Thursday, April 3, 2014

Transfer of Title

On linkedIN, I responded to a discussion about where title should transfer. Title means the legal ownership in the product of equipment that is sold. In the past many companies would have sales terms where title would not pass until payment was made. Since title did not transfer if the seller wasn’t paid, they could bring an action of replevin to seek to recover the unpaid goods or equipment. As commerce has expanded internationally, pursuing an action of replevin to recover unpaid goods or equipment can be both costly and lengthy. You would need to get an order of replevin in your country and have that accepted by the courts of the buyer’s country. The days of companies having large inventories just sitting there are done. Goods delivered one day may be incorporated into products shipped to many countries in a matter of days or weeks. A third thing that makes withholding title until payment undesirable is GAAP (Generally Accepted Accounting Principles). Under GAAP you cannot claim the item has been sold until title has transferred. There are other forms of protection to help ensure you get paid beyond retaining title such as letters of credit, bank guarantees or bonds.

The other concern that I have with the location where you transfer title after payment is when you are selling internationally you run the risk that it may be considered a local sale in the jurisdiction where the customer is located. If that happens it would mean that you need to be registered to do business in that country, become subject to local laws, and the profits that you will make on that sale will be subject to local tax. If it is considered a local sale you also have countries in which it is illegal to pay in anything other than local currency. That creates both currency exposure issues and the issue of repatriating that money. The local laws may further impact contract obligations such as warranties, or other requirements that must be met.

While the parties to a contract have the right to specify the applicable law, jurisdiction and forum, that is for the interpretation of the contract. The laws you become subject to will always be based upon the location of the sale. If the sale occurs prior to export clearance, the seller is responsible to comply with that country's laws irrespective of the applicable laws selected for interpretation of that contract. A good example of that is the need to comply with export control laws. If the sale occurs "while the goods are on the high seas" meaning any point after the export frontier and before the import frontier, it becomes an international sale. For international sales unless the customer specified specific requirements that must be met, it becomes the customer’s responsibility to import the item and ensure its compliance with the local law. For international sales the seller is not subject to that local law.

If you actually have the sale occur within the import country, that is a local sale. Irrespective of what the contract may say about the applicable law for the interpretation of the contract if you are conducting business within their country you are subject to their laws and taxes. The fact that GAAP considers it not to be a sale until title transfers could be used by local countries arguing that it is a local sale if title does not transfer until after payment is made (which is after it has been delivered into the customer’s country).

In the discussion the individual’s customer wanted to have the product installed and accepted at their location as a condition of payment. That would clearly make the entire contract a local sale.
The impact of that requested term would be that the Seller would be responsible for:
1. Providing transit to the port of export.
2. Clearing customs at the export country.
3. Providing transit to the port of import.
4. Clearing customs and paying any duties for import.
5. Providing transit to the customer’s site.
6. Arranging for riggers to place the equipment at the customer’s site.
7. Installing the equipment at the customer’s site.
8. Performing all work needed for test and acceptance.
Since work would be performed at the customer location and the supplier has the responsibility for import, they would need to be registered to do business within that country. They would be subject to local laws and local taxes on the profits made from the entire sale.

Another thing that impacts where title should transfer is custom’s clearance. Only the owner of the product or a representative of the owner (such as a customs broker), can perform export and import clearance of the product. That means that whoever holds the title determines the ownership and establishes who must perform customs clearance. If the supplier withheld title until after payment, and payment was conditioned on delivery and acceptance at the customer’s location, the supplier would be responsible for both export and import customer clearance as they still have title.

While there are a number of options that could be available, here’s another option they might want to consider. Have the sale to the customer and have title transfer simultaneously after the goods have cleared export customs.
In that the supplier responsibilities would be:
1. Providing transit to the port of export.
2. Clearing customs at the export country.

The customer responsibilities would be:
1. Providing transit to the port of import.
2. Clearing customs and paying any duties for import.
3. Providing transit to the customer’s site
4. Arranging for riggers to place the equipment at the customer’s site.
5. Installing the equipment at the customer’s site.
6. Assuming the risk of loss or damage from the port of export until installed at the customer site.

When a company sells a product and that requires installation and testing another solution would be to unbundle the two and price the two separately. To offer protection to the customer that the work will be completed and accepted you could consider offering a bank guarantee of bond. With the two separated only the local work to be performed could be subject to local law and taxes. You could either have the installation part of the work subcontracted to a local company and have someone oversea the installation, or you could have a team fly in to perform the installation. Whether that would be considered as conducting business in that location, would be decided by the government. If they did consider it local, the only thing potentially subject to local taxation would be the installation portion of the contract.