Importing via Broker’s Contract in Russia

June 30, 2024

BRACE Law Firm ©

Importing goods under foreign trade contracts involves interaction between various market participants to ensure supply under the most favorable conditions for all parties. However, direct interaction between a seller and a buyer sometimes creates difficulties for foreign partners, which specialized professionals can help resolve.

Supply via a broker’s contract is a type of transaction where goods are imported involving a professional participant in foreign trade who possesses the necessary capabilities and expertise. Pursuant to the EAEU Customs Code, a customs representative is a legal entity that performs customs operations on behalf of and as instructed by a declarant or other interested parties and is included in the registry of customs representatives in accordance with international treaties and acts regarding customs regulation.[1]

The distinctive feature of supplying goods via a broker's contract is the conclusion of a supply contract between the buyer and the organization performing the import while complying with all customs requirements for clients who cannot, or find it difficult to, conclude a foreign trade contract directly with a seller. In this type of market interaction, the buyer enters into a contract with a broker (a specialized organization) for the supply of specific goods from a foreign partner. The broker assumes obligations for delivery, customs clearance, payment, and related matters. Simultaneously, the buyer receives goods from the broker that were acquired from the foreign partner and have cleared customs.

Importing under a broker's contract is utilized by the following foreign trade participants:

• individuals purchasing large batches of goods that customs authorities may classify as commercial shipments;
• legal entities importing small batches or lacking the foreign trade experience required for proper customs clearance, as well as those who do not wish to become full-fledged participants in the foreign trade market;
• foreign trade participants who made errors in cargo documentation during import and cannot independently resolve control issues with customs authorities.

Customs Representative (Broker)

The activities of a customs representative (broker) are governed by the EAEU Customs Code[2] and Federal Law No. 289-FZ dated August 3, 2018, On Customs Regulation in the Russian Federation and on Amending Certain Legislative Acts of the Russian Federation[3] (the "Law No. 289-FZ", the "Customs Regulation Law").

The relationship between a customs representative and declarants or other interested parties is built on a contractual basis.[4] A customs representative may only operate after being included in the registry of customs representatives, which requires meeting the conditions specified in the EAEU Customs Code and Law No. 289-FZ.

A significant aspect of a customs broker's activity when clearing imported goods across the Russian border is that the broker is granted the same rights as the customer. Furthermore, legislation does not provide for the right of a customs broker to refuse to conclude a contract with a person seeking their services. A refusal is only possible if the customs broker is unable to provide the requested services.

Importing Goods Under a Broker's Contract

Foreign suppliers sell goods through foreign trade contracts, which, in the context of this article, are concluded between the supplier and the broker. The interaction scheme follows these stages:

• the broker acquires the goods from the foreign supplier as instructed by the client;
• the customs broker handles customs clearance, payment, delivery, and related tasks;
• the client receives the cleared and paid goods from the customs broker.

To acquire goods from a foreign supplier at the client's request, the broker concludes a foreign trade contract for the purchase of the goods, and a sale-purchase agreement is concluded between the broker and the client for the acquisition of specific goods from the foreign supplier under the client's request.

Payment, customs clearance, and logistics are critical components of the sale and purchase of goods for which the broker is responsible. When purchasing goods via a broker's contract, the client does not handle these issues; the broker bears full responsibility for these stages. Given that a customs broker is a professional participant in foreign trade, difficulties at this stage typically do not arise. When drafting the sale-purchase agreement between the broker and the client, it is crucial to clearly define the liability for breaches at any stage of cargo delivery, payment, or clearance, as these factors can significantly impact the final cost of the goods, their delivery, and their safety during transit.

Receiving and accepting the goods from the broker is necessary because the buyer must verify the quality and quantity of the goods acquired by the broker, the customs clearance, the payment of all mandatory fees, and the payment to the seller. Skipping this stage deprives the client of the right to claim that the goods are of inadequate quality, that the quantity is incorrect, or that mandatory payments were not made.

Importing Goods for Legal Entities via a Customs Broker's Contract

Most entrepreneurs engaged in foreign trade import goods independently, handling transportation logistics, customs clearance, opening bank accounts, making payments, reporting, and interacting with customs authorities. However, successfully executing all stages of importing cargo from a foreign supplier requires not only resources but also experience in cargo clearance and interaction with customs and currency control authorities. Not all entrepreneurs are prepared to handle these aspects, leading them to import goods under a customs broker's contract.

The primary reasons legal entities utilize customs brokers for imports include:

• the customs broker handles all stages of delivery, clearance, and product selection;
• there is no need to search for a supplier;
• the entrepreneur does not need to participate personally in every stage of the import;
• reduced risks associated with customs clearance, payments, customs duties and fees, and reporting.

Importing Goods for Individuals via a Customs Broker's Contract

Cases where individuals purchase batches of goods recognized as commercial shipments are quite common in customs practice. To avoid liability, individuals conclude a sale-purchase agreement for goods from a foreign supplier via a broker’s contract. This allows for customs clearance under the broker’s contract and reduces the number of inquiries from customs authorities regarding the imported goods.

Meanwhile, the International Convention on the Simplification and Harmonization of Customs Procedures specifies that documentary evidence of origin should not be required for commercial shipments with an aggregate value not exceeding an amount that should not be less than 60 US dollars.[5] This allows for the interpretation of commercial shipments as those exceeding 60 US dollars in value. However, in practice, during customs clearance, customs authorities independently determine whether a specific batch of goods is for commercial purposes.

Consequently, supplying goods via a customs broker's contract significantly simplifies the import process for individuals and reduces the risk of the cargo being classified as a commercial shipment, with the corresponding consequences.

Supply Schemes via a Broker's Contract

The interaction between a customs broker and a client depends on various circumstances, supply terms, the customer, and the specific goods being imported. Therefore, a customs broker and a client may choose schemes such as:

• an agency agreement;
• linked contracts (contractual chain);
• a commission agreement.

Under an agency agreement, the agent undertakes, for remuneration, to perform legal and other actions on the principal's behalf, either in the agent's name but at the principal's expense, or in the principal's name and at the principal's expense.[6] A commission agreement is a type of agency interaction between a commissioned agent (commissioner) and a principal (committent).[7] Under linked contracts, two interrelated agreements are concluded: under one, the broker buys the goods from the foreign partner, and under the other, the broker transfers the acquired goods to the buyer. The key aspect of such interaction is the balance of risks and obligations between the parties.

Regardless of the chosen scheme, the contract imposes specific obligations on the broker, including acquiring the specified goods from the foreign partner, handling customs clearance, and, in most cases, managing logistics and paying all related delivery fees.

Advantages of Importing via a Broker's Contract

The main advantages of importing goods via a broker's contract include:

• no risk of violating currency legislation if the parties choose the national currency of the Russian Federation for settlements;
• no risk of customs control being conducted against the client, as the buyer is not a participant in foreign trade;
• the customs broker handles negotiations with foreign suppliers;
• customs duties are often not reassessed after the release of goods, as this responsibility lies with the customs broker;
• the customs broker handles all product declarations, shielding the client from these issues;
• time savings;
• the customs broker manages the delivery of the goods;
• responsibility for declaring goods is transferred to the customs broker;
• no obligation to install specialized software required for customs clearance;
• no need to track changes in customs legislation;
• the broker can make online payments for customs fees;
• customs clearance is not the client's concern, and all responsibility lies with the broker;
• the customs broker handles the necessary permits for importing the goods.

The advantages of importing via a broker's contract are extensive, and most entrepreneurs purchasing goods from foreign suppliers interact with them through a customs broker. This approach resolves most import-related tasks and allows the client to receive cleared goods with minimal risk regarding the quantity and quality agreed upon in the contract.

Disadvantages of Importing via a Customs Broker's Contract

Interaction schemes for supplying goods via a broker's contract may also involve disadvantages that the parties did not anticipate when formalizing their relationship. Customs brokers often attempt to minimize their liability for improper contract performance and shift most of the responsibility to the client. Disadvantages include:

• inability to independently control the purchase of goods;
• potential increases in delivery timelines;
• high transaction costs, which increase the final cost of the goods;
• ambiguity in identifying the party responsible for executing the transaction.

Another aspect of importing via a broker's contract involves potential overpayments of taxes and customs fees. A customs representative may pay customs duties and taxes if the customs procedure for the goods requires it and if the contract between the declarant and the customs representative provides for such payment. Excessively paid or collected customs duties and taxes are refunded based on a decision by the customs authority exclusively upon a request from the payer (or their successor) to the account specified in the refund application.

It is important to note that the representative bears joint and several liability with the declarant or other represented persons for the payment of the full amount of customs duties, regardless of the terms of the contract between them. If the customs duties or taxes were paid by a person not obligated to do so, the payer must attach a document confirming the consent of the person who paid the duties to their refund to the application.[8]

Risks of Importing Goods Under a Broker's Contract

Business activity involves various risks. When importing goods under a broker's contract, the following risks may arise:

• improper service by the customs broker may lead to unforeseen losses or damage to goods, which the client must bear;
• in the event of disputes or late payment, the broker may prevent the client from accessing the acquired goods;
• the goods may be seized, arrested, or confiscated during customs clearance, and the client may be unable to participate directly in resolving the conflict with customs authorities.

To eliminate or minimize these risks, it is essential to reflect all party obligations, consequences, and liability measures in the contract.

Disputed Issues in Supplying Goods via a Broker's Contract

Any interaction between business participants can lead to disputes, including in foreign trade. Regarding the supply of goods via a broker's contract, several important aspects frequently arise in practice.

In Case No. 88/2012 of the ICAC at the RF CCI, there was a lack of clear understanding between the parties regarding payment, including the payment of customs duties and fees. While a contract with a customs broker simplifies delivery and payment of duties, the parties must clearly define the amount, procedure, and deadlines for the buyer's payments and the responsibilities of the seller or broker. In one case, the plaintiff[9] sought judicial protection, believing they had not received funds. The defendant did not contest the debt but believed they were only required to pay after receiving funds from the final buyer. Under the contract, the seller paid Russian customs duties, taxes, and additional clearance services through the buyer. The ICAC established that the plaintiff had made the payment in performance of the contract. The price of the goods was set on DDP Moscow (INCOTERMS 2000) terms and included the cost of the goods, insurance, marking, export formalities, transportation to the Russian border and to the unloading point, Russian taxes and fees, and customs broker services. The contract explicitly stated that customs taxes, fees, and broker services were to be paid by the seller (the plaintiff). The ICAC granted the claim for the debt for the supplied goods and penalties.

Case No. 164/2003, considered by the ICAC at the RF CCI, concerned the distribution of liability in supply via a broker's contract. Parties must clearly define who is responsible at each stage. Failure to coordinate liability can lead to misunderstandings. Since purchasing via a broker involves several contracts, they must align with one another to avoid shifting liability to an innocent party. For example, if the contract with the broker does not specify that the defendant (as the supplier) can be held liable for penalties or other sanctions for breach of supply obligations, claims for damages must be dismissed.[10] In this case, the defendant's claim for reimbursement of fines paid for breaching supply obligations to a client in South Korea (for whom the goods were intended) could not be granted because the defendant failed to provide convincing evidence regarding the grounds and amount of losses, and the broker's contract did not properly address this point.

Many beginning entrepreneurs in the foreign trade sector choose to import goods under a broker's contract. Additionally, market participants who do not wish to manage foreign trade operations but require delivery from foreign partners — or those who lack customs experience — utilize these services.

In most cases, the listed advantages make the broker's contract the deciding factor for interacting with foreign partners. However, proper formalization and a thorough review of the contract terms with the customs broker can resolve many challenges and minimize risks associated with imports and interactions with the broker.

_______________________________

References

[1] Item 1 of Article 401 of the EAEU Customs Code.

[2] Chapter 55 of the EAEU Customs Code.

[3] Chapter 60 of the Customs Regulation Law.

[4] Item 2 of Article 401 of the EAEU Customs Code.

[5] Concluded in Kyoto on May 18, 1973. Russia acceded to this document via Federal Law No. 279-FZ dated November 3, 2010, On the Accession of the Russian Federation to the International Convention on the Simplification and Harmonization of Customs Procedures of May 18, 1973, as amended by the Protocol Amending the International Convention on the Simplification and Harmonization of Customs Procedures of June 26, 1999, with the exception of Special Annexes. The document entered into force for Russia on July 4, 2011.

[6] Item 1 of Article 1005 of the Civil Code.

[7] Article 990 of the Civil Code.

[8] Clarification of the FCS of Russia, On the Procedure for Refunding Excessively Paid or Collected Sums of Customs Duties and Taxes in Cases Where Funds Were Paid by a Customs Representative.

[9] Decision of the ICAC at the RF CCI dated May 20, 2014, in Case No. 88/2012.

[10] Decision of the ICAC at the RF CCI dated November 5, 2004, in Case No. 164/2003.