Alerts
The United Nations Convention on Contracts for the International Sale of Goods - PART 2
What does it mean and how does it affect Texas businesses?
by Gus Bourgeois & Adam Wilhite
January 23, 2012
The United Nations Convention on Contracts for the International Sale of Goods (CISG) is an international treaty providing a uniform international sale law for buyers and sellers of goods with places of business in different Contracting States. The practical effect of the CISG is that, for example, if you are a business located in Texas and engaged in buying goods from, or selling goods to, a party located in another country that has ratified the CISG (a "Contracting State"), the terms of that transaction are likely governed by the CISG, even if the contract states that the laws of another jurisdiction (such as Texas) apply — unless the contract specifically says that the CISG does not apply. So what are some of the implications of having the CISG apply?
First, consider the statute of frauds, which (as codified by Texas' version of the Uniform Commercial Code) holds that a contract for the sale of goods with a price over $500 is generally not enforceable unless in writing and signed by the party against whom enforcement is sought. This long-standing bias against the enforceability of oral contracts is reversed under the CISG, which instead holds that a contract for the sale of goods under the CISG need not be in writing. Significantly, under the CISG, contracts for the sale of goods generally may also be amended orally, even if the original contract was in writing, unless the original contract expressly requires written amendment.
Second, consider the "battle of the forms", for example, when a buyer of goods issues to seller a purchase order with buyer-friendly terms and conditions, and seller issues an acknowledgment of the commercial terms of the order (price, quantity, etc.) backed with a separate set of different (seller-friendly) terms and conditions. In the absence of any other communication or conditions, seller's acknowledgement would generally be deemed to be acceptance of buyer's offer under the Texas UCC, and a binding and enforceable contract would be created. To the extent that seller's terms and conditions materially differed from buyer's, the different provisions would be considered to be proposals amending buyer's initial terms and conditions. Under the CISG, however, seller's response would be considered to be a rejection of buyer's initial offer, and a separate counteroffer. At this stage, either party could "walk away" from the proposed transaction, without obligation. In the absence of any further communication, if the parties thereafter "perform", the CISG would generally hold that the performance was pursuant to seller's terms and conditions, which buyer would have accepted by performance. Thus, in such a scenario, the CISG favors the "last form", while the Texas UCC favors the "next-to-last" form.
Third, while the CISG provides for many of the same types of damages in the event of breach as does the Texas UCC, the CISG provides an additional "self-help" remedy to buyers of goods. If the goods purchased do not conform to the contract, then the buyer may unilaterally reduce the purchase price in proportion to the non-conformity, even if the full purchase price has already been paid, unless the buyer can cure the non-conformity without unreasonable delay or inconvenience. There is no equivalent to this remedy under the Texas UCC, and obviously the exercise of such a remedy could be quite a surprise for an unsuspecting Texas seller.
While the differences between the CISG and the Texas UCC noted above are illustrative only, they support the idea that a Texas buyer or seller of goods may be better served by disclaiming the application of the CISG entirely. We'll discuss how and when to do so in part 3 of the article.
The United Nations Convention on Contracts for the International Sale of Goods - PART 1
What does it mean and how does it affect Texas businesses?
by Gus Bourgeois
January 18, 2012
The United Nations Convention on Contracts for the International Sale of Goods (CISG) is an international treaty providing a uniform international sale law for buyers and sellers of goods with places of business in different Contracting States. The CISG will also apply if only one party to the transaction is located in a Contracting State, if the terms of the contract, or operation of applicable "conflicts of laws" provisions, specifies that the Contracting State's laws will govern the transaction. The CISG was initially adopted by 11 countries in 1988, including the United States. It has been subsequently ratified by more than 60 additional countries, excluding, notably, the United Kingdom and India. Countries that have ratified the CISG are referred to as "Contracting States".
The purpose of the CISG is to provide a uniform regime for contracts for the international sale of goods, thereby introducing certainty and confidence in commercial exchanges. The idea is that such certainty would increase the volume of international trade, for the benefit of all Contracting States. In furtherance of that goal, the drafters of the CISG provided that the terms of the CISG are deemed to supersede the laws of the Contracting States with respect to sales transactions covered by the CISG, unless the application of the CISG is expressly excluded.
In other words, if you are a located in Texas, for example, and engaged in buying goods from, or selling goods to, a party located in another Contracting State, the terms of that transaction are likely governed by the CISG, even if the contract states that the laws of another jurisdiction (such as Texas) apply — unless the contract governing the transaction specifically says that the CISG does not apply. In my experience, many Texas businesses engaged in international sales transactions, if not most, have never heard of the CISG and do not realize that these transactions are governed by the CISG — until a problem arises.
What are the implications of the CISG for a Texas-based business involved in international sales transactions? When is it appropriate to specify that the CISG does not apply to a particular transaction — and how is that accomplished? We'll explore those answers to those questions in part 2 of the article.
The Pitfalls of Stock Options for Start-Up Companies
by Gus Bourgeois
October 19, 2011
It is very common for start-up companies to issue stock options to certain key employees, but there are significant risks in doing so to both the option recipient and the company under Internal Revenue Code (IRC) Section 409A if the options have an exercise price less than the fair market value of the common stock as of the option grant date. Internal Revenue Service (IRS) regulations require that fair market value be determined using "reasonable application of a reasonable valuation method," and provide a presumption that a company's fair market value determination will be considered reasonable if it takes into account the relevant valuation factors described in the regulations, and:
(a) if the valuation is determined by an independent appraisal no more than 12 months before the transaction date; OR
(b) if the valuation is of "illiquid stock of a start-up corporation" and is made reasonably, in good faith, evidenced by a written report, performed by a person with significant knowledge and experience or training in performing such valuations
But the costs of obtaining an independent appraisal may be high for start-up companies, and the company may not have ready access to a person who has "significant knowledge and experience or training in performing such valuations."
WHAT YOU SHOULD DO
If a start-up company is considering issuing stock options, it is important to understand the requirements of IRC 409A as early as possible in the process, and to plan for the costs of obtaining the required valuation. In such cases, a start-up company may find that it will be better served by issuing restricted stock or some other equity vehicle which falls outside the purview of IRC 409A, instead of stock options.
United Kingdom's Bribery Act 2010 to Become Law
by Gus Bourgeois
June 14, 2011
After years of discussion, debate and delay, the United Kingdom's Bribery Act 2010, which has been described as the toughest anti-corruption legislation in the world, will finally become law effective July 1, 2011. Although the Act covers the crime of bribery broadly, the most important provisions of the Act from the point of view of international businesses are those dealing with bribery of a foreign public official (Section 6 of the Act) and failure of a commercial organization to prevent bribery on their behalf (Section 7 of the Act).
A person who promises, offers or gives an improper financial or other advantage to a foreign public official, either directly or through a third party, can be found guilty of bribery of a foreign public official. A foreign public official is defined as "an individual holding legislative, administrative or judicial posts or anyone carrying out a public function for a foreign country or the country's public agencies or an official or agent of a public international organization". There is no requirement to show that the bribe resulted in the public official acting improperly. This Section applies to a person who (1) committed the act in the UK, or (2) acted outside of the UK if such act would have constituted a crime if committed in the UK, if the person had a "close connection" to the UK, which includes being a British citizen or resident, or a company incorporated in the UK. Unlike the U.S. Foreign Corrupt Practices Act, there is no exception for "facilitation payments" — making the Bribery Act 2010 much more comprehensive in its scope than the FCPA.
The crime of failure of commercial organizations to prevent bribery on their behalf applies not only to the organization itself, but to its employees and agents on an individual basis, and the employer can be held vicariously liable for the acts of its employees, agents and subsidiaries. This is a strict liability offense, so there is no need to prove intent in order to reach a finding of guilt. This Section applies to any commercial organization which has business in the UK, without regard to location; therefore, according to the Archbold Review, "...a German business with retail outlets in the UK which pays a bribe in Spain could, in theory at least, face prosecution in the UK". However, the commercial organization has a defense if it can show that it had implemented adequate procedures to prevent persons associated with it from engaging in such conduct.
These provisions may have a significant impact on the compliance efforts of international businesses which employ British citizens or residents, or which conduct business in the UK (whether directly or through subsidiaries or affiliates). It is expected that such businesses will attempt to impose their internal compliance regimes on suppliers by contract, which may lead to higher costs to the supplier and a "shaking out" of smaller suppliers who do not have the financial and compliance resources to satisfy such contractual requirements.
Upswing in Logistics Activity Bodes Well for Port of Houston
by Gus Bourgeois
May 23, 2011
Research firm Armstrong & Associates (www.3plogistics.com) reported that most third party logistics providers (3PL) experienced improved financial performance in 2010 and into 2011. In its annual report released May 20, 2011, Armstrong & Associates noted that while both revenues and profits of 3PL's were generally higher during those time periods, the trend was strongest in the international transportation management segment.
Meanwhile, in an unrelated report, the Los Angeles Economic Development Corporation recently predicted that the volume and value of international trade in the Los Angeles Customs District (including the Long Beach Port, which has long been the dominant US port for imports from Asia) is expected to grow in 2011. But Donald Sachs, the executive director of the Industry Manufacturers Council, cautioned about whether Southern California would continue to reap the benefits of the resurgence in international trade. "I hate to rain on their parade," he said. "But until we know what effects the widening of the Panama Canal will have, we won't really have a clear picture." According to the Inland Valley Daily Bulletin, which reported the story, Sachs is concerned that allowing bigger ships to go through the canal will give a lot of the local Customs District's business to Texas ports.
The upshot of these reports? With economic trends now firmly reflecting a rebound in international trade, and with the long awaited completion of the Panama Canal expansion only three years away, the hope that the Port of Houston will reap immediate and significant benefits from the expansion — at the peak of the economic cycle — is getting closer to reality.
Tips for Transitioning 3PL Services
by Gus Bourgeois
November 18, 2010
Here are a few tips for manufacturers and other consumers of third party logistics (3PL) services to consider when drafting their next 3PL contract, to minimize transition issues, regardless of whether transitioning to another provider or in-house:
- The transition from your incumbent 3PL to another provider, or from your incumbent 3PL back in-house, is a process - even in relatively basic 3PL arrangements, the transition can often take several months. More importantly, the transition will require the incumbent 3PL to work closely with you and any successor 3PL to ensure that your supply chain is not interrupted. Of course, the incumbent 3PL has its own concerns, such as redeploying employees and equipment in a timely manner, and minimizing "end-of-contract" expenses. It is therefore wise to include a "transition" clause in your 3PL contract, setting forth in reasonable detail those additional duties required of the incumbent 3PL as part of the transition process (including a general duty to act in good faith to assist in such transition), allocating costs related to those additional duties, and most importantly, identifying those critical "end-of-contract" tasks which must be successfully completed before final payments are made.
- Perhaps the most important service provided by a 3PL relates to information about the flow of goods through your supply chain. Visibility to this data is crucial to your core business, and any gap in that visibility can affect your bottom line. Therefore, one of the most important considerations from the very start of any 3PL relationship is to ensure that you will have unrestricted access to such information during any end-of-term transition period, and that upon termination, such historical data will be provided to you (and to any successor 3PL) in a format that is efficient and economical, in order to facilitate a smooth transition. One key point in this regard is to make certain to include a clause stating that all of your data in the possession of the incumbent 3PL, regardless of the form it may be in or whether the format has been manipulated by such 3PL, remains your sole property.
- As mentioned, 3PL relationships tend to be long-term, often lasting multiple years and in some cases, more than a decade. As a result, certain key employees of your incumbent 3PL can become so integrated into your supply chain function that losing access to the knowledge base of those employees in any transition would be detrimental to your operations. Of course, 3PL providers recognize this fact and the inherent value of these employees, not only because of the experience and knowledge they bring to the 3PL and its other customers (existing or potential), but because their ability to retain these employees (or, more to the point, to prevent such employees from working directly for you or a successor 3PL for some period of time after any termination) acts as a disincentive to your ending your relationship with such 3PL. As a result, 3PL providers typically include "no-hire" clauses in their customer contracts. You should evaluate these clauses carefully and consider their effect on your future transition plans. At the very least, it is recommended that you include a liquidated damages or "buy-out" clause, so that you have an option to hire any such key persons in-house, in the event that a transition would otherwise involve the loss of the services of such person. It may be easier to negotiate the amount of such liquidated damages or buy-out provisions at the start of the 3PL relationship, when the 3PL is anxious to finalize the contract and start the flow of payments, than to negotiate the deletion of the clause entirely, which will almost certainly be met with stern opposition from even the most eager 3PL.
- Although an efficient and cost-effective dispute resolution process is critical to any long-term services contract, it is especially important with respect to 3PL contracts in any transition process. You should take care to negotiate a dispute resolution clause that prohibits the 3PL from terminating the contract earlier than the anticipated termination date, suspending services or payments to your suppliers, or otherwise disrupting the flow of goods and information through your supply chain, due to the existence of a pending dispute. While these actions would be detrimental if taken at any time during the term of the contract, they are more likely to occur during a transition, when the incumbent 3PL may feel that it has less to lose in taking such actions (and may also fear that resolving the dispute may have less significance to you once it is no longer the "incumbent" 3PL). It is therefore critical to clearly specify the parameters of the dispute resolution process, and to separate such process from the ongoing provision of services by the incumbent 3PL.
The Inventory Effect
by Gus Bourgeois
July 30, 2010
U.S. Gross Domestic Product (GDP) was recently revised downward from a seasonally adjusted annual rate of 3.0% to 2.7% for the first quarter of 2010. Standing alone, this is sobering news for the U.S. economy, after an encouraging 5.6% reading during the fourth quarter of 2009. But this reduction has particular relevance to the transportation and logistics industry.
Looking behind the numbers that make up the downward revision for the first quarter of 2010, Tim Lacono, founder of the investment website Lacono Research, notes that "[t]he change for the first quarter was a result of downward revisions to personal consumption and net exports that more than offset upward revisions to inventory, which has been the primary driver for the U.S. economy since last summer."
That statement reflects two important points: first, one of the primary economic drivers of the U.S. economy in the last year has been the rise in inventories (which has obviously been very beneficial to the transportation and logistics industry). That fact shouldn't be surprising, considering the prolonged drop in inventory levels witnessed during the Great Recession — at some point, businesses deplete their inventories to "bare-bones" levels, and are forced to replenish or go out of business. This is a normal part of the "end-of-recession" cycle, and is generally followed by an increase in personal consumption and net exports, as the roots of the economic rebound take hold and consumer confidence increases — which feeds and extends the cycle of recovery and expansion, and returns transportation and logistics activities to more normal levels.
But Lacona notes that for the first quarter of 2010, "[t]he change in inventories alone accounted for a full 1.75 percentage points of the just revised first quarter growth rate of 2.7%." That ratio, coupled with the fact that the recent GDP reduction was based primarily on downward revisions to personal consumption and net exports, is troubling.
The recent inventory replenishment cycle has been just what the doctor ordered for the transportation and logistics industry, as business levels bounced off of the Great Recession lows, and transportation rates began to find some support. But at some point, businesses will have replenished their inventories from the depleted levels of the Great Recession, and will be looking for signs that the consumer is buying before continuing the cycle. The numbers behind the recent GDP revision suggest they aren't going to find it.
The Great Freight Recession
by Gus Bourgeois
July 21, 2010
The Council of Supply Chain Management Professionals released a report in late June 2010 entitled "The Great Freight Recession", which stated that U.S. business logistics costs plummeted to $1.1 trillion in 2009, a decrease of $244 billion from 2008. In addition, the report noted that in 2009, "U.S. logistics costs as a percentage of Gross Domestic Product (GDP) hit a record low of 7.7 percent, the lowest point ever recorded in the 30 years that data has been collected. In the past, a low ratio signified that American logistics managers were doing a good job controlling costs and efficiently moving and storing goods. But last year, that number slipped for a different reason. As the volume of goods produced in the United States declined, so did the amount of tonnage to be shipped, thus dragging down logistics spending."
The fact of the downturn in logistics spending is certainly no surprise — but the depth of this downturn remains a major concern, not only for the transportation and logistics industry, but for the U.S. economy as a whole. Conventional wisdom holds that the Great Recession ended in late 2009 and that economic activity began to substantially rebound in early 2010, with manufacturing leading the way. However, unless shipping and logistics activities enjoyed a significant bounce in the first two quarters of 2010 — which appears unlikely, in light of recent downward GDP revisions for that time period — then, to paraphrase Mark Twain, reports of the death of the Great Recession may have been greatly exaggerated.
The Big Squeeze, Wal-Mart Style?
by Gus Bourgeois
July 19, 2010
Wal-Mart announced in mid-June 2010 that it is considering pulling business from its outsourced transportation providers (including, potentially, Swift Transportation, Con-way Freight and Greatwide Logistics) with respect to delivery of goods from suppliers to its distribution centers, and instead moving that freight using its in-house private fleet, wherever it is cost-effective to do so. According to a Bloomberg report, Wal-Mart is in the processing of contacting manufacturers about this approach, with the goal being to lower costs for its suppliers, which in turn would lower the cost of goods to Wal-Mart.
The real question is whether this represents a serious effort by Wal-Mart to reduce costs by using its in-house resources (which aren't exactly sitting idle now, as anyone traveling any U.S. interstate this summer can attest), or whether this is merely the first move by Wal-Mart to force its outsourced transportation providers to cut their rates.
The larger question involves the effect of this move on the U.S. trucking industry. According to John Schulz of the Gerson Lehrman Group, "If Wal-Mart were to pull that freight off common carriage — or even threaten to pull it — that would result in tons of excess capacity at a time when the U.S. trucking industry is just recovering from a three-year freight recession."
I think it's reasonable to assume that forcing its outsourced transportation providers to cut their rates in order to keep the business would have a similar detrimental effect on the U.S. trucking industry, just at the time when many hoped that even a small recovery in U.S. manufacturing activity would at least offer support to current (already discounted) rates.
The Great Freight Recession
by Gus Bourgeois
October 5, 2010
The Council of Supply Chain Management Professionals released a report in late June 2010 entitled "The Great Freight Recession", which stated that U.S. business logistics costs plummeted to $1.1 trillion in 2009, a decrease of $244 billion from 2008. In addition, the report noted that in 2009, "U.S. logistics costs as a percentage of Gross Domestic Product (GDP) hit a record low of 7.7 percent, the lowest point ever recorded in the 30 years that data has been collected. In the past, a low ratio signified that American logistics managers were doing a good job controlling costs and efficiently moving and storing goods. But last year, that number slipped for a different reason. As the volume of goods produced in the United States declined, so did the amount of tonnage to be shipped, thus dragging down logistics spending."
The fact of the downturn in logistics spending is certainly no surprise — but the depth of this downturn remains a major concern, not only for the transportation and logistics industry, but for the U.S. economy as a whole. Conventional wisdom holds that the Great Recession ended in late 2009 and that economic activity began to substantially rebound in early 2010, with manufacturing leading the way. However, unless shipping and logistics activities enjoyed a significant bounce in the first two quarters of 2010 — which appears unlikely, in light of recent downward GDP revisions for that time period — then, to paraphrase Mark Twain, reports of the death of the Great Recession may have been greatly exaggerated.
Logistics Data Points to Improving Economy
by Gus Bourgeois
April 16, 2010
The commercial strength of logistics providers is often seen as a leading indicator of an expanding economy. The Council of Supply Chain Management Professionals recently reported that the March 2010 Supply Chain Index (SCI), a monthly index of accounts receivable activities covering approximately 350,000 businesses, dropped to 7.65 days beyond terms, its lowest level since August 2008.
"Payment behavior can been seen as a barometer of confidence in future sales and demand. And when payments between partners show this kind of improvement, it provides an indicator of overall optimism," says Jim Swift, CEO of Cortera, creator of the SCI. "It remains to be seen whether such optimism can be maintained, but it is clearly a positive development for businesses seeking what has been an elusive improvement in cash flow."
Recent Changes to Delaware Limited Liability Company Laws
by Gus Bourgeois
October 12, 2009
Gus Bourgeois recently gave an in-house presentation to BoyarMiller's Business Group regarding recent changes to Delaware's limited liability company laws as discussed in The Wave of the Future and Advising Your Clients About What to Expect, written by Peter J. Walsh, Jr. and Dominick T. Gattuso published in the ABA Business Law Today.
Highlights include reviews of Spellman v. Katz, C.A. No. 1838 (Del. Ch. Feb. 6, 2009) which cites parol evidence of members' contrary intent as to dissolution of company inadmissible when language in Operating Agreement is clear and unambiguous; and Fish Venture, LLC v. Segal, C.A. No. 30l7-CC (Del. Ch. May 7, 2008) which cites fiduciary duties may be limited or excluded by clear and unambiguous language in Operating Agreement. For more information download the complete article at http://tiny.cc/ICgmX.
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