Importers, Be Sure to Remember Your Surety: Court Ruling Highlights Need to Protect Against Additional Import Costs
Most importing companies know that U.S. law requires "reasonable care" in researching and declaring the tariff number, value, duty and all other import data. This standard is comparable to "due diligence" and it applies to the importer, not the customs broker or freight forwarder. Importing companies that do not meet this standard (and maintain some supporting documents to prove it) can be subject to substantial penalties from U.S. Customs and Border Protection ("CBP").
In addition to this legal obligation to the U.S. government, importers also have a contractual obligation to a surety company. All importing companies are required to purchase a bond from an approved surety company and submit it to CBP, even if the imported merchandise is always duty free. The bond guarantees that all charges will be paid and the importer agrees that the proper procedures will be followed for the imported goods. If the importer fails in some respect, CBP issues bills. If those bills are not paid by the importer, the surety pays CBP. The surety can then recover all those amounts from the importer, plus all the surety's expenses and legal fees, under the indemnity agreement that all importers are required to sign when they purchase their bond.
When CBP files a lawsuit to collect duties or penalties, it often sues both the surety and the importer to ensure that it will be able to collect the entire claimed amount. In the recent case of United States v. World Commodities Equipment Corp., No. 07-00263, slip op. 08-35, the U.S. Court of International Trade ("CIT") allowed CBP to maintain a lawsuit against a surety alone - even when the importer was not a defendant in the suit. In that case, CBP alleged that World Commodities made incorrect statements on its import documents. CBP filed suit against both World Commodities and its surety, Hartford Fire Insurance Company. However, lawyers for CBP made an error by failing to serve the complaint on World Commodities within the required period of time. World Commodities argued that the lawsuit against it should be dismissed and the CIT agreed. The surety argued that if the CIT dismissed the lawsuit against the importer, it also should dismiss the suit against the surety because without the importer in the case, CBP could not prove a violation of the law. The CIT disagreed and allowed the lawsuit to continue against Hartford alone because the court found that CBP always has the option to file a complaint against either the importer or the surety or both.
Most importers would be tempted to celebrate a governmental error which allows them to escape costly litigation. However, because of the indemnity agreement that the importer must have signed when it bought its bond, it seems likely that the importer still will be required by that contract to pay to the surety any amounts that CBP recovers (up to the bond amount). PLUS the indemnification agreement almost certainly provides that the importer also has to pay the surety for any attorneys' fees and other administrative costs associated with this claim. These costs can substantially increase the total amount owing over and above what was originally claimed by CBP. If an importer can still face substantial liability after being granted release by the court, this situation should be strong reminder to all importers of the need to pay attention to the obligations and potential liability to the surety.
To protect against unnecessary costs and liability, importers should:
- Remember that any time a dispute arises with CBP, the agency can make a demand against the surety for payment before it is resolved. If the surety pays, the importer could end up owing the surety not only the duty or penalty amounts originally in dispute with CBP, but also these additional administrative and attorney's fees.
- Review the indemnification agreement. Some indemnification agreements also give the surety lien rights against the importer's property and the right to take possession of the imported merchandise.
- Consider contacting the surety in the event of a dispute with CBP. Importers in a dispute with CBP should always consider contacting the surety to advise that the matter is being contested under the proper CBP procedures and that there is no reason for the surety to make any payment.
- Review their bonds every year when renewed to be sure that the coverage amount is up to, but no more than, the amount required by the CBP regulations.
These steps can help limit the exposure of an importing company, so that if the company has an argument with CBP, the issue does not cost even more (win or lose) than the company anticipated when it decided to fight.