the insurance company (see below,???). #13 Depending on the distribution of responsibilities agreed upon in the Contract of Sale and the list of requirements in the Letter of Credit, the seller may now have to procure an export license and have the goods independently inspected before they are packaged for shipping. #14 Once all pre-shipment procedures are completed and all other documents required by the L/C have been procured, the seller takes the goods to the shipping company. #15 As a receipt for the delivery of the goods and document of title, the seller obtains the Bill of Lading from the shipping company = carrier, in exchange for the goods.

4 Version as of 20 September 2016 p. 4 of 183 add chart here

5 Version as of 20 September 2016 p. 5 of 183 #16 Having completed all required tasks, the seller now goes to the Nominated Bank, which may be a Confirming Bank, and presents the L/C with all required documents to get paid. #17 If the Nominated/Confirming Bank deems the presentation complying, it will release the funds secured by the L/C to the seller. Note that this happens after the goods have been shipped but before and independent of their arrival and approval by the buyer. #18 Having purchased the documents from the seller, seller s bank now presents them to the Issuing Bank = Buyer s Bank for reimbursement. #19 If the Issuing Bank deems the presentation complying, it will release the funds secured by the L/C to Seller s Bank. #20 Having purchased the documents from Seller s Bank, Buyer s Bank forwards them to the buyer who needs the BoL to get the goods from the carrier upon arrival. #21 In exchange for the documents, the buyer has to pay up on the L/C, either by transferring cash to Buyer s Bank, having money debited from her account with Buyer s Bank, or via some financing agreement to defer actual payment until the goods have been received and processed and/or re-sold. Typically, Buyer s Bank will require some lien on the goods and/or other assets of the buyer if a financing agreement is concluded. #22 Having purchased the documents from Buyer s Bank, the buyer now proceeds to the port to collect the goods from the carrier. #23 In exchange for the Bill of Lading, the carrier hands over the goods to the buyer. #24 Buyer proceeds with customs clearance and, after payment of any duties and settlement of any other formalities, receives the goods into free circulation. What we can see from this arrangement is that it protects the interests of both seller and buyer. On the one hand, the seller does not have to ship the goods merely hoping that the buyer will pay. The seller has the L/C in hand and can work down the list of required documents. Once all conditions of the L/C are met, the seller is confident that he will be paid. Importantly, this happens as soon as the seller has fulfilled his part of the deal, typically as soon as the goods have been handed over to the carrier. In particular, the seller does not have to wait for the goods to arrive safely at the buyer s place and to be approved by the buyer. At the same time, the buyer is also protected to a large degree. First, the buyer does not have to pay in advance, merely hoping that the seller will keep up his end of the bargain and ship the goods. In order for the seller being able to make a draft on the L/C, the seller has to meet a number of conditions. These often include an inspection of the goods by an independent company to verify that they match with the contractual obligations. Also, no money will be withdrawn before the goods are on their way to the buyer. While in transit, the goods are insured against damage or loss, which also protects the buyer against surprises. Nevertheless, problems can still arise, for example if the different agreements are not drafted well, or if there are gaps or mishaps when the goods are handed over from the responsibility of one party

6 Version as of 20 September 2016 p. 6 of 183 to the next, for example if the local trucking company arrives at the port and the ship is not there yet and the goods have to be stored temporarily and get damaged while in storage. Last but not least, the buyer may not be happy with the quality of the goods in a way that the inspection company was not able to detect. It is one thing for an inspector to assess the quality of say corn or wheat or crude oil and quite another to determine whether an injection molding machine will indeed produce 1500 units an hour. Therefore, the different contracts mentioned above not only have to be drafted well and work seamlessly together, they also need suitable choice of law and dispute settlement clauses. All of these issues shall be discussed in the coming chapters. Section 2: Common Pre-Contractual Documents: Pro-Forma Invoice, Purchase Order and Non-Disclosure Agreement The first document we will be looking at a bit more closely is a Pro Forma Invoice. The purpose is somewhere in the middle between a non-binding price quotation and a binding offer. Typically, it is used by the (potential) buyer to compare competing offers from different sellers on the basis of real prices, including packaging, sales commissions, shipping, and tax. Once the (potential) buyer has decided upon the best supplier and secured financing from her bank, she will finalize negotiations with this supplier/seller based on the earlier pro forma invoice. Although the seller might still decline to enter into a contract of sale, for example if he has already sold the goods to another buyer in the meantime, he can normally not increase the price beyond the pro forma invoice without good reason. Therefore, the document has also been called a good faith estimate of the total sale price. On the other hand, the buyer can still try to negotiate a discount, for example for volume purchases or for favorable payment terms. Sometimes the invoice traveling with the goods and used for customs processing is also referred to as a pro forma invoice. By contrast to the abovementioned document, this document would have to be an accurate reflection of the goods being shipped and their customs value (see p.???).

7 Version as of 20 September 2016 p. 7 of 183 Sample Document #1: Pro Forma Invoice Company Name & Logo of Seller Pro Forma Invoice [1] Contact Person [2] Expiry Date... [3] Street Address Customer Reference... [4] City, Zip Code & Country Phone, Fax and Customer/Buyer Destination for Shipping Shipping Details Company Name Company Name [5] Mode of Transport... [6] Contact Person Contact Person Incoterm... [7] Street Address Street Address Port of Departure... City, Zip Code & Country City, Zip Code & Country Port of Arrival... Phone, Fax and Phone, Fax and Estimated Ship Date... Description of Goods Part # Unit of Measure [8] Description [9] Unit Price x Quantity = Net Price Total # of Pieces: Subtotal [10] x Tax Rate = Estimated Net Weight and/or Volume: [17] Packaging Specifics: [18] Estimated Gross Weight and/or Volume: [19] + Total Tax + Freight [11] + Insurance [12] + Customs & Legal Fees [13] + Inspection [14] + Other (specify!) [15] = Total w/currency [16] Payment Terms [20] Payment on Open Account, Bank..., Account #..., SWIFT #... by... Date [21] Letter of Credit confirmed unconfirmed Other Signature of Seller Representative and Date

8 Version as of 20 September 2016 p. 8 of 183 Explanations #1 The document should be clearly marked as pro forma invoice to indicate that it is neither a binding offer nor an effective demand for payment. #2 Whenever the seller or buyer is identified in a document or contract, there should also be the name, phone number, and of the person authorized to send or receive any communication regarding the transaction. This avoids disputes over messages sent but not received in time by the right person. #3 If an expiry date is provided, it indicates that the seller is promising to have the goods available at the quoted price until this date. If no such promise is intended, the space should not just be left blank but the entire entry should be deleted to make it clear that there is no promise for any time frame made beyond the general good faith estimate. #4 The reference would be to the letter or or phone call of the (potential) buyer in which the pro forma invoice was requested. #5 Buyer and Destination can differ in two ways. First, the buyer may have more than one location and it should be made clear where the goods have to be shipped. Second, the buyer may not purchase the goods for herself but rather for a customer. Thus, it never hurts to specify the destination name and address separately, even if it is the same as the name and address of the company identified as the buyer. #6 There are four main modes of transport, air, rail, road, and sea. There is also a combination of two or more of these, usually referred to as multimodal. While the mode of transport may not be of interest to the buyer, as long as a certain arrival date is guaranteed, it may be a significant cost factor and require different paperwork and insurance coverage. In particular, if the seller only promises a certain date for departure of the shipment, the mode of transport will also affect the date of arrival. In general, therefore, it is better to include the mode of transport in the quote and in the final contract. #7 Different Incoterms lead to different distributions of responsibilities for shipping and insurance charges and possibly other expenses, see below, p.???. To be a meaningful quote, therefore, it is essential that seller and buyer understand and agree on the Incoterm suggested. #8 The unit of measure will depend on the customary way of describing the goods in question in a given industry. This may refer to units or pieces, gallons, bushels, barrels, and many other units of measure. In international sales, additional care is often required because different units or customs may prevail in other countries. For example, a reference to gallons is not necessarily clear because the U.S. gallon ( liters) differs significantly from the UK or imperial gallon (4.546 liters); similarly, a U.S. pound or lb ( kg) differs from a metric pound (0.5 kg); even a ton is different in the UK (1'016 kg) from the rest of the world (1'000 kg). When in doubt, the unit of measure should be supplemented with a reference to the country. The goal is to prevent any ambiguity. The motto should be better safe than sorry.

9 Version as of 20 September 2016 p. 9 of 183 #9 Regarding the description of the goods, there is an essential conflict of interest between seller and buyer. The seller s interest is to keep the description rather basic, while the buyer would want to see additional information, for example regarding suitability and performance of the goods. We will return to this discussion as we home in on the final sales contract. For the purposes of the pro forma invoice, on the one hand, the description has to be detailed, including the country of origin and the customs code in the Harmonized Schedule system (see below, p.???) to enable the (potential) buyer to understand exactly what she is negotiating for. On the other hand, the description does not need to include assurances as to performance, suitability, marketability, warranty, etc. unless they are important elements of price. #10 The subtotal reflects the net price of the goods and is composed of all units times quantity. It generally includes standard packaging. However, unless there is a well-established custom in a particular industry, it does not include any special packaging and other uncommon services such as inspections, certificates of origin for customs clearance, and the like, as well as the cost of carriage/freight and insurance, which will depend on the destination. #11 The pro forma invoice should only include freight or shipping or carriage charges if the seller is offering to organize and pay for at least some of the carriage. With an Incoterm of EXW, this entry should be zero. We will discuss below when a seller should offer to organize and pay for carriage, and roll it over to the buyer in the contract, versus leaving it to the buyer to organize and pay for carriage directly (see p.???). #12 In the same way, the pro forma invoice should only include insurance charges if the seller is offering to organize and pay for insurance, expressed via the Incoterm. We will discuss below also when a seller should offer to organize and pay for insurance, and roll it over to the buyer in the contract, versus leaving it to the buyer to organize and pay for insurance directly (see p.???). #13 An entry like Customs and Legal would cover a number of other services required for the implementation of the export/import transaction. The scope of services to be included here would again depend on the Incoterm. For example, both FOB and CIF require that the goods are cleared for export and loaded onto the ship agreed upon between seller, buyer, and carrier. Thus, any procedures and dealings with the authorities of the exporting country would be seller s responsibility and the seller would want to enter his expected cost or compensation here. If the Incoterm requires delivery in buyer s country, additional procedures and dealings with the authorities of the importing country will become seller s responsibility and the corresponding expenditure of time and money would have to be reflected here. #14 A reference to an inspection would be to separate services of a private inspection company, not to the customs inspection by the authorities of the exporting or importing country. An inspection by an independent third party is usually done if the buyer wants to verify that a certain quantity and quality of goods has indeed been shipped before the seller can go to the bank with the L/C and collect his money.

10 Version as of 20 September 2016 p. 10 of 183 #15 Depending on the specifics of the goods and the transaction being negotiated, other cost may be incurred and have to be distributed, for example special packaging, quarantine charges or the cost of warehousing, brokerage fees, etc. #16 The total amount should reflect all elements supplied by the seller until the risk and responsibility for the goods passes to the buyer. #17 The net weight is for the goods themselves, in their standard packaging, if applicable. #18 Packaging other than the standard packaging and the shipping container should be specified here. The general understanding is that normal packaging for the selected mode of transport and destination is included in the price for the goods and only special and/or additional packaging should be mentioned here and can be billed separately. #19 The gross weight is for the shipping container(s) including dunnage, if applicable. #20 Payment terms will be discussed in detail in Chapter???. In the pro forma invoice, the seller needs to indicate the payment terms he would expect in order to be able to offer the quoted price. Less favorable terms, such as 30, 60 or even 90 days after sight or even delivery (time draft), may entitle the seller to ask for a higher price for the goods. #21 Most prices will be quoted for payment by L/C at sight or for payment on open account around the time of shipping. If the seller accepts payment by term draft, he effectively extends a credit line to the buyer and may want a higher price for the goods. Conversely, if the seller requires advance payment, for example full or at least partial payment at the time the contract is signed or within a few days thereof or in installments during the production of the goods, the buyer may be able to negotiate a discount off the regular or list price. * * * The next document to consider is a standard Purchase Order, typically used by a buyer after a pro forma invoice was received and found satisfactory. By contrast to most pro forma invoices, the average purchase order is sufficiently specific to qualify as an offer. From the point of view of the buyer, therefore, it is very important that the purchase order is carefully drafted and contains all elements the buyer would want to see in the final contract of sale in case the seller accepts without further ado. If the buyer does not want the purchase order to be an offer, she has to indicate this clearly, for example by requesting that the seller should send a draft contract for acceptance and signature by both parties.

11 Version as of 20 September 2016 p. 11 of 183 Sample Document #2: Purchase Order Company Name & Logo of Buyer Purchase Order [1] Contact Person [2] Date... [3] Street Address PO Number... [4] City, Zip Code & Country Vendor Reference... [5] Phone, Fax and Addressee / Vendor Destination for Shipping Shipping Details Company Name Company Name [6] Mode of Transport... [7] Contact Person Contact Person Incoterm... [8] Street Address Street Address Port of Departure... City, Zip Code & Country City, Zip Code & Country Port of Arrival... [9] Phone, Fax and Phone, Fax and Shipping Date... [10] Description of Goods Part # Unit of Measure [11] Description [12] Unit Price x Quantity = Net Price Total # of Pieces: = Subtotal [13] Estimated Net Weight and/or Volume: [17] Packaging Specifics: [18] Estimated Gross Weight and/or Volume: [19] - Discount [14] + Tax, Carriage, Insurance and any other costs [15] = Total w/currency [16] Payment Terms [20]... Other Terms and Conditions [21]... Please contact us immediately, if you should be unable to ship the goods as requested. We enclose our general terms, which form an integral part of this PO. Signature of Buyer Representative and Date

12 Version as of 20 September 2016 p. 12 of 183 Explanations #1 By marking the document as purchase order the buyer signals that she is now ready to commit and that the agreement would be acceptable to her as reflected in the PO. A binding contract would be concluded if the seller simply accepts the PO without further details or conditions. At least under the CISG (Article 18(1)) and in common law of contracts ( 50 Restatement (Second) of Contracts) the acceptance of the PO and formation of the contract is possible via declaration or promise and also via performance, in particular if the seller ships the goods. #2 Whenever the seller or buyer is identified in a document or contract, there should also be the name, phone number, and of the person authorized to send or receive any communication regarding the transaction. This avoids disputes over messages sent but not received in time by the right person. #3 In business communications, where several offers and counter-offers may be exchanged within a short time, it is essential that all documents are clearly dated. Sometimes, they may need to be identified further to avoid any confusion which document is the last one in a series and supersedes all earlier ones. #4 A unique identifier number should be provided and used as a reference in all further communications referring to this PO. #5 In particular, if the PO is sent in response to a particular pro form invoice or an offer by the seller, a clear reference to the respective document should be included. #6 Every contract or draft contract should always specify who is bound by it (the seller and the buyer = the principals), where the goods are to be sent and, if necessary, who should be invoiced. Even if several of these names and addresses are the same, it does not hurt to list them separately. #7 There are four main modes of transport, air, rail, road, and sea. There is also a combination of two or more of these, usually referred to as multimodal. While the mode of transport may not be of interest to the buyer, as long as a certain arrival date is guaranteed, it may be a significant cost factor and require different paperwork and insurance coverage. In particular, if the seller only promises a certain date for departure of the shipment, the mode of transport will also affect the date of arrival. In general, therefore, it is better to include the mode of transport in the PO and in the final contract. #8 Different Incoterms lead to different distributions of responsibilities for shipping and insurance charges and possibly other expenses, see below, p.???. Any contract should absolutely ensure that seller and buyer agree on the Incoterm. As an offer, therefore, the PO needs to be unambiguous in this regard. #9 The port of arrival matters primarily if the seller, per Incoterm, is expected to organize and pay for carriage and insurance (C-terms), let alone carry the risk until delivery at the port of arrival (D-terms). It is irrelevant if the buyer has to pick up the goods at the seller s premises

13 Version as of 20 September 2016 p. 13 of 183 (ex works), and it is less important if the seller merely has to bring the goods to the port of departure and a specific vessel (F-terms). In the latter case, the buyer will still want to include the port of arrival because the seller has to clear the goods through customs as the port of origin or departure. This may require an export license for some destination countries and ports (see below, Chapter???). #10 The important date is usually the date when the risk will pass from the seller to the buyer. With F and C terms, this will be at the port of origin or departure when the goods are handed over to the carrier for the marine voyage. If the parties should include a D-term, the date to be entered here should be the arrival date. If the parties should agree on ex works, the date should be the date when the goods have to be handed over to the buyer or buyer s representative at the seller s premises. Instead of shipping date, the parties may specify delivery date in these cases and the place or port of delivery, i.e. where the goods are handed over and the risk passes to the buyer. In many industries it is still customary not to specify a particular day but a calendar week for the agreed upon delivery. This gives a measure of flexibility to the seller but requires notification of the final date to ensure a seamless handover. #11 The unit of measure will depend on the customary way of describing the goods in question in a given industry. This may refer to units or pieces, gallons, bushels, barrels, and many other units of measure. In international sales, additional care is often required because different units or customs may prevail in other countries. For example, a reference to gallons is not necessarily clear because the U.S. gallon ( liters) differs significantly from the UK or imperial gallon (4.546 liters); similarly, a U.S. pound or lb ( kg) differs from a metric pound (0.5 kg); even a ton is different in the UK (1'016 kg) from the rest of the world (1'000 kg). When in doubt, the unit of measure should be supplemented with a reference to the country. The goal is to prevent any ambiguity. The motto should be better safe than sorry. #12 Regarding the description of the goods, there is an essential conflict of interest between seller and buyer. The seller s interest is to keep the description rather basic, while the buyer would want to see additional information, for example regarding suitability and performance of the goods. We will return to this discussion as we home in on the final sales contract. For the purposes of the PO, the description has to be detailed, including the country of origin and the customs code in the Harmonized Schedule system (see below, p.???) to make clear what buyer and seller are talking about. Since the PO is drafted by the buyer, she may additionally want to include requirements as to performance, suitability, marketability, warranty, etc., in particular if they are important elements of price. #13 The subtotal reflects the net price of the goods and is composed of all units times quantity. It generally includes standard packaging. However, unless there is a well-established custom in a particular industry, it does not include any special packaging and other uncommon services such as inspections, certificates of origin for customs clearance, and the like, as well as the cost of carriage/freight and insurance, which will depend on the destination. All of those should be included in #15.

14 Version as of 20 September 2016 p. 14 of 183 #14 In particular, if the seller at some point in the negotiations mentioned any possibility of discounts for new customers, volume purchases, up-front payment, or the like, the buyer should try to get them into the contract here. #15 The buyer should list agreed upon services of the seller at this point, in particular if the contract is for a C-term and the seller has to organize and pay for carriage and insurance. However, the buyer should also include a clause such as and any other costs and expenses to prevent the seller from claiming, at a later stage, expenses for export licenses, origin receiving charges, and the like. The buyer wants to ensure that the total price will remain as stated in #16 and any surprises will not be at her expense. #16 The total amount should reflect all elements supplied by the seller until the risk and responsibility for the goods passes to the buyer. #17 The net weight is for the goods themselves, in their standard packaging, if applicable. Since the buyer may not know the weight of the goods, this would have to refer to information supplied by the seller in the pro forma invoice or other documentation. #18 Packaging other than the standard packaging and the shipping container should be specified here. The general understanding is that normal packaging for the selected mode of transport and destination is included in the price for the goods and only special and/or additional packaging, if required by the buyer, should be mentioned here. #19 The gross weight is for the shipping container(s) including dunnage, if applicable. Again, since the buyer may not know the weight of the goods, this would have to refer to information supplied by the seller in the pro forma invoice or other documentation. Even if the buyer does not know the weight, it is not irrelevant for her and should be part of the contract. If the actual weight should deviate significantly from the contractual weight, the buyer may hold the seller accountable for additional expenses. #20 Payment terms will be discussed in detail in Chapter???. In the PO, the buyer needs to indicate the payment terms she is offering at the quoted price. Less favorable terms, such as payment in advance on an open account, would either be unacceptable to the buyer or at least entitle her to ask for a lower price for the goods. #21 If they were not included earlier in the description of the goods, any assurances sought by the buyer on issues such as suitability of the goods for a specific purpose, marketability, performance targets, warranties, etc. should be clearly spelled out here. Also, the buyer may want to specify the choice of law and forum. Many buyers don t invest a lot of time when generating a PO and send more or less just a list of the goods they are seeking to buy and the price agreed upon in earlier communications. This is a grave mistake, since the seller can simply accept the PO and there would be no clear record of many of the terms that should be included in the contract of sale, which we will discuss below. * * *

15 Version as of 20 September 2016 p. 15 of 183 Finally, we turn to a document that is becoming increasingly widely used, often without real need. This is the Confidentiality Agreement or Non-Disclosure Agreement for the protection of proprietary information of the seller and/or the buyer. The seller will ask for an NDA to be signed before revealing proprietary information related to the goods to be sold, for example secret methods or processes used in the production of the goods or certain of their features or performance characteristics. The buyer may ask for an NDA to be signed before revealing proprietary information related to the intended use of the goods, for example pricing strategies, production or sales targets, marketing strategies, client lists and other information about clients, but also how parts might be integrated into a larger unit, etc. In some companies, it is now a general requirement that anybody who enters into negotiations with the company and, in the course of such negotiations, may receive any kind of proprietary information, first has to sign an NDA. This may include any and all vendors and customers (sellers and buyers). However, with the exception of NDAs used by employers with their employees, it is not so obvious that these agreements are worth the trouble and ultimately serve more than psychological effects. Here are some of the concerns: NDAs have to be sufficiently broad to cover all intended aspects of a business relationship but also sufficiently specific to identify the proprietary information they are eligible to protect. Aggressive use of overly broad NDAs can expose a company to antitrust liability based on attempted restraint of competition! Identifying the proprietary information and who owns it is important so that the other side cannot later say that they already knew the information or obtained it from elsewhere. Only confidential information can be protected via an NDA. If a party has already disclosed the information in marketing materials or otherwise publicly available technical product specifications, or in a patent filing, or during public hearings in an antitrust case or lawsuit, the information is no longer confidential and cannot be protected via an NDA. Many trade secrets are already protected in common law (misappropriation, breach of confidentiality, and unfair competition can trigger liability), and in statutory law. The US Federal Trade Commission Act, and various state level legislation implementing the Uniform Trade Secrets Act provide protection and a range of remedies including injunctions and damages. An NDA is not needed in areas covered by these rules but may facilitate proof of misappropriation or misuse of confidential information. The following is a classic example of an overly broad NDA clause that will be hard to enforce and could easily be interpreted as an illegal restraint of competition: 1 1 Cf. Sage Languages Pte Ltd - Standard Confidentiality Agreement, available at (last visited 8 September 2016).

16 Version as of 20 September 2016 p. 16 of 183 The Confidential Information to be disclosed can be described as and includes: Invention description(s), technical and business information relating to proprietary ideas and inventions, ideas, patentable ideas, trade secrets, drawings and/or illustrations, patent searches, existing and/or contemplated products and services, research and development, production, costs, profit and margin information, finances and financial projections, customers, clients, marketing, and current or future business plans and models, regardless of whether such information is designated as Confidential Information at the time of its disclosure. By contrast, if an NDA is well crafted, it can be a life-saver for a company if proprietary information is misappropriated. An illustration is provided by the case RRK Holding Co. v. Sears, Roebuck, & Co. (563 F. Supp. 2d 832 (N.D. Illinois 2008): In the 1990s, RRK manufactured and sold a spiral saw under the brand name Roto Zip with some success. Sears contacted RRK in 1997 about manufacturing an updated model to be distributed under the Craftsman brand owned by Sears. The two companies entered into an NDA and RRK disclosed information about its next-generation model to Sears. The two companies eventually could not agree over the pricing of the device and terminated their cooperation before a single saw was produced by RRK for Sears. Shortly thereafter, Sears introduced its own new spiral saw under the Craftsman label, which incorporated the technology RRK had disclosed to it. RRK sued and was able to show that all key documents handed over to Sears had been marked as confidential. Although Sears claimed that the respective technology was by then public knowledge in the power-tool industry, a jury agreed with RRK that the technology was innovative and returned a verdict finding Sears liable for breach of the NDA and for misappropriating RRK s trade secret. A judgment granted RRK $11,665,105 for actual losses, $1,688,136 for unjust enrichment, and $8,011,344 for punitive damages. Defendant then moved for a judgment as a matter of law, claiming that there was no legally sufficient evidentiary basis for a reasonable jury to find for the other side. RRK moved for prejudgment and post-judgment interest. In the end, the court denied defendant s motion and granted plaintiff s motion ordering Sears to pay $21,363,585 in total damages, $3,715,479 in pre-judgment interest, and $1, per day in postjudgment interest until paid as awarded. Against this background, we can now draft a model that can be adapted to most IBT relationships of the kind discussed in the present volume. We have to distinguish unilateral NDAs where one company is the disclosing party and the other is the receiving party, and mutual NDAs, where both parties are disclosing information and both are sworn to secrecy.

17 Version as of 20 September 2016 p. 17 of 183 Sample Document #3: Unilateral Non-Disclosure or Confidentiality Agreement entered into between Company Name & Logo of Disclosing Party and Contact Person Street Address City, Zip Code & Country Phone, Fax and Confidentiality Agreement Company Name of Receiving Party Contact Person Street Address City, Zip Code & Country Phone, Fax and 1. Purpose In the course of their business dealings, the disclosing party has transmitted or will transmit valuable information to the receiving party. This information currently is and needs to be kept confidential. It is and remains the property of the disclosing party. Neither its disclosure nor the present agreement imply that a license is granted or rights are transferred to the receiving party, unless otherwise agreed between the parties in writing. 2. Existing Trade Secrets Being Disclosed The parties agree that the following specific information is proprietary information of the disclosing party and falls under the non-disclosure obligations of the receiving party. (1)... (2) Future Confidential Information Any communication in any medium transmitted in future from the disclosing party to the receiving party will be marked as Confidential - Subject to NDA of... [date] if it contains trade secrets and other information falling under the scope of this agreement. 4. Obligations of the Receiving Party The receiving party agrees to protect the proprietary information of the disclosing party identified pursuant to this agreement with all lawful means, in particular (a) (b) (c) (d) (e) (f) not do disclose the information to any third party unless required by law; to maintain the confidentiality of the information in its internal procedures, to limit access to the information among its staff to those who need to know, to maintain binding legal agreements with all employees and independent contractors who have been given or may gain access to the information, and to safeguard against unauthorized third party access to facilities and computers; to notify immediately if it disagrees with the designation of information pursuant to #3 because it has already received the information from a third party, considers the information to be part of the public domain and can name the sources to back up this claim, or is able to prove that it has already independently developed the same information itself; not to use the information in any way in competition with the disclosing party, for example but not limited to the acquisition of patents or trademarks, the registration of domain names, the solicitation of employees, customers or suppliers, or the development of products or services; to delete the information from all electronic media and destroy any documents containing such information, when the business relationship ends or the information is otherwise no longer needed, whichever comes first; to take any other measures reasonably required to protect the confidentiality of the information.

18 Version as of 20 September 2016 p. 18 of 183 Non-Disclosure or Confidentiality Agreement, Page 2 5. Exclusions The obligations of the receiving party do not extend to information that has become part of the public domain by action of the disclosing party or a third party. If the receiving party has disclosed or wishes to disclose information covered by this agreement based on this exclusion, the receiving party bears the burden of proof that the information has become part of the public domain before its disclosure. If a lawsuit or other procedure is started against the receiving party that might require disclosure of protected information, the receiving party shall notify the disclosing party in a timely manner to enable it to intervene and protect its rights if necessary. 6. No Implied Warranties The fact that the information is classified as valuable in this agreement does not imply any warranties on behalf of the disclosing party, for example that the information is accurate, that it will be of use for the receiving party, or that it will never be disclosed to third parties or otherwise become known or available to them. 7. Assignability The rights and obligations under this agreement are binding on the parties and not assignable to third persons without mutual consent of the parties to this agreement in writing. 8. Term The agreement is valid for the duration of the negotiations and business dealings of the parties and for a period of five years beyond. It can be extended by mutual consent in writing. 9. Consideration The parties agree that the disclosure of the confidential information is of sufficient value for the receiving party to constitute consideration. 10. Remedies Any breach of this agreement that entails access of third parties to the protected information can cause irreparable harm to the disclosing party. Therefore, the receiving party agrees to compensate the disclosing party for proven loss or a minimum amount of liquidated damages of...$, whichever is higher. The receiving party will also compensate the disclosing party for the cost of any legal remedies against itself and against any third party that gained access to the information as a result of the breach by the receiving party. 11. Governing Law and Forum This agreement shall be subject to the laws of... Any disputes about the agreement or a breach of the agreement shall be settled in arbitration administered by the International Centre for Dispute Resolution of the AAA in accordance with its international arbitration rules. The place of arbitration shall be... and the proceedings shall be conducted in English. The number of arbitrators shall be one/three. 12. Final Clauses This is the entire agreement between the parties and supersedes any earlier communications, negotiations, and agreements with respect to its subject matter. Any modifications or subsequent agreements on the subject matter must be in writing and duly signed by both parties. Should any part of this agreement be found to be invalid, the remaining parts shall remain binding and enforceable between the parties. Date and Signatures On behalf of the disclosing party On behalf of the receiving party

19 Version as of 20 September 2016 p. 19 of 183 Explanations In some industries or settings the name confidentiality agreement is more commonly used (for example in employment contexts), in others the name non-disclosure agreement ; there is no material difference between the two, as long as the other terms are clear. #1 The entry on purpose clarifies several things: first, that there will be a transfer of information that is currently not publicly available, i.e. it is confidential; second, the information is considered valuable by both parties and is, therefore, consideration (see also #9); third, the information has to remain confidential; fourth, the present agreement does not affect the ownership of the disclosing party and does not constitute a license or permission for the receiving party to do anything with the information other than the purpose for which it is being disclosed. #2 There are generally three ways of determining the scope of the NDA or CDA: i) The information can be broadly described with reference to the IBT in question (see the example on p. 16???); ii) the information can be specifically described; and iii) the information can be marked. The present NDA or CDA uses a combination of ii) and iii) (see also #3). To the extent that existing information is disclosed, it needs to be described quite clearly. In practice, very general NDAs and CDAs have often proven unenforceable. To this end compare below, Magellan International Corporation v Salzgitter Handel GmbH, pp.???-???, in particular paras #3 The proposal specifies that future information will be marked if it is to fall under the NDA. This ensures a high level of enforceability but also puts a significant burden on the disclosing party. They may want to have a stamp made and place it on every piece of paper and other information that is being transmitted by mail, fax, or attachment and contains confidential information. They may also want to include a rider in all s and delete it when it is not needed versus adding it when it is needed. #4 The obligations of the receiving party are spelled out clearly in this model. They cover both voluntary and involuntary disclosure by the receiving party. The obligation to maintain a high level of computer security is increasingly important in practice. Clause #4(c) is of particular importance. By way of the NDA, the receiving party acknowledges that existing information described under #2 falls under the NDA; by way of clause (c), the receiving party also acknowledges that future information falls under the NDA if it is so marked and not contradicted by the receiving party. This prevents the receiving party from claiming that some information was already in the public domain when received or that they had already independently arrived at the same research results (see also #6). #5 The exclusions are important because it is always possible that confidential information becomes publicly known without an act or fault of the receiving party. For example, the disclosing party may have transferred it to third parties with or without an obligation to keep it confidential. Third parties may have violated their NDAs. Third parties may have independently arrived at the same research results. Clause #5 accounts for these possibilities.