Countertrade
| Jurisdiction | United States |
(Mar 1985)
Countertrade
Lane & Mittendorf
London, England
Mine to Market:
The Legal Issues
Introduction
I believe that the best definition of countertrade is the simplest. Countertrade includes any form of trade involving an element of reciprocity. By this definition virtually every country engages in some form of countertrade (See Exhibit 1, the Reciprocity Spectrum). Certainly, the Nato countries, and especially the United States, are engaged in countertrade because of their offset programmes in the military and aerospace fields.
The General Agreement on Tariffs and Trade (the "GATT") estimates that countertrade is involved in 8% of all merchandise trade. (The GATT does not cover services and is not effective in the agricultural area). Accepting the GATT definition of 8% of merchandise trade, countertrade accounts for $136 billion of trade in 1983.
Counterpurchase and Barter — Detailed Discussion
Set out below is an examination of the problems of counterpurchase from the viewpoint of the foreign supplier.
1. Protocol. The "link" between the two underlying sales agreements is generally created through the use of a
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protocol or preliminary statement by which the parties agree to enter into both underlying agreements simultaneously.
The protocol should be looked upon as a contract in itself, separate from the two underlying purchase agreements, and is fulfilled upon the parties' execution of both underlying sales agreements.
2. Primary Contract. The agreement for the primary sale of goods from the foreign supplier to the LDC importer is generally a standard contract for the sale of goods used in a conventional international trade transaction. One point of particular importance, however, should be recognized. It is critical that no reference should be made in the Primary Contract to the obligation of the foreign supplier to purchase goods from the LDC importer under the Secondary Contract. References should especially be avoided which acknowledge that the obligation under the Secondary Contract is part of the consideration paid by the foreign supplier in connection with the first obligation, or which in any other way described the second obligation as part of the "bargain" involved in the first agreement. To do so would cause the two agreements to "merge" into one obligation, thus initiating all of the problems involving financing, guarantees and execution discussed below.
3. Secondary Contract. The Secondary Contract, where the foreign supplier agrees to purchase the goods of the LDC importer, should include the following provisions:
(a) Recitals. The parties may wish to use the recital portion of the Secondary Contract as an opportunity to
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tie the second agreement into the Primary Contract in lieu of a protocol. As stated above, however, care must be used to prevent the merger of the two separate contracts into one integrated obligation.
(b) Acknowledgement of Purchase Obligation. The foreign supplier acknowledges its obligation to purchase certain products from the LDC importer or third party in consideration for the purchase price to be specified either in the agreement or at a later date.
(c) Time Period. The parties designate a period of time in which the foreign supplier is allowed to fulfil its counterpurchase obligation. A time period of one to three years is common. Obviously, the greater the time period which is available, the greater the advantage to the foreign supplier.
(d) List of Available Goods. As is the case with the time period, the greater the flexibility afforded in the selection of goods to be purchased, the greater the benefits available to the foreign supplier in connection with the subsequent resale of the purchased goods. The specific parameters within which the foreign supplier can operate in selecting its counterpurchase goods depend upon the sophistication of its position in the international markets, either via its own sales network or through its contacts with outside trading companies. In most cases, the most undesirable counterpurchase goods are finished products, while the most desirable goods include raw or semiprocessed minerals, ores, chemicals and other easily traded goods.
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(e) Quality of Counterpurchase Goods. Due to the nature of many counterpurchase goods, i.e., being of inferior quality or in low demand, it is essential that quality control provisions be established which set forth detailed specifications for acceptable goods and which either (a) state that goods will not be accepted unless meeting the agreed upon specification, or (b) set forth contingent arrangements or options for the foreign supplier in the event that the goods fail to conform to the agreed upon specifications (e.g., reduction in price, alteration of purchase requirement, etc.)
(f) Quantity of Purchase. The quantity of goods to be counterpurchased should be designated. This can be accomplished either through the designation of an exact quantity of specified items or in a dollar amount as a percentage of the first sales agreement.
(g) Price. If the quantity and description of the goods and exact date of sale have been definitively set in the Secondary Contract, it is likely that a prearranged selling price will have been established and included in the contract. In the event that the goods to be purchased will be selected by the foreign supplier at a future date, a "pricing formula" will most likely be included in the Secondary Contract in lieu of a firm price. For example, price provisions such as "the acceptable international price at time of purchase" or "five percent below the fair market value of the goods in the foreign supplier's home country" are common. In the event that a pricing formula is to be utilized for the future selection of prices, it is most likely in the
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interest of both parties that the formula be carefully structured and specific. (Occasionally it is determined by a party that due to market volatility or other external conditions, it may be in its best interest to enter into an agreement with ambiguous pricing provisions.)
(h) Right to Inspect, Right to Neutral Surveyor. It is clearly in the interest of the foreign supplier to obtain the right to inspect the counterpurchase goods. It is preferable for the foreign supplier to have the right to reject the goods in the event that it determines that the goods do not conform to the contract specifications. An alternative arrangement is to provide for the selection of a neutral surveyor, selected by both parties, to render a binding decision concerning the quality of the goods in question.
(i) Foreign Supplier Penalties. The LDC importer will most likely insist that a penalty provision be included which provides that in the event the foreign supplier fails to fulfil its counterpurchase obligations in full, a penalty will be paid by the foreign supplier. A penalty of from ten to twenty percent of the value of the countertrade goods or the unfulfilled portion of the second agreement is common. It should be specified, however, that payment of a penalty by the foreign supplier does not affect the obligations of the parties under the first agreement. Additionally, the foreign supplier should be assured that once the penalty is paid, all of its obligations under the second agreement shall terminate. It should be recognized that this
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provision may be used by the foreign supplier as an "escape clause" in the event that it is no longer willing or able to fulfil its obligation under the second agreement and should be negotiated in anticipation of the possibility of such an occurrence. While the foreign supplier would prefer not to be required to obtain a bank guarantee for the penalty clause, such a request by the LDC importer is common and frequently agreed to by the foreign supplier.
(j) LDC Importer Penalties. A penalty provision should also be included for the benefit of the foreign supplier in the event that the LDC importer fails to perform as agreed. The LDC importer could fail to perform through its failure to provide the contract goods, its tendering of inferior goods, or through the late delivery of the otherwise conforming goods. One option would be to impose a financial penalty upon the LDC importer in proportion to the degree of severity of its failure to perform, e.g., a minor variation in quality would result in a slight reduction in contract price, while a significant variation would result in a substantial price reduction. Another option would be for the obligation of the foreign supplier under the second agreement to be void or voidable, i.e., its obligation to purchase goods from the LDC importer is eliminated or it obtains the option of withdrawing from the second agreement. Once again, it should be specified that the imposition of any penalties would not affect the rights of either of the parties under the first agreement.
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(k) Cancellation of First Agreement. It should be agreed between the parties that in the event that the first agreement is cancelled, the second agreement is void or voidable at the option of the foreign supplier.
(1) Linkage. In the event that the LDC importer is a communist country or other country with a variety of governmental...
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