International supply contracts: Key legal risks

Mainstream

An international supply agreement is not just a price and timing agreement. It is a system of risk sharing between parties in different jurisdictions.

The main mistake is to treat the contract as a formality that “will only be needed if something goes wrong.” But it is the moment when "something went wrong" that shows: Eight of the ten critical risks could be removed at the stage of the agreement.

Therefore, the management of legal risks in international supply begins with three checks:

• What legal system will govern the dispute and how predictable it is.
• Where and how the conflict will be dealt with and whether the solution will be enforceable.
• What public and sanction barriers can block the transaction or payment?

If these issues are not closed before signing, a commercially successful contract may become an unenforceable document.

When there are legal risks in international delivery

An international supply contract requires special attention if:

• The buyer and supplier are located in different countries, especially if one of them is Russia, Belarus or another CIS jurisdiction.
• goods cross several borders, including through countries applying sanctions regimes;
• payment is made in foreign currency and affects currency regulation;
• Delivery time is critical and the logistics chain is complex.
• INCOTERMS are applied but the parties do not fully understand their legal consequences;
• the contract is concluded for a large amount or is of a framework nature;
• the supplier manufactures the goods specifically for the customer;
• the contractor insists on his right and his court;
• The transaction involves intermediaries, traders, agents or related companies;
• It is necessary to take into account sanctions restrictions, export controls or the requirements of the currency legislation of the Russian Federation.

The mistake most companies make

Many entrepreneurs ask the question:

“What contract do you want to sign to make it easier?”

That's the wrong first question.

The right question is:

What are the risks in this transaction that are really critical, and how do you distribute them so that the business is protected in any scenario?

The answer to this question does not require a model contract, but a point-by-point legal elaboration, taking into account the specific product, route, jurisdictions and regulatory environment.

Key legal risks and how to manage them

1. Choice of applicable law: CISG or national legislation

If the parties have not chosen the right, the United Nations Convention on Contracts for the International Sale of Goods (CISG) often applies to the contract of international sale. Russia and most CIS countries are parties to the Convention.

Risk: The Convention does not regulate many important issues (forfeiture, limitation period, interest per annum) or regulates otherwise than the law customary for Russian business. For example, the amount of interest on late payment and the admissibility of recovery of contractual penalty may be completely different than the supplier expects.

Management:

• explicitly state the applicable law (Russian, English, Swiss, etc.);
• If necessary, exclude the use of CISG in whole or in part;
• agree on a specific interest rate for delay;
• Compare the penalty rules with applicable law.

2. INCOTERMS and the transition of risk of accidental death

The INCOTERMS delivery terms define the moment at which the risk of loss or damage to the goods passes from the seller to the buyer. The wrong choice of the term – for example, the use of EXW without a real opportunity for the buyer to take the goods out under sanctions restrictions – creates a risk of complete loss of cargo without the right to claim against the seller.

Management:

• choose the term INCOTERMS consciously, taking into account logistics and real capabilities of the parties;
• synchronize the basis of delivery with the conditions on the moment of transfer of ownership and payment;
• for deliveries to/from Russia, additionally take into account the requirements of currency control and customs clearance.

3. Sanctions, export controls and “sanctions clauses”

The supply of goods with the participation of Russian or Belarusian persons today is subject to multilayered restrictions: blocking sanctions, sectoral bans, restrictions on technology transfer, EU and US export controls, Russian counter-sanctions.

Risk: The contractor or goods may be subject to restrictions after the contract is signed. The payment can be frozen by the corresponding bank. The execution of the contract may become illegal for one of the parties.

Management:

• include in the contract a sanction clause (sanctions clause), giving the right to suspend performance or withdraw from the transaction without liability;
• to conduct compliance screening of the counterparty, the final recipient and banks before signing;
• provide for an alternative currency and payment route;
• The new adjustment clause (hardship/adaptation clause) is used.

4. Currency Regulation and Currency Risks

Russian currency legislation obliges residents to repatriate foreign currency earnings, issue passports of transactions (unique contract numbers), and comply with the terms of crediting funds. Violation threatens with large fines and blocking of settlements.

Risk: the mismatch of the currency price and the currency of payment, a sharp fluctuation of the exchange rate, the inability to credit export proceeds due to the refusal of a foreign bank to make payment in favor of a Russian person.

Management:

• fix in the contract the currency of the price and the currency of payment, the currency clause;
• determine who suffers losses from exchange rate fluctuations in the period between shipment and payment;
• to agree in advance with the bank the structure of settlements, especially when payments in rubles abroad;
• include the right to change the terms of payment in the event of currency or banking restrictions.

5. Arbitration clause and dispute settlement

A vague or “pathological” arbitration clause can make real proceedings impossible or last for years.

Typical pathologies for contracts with contractors from Russia and the CIS:

• (a) the designation of a non-existent arbitration institution;
• a reference to the “arbitration court” without specifying whether the State Arbitration Court of the Russian Federation or international commercial arbitration is intended;
• absence of a place of arbitration;
• The conflict between arbitration and judicial clauses.

Risk: The dispute will not be considered on the merits or the decision will not be recognized.

Management:

• use modeled reservations of recognized institutions (ICAC at the Chamber of Commerce, ICC, SCC, SIAC, etc.);
• specify the place of arbitration, the applicable law, the language of the proceedings and the number of arbitrators;
• For transactions with state-owned or CIS companies, additionally assess the possibility of ad hoc arbitration.

6. Force majeure and a significant change in circumstances (hardship)

In recent years, suppliers and buyers have faced pandemics, disruption of supply chains, sanctions shocks, and border closures. Not all of these events are automatically recognized as force majeure.

Risk: A reference to force majeure without a properly drafted reservation and timely notification may not exempt from liability. Moreover, if an event creates only a commercial impossibility or a sharp rise in the cost of execution, a hardship clause is needed, not just a force majeure.

Management:

• include both a force majeure clause and a hardship clause;
• detail the list of circumstances (sanctions, termination of transport communication, revocation of licenses, closure of borders);
• prescribe the procedure for notification, confirmation and consequences (suspension, revision of the conditions, termination).

7. Interim arrangements: Guarantees, Letters of Credit, Retention of Title

Non-payment or non-delivery risk is a central commercial risk. But its minimization is possible only with the use of legally correct security structures.

Management:

• a bank guarantee (including in the form of URDG) or a standby letter of credit;
• Documentary letter of credit, certified by a first-class bank in a neutral jurisdiction;
• Retention of title clause until full payment, taking into account its validity under applicable law;
• The right to suspend delivery in case of late payment (cessation of delivery clause).

Each of these tools works differently under Russian law and in common law systems, and this must be checked in advance.

8. Acceptance of goods and warranty obligations

Uncoordinated quality standards, acceptance procedure and deadlines for claims are one of the main causes of disputes in international delivery.

Risk: the buyer loses the right to refer to defects if the procedure for inspection and notification is not followed; The supplier faces unlimited warranty requirements.

Management:

• clearly define the specification, standards, permissible deviations;
• regulate the procedure and terms of acceptance by quantity and quality with the participation of independent surveyors;
• limit the period of claims and the warranty period;
• agree on the means of compensation: repair, replacement, proportionate reduction in price, not abstract losses.

9. Liability and limitation of damages

International contracts have made extensive use of limitation of liability, exclusion of consequential damages and agreement of fixed penalty. However, their validity depends on the applicable law.

Risk: parties may consider themselves protected by a limitation clause, and it will later become clear that it is invalid (for example, under English law liability for intentional violation cannot be excluded, and under Russian law the limitation of liability for intent is negligible).

Management:

• adapt the limitation of liability clause to the applicable law;
• separate the grounds for recovery of losses and fixed penalty;
• It is clear to determine which losses are excluded and which are not.

10. Confidentiality and intellectual property

When supplying complex equipment, software or goods under the customer’s brand, the issue of protecting know-how, trade secrets and IP arises.

Management:

• enter into separate NDAs or include confidentiality clauses in the supply contract;
• determine the mode of use of technical documentation;
• provide for liability for breach of confidentiality and return of materials upon termination.

Typical errors in the conclusion and execution of international supply contracts

1. Signing a contract in the form of a counterparty without a deep verification of law and arbitration.
2. Mixing Russian legal concepts ("arbitration court") with international commercial arbitration.
3. Ignoring the Vienna Convention when it is applied by default.
4. The choice of INCOTERMS is “by eye”, without taking into account transport and customs realities.
5. Absence of currency clauses when delivering to/from Russia.
6. Work without a sanction clause in the current regulatory environment.
7. Limiting liability to a percentage of the contract price without analyzing potential losses.
8. Too late fixation of quality claims and notification of force majeure.
9. There is no mechanism for price revision in long-term supplies.
10. Storage of correspondence that can harm arbitration (informal recognition of problems, promises without reservations).

Checklist: 20 Questions Before Signing an International Supply Agreement

1. Is the applicable law chosen and is the application of CISG excluded, if necessary?
2. Does the INCOTERMS framework fit the actual logistic framework?
3. Is the time of transfer of ownership separate from the risks?
4. Is prepaid delivery and refund of advance on non-delivery settled?
5. What is the currency of the price and payment, who carries the exchange rate risks?
6. Are the requirements of the Russian currency control (repatriation, deadlines) taken into account?
7. Is there a right to adapt to the new restrictions?
8. Is an explicit arbitration clause included (institution, place, language, number of arbitrators)?
9. What is the acceptance procedure for quantity and quality, the timing of notification of deficiencies?
10. Are technical specifications and tolerances agreed?
11. What is the term and amount of the guarantee?
12. Is there a fixed penalty or other method of calculating losses?
13. Is the limitation clause valid under applicable law?
14. How are force majeure and difficulties, including sanctions and logistical disruptions, resolved?
15. Is there a support structure: Guarantee, letter of credit, retention of title?
16. Is the language of the contract and correspondence agreed?
17. What are the consequences of termination and the procedure for returning the goods?
18. Is intellectual property and confidential information protected?
19. Who is authorized to sign the contract and is the corporate authority verified?
20. Is the solvency and sanction status of the counterparty and its bank analyzed?

Comparison of key approaches to risk minimization

Strong risk management strategy in international delivery

It is built on five levels:

1. Legal Framework: A conscious choice of applicable law, jurisdiction, arbitration. Adaptation of the contract to the real regulatory conditions of Russia, CIS and the counterparty countries.
2. Deal Structure: Well-thought-out supply chain, form of settlements, currency, security instruments, document management, customs and currency compliance.
3. Contractual Protection: Sanctions, currency, force majeure and hardship clauses; Limitation of liability; guarantee obligations and acceptance procedure; Effective arbitration clause.
4. Operational Compliance: Timely notification of violations, record of evidence, compliance with deadlines and procedures, currency monitoring, sanction screening.
5. Plan B: A predetermined dispute resolution mechanism, jurisdiction for interim measures, understanding where the counterparty’s assets are located and how the decision will be executed.

FAQ

Does the Vienna Convention (CISG) apply to the supply to/from Russia? Unless the treaty excludes its application, the Convention will govern a substantial part of the relationship between the parties automatically.

More importantly: Is it legal or legal? – These are related issues. A mistake in any of these can devalue the defense. Law determines the rules of the game, and arbitration determines where and how these rules will be applied.

It is recommended to use the reservations of reputable institutions with a place of arbitration in a neutral and convenient country. Popular options remain ICAC at the Chamber of Commerce and Industry of the Russian Federation (for disputes within the CIS), ICC, SCC.

How to protect yourself from non-payment by a foreign buyer?Use a confirmed letter of credit, a bank guarantee or a retention clause. When delivering large quantities, combine several tools.

Liability can only be completely excluded to the extent that applicable law allows. A sanctions clause allows the contract to be suspended or terminated without breach if compliance with the sanctions makes the performance illegal.

If there is a currency clause or a condition for a price revision (hardship), the parties can redistribute losses. Without it, the risk usually falls on the party that bears it under the contract.

The main risk is the mismatch of the contractual basis with the real possibilities to perform delivery on these conditions, especially under sanctions logistics restrictions.

Do you have to write a sanctions clause?In the current conditions, yes. It gives the right to legally refuse performance or suspend it, minimizing the risk of claims of breach of contract.

Can the contract of supply simultaneously specify both arbitration and the state court? Alternative or multi-level reservations may be declared invalid. It is better to choose a competent forum.

Related services

• International Trade, Distribution & Cross-Border Transactions
• International Arbitration, Commercial Litigation & Cross-Border Disputes
• Commercial Contracts
• Sanctions, Export Controls & International Compliance
• International Regulatory Risk & Strategic Advisory
• Corporate Investigations, Regulatory Investigations & Business Integrity

Related material

• How to choose an arbitration clause for an international treaty
• International arbitration: When it is more effective than the court
• How to check a foreign counterparty before concluding a contract
• Vienna Convention (CISG): What Russian Businesses Need to Know
• Sanctions clauses in international contracts
• INCOTERMS 2020: Choosing the basis of delivery without errors
• Currency control in export and import in Russia
• Interim measures in international trade: Guarantees, Letters of Credit, Retention of Title
• Force majeure and hardship in supply contracts
• Asset tracing: How to find the assets of a foreign debtor

Conclusion

The key legal risks of an international supply contract are not reduced to non-payment. It is a multi-layered system in which law, sanctions, currency control, logistics, arbitration and real enforceability of conditions are intertwined.

A contract signed without analyzing these risks sooner or later becomes a source of losses. A contract built around risk management is transformed into an asset that protects business even in the most adverse environment.

The winner is not the one who signed the contract faster, but the one who knows before signing what scenarios are possible, how to prepare for them and how to get out of any of them with minimal losses.