RISKS OF NOT HAVING CONTRACTS IN PLACE FOR THE INTERNATIONAL SUPPLY OF GOODS

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When starting a new business or supply chain, there are justifiable pressures to keep costs low.  One area where you may be tempted to cut corners is putting in place written contracts.  At the start of the arrangement, parties are usually on the best of terms and the disputes seem a long way off. 

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Unfortunately, dispute do often happen and sometimes it is due to a genuine disagreement about each parties’ rights and obligations.  Where such disputes arise, in the absence of a written contract, lawyers and Australian Courts will have to try piece together the terms of the contract together from conversations, emails, implied terms and established practices.  It makes for a very uncertain dispute resolution process.

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For international suppliers, it is especially risky as Australian courts may impose terms that are very different from the usual terms adopted in the supplier’s country.

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Before passing on the cost of a written contract, ask if you want a judge in 2 years time to be deciding when ownership in the goods passes, how the price was calculated, who carried the risk that the goods would be damaged during transport, who was responsible to a customer if the goods were faulty and who owned the intellectual property in the design of the goods.

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Distribution agreement example

It may seem hard to believe, but an Australian Court recently found that in a distribution agreement there was not a requirement that the supplier would provide a secure and reliable supply of stock and ensure that orders of the purchaser were met. The case highlighted the risks of not putting supply and distribution agreements in writing.

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The case, (Charles Parsons & Co Pty Ltd v Express Publications Pty Ltd) concerned an agreement made up of conversations and emails that one party would arrange for the manufacture in China of tents and swags to be supplied to the other party on the receiving of orders. The parties were in dispute as to whether the contract contained a term that the supplier would obtain secure and reliable supply of quality merchandise, and that it would keep sufficient stock on hand to ensure that orders were met (Supply Term).

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The Supply Term may seem obvious and go to the heart of the agreement. However, because the parties did not have a written agreement and had not expressly stated the obligation in conversation or email, the obligation could only form part of the contract if it was an implied term. This is where the law takes a detour from commercial expectations.

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Implied terms

A term will only be implied into an agreement if it meets all of the below requirements:

1. it is reasonable and equitable;

2. it is necessary to give business efficacy to the contract;

3. it is so obvious that it goes without saying;

4. it is capable of clear expression; and

5. it does not contradict any express term of the contract.

In this case, the Supply Term sought to put the risk of a third party Chinese manufacturer not being able to meet an order onto the supplier. It essentially required the supplier to guarantee supply. The Court found that this term was not necessary for the contract to work nor was it so obvious that it went without saying.

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This reflects the difficulty of implying a term. Many contracts can work without the implication of an obvious term. It may just be that without the implied term the agreement is not as favourable to a particular party as anticipated.

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Written supply or distribution agreements often contain terms that on the placing of an order, the supplier will supply the relevant goods. Other agreements may create a process whereby a purchase order does not create a binding order to supply. The supplier may have to actively accept the purchase order. In either case, the parties have certainty as to the nature of the supply obligation.

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Role of written agreements

Written agreements should be seen as documents that:

1. increase certainty as to the commercial details of the agreement;

2. allocate obligations and risks;

3. can result in a quicker resolution of disputes;

4. force the parties to focus on important issues at the time of making the agreement rather than just making assumptions.

In this case, the failure to document the agreement resulted in a 5 day Court trial to resolve the dispute and it was resolved in a manner that would have seemed absurd to at least one of the parties.

CGT Law specialise in international trade agreements.  Our experience means that we can often draft international supply agreements efficiently and for a fixed price.  We also aim to provide you with an agreement that can be used for similar transactions with minor variations.

A well drafted written agreement will both reduce the likelihood of disputes and, if a dispute does arise, allow quick and less costly resolution.  Ultimately, this could save the commercial relationship and the supply chain.