By S. Jon Trachta
The Risk of Not Getting Paid for Goods or Services.
International sales of goods or services entail greater risk than domestic sales. Many reasons account for this. One of the most important is the difficulty often encountered in compelling payment for goods delivered or services rendered. Several means are routinely recommended for minimizing the risk of nonpayment in international transactions. These include payment of all or some portion via cash in advance; payments against documents; irrevocable letters of credit; the use of security interests in or liens against the property being sold or delivered; and export credit insurance. However, many of these tools may be of little or not use in particular situations.
Letters of credit may be unavailable due to the newness of the buyer’s company or the unavailability of credit in the buyer’s home state. Cash payments may not be an option for the same reason. Security interest or liens against property to be sold or delivered are also problematic because, for example, such rights do not exist in some countries. And export credit insurance is not widely available for all manner of transactions. Consequently, goods will inevitably have to be sold or services provided “on account,” that is, with the seller or service provider agreeing to deliver goods or perform services in exchange for an unsecured promise of future payment.
When there is no payment in advance or other relatively sure-fire method of protecting the seller or provider against the risk of nonpayment, the seller must decide whether the potential long and short-term benefits of “making a sale” outweigh the risk of loss. The factors which the business person must evaluate include these: If I am not paid for my goods or services as agreed, what recourse do I have? How much will it cost me to seek it? How long will it take? What is the likelihood that I will recover what I am owed?
What do I do when the wheels come off?
1. Court Litigation. Creditors seeking payment of debts from recalcitrant customers frequently file suit for nonpayment. Often suit is accompanied by use of garnishments, attachments and other provisional remedies designed to tie up a debtor’s assets at the outset of a lawsuit. Impounding assets at the beginning of a case enables the creditor not only to get the undivided attention of the debtor but also to prevent dissipation of assets during the pendency of the case.On the other hand, as anyone schooled in commercial dispute resolution would agree, business clients typically react to the prospect of court litigation with a sense of dread. The sentiment surfaces for a variety of reasons: Lawyers are seen as a overreaching, inefficient lot driven only by the quest for the almighty billable hour (and its successor the almighty dollar). The courts are seen, because of the nature of the litigation system which lawyers have designed for themselves, as an unproductive or counterproductive method for resolving business problems, with inherent uncertainties sufficient to trouble even the most savvy C.E.O. When the vagaries of the United States’ jury trial system are blended into the mix, the unpredictability of the process often takes on foreboding dimensions.When commerce crosses international boundaries and transverses the wide gulfs that often separate disparate cultures and incompatible legal systems, anxieties over the spectre of court litigation reach their zenith.
2. These are not new discomforts, but they were certainly highlighted by the signing and ratification of the North American Free Trade Agreement (“NAFTA”). Put simply, the ambiguities, anxieties, fears, misconceptions, distrusts and uncertainties associated with doing business withing a totally alien legal system can be formidable non-tariff barriers to free trade and commerce.
3. Avoiding Court Litigation. Arbitration, mediation and conciliation can be used to reduce the worries of international commerce.Arbitrationinvolves the submission of a dispute to a neutral third party (or panel of neutrals) for a binding decision.Mediation is a process in which a neutral third party intervenes in a dispute to help facilitate a voluntary settlement between the parties. The “traditional” mediation model in the United States contemplates that the mediator normally not suggest specific solutions to the parties. If mediation results in agreement, it can be made binding upon the parties in a number of ways, but the mediator does not decide the controversy. Instead, the parties are encouraged to come up with their own solution.
Conciliation is similar to mediation, and involves submission of a dispute to a neutral “conciliator.” Rather than deciding the controversy and imposing an outcome on the parties, the conciliator reviews the respective legal and factual positions of the parties and normally suggests possible outcomes and settlement arrangements.
4. Court Avoidance in the International Context. For a variety of reasons, it is best to avoid trying to resolve cross-border commercial disputes exclusively by resort to the courts.First, international litigation can be quite expensive, costing as much as three times more than the same case litigated locally. Second, and more important, court avoidance is especially important for the U.S. plaintiff, as the United States is not a party to any bilateral or multilateral treaties governing the enforcement of U.S. court judgments in other countries. The lack of uniform rules for dealing with enforcement of U.S. judgments outside of the U.S. makes their enforceability very difficult, both practically and legally.On the other hand, the United States is a party to two treaties that sanction use of international commercial arbitration, and require courts to recognize and enforce international commercial arbitration awards: the United Nations Convention on the Recognition and Enforcement of International Arbitration Awards, and the Inter-American Convention on International Commercial Arbitration. More than 100 countries are parties to one or the other of these treaties, making arbitration a widely accepted means of international dispute resolution.<br><br>
5.How to Ensure Court Avoidance: Contract and Business Forms. Sales of goods on account is frequently accomplished utilizing standard form purchase orders, confirmations, invoices and the like. Selecting arbitration and mediation for resolution of payment disputes and other controversies is as simple as ensuring that your contracts and business forms contain language clearly opting for ADR. In addition, the arb/med clause can select procedures by which the arbitration is to be conducted. Here is one example of how the language might be worded:
Any dispute, controversy or claim (whether tort or contract) arising out of or relating to this contract, its formation, breach, performance, validity, invalidity or termination, shall be submitted to and settled by mediation and, if necessary, arbitration in (insert location chosen for arbitration).The arbitration proceedings shall be conducted by the U.S. – Mexico Conflict Resolution Center, in accordance with the Rules in effect at the time of commencement of such proceedings and, unless the parties otherwise agree, shall be conducted in the English language.
Regardless of the provider selected, arbitration and mediation are the dispute resolution methods of choice. And there are certain key features of any arbitration or mediation service which ought to be examined in deciding which provider to utilize:What provision is made for interim or provisional remedies, such as garnishment or attachment?
1. What provision is made for interim or provisional remedies, such as garnishment or attachment?
2. What do the provider’s procedures offer in terms of pre-hearing exchanges of information or pre-hearing discovery?
3. How efficiently is the case likely to be administered, and at what cost?
4. Does the provider offer the services of competent mediators and arbitrators for the specific type of case that may arise?
In summary, the wise international business person who wants to get paid expeditiously and to avoid the high cost and uncertainty of international litigation will almost always consider an arbitration/ mediation clause in any international contract.
Law Offices of S. Jon Trachta
© All Rights Reserved, June 7, 1999