The following article first appeared in presentation materials of the Minnesota Bar International Business Law Section’s Annual Institute in April 2021
If you work on your company’s commercial contracts for cross-Atlantic deals, you have a great many things to worry about: pricing and delivery terms, warranties, IP rights, choice of law, arbitration provisions, the GDPR, whether to spell it “labor” or “labour,” just to name a few. Yet how much attention do you pay to delineating the parties’ respective obligations with applicable laws and regulations affecting international trade transactions?
That is one area to which you may wish to pay more attention. Both the United States and European countries take the opportunity of goods or services crossing borders to regulate the privilege of transnational business activities. Protection of customs revenue, domestic markets, foreign policy interests, national security, human rights, and sharing of sensitive technologies is just of few of the policy concerns governments address through regulation of trade. Some of the laws regulating trade between the United States and Europe are in direct contradiction with each other. It is prudent for companies engaged in international trade to assign responsibilities for compliance and manage their trade compliance risks with contractual language. (Note that many companies choose to manage their trade compliance risks with stand-alone end-use certifications. I believe, however, that, whenever possible, it is preferable to do this through language integrated into and made enforceable through the reciprocal obligations of the commercial contract.)
So what are the risks of international trade compliance and through what contractual clauses can they be addressed? This, of course, will depend on the particular circumstances and the nature of your business, the geographic area, the nature of your business partners, and many other factors. It is possible, however, to make a general list of risks and provisions related to international trade compliance:
- Terms of sale. Terms of sale, specifically Incoterms, which are often used in conjunction with pricing terms, allocate responsibilities for the costs and risks of insurance, inland and overseas transportation, and other logistical activities. Among other things, Incoterms also allocate responsibility for export and import clearance of goods. For example, with the EXW term, the buyer will have responsibility for both the export clearance for the country from which the goods are being shipped, and for customs / import clearance into the country of destination. Other Incoterms, including common terms such as FCA, FOB, CIF, and DAP, assign the responsibility for export clearance to the seller, and responsibility for the import clearance to the buyer. With the DDP Incoterms, the seller bears the responsibility for both the export clearance and the import clearance.
- Customs (import) compliance. If your business partner acts as the importer of record for your products into their country, it may be prudent to highlight in the contract that they are responsible for compliance with all applicable import or customs regulations. This may include requirements for correct harmonized tariff classification, country of origin, and valuation of products. In addition, this may include product marking and labeling, and compliance with product registration, import licensing, safety, environmental, and many other product regulatory requirements. On the other hand, if your company is importing product from overseas, it may be helpful to build in an obligation on your business partner to notify you regarding any changes in their supply chain that can affect the country of origin, value, or classification of the product you are importing.
- Export controls compliance. If you are exporting export-controlled products, it may be a very good idea to notify your customers of that fact in the contract. If you are importing products, it would be very helpful for your vendor to inform you if the product is controlled, and provide the export control classification. However, the export control risks are not limited to trade in goods. It is even more important to provide information or impose a contractual notification requirement in connection with the sharing of export-controlled technology. You also may wish to add a provision allocating responsibility for compliance with applicable export control requirements, or a provision excusing delay or non-performance in the event of inability to obtain or maintain an export license or authorization.
- Embargo compliance. From the point of view of U.S. regulators such as the Office of Foreign Assets Control (“OFAC”), you as a U.S. person are responsible for making sure that your products are not exported directly or indirectly (with your actual or constructive knowledge) to a number of embargoed destinations (currently, Cuba, Iran, Syria, North Korea, and the Crimea Region of Ukraine). However, be careful! Under the EU Blocking Statute, and its UK equivalent, it is unlawful for EU residents to agree to comply with the U.S. embargoes on Cuba and Iran (and they are required to report such requests to the EU Commission). What do you do, then?
- Movement of product or distribution territory. Rather than impose a restriction related to the U.S. embargoes, it may be helpful, if possible, to limit the physical movement of your product by your end-user customers in Europe, or the distribution area of your distributors. However, once again – be careful! Restricting the movement or distribution of goods within the European Economic Area may run afoul of EU competition laws.
- Restricted party compliance. Akin to embargo compliance, U.S. regulators such as OFAC and Department of Commerce’s Bureau of Industry and Security (“BIS”) are keen on ensuring that U.S. companies do not do business with actual or constructive knowledge with any of the thousands of persons and entities named in various restricted party lists (or even with unnamed entities that are majority owned by the listed parties). In fact, it is not only the U.S. regulators – restricted party lists are also maintained by the United Nations, and the European Union, and a number of other jurisdictions. So it is prudent to have a provision allocating responsibility for compliance with applicable restricted party lists. For added assurance, it may be helpful to provide a reference to specific restricted party lists or the U.S. Consolidated Screening List.
- End-use compliance. Compliance with end-use restrictions is related to export controls compliance. It is often a good idea to add a provision that requires compliance with end-use restrictions, such as licensing requirements for end-uses related to nuclear, chemical, or biological weaponry, missile technology, and unmanned aircraft. Such provisions are relatively non-controversial.
- Antiboycott compliance. Many commercial documents originating in the Middle East and sometimes showing up in Europe (e.g. letters of credit) contain provisions related to the boycott of Israel, compliance with which may violate U.S. antiboycott law. (Receipt of such provisions or information requests must also be reported to the U.S. government). It may be a good idea to add a “savings clause” that states that no matter what you agree to, you do not agree to take any action in violation of antiboycott law.
- Antislavery compliance. Both the U.S. and the EU now have laws that prohibit the importation of products of involuntary labor. Due to the global nature of modern supply chains, it may be worthwhile to have a contractual requirement for slavery-free products.
As with other areas of contractual risk, it is not possible to anticipate all potential trade compliance risks. Hopefully, the discussion above will assist the reader in addressing the trade issues relevant to their business. In many circumstances, it is a good idea to consult experienced trade counsel to help you formulate or negotiate your contractual strategy and language related to trade in goods or services.