It’s important to understand how you can protect your business when importing goods from overseas. If you are purchasing goods from overseas to sell to local customers, you need to make sure the goods are tested to ensure they are of acceptable quality. You also need to ensure that the overseas supplier or manufacturer is held accountable if the goods are of poor quality and that your business has some financial recourse.
This article will look at the legal and commercial implications for Australian businesses that buy goods from overseas.
Author: Farrah Motley, a commercial lawyer with experience in writing international supply agreements and helping Australian businesses to reduce legal risk.
The Commercial Benefits of Importing Goods
Buying goods from overseas and importing them into Australia can be beneficial for local businesses. The benefits of importing goods include:
Some goods are cheaper to manufacture overseas than they are to manufacture locally in Australia. Your costs to buy the goods from the manufacturer, exchange rates and any import duties, levies or local taxes, may still make it commercially beneficial for your business to buy internationally.
Many Australian businesses discover that importing products is more affordable than producing them locally. What’s more, usually large orders attract better discounts and this also serves to minimise costs.
2. Access to different products
Consumers like ‘new’. By offering your customers new products from other countries, you may be able to differentiate your product offering from that of your competitors.
Australian businesses may find it appealing to purchase products produced in countries like China, import them into Australia and introduce them to Australian consumers.
Your Business’s Legal Status as an Importer
Under Australian law, a manufacturer is not just the business that actually manufacturers goods. The definition of manufacturer is much broader and includes a person (or business) who:
The Australian Consumer Law defines a manufacturer to include a person who:
- grows, extracts, produces, processes or assembles goods;
- holds themselves out to the public as the manufacturer of goods;
- uses their own brand or name in relation to the goods; or
- permits others to use their own brand or name in relation to the goods.
Importantly, the Australian Consumer Law also ‘deems’ a business to be a manufacturer if they import goods into Australia and at the time they import the goods, the actual (overseas) manufacturer does not have a place of business in Australia.
The implications for your business being deemed to be a manufacturer are that:
- a consumer can sue you for breaching the Australian Consumer Law if the product(s) fail to meet the consumer guarantees; and
- a reseller has remedies against you for breaching the Australian Consumer Law plus under the relevant supply agreement.
Use of Trade Marks and Other Intellectual Property
When it comes to importing goods that have been manufactured outside of Australia, there are two scenarios:
- the design of the goods belongs to your business and the overseas manufacturer makes them (these are also known as ‘private label’ goods); and
- the design and the goods themselves have been produced overseas.
This distinction becomes important when we assess intellectual property rights, including the use of trademarks, and the risks and benefits involved in importing overseas goods.
Private label goods and intellectual property
Private label products refer to products that a business sells, but arranges to be manufactured by someone else. The business that sells the products sells them under its own brand name (and that’s where the term ‘private label’ comes from)).
The business selling the private label products specifies the colour, quality, packaging, branding, marketing and price of the product. The only role of the manufacturer is to produce the goods as directed by the business that sells them.
Now that we understand what private label goods are, we can look at how intellectual property rights can be dealt with and the problems to try and avoid.
In order for overseas manufacturers to have the right to produce ‘your products’, they need the right to use any applicable trade marks, colours, dyes, branding, packaging design, patent, etc. Some of these aspects of the products may be intellectual property. If they are, the intellectual property that is owned by the private label owner needs to be licensed to the manufacturer. A licence doesn’t transfer ownership, but it enables the person receiving the benefit of the licence to use the intellectual property for a limited purpose.
If a private label owner doesn’t expressly authorise (for instance, through a written contract) a manufacturer to use the intellectual property, the manufacturer may nevertheless have an implied licence to use the intellectual property.
In order for some overseas manufacturers to export goods to different countries, they need a letter of authorisation from the owner of the private label. This letter can also be used as a basis to confirm to the manufacturer that they have a right to produce the private label products.
Where it gets tricky:
In some countries, you need to register your trade mark before you have an exclusive right to use that trade mark. If your private label products are being manufactured in a country in which your trade mark is not registered, you might encounter problems.
Those problems could include copycats emerging within the country of manufacture.
Overseas acquired goods (not private label)
If the goods you are importing into Australia are not your private label products, but are designed and produced by another company and manufactured overseas, you need to make sure that you have a right to use the intellectual property.
You need to make sure that you have a written contract in place with the business that owns those products and which enables you to market and sell the goods. Depending on how far you go with your commercial arrangement, you may also want:
- an exclusive intellectual property licence (so that no one else can sell those products); or
- an obligation on the product owner to enforce any intellectual property breaches (for your benefit); and
- assurance that the products are safe and of good quality.
Modern Slavery and Importing Goods
‘Modern slavery’ is the new global buzzword for supply chains; and for good reason.
Here is a heat map that shows the prevalence of modern slavery across the world. Although modern slavery is typically perpetrated in the world’s least developed countries, the world’s most developed countries are the ones that import and consume products generated through modern slavery. Here is a detailed report by the Global Slavery Index that explains the modern slavery risks of importation into G20 countries.
By purchasing goods from overseas, you are inserting your business as a link in that international supply chain. Because of this, you need to do your due diligence. You can do this by:
- requesting the business’s modern slavery policy or, if they don’t have one, how they deal with modern slavery risks in their business and supply chain;
- requesting a solicitor to undertake company and litigation searches to find out whether there have been any legal issues relating to modern slavery; and
- visiting the manufacturer’s warehouse and other premises to assess the risks for yourself.
If you fail to assess, monitor and avoid modern slavery risks in your supply chain, you may be subject to legal penalties which will hurt your back pocket.
Aside from the purely legal implications that follow from breaching modern slavery laws, the reputational damage to your business can be significant. This is because modern slavery issues are now in the spotlight and consumers respond negatively to unethical business practices.
Large Australian businesses are now including modern slavery reporting as part of tender processes, due diligence for business purchases, cause for terminating contracts and a reason for banning organisations from doing business. If you have turned a blind eye to modern slavery and word gets out; your business’s shortcomings will become front and centre. Reputational damage is notoriously difficult to bounce back from, so it’s important to avoid it at all costs.
How Can Your Business Can Reduce the Risk of Poor Quality Goods?
Why are poor quality goods a problem for your business?
This one might seem to have an obvious answer. But actually, there is a laundry list of reasons why poor quality products cause problems for businesses that sell them. Those reasons include:
- competitor (dis)advantage: if your business’s products become known as ‘cheap’ or otherwise poor quality, your competitors will take advantage of this and have a basis to differentiate their products from yours. Unless your price differential can justify the quality difference, you may have a problem.
- reputational damage: reputational damage is bad and rebranding/repositioning is expensive.
- insurance risks: poor quality goods can mean that your products are unsafe. And unsafe products can lead to a high product return rate and worse. If your products are of poor quality and, as a result, one of your customers is injured or suffers a loss, you need to ensure you have robust product liability insurance in place. Even if you do, you may see significant premium increases and you will have to pay your insurance deductible for each claim.
- statutory penalties and fines: Unsafe products can lead to statutory penalties and fines against your business. Sometimes, your insurance may not cover your business for these costs.
- consumer claims and increased overhead: whether your business is insured or not, claims from consumers of your products can mean an increased cost for your business. Those costs can include an increase in overheads to receive, manage, investigate and respond to consumer claims.
How can you avoid importing poor-quality goods?
There are a number of ways you can try to avoid importing poor-quality goods.
Choose the right manufacturer
Choosing the right manufacturer is vitally important to ensure you only import quality goods. This may involve visiting the manufacturer’s premises to inspect their processes and output, and choosing renowned manufacturers that supply well-known, global brands.
Require batch testing certificates
Batch testing certificates can be required as a condition of payment; if the manufacturer can’t produce a batch testing certificate and you can’t be assured of their quality – you don’t have to pay for the goods.
You can use the leverage of payment as a means to ensure testing is consistently carried out on the goods you buy.
Foster a culture of quality
If you convey to your employees and suppliers that quality is not a key focus of your business; don’t expect it to be a key focus! Make sure that you have policies and training in place to ensure that there is a consistent message across your business and communicated externally; quality is core to your products and your business. If you can demonstrate to manufacturers that product quality is a core value, they are more likely to ensure that the goods they are selling to you are just that – good quality.
What Financial Recourse Does an Importer Have?
If you’ve imported goods from overseas and there is something wrong with the products, you want to make sure that there is someone or something of substance standing behind the supplier.
To make sure you have financial recourse against an overseas supplier of goods and you are an importer, you should ensure that:
- you have a robust written supply agreement in place between your business and the overseas supplier;
- the overseas supplier has product liability insurance in place and provides proof of that insurance by providing you with certificates of currency;
- you have a right to withhold payment for products that do not meet the requirements of the supply agreement;
- you have extended payment terms with the overseas supplier so that, at all times, you have access to more products than what you have paid for;
- you withhold a small % from any payments due to the overseas supplier to cover your administrative costs in dealing with customer returns; and
- if the overseas supplier has a parent company, that parent company provides your business with parent company guarantees.
Your best protection against defective goods you import from overseas is going to be insurance. You should aim to have a products liability policy covering your business against the risks associated with imported goods, and ensure that your manufacturer also has a policy of product liability insurance that extends to products exported to your business.
You can also find out more about risk reduction strategies for your business that imports foreign goods here.
Another very helpful source of information and support for Australian importers (and exporters) is the Australian Trade and Investment Commission. Here is a link to their page on import and export laws in Australia.
How Can Prosper Law Help Your Business?
Prosper Law has extensive experience working with Australian importers and exporters. If you want to ensure that your business is legally compliant and protected, contact our team today.
We can help to draft, review and negotiate international supply agreements and provide you with the best legal advice in Australia.
Farrah Motley | Director
M: 1300 003 077
A: Suite No. 99, Level 54, 111 Eagle Street, Brisbane City, Queensland, Australia