What should you do if your foreign counteragent fails to fulfill its obligations as per deal?

• Transport & Logistics

If earlier in most global markets business expansion at the international level was a keystone to success and development, today internationality of business is an essential condition for successful existence of the company.

In response to our clients’ requests, lately we have faced the following:

      - small and medium business entities enter into deals with counteragents in various jurisdic­tions, but neither verify counter­agents nor under­stand all the risks of operation under foreign laws nor study all the nuances and consequences;
      - in case of deal for small or large money, aimed to save costs, potential parties to the deal prefer not to involve lawyers for verification or legal support;
      - a disputable situation arises and the counteragent openly rejects to fulfill its obligations;
      - the counteragent disappears and stops communicating (the client becomes a victim of fraudsters);

It results either in absence of goods, or in poor quality of goods or in lack of payment.

When contacting lawyers, it turns out that the prospects for successful dispute settlement are low (a contract has not been signed, there are no regulatory documents for the cargo, cargo quality has not been verified, powers of the signatories have not been confirmed – there can be many reasons).

However, costs of legal defense are quite large, while terms of a potential conflict resolution are long-standing.

Several case studies from Interlegal practice are set below:

Example 1

The Ukrainian company engaged in import of fertilizers followed by their sale at the territory of Ukraine, has entered into supply deal with the Turkish company.

The contract itself was not concluded.

Instead of the contract, provisions concerning each delivery were contained in invoices.

Having received the first batches of goods, followed by their sale in Ukraine, the Ukrainian company received complaints from its customers concerning quality indicators.

Since the contract was not concluded, while proforma invoices did not contain qualitative specifications of the goods, it was quite a complex and long-term process to prove legally the fact of violation by the Turkish company.

Since the prospects for successful dispute settlement are quite low, the client decided not to initiate legal proceedings in Turkey.

Example 2

The client, a forwarding company, paid 100% advance payment for truck purchase in Italy. The Italian alleged seller received payment and stopped communicating. Costs have been spent, while the goods have not been imported to Ukraine; therefore, the buyer not only lost a significant amount of funds, but would eventually bear liability due to withdrawal of foreign currency outside Ukraine.

The legal instruments are simple: either court proceedings against the Italian supplier company or initiating criminal case proceedings in Italy upon the fact of fraud.

Each aforesaid instrument can have a proper legal support initiated by Interlegal associated office in Italy. But will it be useful for the buyer? Probably not.

A successful judgment against an empty company will not result in refund of costs, while legal support of criminal case proceedings in Italy will last for many years.

Example 3

The Ukrainian company, acting as the buyer, concluded an alleged contract on goods supply (fabric for tailoring) with a Turkish supplier.

The goods were delivered, but under the results of initial inspection quality of the goods did not meet the buyer’s expectations.

As shown by analysis of the documents, there was no signed contract (it is not a problem yet), while the invoice, to be interpreted as a contract, contained no terms concerning quality of the goods.

There are many such situations. Interlegal receives at least 20 such requests per year. Estimated losses of clients in such situations range from $30,000 to $60,000 upon each failed transaction.

What can we recommend:

- to verify the counteragent before starting commercial relations;

- to check the list and content/terms of documents depending on the counteragent’s jurisdiction, goal of the transaction, payment terms;

- to check requirements of the export/import country;

- to understand accurately structure of the deal (who owns and disposes of the goods, who shall be liable for carriage of the goods and according to whose instructions).

For avoidance of showing your company as an example, you should contact Interlegal a just before signing the contract or before payment for the goods. We will weigh the pros and cons and will give you correct recommendations.

Nikita Kocherba

kocherba@interlegal.com.ua