Global Supply Chain Law Blog | Squire Patton Boggs Law Firm
The Global Supply Chain Law Blog discusses legal supply chain issues that often lead to litigation in the supply chain across industries. We discuss current cases, important nuances in the law that can affect supply chain relationships, and ways to make supply chain legal practices more robust, particularly in light of today’s global supply chains.
On May 8, President Trump announced that the US is withdrawing from the Joint Comprehensive Plan of Action (JCPOA) entered among the P5+1 countries (the US, China, France, Germany, Russia and the UK), the European Union and Iran in July 2015. In our publication, we provide an overview of upcoming changes to US sanctions policy toward Iran and how they could impact business operations worldwide.
We are pleased to announce the launch of our EU Conflict Minerals Regulation Flowchart, which promises to be a valuable tool for those charged with compliance with the EU conflict minerals regulation. Read more about how to use this exciting new resource on our Conflict Minerals Law Blog.
The palm oil industry has sometimes been associated with human rights abuses and adverse environmental impacts, including deforestation, soil pollution and erosion, water contamination, and threatening endangered species. However, meaningful efforts are being made to change that.
On February 16, 2018, Unilever shared information about its suppliers and mills in order to provide greater transparency into its palm oil supply chain. Though Unilever isn’t the first company to try to provide better visibility into its supply chain, the company is the first to provide such details about its sourcing and production.
In a statement posted on its website, Unilever’s Chief Supply Chain Officer, Marc Engel, said, “Unilever believes that complete transparency is needed for radical transformation. We want this step to be the start of a new industry-wide movement.”
Publically disclosing supplier information is a key method to allow consumers insight into a company’s corporate practices. Adopting a supplier policy targeted to good corporate practices is vital to ensure adherence with not only ethical concerns, but regulatory and shareholder obligations as well.
Establishing robust and comprehensive supply chain policies, however, is just the first step in providing compliance assurances. Supply chain contracts can include the right to audit suppliers to ensure proper oversight and adherence to ethical and sustainable practices. Companies can also encourage compliance with supplier codes of conduct by measuring successes via quantifiable metrics. Not only can these successes be used to manage suppliers, but they can also be published for customers to look over – better visibility and corporate accountability can lead to a public relations improvement.
Unilever’s transparency highlights the significance of prioritizing ethical global, community, and environmental practices. By working with suppliers on expectations of corporate responsibility, Unilever is helping to shift the standard towards ensuring socially responsible and environmentally friendly sourcing and production of palm oil.
Our colleague, Nicola A. Smith, brings you the most recent edition of our quarterly food and drink sector newsletter for the UK, Legal NewsBITE. The newsletter includes coverage of a recent focus in the UK on meat processing standards and inspections by the Food Standards Agency, which has had a knock on effect on trade customers such as restaurants and pubs. This has highlighted yet again the importance of demonstrating compliance and supply chain mapping in the food and drink sector. Recent delivery difficulties caused by unexpected and severe weather disruptions (with the ‘Beast from the East’ and subsequent mini-Beast from the East bringing unseasonable snow fall to much of the UK) have further underlined and demonstrated the potential reputational impact that can be caused by a third party supplier’s failure to deliver.
The newsletter may be accessed on our website or by clicking the link below:
Responsible sourcing is a vital consideration for supply chain professionals, however, sourcing valuable minerals from conflict-affected and high-risk areas is one of the most challenging supply chain concerns. Importers of conflict minerals must meet the obligations of EU Regulation 2017/821, the Conflict Minerals Regulation, requiring third-party audits and disclosures about supply chain due diligence.
Our resident conflicts minerals expert, Dynda Thomas, explains what is covered under the Conflict Minerals Regulation, sets forth considerations for importers of certain goods that must comply with regulations on conflict minerals, and discusses what to expect in the coming future.
We have published our latest legal updates for February 2018, highlighting some key commercial and intellectual property developments in the US. The update can be accessed by clicking on the document below.
In our previous post, we discussed alternative account receivable collection mechanisms, export insurance, trade credit insurance, and factoring – detailing the pros and cons of such tools. In this post, we will explore the ever popular letters of credit, time drafts, and finally several other best practices and alternative tools that can be implemented to ensure the efficient collection of debt.
A letter of credit is a financial document provided by a third party that typically has no direct interest in a transaction that guarantees the payment of funds for goods and services to the seller. A letter of credit has three noteworthy parties: the seller/beneficiary who is paid the credit, the buyer/applicant who buys the goods, and the issuing financial institution that issues the letter of credit on the buyer’s request. Under certain types of letters of credit, there may also be an advisory bank, often located in the beneficiary’s home country, which provides the beneficiary with advice on the international financial implications involved in dealing with the issuing financial institution.
In international transactions, it is therefore in the seller’s best interest to get a “confirmed” letter of credit (discussed below) by an advisory bank in their home country.
Letters of credit are great tools to reduce the risk of non-payment, but they require exact adherence to specific procedures to be validated. Typically, a letter of credit will set out a list of required documents that the seller must present to the bank before the bank will release payment.
This strict procedure imposes obligations on all parties, holding international parties accountable for the transaction under the letter of credit.
Letters of credit typically have more than one fee, assumed by both the buyer and seller, and only provide a guarantee for a limited time. Further, strict adherence to the specific procedure is crucial; if any document is missing, the bank will refuse pay. Letters of credit are generally only available from the issuing financial institutions if it is confident buyer will pay, making this instrument less available in riskier transactions. Further, sellers must rely on the issuing bank’s permanence, creditworthiness, and legitimacy, which is not always certain in some jurisdictions.
Below is a list of the most common types of letters of credit in international transactions:
This is the standard letter of credit as described above. A bank guarantees payment by the buyer to the seller.
This is a letter of credit designed to assure the payment of an ongoing relationship obligation. If the seller/beneficiary proves that the expected payment was not made, a standby letter of credit will become payable.
This is a letter of credit that allows the seller/beneficiary to further transfer all or part of the payment to another supplier in the supply chain. This is often seen when the beneficiary is an intermediary for the actual supplier.
A confirmed letter of credit occurs where an advising bank also guarantees the payment to the beneficiary. The letter of credit must be irrevocable to be confirmed; that is, the issuing bank may not make changes to the letter of credit without the approval of the beneficiary.
On the other hand, an unconfirmed letter of credit is one that is only assured by the issuing bank.
This is a letter of credit that is valid for several payments rather than the typical practice of issuing one letter for each transaction.
(vi) Back to Back
This is a letter of credit for transactions that include an intermediary. There are two letters of credit issued, one by the bank of the buyer to the intermediary, and a second by the bank of the intermediary to the seller.
Banker’s Acceptance or Time Draft
A time draft is a type of foreign check that is guaranteed by the issuing bank, but that is not payable in full until a specified amount of time passes after receipt and acceptance.
The time draft benefits the seller because payment is guaranteed by the issuing bank. The buyer also benefits from the delay in payment after accepting shipment of exported goods, giving the buyer the opportunity to sell some of the goods before the note is due. This instrument is akin to a bank guaranteed credit line.
The drawback of a time draft to the seller is, in addition to costs, that the seller will often have to wait longer for payment than it would have to by using the other listed tools.
The following alternatives are not instruments, per se, but contractual options that may be agreed to with the buyer to ensure timely payment. These options depend entirely on the bargaining power between seller and buyer and the inherent issues such negotiations can have on an incipient relationship. That said, the cost of implementation is low and, in many cases, the protection it affords is high.
Escrow accounts can take many forms depending on each particular international transaction. In some instances, where the seller is unsure of the creditworthiness of its buyer, funds can be placed in escrow (i.e. in the hands of a trusted third party that collects, holds and disburses funds) until a specified set of conditions is met based on the instructions of both seller and buyer.
In situations where the risk of nonpayment is high, the seller may retain a certain percentage of amounts due from the buyer in escrow. This amount may be collected as an upfront payment or a percentage of the commissions due. Escrows such as these are very useful in new business relationships. After the end of this introductory period, the escrow amount can be released to buyer.
(ii) Payment Terms
Payment terms are the conditions under which a seller will complete a sale. They typically specify the period of time a buyer will have to remit the amount due for the sale. Payment may be demanded in advance, upon delivery, or may be deferred, typically for 30 or 60 days. Payment terms may also provide for a certain discount percentage for early payment. Payment terms are a simple method of ensuring transparency in payment obligations and potential incentives for early payments.
(iii) Due Diligence
Self-help is a cost-effective tool to reduce the risk of non-payment or delayed payment from buyers. This requires ensuring internally that the company’s credit policy is strictly enforced and fixing inefficiencies often by updating the buyer/seller interaction. A robust vendor registration process is a great first step in mitigating the risk of unknown information eroding the likelihood of prompt payment.
The seller should, of course, conduct all due diligence before entering into a contractual relationship with a buyer, including pulling marketplace reports from trusted sources such as Dun & Bradstreet or other international databases. The seller should always request reference letters from new buyers from previous or existing clients. The seller should also run creditworthiness checks on all of their buyers.
A new development in global supply chain management is the use of blockchain to ensure visibility and efficiency across a seller’s entire supply chain. A blockchain is a distributed database that maintains an ever-growing list of records called blocks. The information in a block cannot be altered retrospectively as each block contains a timestamp and a link to a previous block. The nature of blockchains makes it function like a public, digital, distributed ‘ledger’. Blockchain offers a shared ledger between the buyer and seller that is updated and validated in real time at every supply chain junction in a transaction.
In practice, the buyer and seller would enter into what is called a “smart contract” which is a software program that uses blockchain to carry out the contract. This smart contract would depict all steps involved in the supply chain from manufacturing all the way to payment or post-sale services. Each step in the smart contract would need to occur before the blockchain triggers the application of the following step. As such, in a generic sense, an order, triggers the purchasing of the components, which when fulfilled triggers the manufacturing process, which when finished triggers the transportation process and so on. The parties to the smart contract would have the flexibility to create their own transactional parameters.
Its benefits include the elimination of fraud and errors, improved inventory management, the diminution of courier costs, reduced delays from paperwork, increased consumer and partner trust, and the quicker identification of issues.
Blockchain’s application in logistics, however, remains in its infancy and providers of such services are far and few. As such, the cost of implementation is likely to be high, yet the reward may be even higher.
Alternative collection mechanisms are valuable opportunities for sellers to explore, and through the introspection needed to implement these tools, a seller is likely to find further opportunities for efficiencies within their supply chain.
Picture yourself starting a new relationship with a new contact and future distributor in South America. You checked references, as far as that goes, but there are not many companies with experience with your products in the region. Do you take the plunge and hope for the best relying on your arbitration provision or choice of law to recover your losses if things go south?
Manufacturers with global supply chains growing their business internationally run into these types of problems often. They know there are hurdles at every phase of the supply chain, from securing raw materials, dealing with suppliers, transportation and customs, and, of course, local distributors and agents. On top of this logistical complexity, many of these stakeholders, spread out around the world, operate in countries with widely divergent legal systems and traditions.
What could go wrong?
If you have a collections issue, your entire supply chain risks seizing. In that scenario, what can you do? To litigate or arbitrate these claims can take years to resolve, can be very costly, and recovery, at best, uncertain.
This two-part series will explore the possible alternatives to litigation/arbitration you can implement at the outset of the relationship or before shipment that may protect your outstanding accounts and prevent preventable losses. We will also discuss each one of these options, benefits and known drawbacks and, when available, provide you with relevant online resources available to sellers/exporters in international commercial transactions.
Export insurance is an insurance policy offered by private insurance companies and government export credit agencies that can be purchased by an international seller to provide assurance for the payment of goods. In a typical transaction covered by export insurance, the seller chooses a policy based on the risk to be covered by the insurance. Coverage can include both commercial risk, such as potential bankruptcies or defaults on payment, and political risk, such as war, inconvertibility of currency, or even cancellation of licenses.
Export insurance has certain other added benefits in addition to payment assurance, including the increased ability to borrow against insured receivables, and in certain instances, the premium paid for an export credit insurance policy may be tax-deductible. An added benefit is that the costs of the premiums are within the control of the seller, and may be passed on to the buyer depending on the price tolerance of the business.
This insurance includes threshold eligibility requirements, often including the need for a positive net worth of the business, durational requirements of the business, and certain restricted sectors such as imports, grants, early stage starts ups, crude oil, and land purchases, to name a few.
We discuss the three main types of export insurance policies depending on the type and number of transactions covered below:
(i) Express Insurance
In a typical transaction covered by an express insurance policy, the seller first must transact with the buyer, offering credit terms appropriate for the level of coverage chosen in its express insurance policy. Then, the seller ships the product and invoices the buyer. The seller reports the shipments to their insurance broker, and pays premiums pegged to the value of the shipment. This premium is usually split into two categories: an advanced premium, which is an upfront refundable payment that gets applied to exposure fees, and an exposure fee, which is a percentage of the value of the invoices shipped. This percentage is determined by the duration of the payment terms. The account receivable is then satisfied either by the buyer, or in the event of non-payment, by the insurer.
Express insurance will cover all transactions entered into by a seller, ensuring all accounts receivable are satisfied either by the buyer, or by the insurer and as such is the most comprehensive and expensive policy to maintain.
(ii) Single Buyer Insurance
Single buyer insurance mirrors express insurance discussed above, but typically covers only a single buyer or transaction over the course of a twelve-month period. This is particularly advantageous to sellers who do not have an overarching need for export insurance in their typical practice, but have an atypical transaction that requires a further layer of protection than the standard practices performed by the seller.
For sellers with typically low risk transactions, single buyer insurance affords them the ability to ensure payment of a specific transaction on a case-by-case basis depending on the perceived risk. Naturally, the cost of a single buyer policy is costlier than express insurance policies for equivalent transactions.
(iii) Multi Buyer Insurance
Multi buyer insurance policies cover a select portfolio of buyers. Multi buyer insurance blends the benefits of the above two mentioned policies, maintaining the flexibility of insuring only the at-risk transactions with the further benefit of a lower premium tied to the quantify of buyers and transactions insured.
Accounts Receivable Credit Insurance is an insurance policy offered by private insurance companies and government export credit agencies to sellers who wish to protect their account receivables from loss due to credit risks such as protracted default, insolvency, bankruptcy, or even political risk. Trade credit insurance usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid resulting from protracted default, insolvency or bankruptcy. Sellers must impose a credit limit to each of their buyers for insured receivables. The premium rate reflects the average credit risk of the insured portfolio of receivables. In addition, credit insurance can also cover single transactions or trade with only one buyer.
Accounts Receivable Credit Insurance traditionally has similar benefits and pitfalls characteristic of export insurance discussed above. However, unlike export insurance, what is insured with this tool is the line of credit offered to a buyer, whereas with export insurance, what is insured are the transactions or the buyer payments themselves, notwithstanding whether there is a line of credit extended or not.
Factoring is a transaction in which a business sells its invoices, or receivables, to a third-party financial company known as a “factor.” The factor then collects payment on those invoices from the business’s customers.
Factoring is beneficial to sellers because it allows them to receive the value of the invoice usually within 24 hours. It is not considered a loan, so the seller is not deemed to have incurred a debt when they factor.
However, the factor’s fee or discount is usually between 5-20% of the value of the purchased invoice based on the creditworthiness of the buyer rather than the seller.
With the high costs of litigation and arbitration and the uncertainties of foreign legal systems, alternate collection practices may be a more cost-effective means of ensuring your accounts receivables are satisfied. Check back soon for the second part of this two-part discussion where we will explore the likes of escrow accounts, letters of credit, and even blockchain.
On February 1, 2018, the Department of Defense formally disestablished the office of Undersecretary of Defense for Acquisition, Technology & Logistics and will begin a four-month effort to reorganize its acquisition directorate, as required under recent reform legislation. Our colleagues from the Defense Public Policy practice, Jack Deschauer and Pablo Carrillo, discuss the key nominations and what is necessary for the reorganization to ensure the U.S. maintains its technological advantage.
Cracked iPhone screens. The consequence of the finger slipping, circus-like juggling, slow motion crashing down of the one device that keeps you connected like none other to the digital world.
Apple has been trying to find a solution to this literal kink in the armor of the world’s most popular smartphone since its release close to 10 years ago. Yet, poor supplier relationship practices has kept Apple from cracking this problem.
The technology exists to replace the current glass screen of the iPhone with a virtually indestructible sapphire screen. Apple had initially contracted with GT Advanced Technologies (GTAT) in 2013 to manufacture all sapphire screens for Apple. However, as we discussed in two of the inceptive posts for this blog, the relationship quickly soured and GTAT eventually had to file for bankruptcy in late 2014. We pointed to two major legal issues with the agreement between Apple and GTAT that likely led to this relationship’s demise.
First, we noted that because the Apple-GTAT contract was a development contract, a contract to develop a new product or to develop an existing product using new technology, tying a full-scale, production-level supply chain agreement to the success of a development contract carried a legion of potential problems. We proposed that Apple and GTAT should have negotiated the development and production phases separately to allow for the necessary changes in contract terms that the unforeseeables in the development phase may cause for the production phase.
Second, we pointed to the issue of product integration. Because the sapphire screen is one component that must be seamlessly integrated with all other components, according to GTAT, Apple insisted on retaining complete control over the fabrication equipment and processes, giving GTAT autonomy only on the fabrication of the screens. Apple’s fabrication and processes produced errors a majority of the time, GTAT alleges, yet GTAT was legally responsible for any errors that resulted from these processes. In the end, notwithstanding disparities in bargaining powers, we noted that supply chain relationships are partnerships, and that a more balanced, realistic supply agreement generally benefits all parties.
Sadly, on January 22 of this year, Hebei Hengbo New Materials Technology Co., Ltd. (Hebei), a Chinese manufacturer of high purity alumina melt stock used to make sapphire glass, has filed suit in the U.S. District Court for the California Northern District against Apple. Hebei’s two count lawsuit alleges claims for (1) enforcement of rescission of contract and for consequential damages; and (2) breach of contract and the implied covenant of good faith and fair dealing. While the majority of the substance of the complaint is redacted, the complaint as it stands is eerily similar to the GTAT debacle. This may very well be a trip down memory lane and another opportunity to work on creating better supply chain practices, or your iPhones may be the ones to continue to crack.
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