Generally Accepted Trade Practices versus Commercial Law

An Expert's View about Trade Trends in the United States

Last updated: 11 May 2012

A description of some of the differences between generally accepted trade practices and US commercial law.

Commercial Law and “Generally Accepted” Trade Practices Mark Kleinschmidt, MBA Harmony Imports May, 2012 INTRODUCTION “Our standard procedure that is in compliance with ICC policies is: Buyer submits an LOI with seller procedures copied into it, Seller responds with an formal SCO. Buyer responds with an ICPO with soft probe authorization again with seller procedures copied into it. Seller responds with an FCO or draft contract…”. If you have been doing, or trying to do, any trading in almost any commodity, you have seen and heard this litany, or a variation thereof, many times. There are numerous problems with the above statement. I will point out the major ones. But first, some notices and statements that need to be said: 1. I am not an attorney. The opinions here are simply my own opinions and undoubtedly would have no weight in any court of law. 2. I am a citizen of the United States. That very fact means that my understanding of “commercial law” is that of US Commercial Law. If you are interested in a specific discussion of commercial law in your country, please consult a qualified attorney. 3. I am not registered, licensed or certified as a financial advisor in any capacity in any jurisdiction. I am offering my opinion only, and am totally not recommending any course of action or investment as this would be a violation of US law. This paper is based on several years of trading experience trying to work with the generally accepted practice, and now trying to reconcile that practice with my MBA training. GENERALLY ACCEPTED PRACTICE While there are definitely variations on the theme, there are certain commonalities in procedures for the large international transactions with which we find ourselves normally working. The procedure frequently presented goes something like this: Page: 1 Copyright 2012 – Harmony Imports - Harmony Imports May 2, 2012 Commercial Law vs Generally Accepted Practice 1. Buyer issues Letter of Intent (LOI). 2. Seller issues Soft Corporate Offer (SCO). 3. Buyer issues Irrevocable Corporate/Commercial Purchase Order (ICPO) with soft probe authorization or other proof of funds (POF). 4. Seller issues for Firm Corporate Offer (FCO) with Proof of Product (POP). 5. Buyer signs the FCO and returns it to the seller. 6. Seller issues the Draft Contract open for amendment. 7. Buyer and Seller negotiate amendments. 8. Buyer makes amendments to the draft contract and signs it. 9. Seller issues the final contract to the buyer. 10. Buyer reviews and signs the final contract 11. Seller signs the final contract. 12. The transaction proceeds as agreed in the contract. Some of the more common variations to this process include starting with an SCO from the seller, skipping the FCO and going straight to draft contract, or turning the FCO into a draft contract. There are also conditions and requirements optionally placed on each party by the other. Seller wants the buyer to cut and paste seller procedures into the buyer’s ICPO. Seller requires POF up front before the buyer has before presenting any documents to the buyer. Buyer requires POP before issuing the ICPO. And the list goes on. It is clear to us that many seller and buyer requirements and procedures are simply in place because that is the way they have done it since the company started. Right or wrong that is the way it will be. And, to be perfectly honest, the entire process is NOT consistent with commercial law. COMMERCIAL LAW PROCESS NOTE: I would like to repeat here that I am not an attorney. I am expressing my personal opinion and should be not be construed as offering legal advice. A contract is Page: 2 Copyright 2012 – Harmony Imports - Harmony Imports May 2, 2012 Commercial Law vs Generally Accepted Practice “an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration.” -- By this definition as soon as there is a document that has the seller’s and buyer’s signature on it that says the seller will sell product and the buyer will pay for it, there is a contract. Recently sellers have been requiring buyers to sign the Soft Corporate Offer that they have presented already signed by them. Technically that makes the offer a contract and legally binding on both parties. Two parties are defined, seller offers the product, the buyer agrees to purchase, the payment terms are defined, and there are two signatures. If this is, in reality, the case, then the progression should be: 1. Buyer sends RFQ. 2. Seller issues a quote. 3. Buyer agrees to the quote. Presents Proof of Funds. 4. Seller sends firm corporate offer or draft contract with Proof of Product. 5. Buyer and seller negotiate the offer/contract. 6. Buyer and seller sign the offer/contract. 7. The transaction proceeds as agreed in the contract. The seller acknowledges that it is fraudulent to offer a product that you are unable to provide. It is also fraud for a buyer to commit to buy a product they are unable to pay for. COMPARISON There are similarities as well as differences between the two processes. Step Generally Accept Practice (GAP) Commercial Law Practice (CLP) 1 Buyer issues LOI. Buyer issues RFQ 2 Seller responds with an SCO. Seller responds with a quote 3 Buyer issues ICPO with POF Buyer accepts quote, presents POF 4 Seller issues FCO. 5 Buyer signs FCO. 6 Seller issues draft contract Seller issues draft contract 7 Buyer Seller negotiate draft contract Buyer Seller negotiate draft contract 8 Buyer signs draft contract with amendments. 9 Seller issues final contract Seller issues final contract 10 Buyer and seller sign contract Buyer and seller sign contract. Page: 3 Copyright 2012 – Harmony Imports - Harmony Imports May 2, 2012 Commercial Law vs Generally Accepted Practice In the Generally Accepted Practice, GAP, while there is some variation in the process, I have seen the buyer and seller both sign up to 4 documents related to the transaction. Each document has the product, payment terms and procedures in them. None of the documents has language in it that takes precedence over the earlier documents. This means that legally there are up to 4 contracts in existence between the buyer and the seller. On the other hand, the Commercial Law Practice, CLP, has one contract with the signatures of both parties. The RFQ is signed only by the buyer. The seller alone signs the quote. When the buyer accepts the quote they do so by issuing a letter of formal acceptance. The only document signed by both parties is the draft contract. Clearly in the GAP, the seller is trying to minimize risk by having the buyer sign off on their procedures multiple times. The net effect actually introduces additional risk into the process should the contracts ever come under court scrutiny. In the CLP, the documents issued and signed by each side are what they purport to be. The RFQ is a request by the buyer for a particular product, with some information on what the buyer would find acceptable for payment terms and procedures. The quote, signed by the seller, is the seller’s response and presents to the buyer the product, pricing, terms and procedures the seller would like. Now we have the basis, or starting point, for negotiations. The end result of the negotiations is the contract or purchase and sales agreement. Because, this is the result of the negotiation, it represents the consensus reached between the buyer and seller, thus both parties sign this document. Clearly, in my mind, the Commercial Law Process is the preferred. It has the parties interacting in a businesslike manner without overcommitting too early. The trust level rises evenly with the commitment. The end result is arrived at with sufficient time for the parties to get to know each other without undo delay or expense. CALL TO ACTION The time has come to inspire vigorous debate on the discrepancies between generally accepted practices and commercial law. The sooner we, as an industry, can bring these two processes into balance with each other, the sooner we can start trading in a saner less arbitrary fashion. CONCLUSION Somewhere along the way of trading, there has entered into the system a disconnect between generally accepted practices and requirements under commercial law. I believe the situation occurred out of a desire by sellers to try to protect themselves from fake and non-performing buyers. Page: 4 Copyright 2012 – Harmony Imports -
Posted: 09 May 2012, last updated 11 May 2012

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