Are you currently running your own business? Are you looking for the right suppliers? Perhaps local suppliers just don’t have what you’re looking for.
Don’t worry – it’s common to engage with overseas suppliers when running your own business. People find that it’s a lot cheaper to hire suppliers internationally, and sometimes the quality of their goods surpasses what local suppliers can offer.
Like all business arrangements, you’ll need a contract to set out how this relationship will work. However, it’s important to understand how these obligations might be different in an international context, and what you need to consider to maintain a steady commercial relationship with them.
In this article, we’ll go through 7 simple things to consider before you decide to work with overseas suppliers.
1. Supply Agreement
First thing’s first – you’ll need a Supply Agreement with your overseas supplier. If you’ve dealt with local suppliers before, you might be familiar with informal supply agreements. For example, Terms and Conditions might be placed on the back of an invoice or receipt.
This works for most people, but since we’re dealing with overseas suppliers, a formal supply agreement will be more appropriate. Either way, the agreement should cover things like:
- A description of the goods or services (you don’t want to receive the wrong items!)
- Payment – how will payment be made between the parties?
- Price – it’s a good idea to set some rules around whether they can increase prices as they wish. This may disadvantage you if you’re consequently pressured to increase your prices, which could then cost you your customers.
- Delivery – consider any possible shipping delays and how this might affect you.
- Warranties – it’s good business practice to familiarise yourself with the Australian Consumer Law in case of faulty items)
- Liability – if goods are faulty upon arrival, who will be liable? We’ll discuss this shortly.
- COVID restrictions – it’s important to remember that each country is in a different stage in relation to the pandemic. The country in which your supplier is based may have different laws or regulations stemming from COVID that you’ll need to consider when drafting your contract.
- Termination and exclusion clauses – there may be a situation where performance of the contract becomes impossible (we’ll cover this later).
- Confidentiality – like other business partners, suppliers are likely to have access to inside business information or even trade secrets. It’s important to include confidentiality clauses (or even a separate Non-Disclosure Agreement) to ensure your information is protected.
Do I Need An Import/Export Agreement?
Any business dealing with suppliers will need a Supply Agreement, but if you’re planning to engage with an overseas supplier, chances are you’ll need an Import/Export Agreement (or a Distribution Agreement). This is basically a contract between you (the importer) and the international supplier (the exporter), and it should set out your responsibilities. It might cover:
- Payment – how will the exporter be paid?
- Duration of commercial relationship
- Liability – who will be responsible if something goes wrong?
- Delivery standards
Put simply, if your business is importing goods from another country for business purposes, it’s a good idea to have an Import/Export Agreement.
2. Minimum Order Quantity (MOQ)
If you’ve got local suppliers, you might be familiar with the term Minimum Order Quantity, or an MOQ. This is basically the minimum amount of stock you can order from your supplier, otherwise they won’t agree to provide you with anything.
In other words, you need to be prepared to purchase a healthy amount from any supplier to ensure all their relevant production costs are covered and they can make a profit too.
When it comes to overseas suppliers, their MOQ may vary according to where it is. Some people choose to hire overseas suppliers because their MOQs tend to be lower, but you also need to consider the following:
- How long will it take to arrive in Australia?
- How much are the shipping costs?
- Are they reliable?
- Does a lower MOQ mean lower quality of goods?
- Will there be communication barriers?
These are all questions you should be asking yourself in the process of selecting the right manufacturer or supplier for your business.
3. What If Your Supplier Can’t Perform Their Obligations?
Working with overseas suppliers means you need to be understanding of how different countries have been managing the effects of COVID. For example, the country in which your supplier is based might still be subject to a number of commercial restrictions in relation to shipping.
In the past year, we also saw a lot of businesses unable to perform their obligations because of an event that was out of their control. This is what we call a Force Majeure event.
What Is Force Majeure?
A Force Majeure clause in your contract means that parties don’t need to complete their obligations, provided there has been some external event that prevented them from doing so. In other words, the event made it impossible for you to fulfil your obligations.
However, the effectiveness of this clause depends on the wording used in your contract. More specifically, you’d need to look at how they define a ‘force majeure event’ as this could determine whether it is actually enforceable.
Ashley runs an online clothing store, and her suppliers are based overseas. These suppliers provide a unique material that her brand is built upon, so any other supplier would not work.
Following the effects of COVID, her suppliers have dramatically increased their prices, shipping costs and MOQ. As a result, Ashley can no longer afford to hire these suppliers, and she cannot hire local suppliers due to the material she requires. However, she has already placed an order for stock to last for the next 6 months.
She tries to rely on the Force Majeure clause in her contract, specifically the definition of such an event as including a ‘pandemic’. Unfortunately, since the increased costs were not a direct result of the virus itself, this clause wouldn’t be enforceable in the circumstances.
Alternatively, if the increased costs were a result of government acts following COVID, this could have been enforceable by way of force majeure.
To successfully enforce a force majeure clause, you need to establish the following:
- A force majeure event has arisen
- A party has been prevented from performing their obligation/s
- The event was beyond their control
- No reasonable steps could have been taken to avoid it
This brings us to the question of what usually happens with a half-finished job, or to put it quite plainly, when someone breaks a contract.
In some business relationships, one party will have completed part of their obligations. Let’s say Ashley’s supplier had already commenced production of her clothing, but due to the increased costs of resources, they could not complete the job.
Generally speaking, your first step would be to speak with the other party and find common ground (for example, you might want to discuss alternative ways to complete the job). Another option would be to provide compensation for what they did complete – this would fall under the doctrine of part performance.
If both parties can’t reach an agreement about next steps, your last resort would be dispute resolution. The terms around this should be set out in your Agreement, so it’s a good idea to review your rights with a lawyer before deciding which ones to rely on.
4. Liability – Who Is Responsible When Things Go Wrong?
Like all contracts, a Supply Agreement needs to establish who is at fault when the products are faulty.
This is where Product Liability comes into play.
Under the Australian Consumer Law, consumers have the right to take legal action against:
If you’ve hired overseas suppliers, product liability falls to the importer of the products – so that’s you. In addition to limitation of liability clauses in your various contracts, you’ll also want to have Product Liability Insurance.
If you want to avoid product liability from the outset, there are some ways you can ensure your goods are safe for use:
- Test your products when they arrive
- Provide relevant warnings on goods with potential risks
- Review your overseas supplier’s procedures
Another option is to include a clause in your contract with your supplier that requires them to provide compensation if the goods they give to you are faulty in any way.
Other Responsibilities With Imported Goods
Depending on the type of goods you’re importing, or the industry it’s in, you may need to be aware of certain legal requirements. For example, some deliveries need to clear Australian customs or be quarantined upon arrival.
It’s good business practice to familiarise yourself with import laws in Australia so that your goods aren’t seized at the border – this could cause a few hiccups for your business. You can find out more here.
5. Enforcing An International Agreement – How Will Disputes Be Handled?
Generally speaking, when drafting your agreements with overseas parties, you want everything to be under Australian law (this makes things a whole lot easier on your end). That said, you still need to be aware of any local laws that your supplier might be subject to.
For example, they might have different laws around how to execute documents, so there’s potential uncertainty around the validity of your agreements.
So, before you draft your internationally enforceable contract, consider two things:
- What is the governing law?
- Who has jurisdiction?
The governing law refers to which country’s laws will apply to the contract, whereas jurisdiction refers to who will hear the disputes if the contract is enforced. Ideally, you and your supplier should reach an agreement around whose laws will apply, but if this isn’t the case, another option is to adopt a uniform international convention that both countries are party to.
An Australian business has a contract with a Japanese supplier, however a disagreement in their business relationship has led to a dispute.
Initially, it was agreed that Australian law will apply to the contract and the dispute, but the Japanese supplier has now decided that they are not happy with this arrangement.
Thankfully, both Australia and Japan are party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (otherwise known as the New York Convention). Now, both parties can engage in this dispute resolution process which includes a third party making a decision about the dispute (and it’s enforceable in numerous jurisdictions).
An important tip when engaging with overseas workers is to keep all records of correspondence in case a dispute does arise. These records will be extremely helpful when things get messy or confusing.
6. Do I Have Tax Obligations?
It’s possible for your overseas suppliers not to charge you with GST, but you need to provide them with:
- Your Australian Business Number (ABN)
- A statement that you are registered for GST
Usually, you’ll need to register for GST if your turnover is over $75,000. The Australian Taxation Office has provided detailed information about when to charge GST here.
Alternatively, you could check if you are eligible for certain concessions such as any Free Trade Agreements that Australia has with other countries. These agreements lower the costs of importing goods, which can make your business activities a lot easier.
7. Should I Consider Dropshipping?
If you’re finding it overwhelming to deal with all the costs involved in overseas supplier relationships, it’s worth considering models like dropshipping. Dropshipping is known to be a simple, cheap and efficient option for a lot of e-commerce businesses.
Usually, a retailer will need to purchase stock from a supplier. However, it can get complicated if you’re not sure how much stock you need or if your supplier’s MOQ is too high. Sometimes, you might not order enough stock and you’ll need to spend more on shipping costs due to customer demand.
Under a dropshipping model, the retailer (the seller) only purchases stock that they actually need, based on what customers order. When they receive orders, they get the manufacturer to send it straight to the customer, so you won’t actually be holding any stock.
If your suppliers are based overseas, dropshipping could be a lifesaver as you won’t need to pay for your own warehouse or pack the goods yourself. Cutting these costs gives you room for a higher profit margin!
Finding the right supplier is an important process, but once you start engaging with overseas businesses, it’s important that your legals cover all areas.
- What obligations do I have with imported goods?
- How can I enforce my contract in another jurisdiction?
- Who is liable for faulty imported goods?
- What if my supplier doesn’t fulfil their obligations?
- Do I need to review my Supply Agreement?
If you need help with any of the above topics, Sprintlaw has a team of lawyers ready to help. Reach out to us at email@example.com or contact us on 1800 730 617 for an obligation-free chat.
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