Hello everyone. Today we are going to have a look at one of the very important aspects of international trade, which is a contractor. In international trade, as the two parties are not in the same country, the only binding factor between them is a contract. When we talk about a contract, in case of international trade, we are going to see in today's session various indispensable clauses in a contract, the jurisdiction where disputes may be settled. As we all understand that a contract basically is formed in order to settle a dispute.
A contract in international trade does not have any specific format. It may be in the form of your performance invoice, it may be in the form of a purchase order, it can take the form of an LC, it can be a combination of all these, or it may be a simple exchange of information by points jotted down one over the other. But the most essential point that we should look after is that how the disputes will be settled if at all they arise. That means, the legal implication, the law applicable for settling of dispute.
We may also insert certain kind of LD's. Now usually people say LD means Late Delivery. No, it means "Liquidated Damage". You may insert liquidated damage clauses, in order to pre-decide, that if there is any kind of breach, if there is any kind of deviance from the terms agreed, what would be the percentage, or what would be the damage that has to be borne by the other party.
Let us see how a contract is formed. A contract is formed whenever there is an offer, an offer may be given by the seller or the buyer.
It can be an offer to sell, or it can be an offer to buy. If it's an offer to sell, obviously is given by the seller, and it may take the form of a pro forma invoice. In case may take the form of send, it does not mean necessarily always. It may similarly if it is an offer to buy the mayor, buyer may give a purchase order a quote which may be again sent by the buyer to seller.
An offer usually indicates broadly the proposal of the transaction, that means the quantity of the goods approximate price of the goods, and any other important points regarding the quality of the goods which may be there. An offer is effective once it has been sent. That means, only once and offer is given, it becomes irrevocable, and offer once given by either the buyer, or the seller.
Whenever you get a contract, please read, reread, in order to find out, whether you can actually go ahead with it, and how adequately you would be fulfilling the terms. Otherwise, if at all, there is a slight breach in the contract, it may be a huge loss for both the parties.
Contract is the basis based on which we are trading. The evidence of trade is these documents. So the documents are extensively mentioned in the contract, in order to mitigate the risk for both the buyer and the seller.
We all know packaging in international trade is very important. And packaging is not covered by any other clause, but it has always been stated that packaging should be as per the contract. So, we should make some kind of emphasis in order to understand, in order to specify the importance of packaging, and clearly mentioned it in the contract.
Now we know that insurance is very essential. Insurance basically talks about marine insurance, insurance in terms of transportation. If any kind of damage to the goods occur during movement of the goods, which party is responsible for bearing the risk. To cover that risk, insurance is taken. When we say insurance, it should be clearly mentioned in the contract, whether the exporter, or the importer has to take the insurance cover. Insurance is a very essential aspect which may not be covered in INCO terms. We know that it is only CIF and CIP which talk about insurance to be taken by the seller. Otherwise, insurance has to be decided in the contractor.
If it has been evidence that it was caused not due to an act of mankind, maybe something which was uncontrollable. The rationale for force majeure is basically in that it was out of the control of either of the parties. If it is a situation of force majeure, we may not say that a breach has been committed. It is not counted as a breach and hence. There is no point of dispute settlement, because force majeure basically means that it is uncontrollable, and it is not the responsibility of either of the parties.
Method of A Dispute SettlementIn international trade, we have two options. Either to go in for an arbitration, through various arbitration councils. Which is like an out of court settlement, which is speedy but might be costly. And it does not also bring back name to an organization, because the courts are not involved.
This convention again deals with formation of contracts, and how dispute would be settled if at all it arises between the buyer and the seller. The seller and the buyer are free to decide whether they choose the exporting countries law, the importing countries law, a third country's law, or CISG. It is the wish of the seller and the buyer that which countries lawyers applicable to their contract. It is not necessary that we always use CISG. But, if you read further about CISG, you will find out, that almost 85 countries in the world have adopted CISG to be the law of their country in terms of sale of goods. So countries with similar laws may use CISG which may be beneficial in terms of settling disputes or ease of doing business.
Formation of Contract
Now, if you see here in go terms, the price, and the value of the goods should also be indicated in the contract. When we say price here, we mean to say the foreign exchange which is being used the foreign currency, it should be specifically stated, which currency is being used. Now dollar is a very vague term, we should specify, is it $ Canadian, $ US Singapore, or another Dollar.
The time period of delivery is also very important. The delivery period should also be stated clearly. It should not be a vague term that immediate delivery required. It should not be delivered as soon as possible. Likewise, it should be specifically stated, delivered within 10 days, or deliver within 1 month, or deliver within o1 year, or deliver within a specific time period, or have equal shipments, or in which month, which date, the delivery period should be specifically stated.
Now, whenever we talk about a contract, the exporter and the importer are free to choose which act is applicable, which country's law is applicable to their contract. It can be the exporting country's law, or it can be the importing countries law. There is no rule of thumb as such that which countries law would be applicable. We may say; it is always the importing countries law because that is what we have seen, usually. The only reason why we have seen this, typically is that importers usually have a stronger bargaining power, and they are the ones who govern the contract. But in case the exporter is a monopoly, in case the exporter has a stronger hand, the exporter may negotiate to have the dispute settled in his country.
International Sale of GoodsNow an international trade negotiation being very important, it is not so feasible to have a dispute right in the beginning in terms of which countries law would be applicable. So, what has happened is we have a global law which is called as convention for International Sale of Goods, also commonly known as The Vienna Convention. The convention for International Sale of Goods was made in 1980, and it became applicable in 1988.
If you are importers, you should do this. If you are exporters, your importer may have inserted lots of clauses which ensure that the goods would be of their standard. Hence, you should read these clauses in order to be sure that your goods would be coming to terms, or would be in line with the requirements of the importer.
Whenever we talk about an international sales contract, the law applicable to the contract becomes very essential. Now, whenever we say a contract in international trade, it is basically an agreement between the exporter and the importer. It is not a document which is legally stamped, signed, or an affidavit is given. It is just a list of agreements which may be there between the two parties.
The details of the consignee should be specifically mentioned. If the consignee is not same as the buyer. The mode of payment that means how the payment will be given, whether it's advanced payment, whether it is collection, whether it is L/C, whether it's a combination of all these, whether payment will be coming in various stages, it should also be steps specifically stated.
So, how to settle a dispute in terms of various clauses in a contract?, where is the jurisdiction whenever we are understanding or analyzing the terms of trade between two parties?, and how do we bargain or negotiate the power between the seller and the buyer in terms of governing a transaction?
Now this convention, this law is basically a combination of two laws combination of uniform law for international formation of contracts, and uniform law for international sale of goods. Any contract, even when governed by the exporting or the importing country's law, will be governed by the contract act, and the sale of goods act of that country. And similarly, this global law has been formulated, which is the convention for international sale of goods.
INCO Terms, Price and Value
6. Types of Contract
3. Fundamental Breach
Another very significant aspect of a contract is a breach. What do we mean by breach? A breach basically means that either of the parties fails to meet its obligations. What do you mean by obligation? Obligation means, what has to be fulfilled by either the seller or buyer. What is the obligation of the seller in trade? The obligation of the seller is to deliver the right type of goods to hand over any kind of documents related to the goods, and ensure that the goods are as per contract.
What is the foreign currency that is being used. Any kind of taxes, duties that are being charged and which party is responsible. Whether it is the exporter or the importer who is responsible, should also be clearly stated. Any kind of commissions or discounts should also be stated.
4. Time for Examining The Goods
Globally, when we say types of contracts, these contracts are majorly governed by Inco-terms. We may have shipment contracts, we may have transcript contracts, we may have in-transit contracts, and we may have destination contracts. These are just broad names, which may be used while negotiation. There is no hard and fast rule that you title your contract as per. These classifications are just used in negotiations, when whenever we want to understand that, which in term is being used in that particular contract.
Now the discretion of the other party. Whenever an offer is given, we have three options; either to accept the offer, or to reject the offer, or to ask for modifications. We can never accept or reject the offer in parts. Either an offer will be completely accepted, or completely rejected, or we ask for modifications. So, once an offer is rejected, obviously the transaction is over. In international trade, whenever we ask for modifications, we call it as a counteroffer.
It is also important to state the inspection clause. In trade pre-shipment inspection has come out to be very and very essential now. So pre-shipment inspection clause should be specifically inserted. And it has to be carried out by the seller. And if the buyer wants to assert, the buyer may also specify the agency where this inspection may be done.
A contract is usually a balanced document, a balanced agreement between the two parties, and hence essential clauses or important aspects of a contract, range from quality to quantity, to delivery aspects of trade. I'm very sure in today's session when we discuss various aspects of a contract, you are going to find out the major loopholes which have been occurring in terms of bringing losses, or negative site to your transactions in trade. So friends, let us see entire contract in detail in the form of a presentation and various clauses, which may govern on movement of goods as well as movement of payment from one party to another, based on a contract.
Basic Export - ImportExporters and importers are usually located in different countries. They are not in the same country, definitely. So that is why international contract becomes important. Goods have to cross national borders, and there are a lot of risks involved in movement of goods from one country to another. Disputes may arise due to damage to the goods, disputes may arise due to non-delivery, disputes may arise due to non-fulfillment of quality conditions, disputes may arise due to non-payment. So, it is a contract, which looks at all these possible disputes which may arise in the international trade it.
Now test certificate or testing is different from inspection. Usually pre-shipment inspection is mandatory, but testing may not be mandatory, and mail may be asked for by the buyer, depending on from product to product, like pharma products, food products, test certificates may be required.
5. Buyers Obligation
Now, when we say buyers obligation, what is the obligation of the buyer? The obligation of the buyer is to pay in time, the obligation of the buyer is to take the delivery of the goods from the named place, the obligation of the buyer is to make the payment at that particular point required.
A counteroffer basically indicates modifications that are desired by either of the parties. A counter offer may be given in order to change certain clauses. One very important thing that we should keep in mind is that whenever an offer is given. And if we are willing to accept the offer, the acceptance should clearly indicate that this acceptance is with modifications, or some variance to the revised. So, an offer once accepted becomes a contract, it is at the time of contract formation. Now, that all the terms will be decided between the seller and the buyer. We do not say that we deviate too much from the offer, but definitely build up on that particular proposal.
What do you mean by remedies? Remedies here means the solution if a dispute arises. What are the options available? The seller and the buyer have similar options, similar remedies available. That is to settle disputes through a court of law, to settle disputes mutually, maybe to claim some kind of damages, maybe to avoid when we say avoid a contract that we mutually finished off a contract.
Force MajeureAnother very important part of a contract is the situation of force majeure. We all know, force majeure basically means any act of god which is uncontrollable by mankind. If that causes any kind of damage or non-fulfillment of the obligation of the seller or the buyer, it is said to be a situation of force majeure. For example; tsunami, fires.
Whenever we talk about contract, it is one more very essential thing is that an exporter is usually concerned only about realizing payment, and transfer of ownership. So an exporter may be happy with a small, or a short contract. But it is the importer, who is at the receiving, and who needs the goods in the right condition at the right time, at the right place. So he may insert lots of clauses, in order to ensure that he gets the delivery in time. He gets conforming goods in time. An importer will lay a lot of emphasis on each and every clause regarding quantity and quality.
All your export documents which help in transfer of ownership and realization of payment, should also be specifically stated in the contract. The list of documents should be stated in the contract, indicating that how the payment will be released by banks only on presentation of these documents. Because an international train goods move based on trust, this trust can only be cross-checked through documents.
In the contract, the place for delivery, the time for delivery should be specifically decided when we say the goods should be conforming. What do we mean by that? Conformity of the goods means that the goods delivered are as per the quantity, quality, and description as mentioned in the contract. Whereas, conformity now is also understood as goods being fit for the purpose for which they have been purchased. That means supposedly I buy an AC and does not cool the goods become non-conforming. The AC has been bought for the purpose of cooling. It should fill in that particular purpose. So goods should be fit for the purpose for which they have been purchased.
Another way of settling a dispute is through litigation. That means, going to a court of law. Here, we may say that litigation may take several years, litigation may be time consuming, litigation may be expensive, litigation may also lead to a negative name for our organization. So, it is up to the two parties, whether they go in for arbitration or litigation, in order to settle a dispute, or they mutually avoid the contract.
Content of ContractsLet us have a look at the contents of an export contract, an export contract or an import contract or an international sales contract, we may name it depending upon our use, depending upon whether we are an importer or an exporter. Basically has the description of the products in terms of its specifications, its technical name, the product name, any kind of HS code which you must have studied or learned about. It should indicate the quantity specifically, should be mentioned in both words and figures, in order to bring in clarity. There should be no kind of mismatch between the contract. Should also specify any kind of packaging, labeling, and marking requirements.
A good contract should also have a time for examining the goods. The buyer must get some time, in order to examine the goods to see the goods if there are any defects, and hence they can ask for replacement, or repair. Even for the seller it is important, because in some laws, some rules, the buyer may even raise a notice of defect up to two years from the date of delivery.
Finally, the most important clause is the enforcement and the jurisdiction clause. This is with which we had begun our session, and we are coming towards the end. Also, with this, that how and where will the dispute be settled. We may feel that, if the essential country's law is applicable, we may be at a loss because the decision may be biased. So, we may opt for a third country. We may go CISG. The law should be clearly mentioned, the jurisdiction should be clearly mentioned, the enforcement should be clearly mentioned. Without this your contract, maybe of no use, because otherwise it is just a piece of paper, and it is not legally binding on the two parties yet.