If you are bothering to read this blog, you likely know that most goods entering the United States are appraised on the basis of transaction value, which is the total price paid or payable for the merchandise when sold for export to the United States. For most transactions, that means the invoice price. But, the invoice price is usually based on some underlying assumptions about the nature of the goods. For example, if I order 1000 buckets for $250, I am doing so with the expectation that the buckets will actually hold water without leaking. When I enter the buckets, I will declare $250 as transaction value because, at that point, I still think the buckets will not leak. Customs will assess duty on the buckets using $250 as the value. In the ordinary course, that is how things should work.
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Every now and then, things go haywire; and the buckets leak. Now what?
The customs regulations provide an opportunity to secure a refund of the excess duties paid on the full value as compared to the duties that would be owed on the leaky buckets. That opportunity is set out in 19 CFR 158.12(a) as an "Allowance in Value." The Court of International Trade is dealing with a claimed allowance in BRAL Corporation v. United States, in which the Court has recently denied a motion for summary judgment.
The issue in the case is the value of plywood from China. After importation and after it was used to make rolling doors and doors panels for delivery vehicles, the plywood started to delaminate. It was determined that the delamination occurred as a result of a subcontractor substituting inferior glue in the manufacturing process. This caused the U.S. door seller to get complaints and warranty claims from customers. As a result, BRAL, the importer, protested the liquidations and sought a value allowance and a corresponding refund of excess duties. Customs denied protest, leading to the litigation.
In court, as is often the case, both parties moved for summary judgment. That means the parties believe there are no material facts in dispute and that the judge has the information necessary to apply the law and make a decision. The facts, however, were not that clear.
An importer seeking a value allowance has to prove three things.
- The existence of a contract for defect-free merchandise;
- That the defect existed in the subject entries; and
- The difference in value as a result of the defect.
On the first point, there was no written contract between the buyer and seller that specified the merchandise should be free of defects. There was, however, a period of time in which the buyer evaluated a number of samples to determine whether the plywood was appropriate for the intended use. BRAL argued that the testing and evaluation of samples shows its desire for defect-free plywood that was suitable for its intended use. The Court did not agree. Rather, it found that the lack of a written contract creates a question of fact as to the terms of the agreement between the parties.
This is a really good example of why commercial agreements sometimes contain a crazy level of detail for things that seem obvious. Lawyers who draft and review international purcahse agreements should right now be checking that all of their agreements contain language stating that "Merchandise shall be delivered free of defects, including latent defects, and suitable to its intended use." Or something similar. I took Contracts a very long time ago and that is not my area of expertise.
On the second point, plaintiff did not provide evidence showing that the defects were present in the protested entries. Plaintiff's position was that all of the merchandise after the date of the changed glue was defective and, therefore, could be linked to the subject entries. There is support for that in a prior case called
Fabil in which the Court of Appeals held it was not necessary to show that the defect was present in specific entries where it was established that the defect as present in all entries. In this case, the parties did not agree that all of the plywood was defective. The United States pointed to entries that were not the subject of claims for allowances as evidence that perhaps not all entries contained defective merchandise. That created another material fact in dispute.
On the third point, the plaintiff introduced evidence to show that the plywood as improted should be valued as salvage at 18% of its original value. This value seems to be based on a statement from a domestic lumber supplier to BRAL's U.S. customer, who made the roll up doors and door panels. But, the relevant deposition testimony contained potentially conflicting information. As a result, there is an additional question of fact to be resolved.
Given the presence of questions of fact, the Court found this is not ripe for resolution via summary judgment. The Court denied both motions and ordered the partiers to prepare for trial.
The upshot of this is that claims for allowances are going to be subject to scrutiny before Customs cuts a refund check. The three elements are critical and it is important to have a detailed set of documents showing that all three elements can be proven. Despite it seeming obvious, Customs need not assume that the importer expected to receive defect-free merchandise. The burden to prove that falls on the importer.
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