Author: Thomás Gomes Pereira Prete

Lawyer

Reflections on usages in international trade

4 de March, 2024

I have been covering practical issues related to contract formation in international trade for some years with the backdrop of the Vienna Convention (CISG) as applicable law. In prior articles I dealt with binding deals and with the effects of acceptance and rejection of offers. However opportune, this perspective is only a snapshot of the reality of a commercial transaction.

Seen from the outside, commercial operations are a rather chaotic and fragmented bundle of information, punctuated by phone calls, verbal agreements, interim negotiations etc. all joined by “paperwork” and documentation.

Over the years, I gradually learned to identify behavioural patterns, predictable and repetitive steps that logically compose the invisible process. These may apply to parties in continue exchange, or be common to sectors and industries, or are often the expected behaviour within communities or nations. International law refers to these patterns as usages.

I would go beyond legal formalities to say that usages are perhaps the pinnacle of legal development in what trade is concerned. Usage was the basis of a system that for long endured without much legislated material, mainly because commerce was by definition international, mostly city-based, and relatively free from state interference.

Its importance in international trade is still remarkable, and such in our days that CISG formally adopts usage as binding on the parties to the contract at hand if: a) it is of current knowledge of the parties, or b) it is usage the parties should have knowledge of, or c) it is regularly observed practice by other parties in similar contracts and trade.

The notion of usage is therefore closely related to that of good faith in CISG, to the point that one confirms the other. Usage is effectively included in the commercial contract, and enforceable together with the contract’s agreed terms. This position triggers multiple questions: without the parties’ knowledge or expectation, certain usages may conflict with the parties’ literal agreement, or with a party’s interpretation of the agreement, or with both parties’ non-declared intent to abide to that usage, to name a few.

My take: the parties in an international transaction governed by CISG must be aware that usages will also be part of their commercial relationship. One must be able to ponder the effect of usages upon its own trade practice and that of a future transaction. The potential of usage to apply across the board to a trade relationship must be carefully considered in the perspective of the client’s best interest, as it may favour or collide with the client’s preferred practice and risk assumption levels when trading overseas.

(The author has not used any AI machine to write this essay. This essay is protected by copyright and any use, such as processing, analysis or copy of any of its content by an AI machine is strictly prohibited.)

Counterproposals – when overseas deals become complicated

16 de January, 2024

I recently wrote about the elements of law and practice of international trade which together bring about a binding deal. In clear terms, the elements of a valid offer, and those of a valid acceptance according to CISG (the UN Convention on the International Sales of Goods, our legal reference for the subject). See previous articles.

In short, the offer must be specific in respect to the addressee and the goods it refers to. It does not require immediate attention to quantity and price, but a reference for their determination. The valid acceptance takes place with clear assent of the terms of the offer, within its deadline.

But what if the addressee does not agree in full to the content of the received offer? What to do in practical terms, what consequences to draw from any such response, and on top of this, any hint on rules of international trade that apply?

Based upon valid CISG terms, the addressee’s suggestion of deviation from what has been proposed, if in respect to: pricing, payment terms, quality, quantity, place/time for delivery, liability, or dispute resolution will be deemed as a counterproposal, and consequently will cause the formal rejection of the prior offer, even if done unwillingly.

Such elements are indeed classified as material by CISG, and their modification is forcibly interpreted as a new proposal. Then, the only remedy for such rejection is to rely on the offeror’s unequivocal acceptance of the counterproposal, otherwise the deal is broken.

As a way of exception, the addressee’s reply on terms that may deviate from or add to the prior offer without however touching the material elements above, (a) is effectively deemed as an acceptance to the offer, if the offeror does not so object to them in due time (see here a lighter standard), and (b) the terms of the prior offer will be deemed complemented by the addressee’s new terms, forming a contract.

My take: often a negligent response to an offer will cause unexpected results. A reply to an offer must be purposedly crafted to avoid them. The addressee must review each point of the offer and check his willingness to accept them as proposed, or take the risk to repropose them (a) on grounds that may add or change non-material points to the offer, causing its full acceptance but including the new terms, or (b) on grounds that may add or change material points to the offer, causing its rejection and replacement by the addressee’s counterproposal, with all consequences it may entail.

Establishing binding commitments in overseas transactions

9 de January, 2024

In my practice as a lawyer in international trade, few matters are more underrated than knowing when an overseas binding commitment is effectively concluded. How is it formed and when is it enforceable?

Setting up the stage, a valid and effective binding commitment is an obligation: a transaction that entered the “legal realm”, which means it exists, is confirmed by the rules of the system and produces legal effects. It is non-discretionary, as it may be enforced by the same system without a party’s objection, and its breach without fix leads to payable damages.

As paradoxical as it seems, most entrepreneurs do not know with clarity the elements that trigger the binding commitment to supply and to purchase at international level, lest the implications of turning back from an already accepted proposal.

This risk is often reflected in the rather chaotic process of transmission and acceptance of an offer. A key element for those involved in trade, understanding the rationale of a binding offer saves resources, reputation, and credibility, true currencies of international business.

In my experience, the best approach is to first understand when we have a valid offer, and second, when we have its valid acceptance.

We will use the CISG as key legal reference for this analysis (the UN Convention for the International Sales of Goods – please check my last article clarifying the broad application of CISG in international trade).

An offer, to be valid and effective, (a) must have been addressed to a specific person or persons, (b) must indicate the goods it refers to, (b) must, at least and implicitly, make a provision for determining the goods’ quantity and price – for example by referencing trade usages or authoritative third parties such as a commodity exchange, and (d) must have reached the counterparty. It does not require quality information neither will it require specific forms or signatures, save for rare exceptions.

A valid and effective acceptance of an offer consists of (a) the counterparty’s statement indicating assent to the offer – this may include performing an act towards the offer, such as paying the price (buyer’s assent), or signalling start of goods’ production (seller’s assent) and (b) that such assent is provided within the deadline proposed, when applicable. A counterparty’s silence is not deemed as an acceptance. 

Note that a party can revoke an offer pending the counterparty’s acceptance if the offer does not provide a fixed time for the counterparty to accept it.

The formation and conclusion of the international sale is a rich subject that also leads to controversial aspects and additional points of attention, including that of who in the company has the mandate to close deals, and additional risks associated with counterproposals and partial acceptance. More to come in the next article.

My take for today: international trade law leans towards a practical approach to proposals and tends to favour commercial usage and the conclusion of the potential deal. Subtle and non-formal communication prevails over form and procedure. Extra care is therefore required from entrepreneurs in overseas commercial mail exchange – these may quickly become binding commitments should key elements of goods, price and quantities be present in the communication.

International trade operations – which law to apply?

19 de December, 2023

An entrepreneur nearing the conclusion of an overseas trade deal must objectively answer a key practical question: which laws and rules will apply to the transaction?

Without the parties’ knowledge or manifested willingness, their commercial agreement may be subject to the rules provided in the United Nations Convention on Contracts for the International Sale of Goods – the so-called CISG. Unfortunately, not many people know the content and extent of these four letters.

CISG is a United Nations convention providing a set of default rules for international commercial transactions involving goods (not services). This convention is managed by UNCITRAL, the commercial arm of the United Nations.

For sellers and buyers with origin in adherent countries (and these are 97 today, among which the USA, Brazil, Canada, China, France, Germany, Italy and Japan, to list a few), CISG rules apply to their mutual international sales transaction, unless the parties expressly waive CISG’s application and defer to another set of rules or applicable law.

CISG default rules define contract formation, performance, breach, indemnification and termination, to list a few. My view out of own experience is that CISG is known to be relatively balanced between seller and buyer.

However, the tension lies here: the mandate I receive from my client is to seek the application of rules that best suit his operation and risks involved. Oftentimes it is convenient to play at our own turf and rely on the set of rules and decisions we constantly apply.

This logic means accessible language and legal repertoire available to educate judges or arbitrators to solve the next case. And CISG lies unfortunately behind as a practical choice in countries who recently adopted the convention, due to few or inexistent decisions available.

In my experience, considering a balance of powers in a negotiation process, CISG rules can indeed make sense and bring fairness to the table if seen from an equidistant perspective by the parties. It may become a good compromise, a neutral playing field in place of a party’s exclusive solution.

My take: it is undisputed that the parties must employ time and resources to define a set of rules for their international transaction, including the applicable law and venue for conflicts. The definition of the rules that apply are indeed just as relevant as those regarding product price, quality, and delivery, and they become a key priority if both parties come from a CISG jurisdiction.

Is there the right time for a binding commitment?

18 de November, 2023

Oftentimes I am asked by clients if the transaction they are about to conclude is “in any way”, binding.

There may be “shades of gray” towards the completion of a commercial transaction. In my experience I represented those who wanted it to be binding and those who would do their utmost to protract their decision. Those who wanted to close soon, and those who wanted to take another reasonable step without adverse consequences.

Certainty is still paramount to those who work in international trade and in complex manufacturing, operations which require a high degree of predictability from buyers and sellers to prosper and bear long-term fruits. Hence the legitimacy of the question.

Certainty, however, is gradually less of an attribute of our system of life and work. Market signals, thanks to abrupt social, environmental and economical changes, are becoming less relevant to indicate if time is ripe or not for a point of no return. Peculiar times of profuse information but of less consistent elements to assess risk-reward. We manage uncertainty indeed, more than ever before.

Entrepreneurs need counsel, discernment and tools to take critical business decisions. There is a hidden cost of taking binding decisions at the wrong moment, sooner than required. Breaking the project into parts, paying according to milestones and deliverables, acting tight with expectations. Signing non-binding term sheets or heads of agreements while certain key marks are not yet reached.

Stretching the deal without making it definitive and binding is an equally legitimate approach in many business instances. Lawyers and entrepreneurs need to be prepared to work in an increasing ambiguous environment while keeping business decisions under reasonable control and accountability. There is great acumen and ethics required to get this action right.

I must say it does not take a great amount of legal complexity to make a transaction legally binding. What is challenging and subtle but greatly rewarding is to keep a transaction alive and functional with the least negative effects in case of termination, in exchange to gaining time and resources for an informed and wise choice.

Needless to say I take great joy in driving business leaders to the best possible moment for a critical decision, for the least possible cost of the “do-nothing” alternative. The moment an entrepreneur believes is right for undertaking the binding commitment. The moment you are near the crest and decide to stand up and ride it down or just decide to wait for the next wave.

The first overseas transaction

30 de October, 2023

In my career I’ve seen companies reach a next level of growth and maturity when faced with their first real opportunity to trade overseas.

This moment may come when local objectives have been solidly and consistently met. A good time to intentionally seek international expansion.

Positive expectations prevail and the entrepreneur is personally engaged in the preparation of the first overseas order, to ensure price, quality, quantity, payment, logistics are effectively agreed, and the order is ready for delivery. These are urgent matters. As a result, operational and commercial elements of the sale are well taken care of (knowing that payment and receivables will deserve a chapter of their own in the next posts).

Entrepreneurs, however, are less present in discussions related to insurance, risk transfer, and differences of interpretation emerging from these issues, not to say post-delivery issues such as customer support, warranty, and order termination. Less time and concern spent on what legal terms apply, especially in case of a conflict. These are non-urgent matters, but equally important.

In my experience, commercial transactions always require a minimum amount of mutual trust and aligned expectations between the parties to flourish and become long lasting. However, trust may unintentionally set aside necessary clarifications about the rules and laws to apply.

Well-known Incoterms™ are useful and act as facilitators of the overseas sale, mainly to risk transfer, insurance, and logistics, lacking however all other elements of the transaction and of the product lifecycle. A pro-forma invoice or the invoice alone is not the right vehicle to ensure enough clear rules for the sale either. Lack of clarity in determining the rules that apply may lead to undesired default situations (with unknown rules and/or jurisdictions – topic to follow in next posts).

My suggestion is to understand the context of the transaction. What if the order is suddenly changed or cancelled? Will it be a one-time sale or has it the potential for development and evolution? Will it include new products in the future? Will the products require customer support, service, or maintenance? Will the purchaser be able to invest in marketing and expand sales? Has the purchaser the potential to become a preferred distributor in the country?

You and your partner will certainly benefit from an objective term sheet detailing a minimum framework for important elements of your first export transaction, which will set the stage for a potential future and long-lasting relationship.

My final take: consider your sale to a new market as the first of many, and you will be convinced you need to raise the bar in respect to a better alignment of expectations with your new overseas partner.

Know well your distributor

26 de October, 2023

In my experience counselling entrepreneurs, few decisions turn out to be as regrettable as finding out that they had chosen the wrong partner overseas.

A bad choice here works significantly against the business, as it becomes so hard and costly to fix.

Differently from operational or commercial conflicts between the parties, which may emerge long time after a relationship will have started, entrepreneurs may anticipate potential legal and financial problems before contracts have been signed.

Make use of the good practice of a mini audit, which allows to identify – early in the process – important signs of distributor’s good or poor management of cash, investment, and legal compliance.

The advantage of having a non-disclosure agreement signed prior to an audit is twofold. It will provide the candidate with key business data for an informed decision (future sales, marketing investment, assets required – hence minimizing entrepreneur’s risk and liability here), and it will leverage the entrepreneur’s access to candidate’s key compliance information. Documentation may include recent balance sheets, taxpayer returns, corporate and legal documentation, quality certifications, to name a few.

The practice of an incoming audit on the potential distributor as part of the entrepreneur’s selection process will undoubtedly raise standards. Beware of a potential distributor who may not be willing to take part on this exercise and avoid presenting themselves as solid partners for the growth of your business.

As a side comment, I remain surprised to know that few companies going overseas adopt the practice of auditing their potential distribution candidates. In my experience this strategy is highly recommended and, in some instances, even required. The benefit of such practice by far outweighs its intrinsic and limited cost.

(image credits to Vidal Mayor, Fueros de Aragón, by Vidal de Canellas, 1252.)

First steps into international distribution

23 de October, 2023

As counsel to entrepreneurs and business development managers, I am constantly engaged in projects related to opportunities to increase a company’s revenue, and one of them may be to identify and establish a distribution channel overseas.

Entrepreneurs and managers will agree with me that there are equally effective approaches to find the right overseas partner. These may include peer-to-peer references, specific industry research (which may include contacts with professional and sector associations), or contacts enabled by bilateral chambers of commerce.

I will elaborate on key elements of the entrepreneur’s decision to go overseas in the next posts.

In any case, first things first, I am convinced that a contractual framework is required for the first step. In my view, the process of identification of a distribution partner must necessarily start with a non-disclosure agreement with the potential partner.

A later question will come if it may be a one-way agreement or if there will be bilateral exchanges. We will touch this point soon.

The simple fact that your company decides to explore a new market is “per se” confidential information until you finally have your product or service landed on that new territory. And seldom will you not share relevant information of your business or plans with a potential partner.

The practice of signing a simple and objective non-disclosure agreement is widely acceptable in the world of business affairs, is professional and gives your business the importance it deserves. The non-disclosure agreement should precede your first conversation since you may share critical and strategic information as part of your potential partner’s investigation to accept a distribution opportunity.

My take, out of own experience, is very simple: it is never too hasty or too formal to require from your potential distribution partner to sign a non-disclosure agreement. Beware, however, of those who may be rejecting it or simply “playing it down” as ways to avoid this responsibility. Not a good signal to know that a potential partner is neglecting confidentiality, a basic element for the success of your overseas distribution business.

Clutch moment: contract termination in case of default

7 de June, 2022

In my legal activity I have come across situations of clients with pending situations, seeking my advice to help them decide the way to go. This is particularly necessary when they are faced with contract partners in situations of default of a relevant contractual obligation.

In many Continental Law jurisdictions (those based in coded law, including Brazil and Portugal) the breach by a party of an obligation may be cause for contract termination at the free will of the innocent party. This right is usually confirmed in the texts of civil codes, whose wording may vary but, in many instances, provide for a similar solution of swift and direct application.

Considering the damaging effect of the event of default, an innocent party may certainly consider the late fulfilment of the obligation as useless and may prefer to finish with the agreement, with all consequences it may arise, among which is to prevent the defaulting party to remedy the situation. Seldom one could “turn back the clock” to a decision to terminate a contract. Hence the seriousness of the moment.   

This decision is of lower risk if, cumulatively, the default is of a material (relevant) nature for the contract, the parties have contractually agreed it is a case for termination, and that there is clear evidence of the default. Usually, a notice for remedy is not required as a preliminary step for effective termination if in the light of these elements.

Furthermore, higher courts have already decided – in favour of the innocent party – that the right of a party to terminate the contract when faced with material default already provided in its text is not dependent upon a court ruling attesting the same. Many instances confirm the right of the innocent party to pull out of the agreement and execute it for damages and penalties directly.

This position is particularly important if the contract in default concerns sales of unpaid assets, such as real estate: contrary to past unclear interpretations, the property may be subject to direct and immediate forced seizure if the event of default was expressly provided in the contract as such and it fits the conditions of relevance and factual existence.

The fact that an event of default is not correctly foreseen in the agreement, or is not provided therein at all, may lead to future problems and legal questioning at courts, with undesired outcomes and results.

In the ordinary course of business affairs, it is natural that the parties who are about to enter a relationship will not dedicate time or energy to negotiate causes of termination, a list of events of default or their consequences. Lawyers however are ready to assume this task with technical arguments and an effective approach, and may contractually provide in advance for smart ways out for the client in case it undergoes bitter experiences in commercial relationships in the future.

Image credits: Vidal de Canellas and Royal Chancellery of the King of Aragón, Jaime I. In Vidal Mayor (1247).

Reflections on Start-ups (I): effects of the choice of the legal structure

14 de March, 2022

The widespread word “start-up” has come to stay. The digital economy has pushed this term forward and now it is strongly associated with innovative affairs.

However interesting, “start-up” in fact is not a practical definition for effective management of real-life business. The term says very little about a business’ legal character, apart from recent but confusing legislation seeking to minimally define it to allow for tax easements or less bureaucracy, but with limited positive effects.

Indeed, a business does not exist in abstraction. It cannot prescind of a formalized, publicly accepted, and identifiable structure before private and public entities.

In essence a “start-up” must present itself as a company subject to minimum legal standards required by a state jurisdiction, as any other enterprise. It must adhere to a legal framework to exist and operate.

A company is the result of numerous and interwoven formal legal relationships identified as relevant and mandatory by this given jurisdiction.

These legal relationships are in practical terms formalized in declarations, signatures, and due acceptance of rules and procedures emitted by competent authorities.

Altogether, these formalities, once fulfilled, grant a differentiated status for this entity – the status of a person – an entity accepted by Law to be subject of legal relationships, able to take part in legal obligations.

In this perspective, the choice of the most appropriate legal structure is one of the most important initial steps of any potential new venture. Shareholders must clearly understand the consequences and effects of such choice for future decisions.  

In my experience in the field, an uninformed or wrong decision on the legal structure may impede the business venture to grow as planned or may even ruin the initiative – irrespective of any potential commercial success.

Commercial Law presents different types of company structures, seeking to fulfil different purposes and expectations.

Apart from certain innovative and off-the-track choices, there is a reasonable consensus in favour of an old but effective model structure, which is that of the limited liability company.

It was conceived as the most pragmatic legal solution for persons to enterprise and run risks together. It is still the best vehicle for personal, small scale business entrepreneurship.

It entails effective commercial flexibility and relatively simple rules of procedure, offering shareholders a clear framework for their relationship and for the operations of the company.

This legal structure is a standard with similar principles, rules, and procedures across many jurisdictions.

It is still the preferred structure for small to medium-size businesses, as most rules are defined beforehand in commercial or civil law codes in a “default” approach – rules for many events and occurrences of company life.

This legislative approach may be interpreted as a protection for shareholders themselves as well as for third parties doing business with the company. It may be seen almost as a legal package for the partners to simply abide to and start operating.

The limited liability company assumes however a rather personal status. This means its legal framework gives priority and relevance to personal relationships among shareholders.

It presupposes the element of personal bondage between its shareholders as the decisive cause for its incorporation and existence – their intuitu personae character, in contrast to increased protection or preference to new capital investment or a clear detachment between management and investment ownership.

Due to such personal character, there may be limitations concerning the functioning of limited liability companies, in pre-existing, legislated rules.

These rules may obviously collide with the expectation of shareholders to capture additional capital for growth or to be able to step in and step out of the company more easily.

We may draw important consequences of this feature, which are not of simple nor immediate solution. I refer for instance to the opportunity of a shareholder to sell a portion of his shares to a third party, or worse, its entirety. Or the case of succession of a deceased shareholder by members of his/her family.

Additional examples of critical situations could be the potential entry via capital increase of a new shareholder, or negotiations for the conversion of a loan of a creditor of the company into shares of the same.

Lawyers must address such potential conflicts in specific terms. They must provide ways for current shareholders to circumvent undesirable effects of unexpected default rules. This legal approach is frequently possible once lawyers identify the applicable default rules and agree beforehand with shareholders on the convenience of replacing such rules for better-suited private procedures, wherever private law allows this replacement to occur.

Using a tailor-made approach, most default rules of replaceable character may be set aside and new, specific rules re-written for the company at hand. These new rules must be incorporated into the company’s statutes and shareholder agreements. Simply put, the limited liability company is prone to be considered a “people venture”, rather than a “capital venture”, and its peculiar legal character makes legal technical adaptations at early stage often necessary for the company to be fully prepared for growth.