Contracts in International Trade

CONTRACTS IN
INTERNATIONAL TRADE
Foreign trade activity can be defined as activities for the
implementation of transactions in the field of foreign trade in:
✔
goods,
✔
services,
✔
information and
✔
intellectual property
EXPORT PROCESS
1. Identify foreign buyers
2. Negotiate for an export contract
3. Prepare to export
4. Process and transport of goods
5. Submit documents to the bank
6. Get paid
EXPORT PROCESS — IDENTIFYING FOREIGN BUYERS
✔
Trade fairs
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Trade missions
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Market weeks
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In-store promotions
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Visit foreign embassies
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Referrals overseas
EXPORT PROCESS —
NEGOTIATING FOR AN EXPORT CONTRACT
✔
Start with bussiness offer
✔
If samples are shipped purchase order is confirmed
EXPORT PROCESS — PREPARING TO EXPORT
✔
Checklist for preparing for shipment:
✔
Labelled, packed and marked for shipment
✔
Arrangement with shipping lines
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Arrangements with insurance company
EXPORT PROCESS — TRANSPORTING OF GOODS
✔
Preparetion of export documentation, including:
✔
Export declaration;
✔
Commodity clearance;
✔
Certificate of exemption;
✔
Bill of landing;
✔
Other documents.
EXPORT PROCESS-SUBMITING THE DOCUMENTS TO THE BANK
✔
The submission of the documents to the bank as soon as possible,
namely:
✔
Letter of credit;
✔
Bill of landing
✔
Commercial invoice;
✔
Other documents.
EXPORT PROCESS- GETTING PAID
✔
It is pressuposed the payments for export
INTERNATIONAL EXPORT CONTRACT
EXPORT DOCUMENTATION
✔
The export process is made more complex by the wide variety of
documents that the exporter needs to complete to ensure that the
order reaches its destination quickly, safetly and without
problems.
Documentation is required for:
✔
your own business purposes
✔
your business partner, but also
✔
to satisfy the customs authorities in both countries and to
✔
facilite the transportation of and
✔
payment for goods sold.
✔
The export process is encumbered by the amount of documentation the exporter
faces around every turn.
✔
These documents can be broken down into four groups:
●
those required by the importer (and for customs clearance in the target
market),
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those required to export the goods,
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those required for payment,
●
those required to transport the goods (i.e. the transport documents) and
●
those required for insurance.
INTERNATIONAL TRADE CONTRACT
International trade contract is the main commercial document that defines the
relationship of participants in a foreign trade transaction, their rights and obligations.
It fixes the commercial (paid) nature of the relationship between the parties.
The main features of an international trade contract are:
• different nationality of the contracting parties;
• establishing mutual rights and obligations of the parties;
• focus on the organization of international trade in goods, services, information, results of
intellectual activity;
• registration in the manner prescribed by law (international agreement, custom or by agreement of
the parties);
• settlements in foreign currency;
• application of international law or the law of any state chosen by the parties;
• consideration of possible disputes in an international court (arbitration), selected by the parties.
An international trade contract (also referred to as an export or sales contract) is
essentially an commercial agreement, in which the rights and obligations of the
exporter and the importer are stipulated.
There are four main contracts withing the export activity, namely:
The contract of sale (international trade contract): between the seller and the buyer;
The contract of payment: between the seller and the buyer directly or through the bank.
The contract of carriage: between the carrier and the shipper;
The contract of insurance: between the insurer and the assured.
The export contract is used for the international sale of certain products, which are
projected for resale in another country, where the buyer is a trader, importer, distributor
or wholesaler that will sell the products to another company or merchant.
Though it is common practice to export products based a proforma invoice or quotation
received from exporters, it is a safe practice to use written and legal export
contracts.
Classification of international sales contracts:
- depending to the character of delivery;
-depending on the object of the transaction;
-depending on the direction.
Classification
Depending on the character of delivery the contracts are classified as follows:
- a contract with a single delivery of goods, after the execution of which the legal relations
between the parties to the transaction are terminated;
- a contract with periodic regular delivery of goods from seller to buyer over a specified
period;
- a long-term supply agreement.
Classification
Depending on the object of the transaction:
- international contracts for the sale of goods;
-international contracts for the sale of services (intermediary, transportation, advisory services);
- international contracts for the sale of intellectual property (IP) (selling licenses, usually
accompanying the exporting of equipment and technologies);
Classification
Depending on the form of payment within the international contract of sale:
-international contracts with methods of payment in monetary form, namely with
the settlements provided in a certain currency using the payment modes
stipulated in the contract (check, bill of exchange, money transfers via electronoc
systems like SWIFT system) and payment methods (cash in advance, open
account, documentary collection, consignment, letter of credit);
-international contracts with methods of payment in commodity form;
- mixed payment contracts
Classification
Depending on the direction the international contracts are classified into:
-export (sales);
-import (purchase).
LEGAL BASIS
The legal documents governing the compilation of international trade contracts include:
•
International legislation;
•
National legislation (namely national civil code, customs code, specific legal acts on
foreign economic activity, etc. - Principles on European Contract Law (PECL), Union
Customs Code (UCC))
LEGAL BASIS
•
United Nations Convention on Contracts for the International Sale of Goods (Vienna
Convention 1980) (CISG);
•
Principles of international commercial agreements (UNIDROIT Principles);
•
International rules for the interpretation of trade terms "Incoterms" 2020;
•
Convention on the Limitation Period in the International Sale of Goods (the
"Limitation Convention") (New York, 1974);
•
Model Law on Procurement of Goods and Services, developed by the United Nations
Commission on International Trade Law (UNCITRAL), New York, 1994.
•
The United Nations Convention on the Use of Electronic Communications in
International Contracts (the "Electronic Communications Convention", or ECC)
(2005).
LEGAL BASIS
The Vienna Convention on Contracts for the International Sales of Goods
✔
It regulates the formation of international contracts of sales. The Convention was signed in
Austria on 11 April 1980. Forty countries have adopted it, the majority of which are developed.
✔
According to the Convention the layout of a contract is left entirely up to companies. It can also
be accepted in a verbal form. The UN Vienna Convention does not require a sales contract to
be concluded or confirmed in writing. It can be proved by any means, including testimony.
✔
Although there are signatories countries to the Vienna Convention who do not accept verbal
agreements and only recognise a written form of a contract. For a contract to be considered
accepted the consignee's consent must be obtained. Silence cannot be interpreted as consent.
LEGAL BASIS
The Vienna Convention addresses the following issues:
• conclusion of an agreement;
• obligations of the seller (delivery of goods and transfer of documents, compliance of goods and
rights of third parties, legal remedies in case of violation of the contract by the seller);
• buyer's obligations (payment of the price, acceptance of delivery, remedies in case of violation
of the contract by the buyer);
• risk transfer;
• general obligations of the seller and the buyer (contracts for the supply of goods in individual
batches, losses, interest, exemption from liability, consequences of termination of the contract,
preservation of goods).
LEGAL BASIS
Principles of international commercial agreements (UNIDROIT Principles)
The Principles of International Commercial Contracts 2016 (most frequently referred to as
UNIDROIT Principles and often also referred to as PICC) is a set of 211 rules for
international contracts.
They have been drawn up since 1984 by an international working group of the inter-
governmental organization UNIDROIT (Institut International pour l'Unification du Droit
Privé), an international organization that aims to harmonize of private international law.
These principles were ratified by its Council representing 64 governments of member states.
LEGAL BASIS
The Principles of International Commercial Contracts (UNIDROIT), developed by the
International Institute for the Unification of Private Law, are advisory in nature.
The document proposes rules intended for use throughout the world regardless of state
structure, economic system and legal traditions in accordance with the principle of
reasonableness, integrity and honest business practice.
LEGAL BASIS
As soft law*, these principles help harmonize international commercial contract law by providing
rules supplementing international instruments like the CISG and even national laws.
*The term "soft law" refers to quasi-legal instruments which do not have any legally binding
force, or whose binding force is somewhat weaker than the binding force of traditional law,
often contrasted with soft law by being referred to as "hard law".
Traditionally, the term "soft law" is associated with international law, although more recently it
has been transferred to other branches of domestic law as well.
LEGAL BASIS
Most importantly in private practice, they offer a neutral contractual regime which the
parties can choose, either by:
●
incorporation into their contracts (in whole or in parts), or
●
a straightforward choice of the UNIDROIT Principles (e.g. “This contract is
governed by the UNIDROIT Principles of International Commercial Contracts
2016”; in practice such a clause is often combined with an arbitration clause).
LEGAL BASIS
The UNIDROIT Principles were first released in 1994, with enlarged editions published in
2004, 2010, and most recently in 2016 (including issues related to long-term contracts).
Established with an international mind-set, they address many issues on which national
legislators do not concentrate, such as foreign-currency set-off or hardship.
Practitioners who use the principles describe them as a state-of-the art tool which is particularly
useful when parties from different legal systems desire to agree on a neutral contractual
regime.
LEGAL BASIS
International rules for the interpretation of trade terms "Incoterms" 2020
The Incoterms or International Commercial Terms are a series of pre-defined commercial
terms published by the International Chamber of Commerce (ICC) relating to international
commercial law.
They are widely used in International commercial transactions or procurement processes as the
use in international sales is encouraged by trade councils, courts and international lawyers.
LEGAL BASIS
The Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks
associated with the transportation and delivery of goods.
Incoterms inform sales contract defining respective obligations, costs, and risks involved in
the delivery of goods from the seller to the buyer.
However, it does not constitute contract or govern law. Also it does not define where titles
transfer and does not address the price payable, currency or credit items.
LEGAL BASIS
The Incoterms rules are accepted by governments, legal authorities, and practitioners
worldwide for the interpretation of most commonly used terms in international trade.
They are intended to reduce or remove altogether uncertainties arising from different
interpretation of the rules in different countries. As such they are regularly
incorporated into sales contracts worldwide.
LEGAL BASIS
The Convention on the Limitation Period in the International Sale of Goods (the
"Limitation Convention")
✔
It is a uniform law treaty prepared by the United Nations Commission on International
Trade Law (UNCITRAL). It deals with the prescription of actions relating to contracts
for the international sale of goods due to the passage of time.
✔
The Limitation Convention was originally prepared as a chapter of a broader treaty on
contracts for international sale of goods. Adopted in 1974, it was amended in 1980 to
be fully aligned, especially with respect to scope of application, to the United Nations
Convention on Contracts for the International Sale of Goods (CISG), adopted in the
same year.
LEGAL BASIS
The United Nations Convention on the Use of Electronic Communications in
International Contracts (the "Electronic Communications Convention", or ECC)
✔
It is a treaty that aims at facilitating the use of electronic communications in
international trade. It was prepared by the United Nations Commission on
International Trade Law (UNCITRAL) and adopted by the United Nations General
Assembly on 23 November 2005. Pursuant to Article 23, it entered into force on 1
March 2013, the first day of the month after six months passed following adoption by
three States parties, namely the Dominican Republic, Honduras, and Singapore.
LEGAL BASIS
The United Nations Convention on Contracts for the International Sale of Goods (CISG) is the
main convention for international sale of goods. Established by UNCITRAL, the
Convention governs the conclusion of the sale contract; and buyer and seller obligations,
including respective remedies. It is not concerned with the validity or provisions of the
contract nor its effect on the property sold.
The importance of CISG is its interpretation. International context, uniformity and observance
of good faith must be regarded when interpreting the Convention. Matters not expressly
settled by CISG are to be determined according:
●
to the general principles of CISG; or
●
in such absence, according to rules of private international law.
●
The UNIDROIT(International Institute for the Unification of Private Law)Principles on
International Commercial Contracts also provide a ‘gap-filling’ role to supplement CISG,
so long as it supports a principle deduced from the Convention.
EU CONTRACT LAW
Contract law in Europe
Laws on contracts are set by individual member states in the European Union
(EU).
However, the EU has harmonised some aspects of contract law across the whole
of the European Community. In addition, some EU legislation affects contract law
because it takes precedence over national laws.
If you deal with a business in another EU country, there is a choice about where
you make the contract - ie, under which jurisdiction you agree the terms.
Alternatively, the EU has produced a standard contract. This is called the
"Principles of European Contract Law". You can include these the terms in any
EU contract if both sides agree to it.
The European Union (EU) single market is allow businesses to trade throughout the EU on
an equal footing.
The EU has introduced measures to get rid of obstacles to free trade in the single market.
this includes clauses in contracts which may restrict free trade.
EU directives have dealt with areas such as e-commerce and the insurance and banking
sectors. This has affected contract law in member states. However, the EU does not have
the right to regulate the contract law of individual countries, so each country still has its own
legal contract provisions.
The two parties can decide between themselves where to sign the contract is to be signed
and, therefore, which jurisdiction applies.
The Principles of European Contract Law
To make it easier for businesses in member states with different contract laws to trade
together, the EU has introduced the Principles of European Contract Law.
These are a set of 'model' rules for business contracts, based on fairness and simplicity.
They provide solutions for issues where national laws do not offer an answer.
The Principles are available in each of the EU's languages and businesses can agree that
some - or all - of these clauses can be written into a contract. Those clauses then take
precedence over the contract law of the country where the contract is signed.
Formation of European contracts
Most of the elements that are necessary for the formation of a contract under the
Principles of European Contract Law are similar to those in UK contract law. This
includes:
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the process of making an offer and its acceptance
●
confidentiality
●
good faith in making and accepting the offer
The process of making and accepting an offer and it being accepted is set out in
a series of clauses. These define how an offer is made, revoked and
accepted. This lies at the core of making a contract. It includes the opportunity to
specify time limits and modifications.
The role of the agent in European contract negotiation
The role of agents in contract negotiation can be difficult. An agent can sign a
contract that creates a legally binding commitment for your business.
Separate clauses deal with other aspects of the relationship between the agent
and both:
●
your business
●
the other parties to the contract
Validity of contracts in Europe
Usually, once a contract has gone through the process of offer and acceptance,
both parties agree to be bound by its terms. However, even after you have signed
a contract, there may be circumstances where it is invalid. Contracts can
also become invalid because of an action by one side or the other.
After you sign a contract, it can become invalid if one side or the other fails to
deliver what they have agreed.
Interpretation of terms and words in European contracts
The Principles of European Contract Law are written as clearly as possible, so
that they can be understood easily by both sides. Different language versions are
available so that both parties know exactly what they are agreeing to.
This ensures that they understand and accept the terms of the contract. However,
there may be cases where the interpretation of words or terms in a contract could
cause problems.
In general, the underlying rules for interpretation are based on what is
'reasonable'. For example, the interpretation of a term or word is what both
parties intended it to mean - even if that is different from the literal meaning.
If the sides cannot agree, then the term or word will be interpreted in the way that
a suitably qualified 'reasonable person' would interpret it.
Clarifying the content of a European Contract
Among the issues where there is potential for dispute included are:
●
statements that form part of the contract - even if not written into the contract
itself
●
implied obligations
●
how price, quantity, quality and ending the contract are dealt with if not
included in the actual contract terms
The emphasis is on reasonable behaviour by both sides in dealing with issues
where there is any doubt or confusion.
Performance of obligations set out in a European contract
Performance is the focus of the contract, because it is the act of fulfilling the
contracted obligation. In its simplest form, this involves one side supplying goods
or services and the other side paying for them according to the terms of the
contract.
Establishing performance of obligations in a European contract
Where a contract is for a straightforward supply of a product in return for money,
establishing performance is usually simple. However, in more complex contracts,
such as those for supplying goods or services over a period of time, perhaps with
staged payments, the two sides could dispute performance.
The parties can specify performance in the contract terms. These include:
●
the place
●
time and order of performance
●
the type and form of payment
●
what happens if one side refuses to accept what the other side provides
Non-performance and remedies in European contract law
Both sides should fulfil their part of the contract.
The first option is for the non-performing side to get the chance to complete their
part of the contract. For instance, if a product does not work as specified, the
supplier gets the chance to put the problem right. Performance is then achieved,
although the customer in such a case might have the right to claim a reduction in
price.
Remedies for non-performance in European contract law
If one side is simply not going to fulfil some or all of their part of the
contract, there are various specific remedies for the injured party. These include:
●
damages and/or interest on the loss caused
●
a reduction in the price of the product or service
●
termination of the contract
In each case, there are clauses outlining what the parties to the contract can do
and how each side should give notice to the other for non-performance.
Remedies for non-performance in European contract law
If one side is simply not going to fulfil some or all of their part of the
contract, there are various specific remedies for the injured party. These include:
●
damages and/or interest on the loss caused
●
a reduction in the price of the product or service
●
termination of the contract
In each case, there are clauses outlining what the parties to the contract can do
and how each side should give notice to the other for non-performance.
EU Customs Code (UCC)
The Union Customs Code (UCC) defines the legal framework for customs rules
and procedures in the EU customs territory, adapted to modern trade models and
communication tools.
The UCC legal package entered into force on 1 May 2016, repealing and
replacing the previous framework for customs legislation, contained in the
Community Customs Code (Council Regulation (EEC) No 2913/92 and the
Code's implementing provisions (Commission Regulation (EEC) No 2454/93 and
recasting the Modernised Customs Code (Regulation (EC) No 450/2008 so as to
align EU customs legislation with the requirements of the Lisbon Treaty.
It clarifies rules, such as those on release of goods for free circulation and on
special procedures.
It contains most of the EU customs legislation in one package and provides
precise rules of application.
It defines data requirements for customs, pre-arrival and pre-departure
declarations, notifications, applications and decisions in an integrated way.
All of this is designed to contribute to a harmonised implementation of customs
rules and procedures across the EU.
The UCC was adopted on 9 October 2013 as Regulation (EU) No 952/2013
It entered into force on 30 October 2013 although most of its substantive
provisions apply from 1 May 2016.
The UCC was amended by Regulation (EU) 2016/2339, which modified Article
136 of it on goods that have temporarily left the customs territory of the Union by
sea or air.
The UCC was also amended by Regulation (EU) 2019/474, which introduced
some technical amendments in Articles 34, 124, 126, 129, 139, 146, 272 and 275
UCC. It also introduced a new Article 260a to provide relief from import duties on
goods repaired or altered in the context of international agreements.
In addition, this amendment includes a provision that brought the Italian exclave
of Campione d’Italia into the EU customs territory from 1 January 2020 and which
is closely linked to Council Directive (EU) 2019/475 amending the VAT and
Excise Directives. The Directive brings the Italian municipality within the scope of
the EU excise territory but maintain its exclusion from the VAT regime to allow for
the application of a local VAT rate there that corresponds to the Swiss VAT rate in
order to ensure a level playing field for economic operators.
The UCC was also amended by Regulation (EU) 2019/632 allowing customs
authorities and economic operators to continue using transitional arrangements
(i.e. existing IT systems or paper based arrangements) for the completion of a
small number of customs formalities, until 2025 at the latest when new or
upgraded IT systems for the completion of those formalities will be in place.
In addition, this amendment includes a provision that brought the Italian exclave
of Campione d’Italia into the EU customs territory from 1 January 2020 and which
is closely linked to Council Directive (EU) 2019/475 amending the VAT and
Excise Directives. The Directive brings the Italian municipality within the scope of
the EU excise territory but maintain its exclusion from the VAT regime to allow for
the application of a local VAT rate there that corresponds to the Swiss VAT rate in
order to ensure a level playing field for economic operators.
The UCC was also amended by Regulation (EU) 2019/632 allowing customs
authorities and economic operators to continue using transitional arrangements
(i.e. existing IT systems or paper based arrangements) for the completion of a
small number of customs formalities, until 2025 at the latest when new or
upgraded IT systems for the completion of those formalities will be in place.
International Trade practice shows that the majority of transactions are carried out without
signing a contract. However, it is strongly recommended establishing an international
contract of sale for all the international transactions.
✔
In certain cases, a verbal agreement is legally binding, for example, when an exporter
makes a sale at an international fair.
✔
Most foreign trade transactions do not use a formal contract in practice. However, the
clauses in the commercial invoice and the incorporation of an appropriate in the as well
as national legislation will nevertheless imply certain obligations on the Parties.
✔
In any case it is recommended using a formal contract.
✔
While preparing the export contracts, you need to be careful in formulating these
documents as they are drawn up between companies from countries which may have
very different legal systems, regulations and attitudes to doing business.
✔
These differences may cause disputes even when trading with other fairly developed
nations. The challenge is to make your export contracts as clear, precise and
comprehensive as is possible.
A model contract is a model contract or a series of unified conditions set in writing
formulated in advance taking into account trading practices or customs adopted by
the contracting parties after they have been agreed with the requirements of a
particular transaction.
A standard contract is a sample (draft) contract and serves as the basis for negotiations on
the conclusion of a foreign trade transaction.
It can be changed and supplemented by the parties.
The terms of the relevant model contract become binding on the parties only when they are
reproduced in the contract concluded by the parties or it contains a direct reference to
such conditions.
A model contract can be used in two ways:
- by the acceptance by one of the contracting parties of the terms of the final form of the model
contract proposed by the other party, which does not change, with the exception of minor details;
- by applying a standard contract as a model, which can be changed in accordance with the terms of
a particular transaction.
Most often, a standard contract developed by one of the counterparties is taken as a sample and on
its basis, by agreement of each condition, an individual contract is developed, which is signed by
the parties.
Model contracts are developed by interested international organizations, unions (unions,
associations, federations) of entrepreneurs, exchanges, chambers of commerce, and large
firms.
The most common model contracts (general conditions) of sale, developed within the
framework of the United Nations Economic Commission for Europe (UNECE). They are
drawn up in relation to the main foreign trade goods (equipment, grain, consumer
durable goods, etc.), as well as for contracts for the supply and installation of equipment.
There are more than 30 types for standard contracts.
The key clauses of export contract are:
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Description of goods;
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Contract price;
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Delivery Terms;
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Time of delivery;
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Payment conditions;
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Documents;
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Inspection of goods by the buyer;
●
Retention of title;
●
Force Majeure;
●
Resolution of Disputes;
●
Language.
Description of goods
✔
This clause is one of the central clauses in a sale contract. As a general rule, the
buyer will prefer more precise and detailed descriptions than the seller.
✔
If the goods are not described precisely enough, the buyer may have no recourse -
should the seller deliver goods, which technically meet the contract description but
are unsatisfactory for the buyer´s commercial purposes.
✔
On the other hand, exporters would like to define the goods precisely when they are
sure of delivering exactly those goods.
✔
In other commercial situations, however, it may be practical to foresee and permit
slight deviations from the contract description; for example, in statements of colors or
dimensions, are not necessary to precisely identify the goods, and they should not be
included in the product´s description.
Quality clause
In international trade, the exporters and importers are usually far apart in different
countries. Importers are usually unable to see the goods until they reach the port of
destination.
In order to get to know the quality of the goods the following methods have been
developed for such a purpose.
●
Quality Definition - Sales by Inspection;
●
Sales by Sample;
●
Quality Definition - Sales by Specifications, Grade, and Standard;
●
Sales by Brand or Trade Mark;
●
Quality Definition - Sales by Place of Origin.
Quantity clause
Quantity clause is one of the necessary conditions for the conclusion of an import/export
contract.
United Nations Convention on Contracts for International Sale of Goods requires that the
quantity of goods delivered should be identical to that called for in the contract,otherwise the
buyer is entitled to reject that portion of goods excessive in quantity, and to claim against the
seller if the quantity is found to be less than that called for in contract.
Units of calculation include weight, number, length, area, volume and capacity. The
quantities of many commodities are calculated by weight. Gross Weight, Net Weight,
Conditional Weight, Theoretical Weight, etc.
Since quantity terms may be ambiguous, careful definition in the sales contract is very
important. The Metric System, British System, U.S. System and the International System of
Units are generally used in international trade nowadays.
Units of measure shouls be done in both figures and words as well as the total amount.
Contract price
✔
The parties shall indicate clearly the contract currency and the price amount per unit
and total amount in both figures and words.
✔
Should the parties fail to agree on a price in the contract, a provision explaining the
method for determining the price should be included in the contract.
Delivery Terms
✔
It is advisable to use Incoterms 2020 published by the International Chamber of
Commerce as "delivery terms" or "shipping terms".
✔
Incoterms rules allocate the following between seller and buyer:
✔
International transport and administrative costs.
✔
The point of transfer and risk of the goods.
✔
Responsability for customs and payment of import duties
✔
Responsability for obtaining insurance coverage.
✔
When using Incoterms, it is necessary to describe precisely the place and within that
place the exact point of delivery. Additional specifications may also be necessary to
specify such as the amount of the extent of insurance coverage and any necessary
limitations on suitable transport.
Time of delivery
✔
In the contract, the parties should indicate a specific date for delivery (e.g., october 24,
2013) or a period (e.g, november 2013).
Payment conditions
✔
Payment conditions encompass terms of payment, amount, mode and currency.
✔
Take into account two broad methods of financing international transactions, namely:
●
direct payment between seller and buyer; or
●
financing through banks.
✔
Practically, payment is effected by the following methods: payment in advance, open
account, documentary collection and documentary credit (also known as letter of
credit).
✔
The contract should permit the use of all international payment modes.
Payment conditions
●
Cash in Advance: buyer transfers funds to the seller’s account in advance pursuant to the
sale contract.
●
Open Account: arrangement for the buyer to advance funds to an ‘open account’ of the
seller on a fixed date or upon the occurrence of a specified event, such as delivery of the
goods.
●
Documentary Collection: seller (drawer) draws a bill of exchange on the buyer (drawee)
and attaches it to the bill of lading. The idea is to secure acceptance of the bill of exchange
by the buyer; and the buyer is bound to return the bill of lading if he does not honour the
bill of exchange.
Payment conditions
●
Consignment: in international trade is a variation of open account in which payment is sent to the
exporter only after the goods have been sold by the foreign distributor to the end customer. An
international consignment transaction is based on a contractual arrangement in which the foreign
distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they
are sold.
●
Documentary Credits: the bank, on behalf of buyer, issues a letter of credit undertaking to pay the
price of the sale contract on condition that the seller complies with credit terms. Upon presentation
of necessary commercial documents verifying shipment of goods, the bank collects payment for goods on
behalf of the seller. In the collection process, the buyer pays for goods in exchange for title documents.
●
Under this method the bank guarantees the buyer’s title to the goods and guarantees payment to the seller.
Documents
✔
Exporters are well advise to be meticulous in their management of export
documentation, especially when the payment method is letter of credit.
✔
The parties should include a clause with a list of documents most commonly required
for seller in international sales contracts.
Inspection of goods by the buyer
✔
The parties should indicate whether they agree to inspection "before shipment" (also
known as pre-shipment inspection or PSI); the parties may indicate the place of
inspection as well as other details such as inspection company.
✔
The inspection require the seller to notify the buyer of the availability of the goods for
inspection.
Retention of title
✔
The retention of title (RoT) clause is a common one in international trade. It provides
that the seller retains ownership of the goods until the full purchase price is paid and
also that the seller may reclaim the goods if the price is not paid. There are several
variations of RoT clause, but to major types can be distinguished:
✔
(a) the simple RoT clause, under which the seller retains title until price is paid, and
✔
(b) the extended clause, under which the seller seeks to extend its title to include: the
proceeds from any sale of goods and any other indebtedness owed to the seller by
buyer.
Insurance
A contract should provide for the insurance of goods against loss, damage or destruction
during transportation.
Insurance against perils is an important aspect of international commercial transactions.
In the event of loss or damage to cargo due to hazards during voyage, an insured party will be
able to recover losses from the insurer. The type of insurance required depends on the
mode of transport agreed between parties to transport the cargo. Such insurance forms
include marine, aviation and land.
The type of insurance contract depends on the Incoterm adopted by the parties in a sale
contract.
Force Majeure
✔
It is common for international trade contracts to be made subject to force majeure or
"hardship" clauses.
✔
These provisions in the contract define circumstances that would relieve partners of
their liability for non-performance of the contract.
✔
They excuse the parties from performance when their failure is due to impediments
beyond their control or which were reasonably unforeseeable such as the outbreak of
a war, earthquake or hurricane.
Resolution of Disputes
✔
The parties should have the alternative between arbitration and litigation.
✔
In the event the parties opt for arbitration should specify the place of arbitration and
the language.
✔
If the parties opt for litigation as the required mode of dispute resolution, the parties
should designate the national or municipal courts in which lawsuits are be filed.
Resolution of Disputes
The resolution of disputes arising from private international commercial transactions may
be conducted through international commercial mediation, litigation or arbitration.
International commercial arbitration (‘arbitration’) has become a widespread means of
solving international commercial disputes.
Like mediation, arbitration is a private dispute resolution process pursuant to an
agreement between parties. The arbitrator or arbitral panel derives their authority and
jurisdiction from the commercial agreement; and their decision is prima facie binding.
Language
When the parties of an international contract use different languages a language clause
should be included in the contract.
Even if the parties adopt as the only language one in particular, there must be a
clause specifying which version of the document is the official one.
Moreover, it should be mentioned that when there are two language versions of a contract,
either because they are required by the law of one of the countries of the parties or
because the parties feel more secure about their rights and obligations, it is advisable
to insert a clause specifying which language prevails over the other in case of
differences among the parties. It is also important to specify which language to use
for notifications, especially in long-term contracts.

Contracts in International Trade

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