Who is responsible for the cost of goods if the goods are detained or seized by Customs?

Kristal Snider

Actual Scenario

A US Buyer placed a purchase order for integrated circuits with an international supplier.  The payment terms were Net-10 (i.e. payment was required no more than (10) ten days after delivery of the goods).  A dock date (i.e. deadline by which the goods had to be delivered) was specified on the purchase order contract.  While awaiting delivery, the Buyer received written notification from US Customs that the goods were being detained in accordance with 19 CFR § 133.21 - Articles suspected of bearing counterfeit marks.

Importers are given seven business days from the date of notice to provide evidence to demonstrate the authenticity of the goods.  Immediately upon receipt of CBP’s Detention Notification, the Buyer requested the Supplier provide evidence of the goods’ authenticity and supply chain traceability to an authorized source.  The requested documentation was not provided which may have contributed to a prolonged (30-day) detention.  Without warning, the goods were subsequently released and delivered but the Buyer was no longer willing to accept the product due to the late delivery.  The Supplier is not willing to accept the cancellation and argues the Customs detention was outside of their control and that the Buyer should accept and pay for the goods as agreed. 

Is the Supplier entitled to payment or is the Buyer within its right to cancel the order and refuse payment?

In this case, the Buyer has the right to cancel and it is the responsibility of the Seller to arrange for the return of the goods at their expense for the following reasons:

1.) The Buyer’s Purchase Order contained a firm delivery deadline (dock date).  The goods were not delivered as required.
2.) The Supplier’s Invoice did not contain any language regarding late delivery.
3.) The Buyer notified the Supplier immediately of the detention and requested the Supplier’s assistance in proving the goods’ authenticity.  The Buyer’s requests were ignored.   The Supplier’s unresponsiveness may have contributed to the shipment’s delay.

But what if a delivery deadline (dock date) had not been specified in the purchase order contract?  Would the Buyer be obligated to accept delivery of and pay for the goods? What if the delivery was late but the supplier was responsive and willing to work with the Buyer and CBP?  Should consideration be given to the Supplier if they did everything in their power to meet the delivery deadline and failure to do so was beyond their control?

I asked ERAI’s attorney, Keith Gregory of Snell & Wilmer LLP, to weigh in on today’s discussion and provide recommendations for the benefit of both importers and exporters.

KS: Keith, after reviewing the above scenarios, what advice can you offer ERAI Members and others that would prevent this type of dispute?

KG: This situation provides an example as to why a Supplier’s terms and conditions should contain what is called a Force Majeure clause which provides that a Supplier’s performance is excused for events beyond its control. If such a clause was contained in the Supplier’s terms and conditions, then the delay in performance would have been excused and it most likely could have properly demanded payment for the goods that it had obtained for its customer. Also, the Supplier should consider adding language to its terms and conditions providing that if delay in its performance is caused by events beyond its control but the Supplier is still able to perform, even if late, then the Supplier should at the very least be entitled to recover its costs for the goods it secured for its customer.

KS: What if the Buyer had wired payment in advance?  What recourse does the Buyer have if the Supplier refuses to return their advanced payment?

KG:  The rights of the parties is completely dependent upon the language contained in their terms and conditions. If nothing is said in the terms and conditions about a delay in performance or non-performance as a result of events beyond their control but the customer’s purchase order calls for delivery of the goods by a certain date, then the Supplier should be required to reimburse the funds to its customer since its performance was late.

KS:  What terms and conditions should a Buyer include in their purchase order contract to protect them from detained and/or seized shipments?

KG: A Buyer should include language in its terms and conditions stating that under no circumstances, if performance is delayed for whatever reason, then payment to the Supplier is excused as the Supplier acknowledges and agrees that time is of the essence for the performance of all of its obligations.

KS: What terms and conditions should a Seller include in their invoice?

KG: As stated above, a Supplier should include a Force Majeure clause as well as language providing for at the very least reimbursement of Supplier’s costs for the goods that it acquired for the Buyer’s benefit.

KS: Keith, in closing, please offer readers one final piece of advice.

KG: Even before the possibility of the goods being seized by CBP, a buyer should take the following precautions:

1. Utilize the services of an escrow, because by doing so, if the goods are seized by CBP and they turn out to be deemed counterfeit or suspect counterfeit, then whatever monies might have been deposited with the escrow, should be returned to it; and
2. If the Buyer chooses not to use an escrow, then no funds should be pre-paid to the Supplier and any funds should be paid only after the goods are received by the Buyer and thoroughly inspected and tested.

If the goods are seized by CBP and the Buyer has not taken the above referenced precautions, the Buyer could still claim that the Supplier is not permitted to retain the funds paid by the Buyer if CBP determines that the Goods are counterfeit or suspect counterfeit, because the Buyer did not receive the benefit of its bargain.

KS:  Thank you Keith. 

Know and protect your rights. 

If you have a question or a comment relating to today’s blog post, please do not hesitate to contact me at ksnider@erai.com.

About Keith

Keith M. Gregory
Snell & Wilmer L.L.P.
350 S. Grand Avenue, Ste. 2600
Los Angeles, CA 90071
Phone: (213) 929-2547
Fax: (213) 929-2525
E-Mail: kgregory@swlaw.com

Keith Gregory practices in the areas of general business matters, corporate, franchise and partnership disputes, and intellectual property and commercial litigation. He is an experienced litigator, with considerable background in intellectual property issues, licensing agreements, trade secret matters and Uniform Commercial Code issues, especially within the electronic components and semi-conductor industries. Keith serves on the SAE International AS6081 Committee, established to develop standards proscribing counterfeit parts avoidance requirements for independent distributors.