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0806

BRIEF NOTE ON COMMERCIAL CONTRACTS (by Mrs. Hema Krishnamurthy ,FCA., Chartered Accountant & Guest faculty IIM-B., ICAI., Essae Tapmi, IFIM, IIIT-B)
1. 2. 3. 4. INTRODUCTION LEGAL FRAME WORK WHAT IS A CONTRACT CONTRACT OF SALE 4.1 4.2 5. ROLE OF STANDARD DOCMENTS AND SYSTEMS BASIC ELEMENTS OF A CONTRACT OF SALE

CONTRACT OF CARRIAGE 5.1 5.2 5.3 CARRIERS LIABILITY CHARTER PARTY MULTI MODAL TRANSPORT

6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

CONTRACT OF INSURANCE PAYMENT RELATED CONTRACTS HARMONISING THE VARIOUS CONTRACTS PERFORMANCE AND REMEDIES FOR BREACH OF CONTRACT PRE-CONTRACTUAL LIABILITY, LETTERS OF INTENT & OTHER PRELIMINARY AGREEMENTS RESOLVING DISPUTES INTERNATIONAL TRADE ORGANISATIONS AND THEIR ROLE INCOTERMS MODEL CONTRACTS CONSLUSION

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1204 1. Introduction: Trade negotiations are often based on a gentlemans agreement. Consider this humorous definition of a gentlemans agreement: An unwritten agreement, not a contract, between two parties neither of which may be a gentleman under which each party believes the other side is fully bound, while its own performance is strictly optional. Even though informal means of contracting may be customary, businessmen should be conscious of the dangers. When a dispute arises, reference to the contract is the first recourse of the parties. If the contract is silent or is unclear with respect to the element in dispute, the parties may have to enter into litigation or arbitration and this can prove to be expensive. Hence, need for a formal contract. With the opening up of economies, international trade is flourishing. This makes it all the more important to address the risks associated with trade through proper contracts. Some of the risks are listed below: a) b) c) d) e) f) g) h) i) Misunderstanding (as to identity of goods, delivery, costs-sharing, taxes etc) Payment (when, how, where) Quality (specifications, tolerance) Non-performance (expectations, consequences) Delays (Time, risk, force majeure, hardship) Transit (Loss, damage, insurance) Title (Indemnity) Confidentiality (Disclosures) Foreign exchange rates (fluctuations)

Trade may be in goods or services or other intangibles such as intellectual property (i.e., patents, licenses, trademarks, goodwill) or financial products (i.e., securities, funds, stocks, bonds). This chapter is intended to give an overview of the law and commercial aspects of trade in goods. Each contract often gives rise to several independent and inter-dependant contracts. For eg. A basic contract of sale of goods may give rise to contracts of Carriage, insurance, employment, labour etc. While each is an independent contract, they come into existence because of the sale contract. Apart from contracts for sale or purchase of goods or services, there may be contracts of agency, distribution, bailment, indemnity, guarantee, hire purchase, lease etc Legal framework: Domestic and international trade laws have evolved over time around practices, customs and traditions. As such they do not interfere with trade practices and step in only when the contract is silent about any issue. Their main purpose is to specify prohibitions and provide fillers to assist parties on issues they have not covered in their contract. The Indian Contract Act, 1872 is the outcome of the New York Convention on contractual laws held in 1871 and has withstood the test of time, with very few changes. As a general rule Contracts need not be in writing. However, some contracts like those dealing in properties and contracts with the State or Central Governments are required to be in writing as per the requirements of specific enactment. To avoid disputes, unnecessary litigation and mitigate risks especially where the consequences can be significant, traders enter into written contracts, as opposed to oral contracts. The other relevant enactment in India relating to commercial contracts are The Negotiable Instruments Act, 1881, Sale of Goods Act, 1930, Arbitration and Conciliation Act, 1996 & very recently Information Technology Act, 2000.

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1204 In international trade, parties should be clear as to which countrys laws and dispute settlement procedures will apply. There are many International organizations that have issued guidelines, rules and model contracts to simplify and standardize international contracts. Some of them are discussed later in this chapter. 3. What is a Contract?

An agreement enforceable by law is a contract. For an agreement to be a contract there are three essential elements. They are - an offer, an acceptance and consideration. Agreements should be made by competent parties, for a lawful consideration and purpose and with a free will (not under coercion etc.), in order to be enforceable contracts.

C AC EP

C ON T R AC T

By competent parties For lawful consideration For lawful purpose With free will

FE

TA

OF

C O N S ID E R AT IO N

NC E

4.

Contract of sale of goods:

Usually the seller makes available a catalogue and brochure of his products with certain list of prices, through advertisements, trade fares, mailers or through other media. Thereafter he receives an inquiry for a certain amount of goods of a specified quality. Sometimes the buyer may float a tender, for his requirements, which is an invitation to offer. At this point the seller may issue some kind of an Offer, including a price quote. A common method is for the seller to send a proforma invoice. This document specifies the basic terms and conditions of sale including the price, delivery, and payment terms. Since the proforma invoice is meant to mirror the commercial invoice, when the transaction is completed, the likelihood of disputes is reduced. The buyer can see in the proforma invoice exactly what he will pay for if he goes through with the deal. Often the buyer issues his own purchase order, which mirrors the proforma invoice. In law this offer by the seller should receive the buyers unconditional acceptance. If the buyer writes back stating that he wants certain changes in the offer, this would amount to a counter offer. Thus it would not be an acceptance and hence no contract can come into force. Normally the proforma invoice does not contain any legal stipulations. Hence it is appended by general conditions of sale thereby providing a detailed legal framework in support of the contents of the proforma invoice. This exchange of proforma invoice and purchase order is just one way to form a contract. It is of course possible to draft a specific contract of sale for a particular transaction between the parties. The following exhibit gives an idea of how a contract comes into force.

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1204
CONCLUDING A SALE CONTRACT Advertising 1

Buyers enquiry 2

Sales offer

Purchase order/ 4 Buyers Counter offer

Revised proposal by Seller

Purchase Order

Acknowledgement of Order

Contract 4.1 The role of standard documents and systems

Traders have learnt to manage the risks associated with domestic and international trade through documentary systems and customs, which specifies the rights, costs and responsibilities of both the parties into documentary equivalents. Thus a contract of sale involves the following: a) The real shipment of physical goods and b) Exchange of documents between the parties

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1204 It is just as important for the seller to provide the correct documents as providing the correct goods. The key documents in this scheme are as follows:

a) Contract of sale Purchase order/Accepted proforma invoice


b) c) d) e) Transport document Bill of Lading, Lorry Receipt, Railway Receipt, Air Way Bill Payment related documents (LC, Bills of exchange etc.) Insurance document (Policy, Certificate or Cover Note) Quality Certificate/Inspection Certificate

While there are advantages to this documentary system there are also inherent risks. Paper documents are particularly susceptible to loss, forgery, alteration or simple misrepresentation. Hence it is important that the seller prepares the proper documentation after dispatch of goods and ensure proper delivery of them. Similarly the buyer should examine the documents carefully before parting with his money. Transport Documents Commercial Invoice Insurance Certificate Inspection Certificate

Documents By Seller

Bill of Exchange

Sale Contract

Pro Forma Invoice Purchase Order

Documents By Buyer
Payment Documents/ LC etc. Tax Declaration/ Documents Purchase Order

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1204
4.2 Basic elements of a contract of sale of goods For a contract of sale to come into existence it has to be sufficiently precise with respect to the following: a) Clear description of the goods, quality, quantity etc. b) Price and payment terms c) Delivery terms including packing, invoicing, transportation instructions. The key clauses in sale contracts may be categorized as Special conditions which are peculiar to a particular transaction General conditions which are applicable to all contracts generally.

and

insurance

The following are some of the key clauses:

a) Preamble; parties to the contract:


These introductory types of clauses generally identify the parties and the effective date of the contract. It is important to ensure that the parties and their correct legal status are precisely mentioned. Individuals signing the contract on behalf of organisations should have the power do to so. It is also important to assert who they are (traders, manufacturers, agents etc) to enable parties to know the importance of the terms of the contract. For example if the seller of certain chemicals knows that the buyer is a pharmaceutical manufacturer, he will realize the over-riding critical importance of quality.

b) Description of goods:
The intention of the parties to the contract, with regard to the specifications of the goods should be clearly stated. If this clause is vague and there is a misunderstanding, the contract itself may be rendered void. Care should be taken to clearly state the description, quality standards, tolerances and packing instructions. For example if the buyer mentions the international classification code of the goods (known as HSN Harmonised System Nomenclature given by World Customs Organisation), the problems and disputes relating to classification for import, export, customs & excise formalities can be mitigated.

c) Pre-shipment inspection and examination of the goods:


In custom made goods and large contracts it is advisable to specify in the contract that the seller must notify the buyer within a reasonable time before the shipment, that the goods are ready for inspection.

d) Price:
Price may be stated as inclusive of all taxes, which means that this includes the basic price and all the applicable taxes and duties, such as Excise duty and sales tax; Or it may be stated as basic price + duty/taxes as applicable on the date of dispatch. Where the contract is silent on whether the price is inclusive of taxes, the seller has a right to claim from the buyer any additional tax by way of Customs Duty, Excise duty, sales tax or purchase tax that may be levied after the contract has been entered into. Similarly the buyer can deduct from the price any remission or reduction in the duties and taxes that are announced after the contract is entered into. This is a special provision contained in Section 64A of the Indian Sale of Goods Act.

e) Payment Terms :

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The mode of payment should be clearly stated This could range between advance payment, payment against LC (Letter of credit), documents through bank against payment or against acceptance (where credit is allowed), open account and clean credit. If there is 1204 an intention of collecting interest on any delayed payments, the rate of interest and the time period should be agreed upon.

f) Title to goods :
Under the Indian Sale of Goods Act, 1930, a sale is complete when the seller transfers the property in the goods to the buyer. The property in the goods is transferred when the parties intend it to be transferred. The intent is to be ascertained from the terms of the contract, conduct of the parties and the circumstances of the case. The Act provides for rules to be applied to ascertain the intention, if the same is not spelt out in the contract. In international contracts it is important to ascertain the provisions of the relevant law of the country, normally where the goods are situated. This is very important from the angle of passing of risk. For example the contract may provide that the Property in the goods shall not pass till the payment is made. In this case the seller continues to be the Owner of the goods, till the payment is made, even though the buyer may be in possession of the goods. There is a general misunderstanding as to Title and Risk. In law, Title can be with one and risk of loss with another (eg. Safe keeper of goods does not have the title but bears the risk of loss).

g) Delivery, costs and transfer of risk:


The contract has to clearly state the time and place of delivery, the mode of transport, and who has to bear the cost of transport. Similarly the contract has also to clarify whether transit insurance has to be covered and who has to bear the cost. Generally trade terms such as CIF, FOB is used to indicate these aspects. In international contracts, the trade generally follows INCOTERMS (as defined by International Chamber of Commerce). The same can be used in domestic trade as well. INCOTERMS of ICC are discussed separately.

h) Non-conformity:
Normally products with tolerances, which are reasonable, or within the range of usages or common practices shall not be deemed to be non-conforming. The contract has to specify what would be deemed to be non-conforming. The buyer must notify the seller in writing of any non-conformity within a reasonable period of time. Similarly, on the sellers side, the goods are expected to conform to the requirements normally they are meant for (known as implied warranty).

i) Force Majeure:
Failure of performance by either party is excused in the event of Force Majeure, which in essence amounts to reasonably unforeseeable and unavoidable circumstances which make it substantially impossible for a party to fulfill its obligations. However, it is important that the concerned party notifies force majeure to the counterpart immediately.

j) Applicable law and arbitration:


In case of a dispute the Courts that will have the jurisdiction may be agreed upon. Alternately it may be agreed that any dispute will be referred to an arbitrator. In India, we have the Arbitration and Conciliation Act, 1996. This Act follows the UNCITRAL(United Nations Commission on International Trade Law) Model Law on International Contracts as recommended by UN General Assembly. This provides a unified legal frame work for the fair and efficient settlement of disputes arising in international commercial relations. In addition there may be certain industry specific conditions.

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1204 5. Contract of Carriage : A contract of carriage is entered into between the seller or buyer and the carrier (transport company). The carrier may act through an agent or broker (e.g. freight forwarder). Legal recourse for damage to the goods during transport may be significantly affected by whether a freight forwarder was contracting as an agent or as a principal. The main modes of transport are Sea, Air, Rail and Road and increasingly by Multi Modal Transport (Containersised Cargo). The terms and conditions of transport contracts are generally found in a transport document known as a bill of lading, airway bill, Railway receipt, lorry receipt or a multimodal transport document. This document plays a triple role in the sales transaction, acting as 1) transport contract, 2) evidence of receipt of goods, and 3) document conferring the right to control delivery of the goods and as document of title to goods. There are several international treaties that apply to the various modes of transport, which state the extent and limitations of the carriers liability for goods which are lost or damaged. Some of them are listed below : Sea transport The Hague-Visby Rules (1968), Hamburg Rules (1978) Air Transport Warsaw Convention Multimodal Transport UN Convention on the International Multimodal Transport of Goods(1980). In India we have the Multi Modal Transport Act (1993) 5.1 Carriers Liability Law and the different legal conventions would state in general terms the extent of the Carriers duties and responsibilities. The general principles are as follows : Monetary limit to liability claim Carriers responsibility Carriers immunities such as - force majeure - defects in the goods/packaging causing the damage - negligence of employees - Procedural limitations The extent of these carriers immunities, protections & limits to liability make it necessary to ensure that sufficient insurance coverage is taken. 5.2 Charter Party:

A buyer or seller may wish to transport certain merchandise by chartering, or hiring, an entire vessel or part of a vessel. The contract for the lease of the vessel is known as the charter party. There are several types of such charter party such as Voyage Charter, Time charter, Space Charter etc. The charterer may himself sub-charter the vessel. In essence, the charterer becomes a commercial intermediary between the shipowner and the ultimate receiver of the bill of lading. The holder of the bill of lading in such cases should know who to sue if the goods are delivered in damaged condition or have been lost.

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1204 5.3 Multimodal transport document: When there is more than one form of transport, such as transport by road cum sea, a single transport document may be issued by the freight forwarder, known as the multimodal transport bill of lading. In the absence of an international treaty on this subject, freight forwarders are tending to abide by the UNCTAD/ICC Rules on Multimodal Transport Documentation w.e.f.1.1.92. In India, it is governed by Multi Modal Transport Act, 1993. 6. Contract of Insurance

Transit Insurance: Basic risk of loss may be due to collision, fire, damage resulting from theft, pilferage, improper handling of goods. In addition there may be reasons such as War, riots and strikes (as in socalled SRCC clauses coverage for Strikes, Riots, and Civil Commotion) Insurance contracts must clearly state the following : Basis of cover clearly identified conditions From place of commencement of insurance To Place of termination of cover Extent of cover Usually cover is for 110% of the value of goods (the extra 10% is meant for the potential profit from the transaction to the buyer) Marine insurance is the generic term used for insurance covering international transport of goods, even in cases where ocean transport is not a pre-dominant leg in the transport chain. Transit/marine insurance is generally provided either in terms of a specific policy or certificate (if payment is on LC terms, care should be taken to provide the one which is required to be provided under the LC), or by open declaration or cover, under which the insurer covers an indefinite number of future shipments and declares each shipment to the insurer as they are made. 7. Payment related contracts:

From the angle of the seller, the payment mechanism serves three purposes: (a) Means of Payment (b) Security mechanism (c) Finance device. The choice of the payment mechanism would depend on the sellers credit policy, the value of the transaction, and the perceived risk. It ranges between advance payment to clean credit. Between these limits there could be payment options such as Letter of Credit, Documents through bank against payment (DP terms) or Documents through bank against acceptance (DA terms). In a letter of credit contract, there are two different independent contracts based on the underlying contract of sale. The following illustration describes the operation of an LC:

BUYER Contract for opening LC BANKER

Contract of sale

SELLER L.C. Contract

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1204 LC terms as a payment mechanism is common in international trade. Letters of Credit also called Documentary Credit provides security for both the Seller and the Buyer. The seller is assured of payment upon production of constructive evidence of shipment (the documents specified under the LC) and the buyer is assured that the bank will not pay unless the seller has met the documentary requirements specified by the buyer. International Letter of Credit practice is governed by a set of rules produced by the ICC commonly known as UCP 500 (Uniform Customs and Practice for Documentary Credit). This system is used both in international and domestic trade as all banks abide by these rules. There are two fundamental principles of documentary credit practice: a. Independence of the credit from the underlying contract since the LC contract is completely independent of the underlying contract, the payment must be made to the exporter when he fulfills the documentary obligations regardless of disputes connected to the underlying contract. Strict compliance the terms of the LC must be strictly adhered to. Any deviations can be deemed to be a discrepancy and the bank need not make the payment.

b.

It is very important to understand the implications of the UCP 500 rules before opting for LC terms. 8. Harmonising the various contracts:

Since many contracts such as insurance, transport, labour, LC contracts are entered into as independent contracts based on the underlying sale contract it is necessary to harmonise these contracts. For example, if the sale contract has specified insurance coverage as 120% whereas the insurance is covered only for 110% of the invoice value as per the insurance contract, disputes will arise. Hence it is necessary to have a comprehensive sale contract and based on this to enter into the other related contracts. 9. Performance and remedies for breach of contract

The remedies for a breach of contract will vary according to the: 1) Terms of the contract The contract may itself specify particular remedies, as for example, liquidated damages in the event of a particular default or breach, interest on delayed payments etc. In law a breach can be a Condition or a Warranty A Condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right (not an obligation) to repudiate the contract, by the aggrieved party. A Warranty is a stipulation, which is only a collateral term to the main purpose. A breach of this gives only a right to claim for damages but not a right to cancel the contract. Whether a stipulation is a condition or a warranty is to be decided in each case depending on the construction of the contract and the conduct of the parties. A stipulation may be a condition though called a warranty in the contract and viceversa.

2)

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1204 3) The nature and gravity of the breach The remedies available to an aggrieved party will depend on the characteristics of the breach. In general, most legal systems seek to avoid creating harsh remedies for minor breaches. However, some breaches are so serious or flagrant that the aggrieved party should have access to the full range of possible remedies, such as those of consequential damages. Two concepts that may be applied in this regard are: Substantial performance - if a party (the seller, for example) has performed the bulk of his obligations, but has failed to perform only to a small degree or in unimportant matters (e.g., short-delivery by a commercially insignificant amount), the aggrieved party may only be allowed the remedy of a price reduction. (For example, supply of 99 cartons of cigarette against an order of 100 cartons). Fundamental breach if a breach is so serious that it deprives the aggrieved party of the intended benefits of the contract, the aggrieved party may be allowed to terminate the contract and claim direct consequential losses. (For example, supply of defective tyres to a car manufacturer, resulting in passengeraccident claims).

Types of remedy available Though the law does not insist, the remedies should better be spelt out in the contract. In case the contract is silent on this, the applicable law will have to be referred to. For example, depending on the circumstances, in India, it may be the Indian Contract Act, Sale of Goods Act or Specific Relief Act. 1) Money damages An aggrieved party may be entitled to receive money in compensation for the contractual breach. The compensation may be in the form of a reduction in the price or a lump-sum damages payment. If the breach was foreseeable and likely to cause further or related damages (such as the lost sales occasioned by the shutting down of the aggrieved partys manufacturing operation), the aggrieved party may be able to obtain consequential damages as compensation for the results of the breach. However, the aggrieved party shall take steps to mitigate damages, e.g., make reasonable efforts to reduce the extent of damages (thus, a buyer receiving a shipment of potatoes of non-contract quality, must take reasonable efforts to sell them as they are, at the best possible price in the nearest market rather than let them rot). Termination If the breach is a particularly serious one (that of a condition) it entitles the other party to terminate the contract in addition to claim damages. Specific performance A party that has not performed according to the contractual obligations can be required to do so. A court may issue an order that the party fulfill the contractual obligations. Normally specific performance may be only available when money damages are not an adequate remedy. (For example, delivery of a particular painting from the legal heir of the painter). In the case of substitutable contract of goods, the buyer is expected to first terminate the contract and seek to buy the goods elsewhere (known as risk purchase). Specific performance is not often resorted to in practice on practical grounds.

2) 3)

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10.

1204 Pre-contractual liability, Letters of intent and other preliminary agreements:

In most cases, statements made during negotiation will not be contractually binding (unless they are later incorporated into the contract). Courts have generally allowed parties some freedom to negotiate without the fear of incurring pre-contractual liability. However, there are several exceptions to this rule, mainly dependent on the actual conduct of the parties subsequent to pre-contractual agreements. If a contract thus results and the pre-contractual statements made by one party turn out to have been misleading, the offending party may be held liable for the consequences of its misleading statements as if a contract was in existence. While it is not possible to state a single, common legal principle that will apply in all jurisdictions, traders should apply common-sense notions of good faith to their pre-contractual negotiations and should take care not to make statements upon which the other party is likely to rely to its detriment. In certain complex transactions, the parties may wish to come to a preliminary agreement, sometimes called an agreement to agree, which may or may not be enforceable, depending on circumstances and applicable law. Such an agreement may take the form of a letter of intent, memorandum of understanding, heads of agreement, agreement with open terms, commitment letter or binder. These preliminary agreements may be necessary when a certain major issue (such as obtaining bank approval for a loan, or obtaining a government authorization) is not yet known or definite. The preliminary agreement itself may be useful in getting a bank officer or government official to grant an approval or authorization. Another possibility is that the parties will use the preliminary agreement to resolve certain basic issues, while continuing to negotiate on more complicated matters. One way of avoiding this problem is to include express language in the agreement to the effect that this document is not intended to constitute a binding contract. Or this document is only intended to indicate the parties willingness to negotiate and nothing more. Despite these, the subsequent conduct of the parties is very important, attracting the principle known as quantum meruit, whereby compensation may have to be paid for the expenses incurred. It should be clear from the above that an instrument such as the letter of intent should be used with discretion. If the document is too vague or contains too many disclaimers, banks or government officials may not wish to rely on it. However, if it is highly-detailed and contains no disclaimers, it may be held to bind the parties as a valid contract. 11. Resolving disputes:

The contracting parties in any commercial contract are generally free to agree how to resolve contractual disputes. This agreement may be built into the contract itself or may be separately agreed upon. As long as the method of settling the dispute is not unlawful, contract-laws do not interfere with the same. For example, contracting parties cannot agree to settle disputes by the toss of a coin, as it will amount to wager which is void in law. Similarly they cannot agree to settle the dispute through a minor, as a minor is incompetent to enter into contracts. 12. International Trade Organizations and their role Many international bodies both private & supra-national try to provide rules, regulations, guidelines etc. for smooth international trade. However, most of them are voluntary ie., unless the contracting parties agree for the same, they are not binding. For example, unless the contracting parties specify that INCOTERMS of ICC are binding, these will not apply. A few important organizations/treaties are:

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1204 A i) Supra-National organizations: The United Nations Commission on International Trade Law (UNCITRAL) (Vienna) The United Nations International private law body is UNCITRAL. UNCITRAL works primarily on instruments intended to become a part of international or national law, such as treaties, conventions, models and uniform laws. Perhaps UNCITRALs key contribution to international trade has been the Vienna Convention on the International Sale of Goods, which came into force in 1988. UNCITRAL Rules for international commercial arbitration provide an alternative to other arbitral and litigation systems. UNIDROIT (Institute for the unification of private Trade Law) (Rome) Unidroit has been active in studying the international private law relating to leasing, agency, franchising and inspection contracts, with a view to proposing international legal conventions where necessary. One of their recent publication is PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS WORLD CUSTOMS ORGANIZATION (Brussels) A global union of customs organizations, which works together to advance the efficiency of the customs process. WCO has given us the HSN (Harmonised System Nomenclature) a 6 digit code for classification of goods. The INTERNATIONAL TRADE CENTRE (ITC) UNCTAD This is the central agency of the United Nations system for export assistance for developing nations. ITC conducts a very wide range of training programmes for exporters and importers as well as local chamber of commerce trainers. The ITC also publishes a full range of export guides focusing on specific areas of trade, such as packaging, marketing or promotion. WORLD TRADE ORGANISATION (Geneva): Separately dealt with. Non-Governmental organizations : INTERNATIONAL CHAMBER OF COMMERCE (ICC), is a world business organization, based in Paris. It has a very wide membership of organizations and associates in over 140 countries. It enjoys a permanent seat in UN. One of their important roles is to develop international commercial, legal and banking standards. They issue guidelines, rules, model contracts and handbooks to standardize and facilitate international contracts. By using these standard clauses, parties can avoid misunderstanding and lengthy legal recitations. For example, ICC Incoterms 2000, gives standard delivery terms such as FOB, CIF, giving definitions for each, the responsibilities of contracting parties etc. Similarly the ICC has developed the UCP 500 which gives the rules that govern global documentary (letter of credit) practice. The UCP 500 is followed by all the banks in the world, even those who are not members of ICC. Very recently they have come up with eUCP regarding electronic Letters of Credit. International Air Transport Association (IATA) - (Montreal and Geneva) The trade organization for the worlds airlines, IATA has had an important role in simplifying and standardizing air transport documents, such as air waybills. International Federation of Freight Forwarders Associations (FIATA) (Zurich) A world organization which promotes standards and quality in international freight forwarding. Certain FIATA standard documents, such as the FIATA Bill of Lading, have become important references in international trade. FIATAs customs clearance manual is a professional reference in transport circles.

ii)

iii)

iv)

v) B i)

ii)

iii)

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iv)

1204 International Maritime Committee (CMI Comite Maritime Internationale) (Brussels) An organization founded in 1987 to promote the unification of maritime and commercial law, maritime customs, usages and practices. Between 1910 and 1971, the CMIs work gave birth to 18 Brussels conventions and protocols on maritime law, including those key pieces of international regulation of bills of lading generally referred to as the Hague and Hague-Visby Rules. In 1990 CMI has come out with Rules for Electronic Bill of Lading for paper-free Bills of Lading. International Road Transport Union (IRU) (Geneva) An international federation representing commercial operators of road vehicles, the IRU notably administers the TIR customs system which allows lorries or trucks sealed by customs officials to cross intervening national borders without having to undergo full customs formalities. This gets inter connected to WCO protocol on Cross-Border formalities.

iv)

Multilateral framework for world trade: the GATT and WTO The GATT and free trade After World War II there was a strong international consensus in favour of creating an international trade organization to implement barrier-free trade regime. From 1947 until 1995, the supposedly interim GATT (General Agreement on Tariffs and Trade) functioned very effectively as the co-ordinator of the multilateral trade system. The progressive strides of GATT gave way to the new World Trade Organisation (WTO), a formal organization to implement GATT and more. The World Trade Organisation The World Trade Organisation (WTO) replaces the GATT, as an administrative organization. While the GATT was primarily a set of rules regarding trade in goods, the WTO is a permanent institution with its own secretariat. While the GATTs scope of application was limited to trade in goods, the WTO also covers trade in services and traderelated aspects of intellectual property and arguable issues of labour and environment. The greatest contribution by WTO is that settlement of disputes under the WTO mechanism will be much faster and more automatic. This enables trade barriers to be overcome efficiently and quickly. The WTO also is now encompassing freedom of foreign investments and repatriation of profits. This means that it is even stepping into forex related issues. In other words, the WTO is trying to remove TQC (Tariff Restrictions, Quantity Restrictions & Currency Restrictions) amongst the member countries. 13. INCOTERMS (ICC) Incoterms are internationally standardised trade terms (such as FCA, FOB, etc ) there are 13 of them as of now, which enable exporters to quote prices that clearly allocate the costs and risks of international transport between seller and buyer. Insurance responsibilities (under CIF and CIP) and customs formalities are also covered by Incoterms. Incoterms are a sort of contractual shorthand that allows the parties to easily specify their understanding as to: 1. 2. 3. 4. the transport costs which the seller will cover; the point at which risk of loss will be transferred from seller to buyer; who must handle customs formalities and pay duties; and in the case of CIF and CIP, the sellers responsibility to provide insurance cover.

Incoterms govern certain responsibilities between seller and buyer under the contract of sale; they should not be confused with the allocation of responsibilities between shipper, carrier and consignee under the contract of carriage. The Incoterms cannot be expected to make up for a

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1204 contract that is not sufficiently precise. In many cases it is advisable to include in the sale contract precise details on exact place and method of delivery, loading and unloading charges, extent of insurance, and mode of transport. IT IS IMPORTANT TO NOTE THAT INCOTERMS DOES NOT DEAL WITH TRANSFER OF OWNERSHIP AND TITLE. (This will be dependent on national laws and other terms of the contract). The following chart gives the classification of the INCOTERMS (Revision 2000 ICC 560) Group E Group F Departure EXW Ex Works (..named place) Main carriage unpaid FCA Free Carrier (..named place) FAS Free Alongside Ship (..named port of shipment) FOB Free On Board (..named port of shipment) Main Carriage Paid CFR Cost and Freight (..named port of destination) CIF Cost, Insurance and Freight (..named port of destination) CPT Carriage Paid To (..named place of destination) CIP Carriage and Insurance Paid To (..named place of destination) Arrival DAF Delivered At Frontier (named place) DES Delivered Ex Ship (named port of destination) DEQ Delivered Ex Quay (named port of destination) DDU Delivered Duty Unpaid (named place of destination) DDP Delivered Duty Paid (named place of destination)

Group C

Group D

The full text of the Incoterms are far more detailed, precise and given in ICC 560 (R.2000 w.e.f. 1.1.2000). The advantage of using INCOTERMS : these allocate costs, risks and responsibilities between seller and buyer according to the provisions of 10 numbered articles, divided into two parallel series A for sellers responsibilities, and B for buyers responsibilities under each INCOTERM as follows: A Sellers responsibilities A1 Provision of goods in conformity with the contract A2 Licences, authorisations and formalities A3 Contract of carriage and insurance A4 Delivery A5 Transfer of risks A6 Division of costs A7 Notice to the buyer A8 Proof of delivery, transport document or equivalent electronic message A9 Checking packaging marking A10 Other obligations B Buyers responsibilities Payment of the price Licences, authorizations and formalities Contract of carriage Taking delivery Transfer of risks Division of costs Notice to the seller Proof of delivery, transport document or equivalent electronic message Inspection of goods Other obligations

B1 B2 B3 B4 B5 B6 B7 B8 B9 B10

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1204 ICC has also published ICC 620, Guide to Incoterms which gives a detailed analysis of each Incoterm, in addition to COMBITERMS (Cost allocation terms) & other connected information such as Rules for Electronic Bills of Lading by CMI etc. 14. MODEL CONTRACTS: Many Supra-national and private international organizations have tried to make contractual terms un-ambiguous and user friendly. Many of them (such as ICC) have come out with Model contracts (some of them listed under). Besides the above, organization such as FIDIC (Federation Internationale des Ingeneurs Conseils) have also come out with publications recommending standards and terms for large multi-national contracts involving supply of goods, services and turnkey contracts. These models, rules and guidelines basically help the contracting parties to be suspicion free of each others terms. This goes a long way in making contracts smooth and litigation free. The following articles should be incorporated while framing contracts. Care should be taken to avoid long legalistic sentences which can be confusing to the contracting parties. a. b. c. d. e. f. g. h. i. Entity Article Name & address of contracting parties Assertion Article Contracting parties asserting who and what they are Declaration Article Declaring the intention of the contract Objective Article Specifying the objective of contract Procedure Article The procedure contracting parties want to follow (with reference to models etc.) Applicable Law and Jurisdiction Dispute settlement Force Majeure Other details

As E-commerce and E-contracting are becoming popular, it would be useful to subscribe to memberships of trade organizations such as ICC who periodically publish updates on model contracts and suggested standards for contracting. A list of publications is given in Annexure I. 15. CONCLUSION: In Gullivers Travel (by Jonathan Swift), Gulliver visits a country of Wise men. The reason why it is a country of wise men is given by him as follows: I discovered that no law in that country may be longer than the number of letters in the alphabet and must be written simply so all would easily understand it. This rule can be adopted in framing good contracts. Contracts should be simple, clear, precise and practical.

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