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Trade
Contracts
By Joseph
Zaritski. Copyright © 2002 Joseph Zaritski.
Introduction
Quotation
Essential Terms
Additional Terms
Other Important Issues
Preparation of the Trade Contract
Acknowledgments
Legal Notice
Introduction
All international transactions are conducted according to the terms and
conditions negotiated between you and your buyer. By negotiating terms
you secure the deal, minimize risks and protect your company in case of
possible trade disputes, claims and/or legal actions. Usually terms of
trade are stipulated in the trade contract and clearly indicate your and
the buyer’s responsibilities.
There are no standards regulating trade contracts as such. You’ll
find that sometimes it may be just a one-page document and sometimes -
a very complicated 10+ pages booklet including several appendices, additional
conditions, etc. In some cases a contract can even be formed based on
words alone. It really depends on the goods you are selling, your relationship
with the buyer and your personal preferences. Also, in different jurisdictions,
there may be different requirements that must be met for a contract to
be effective according to its terms.
In order to be effective and to promote certainty in your business relationship
with your buyer, it is a good idea to provide for the following details
of your deal in any trade contract:
- Date of Contract
- Seller’s and Buyer’s Names
- Product Name
- Product Description
- Packing
- Quantity
- Unit Price
- Terms of Delivery (Incoterms)
- Terms of Payment
- Delivery Date
- Validity
The contract should be signed by all parties directly involved in the
contract. For example, if some responsibilities under the contract fall
to a middleman, agent or other third party, this party should sign the
contract together with you and the buyer.
Quotation
I would like to bring your attention to the fact that your quote, which
is written on the company letterhead and encloses all the above terms
would generally become binding on you if it was accepted by the buyer
in writing or simply marked “Accepted”, signed and forwarded
back to you.
You have to be very accurate when issuing a quotation and you should always
include a “Validity” condition. For example, “This
quotation is valid for a period of X days from the date above”.
Typos, errors and omissions of words may occur in the preparation of quotation.
In practice, most buyers will unconditionally accept a revision in the
event of an error and omission in the quotation. However, some buyers
would take the error as is, if it is to their advantage and would force
you to negotiate a more favourable price and/or conditions.
As a precautionary measure, it is worthwhile adding the acronym E.&O.E.
stated for “Errors and Omissions Excepted”to your quotations
to disclaim final responsibility for typographical errors and unintentional
omissions.
Essential Terms
The trade terms, which I mentioned, are pretty straightforward and I will
just make a few brief comments in their regards.
Seller’s and Buyer’s Names
Always stipulate the full legal name of your company. For example: “Australian
Export Company Pty. Ltd.” or “Australian Export Company Pty.
Ltd. trading as Aussie Products” in the case where the negotiations
were conducted under the trading name. Also, you are required under the
Corporations Act to quote your ACN or ABN on all documents.
Check the name of your buyer’s company, especially when dealing
with a foreign company for the first time. Usually you would be able to
do it online through the country business register. Otherwise contact
Austrade in the buyer’s country or the buyer’s country embassy
in Australia.
Unit Price
Price stipulated in the contract must cover all expenses and risks as
well as allow for the profit. At the end of the day, you are trading to
earn some money.
For more information please refer to the “Setting Up The Export
Price” tutorial.
Terms of Delivery (Incoterms)
Terms of Delivery must indicate the point of destination and should refer
to the Incoterms. For example, “CIF Hamburg Incoterms 2000”.
Terms of Delivery are specifically explained in the “International
Commercial Terms” tutorial.
Payment Terms
It is important to specify the terms of payment and payment procedure
in detail as well as to stipulate all documents necessary to be presented
for the payment to occur. Commonly, these details are specified in the
appendix or supplement to the contract. In this case, under Payment Terms
you should include, for example, “Irrevocable Confirmed Letter of
Credit at sight in accordance with Supplement No. 1 hereto which is an
integral part of the present contract”.
For more information please refer to the “International Payments
and Export Credit Insurance” tutorial.
Delivery Date
I always recommend to indicate the delivery time as a reference to a certain
date stipulated in the contract. It may be the date of the contract, but
more appropriate the date of the receipt of the confirmation of the letter
of credit. For example, “the goods must be delivered no later than
X days after the date of the receipt of the confirmation of the letter
of credit by the Seller.”
You should check the shipment frequency with the shipping company or with
your freight forwarder before negotiating the delivery date and allow
for possible delays. Usually major shipping lines would have shipments
to most destinations occurring weekly.
Additional Terms
The terms and conditions specified below are not necessary to enclose
in a contract, but I would strongly recommend you to do so to avoid uncertainties
and minimise your risks.
Claims clause
Claims are common in International Trade. In fact, there are people who
make a living out of claims and you have to be aware of that. By including
a claim clause in the contract, you may be able to avoid costly litigation
in the event of a dispute.
Example ”Claims” clause
“1. Any claim relating to either the quality or quantity of the
goods delivered by the Seller to the Buyer in accordance with the present
contract must be submitted by the Buyer to the Seller no later than X
days from the date of delivery of the goods indicated in the transport
document. All claims must be submitted in writing and include originals
of any documentation upon which the claim is based (including, but not
limited to documentation issued by independent inspectors, Chamber of
Commerce, authorised Government agencies, etc.)
2. If the Buyer does not submit a claim in accordance with paragraph 1
within the time stipulated in paragraph 1, then the Buyer is deemed to
have received the correct quantity and quality of goods and the Buyer
expressly waivers any right to make a claim in relation to the quantity
or quality of the delivered goods.
3. The amount of any claim made pursuant to paragraph 1 must not exceed
the contract value of the claimed goods.”
If the payment terms were agreed as a deferred payment you may enclose
the following paragraph to the Claims clause.
“4. Any claim in respect of quality or quantity of the goods being
the subject of the present contract pursuant to paragraph 1 does not entitle
the Buyer to fully or partially reject payment of an Invoice rendered
by the Seller in accordance with the present contract in respect of the
claimed goods.
Arbitration Clause
Trade disputes and claims may be settled in different manners. It is better
to settle a claim amicably by negotiations outside arbitration or a court.
Dealing with a buyer from some Asian, South American or former Soviet
Union countries, you may quite often be offered to settle a claim in the
country where the dispute has arisen. You should unconditionally decline
such offers. In countries with a high level of corruption your buyer may
have connections, powerful friends or relatives, who can affect the arbitration
decision.
The ICC International Court of Arbitration recommends that all parties
wishing to have recourse to ICC arbitration include the following standard
clause in their contracts:
"All disputes arising out of or in connection with the present contract
shall be finally settled under the Rules of Arbitration of the International
Chamber of Commerce by one or more arbitrators appointed in accordance
with the said Rules in the International Court of Arbitration in Paris."
When dealing with non-English speaking buyers it is appropriate to specify
the language of the arbitration in the arbitration clause.
In addition to that I recommend including the following:
“The decision made by the Court of Arbitration is final and binding
upon all Parties.”
Be aware that the law in some countries may lay down certain requirements
in respect of arbitration clauses. Always consult a lawyer before finalising
the arbitration clause.
Force Majeure Clause
Force Majeure literally means "greater force". “Force
Majeure” clauses excuse you or the buyer from performing the
contract obligations if the failure is caused by conditions beyond your
or the buyer’s control. “Force Majeure” clauses
are usually applicable to performance failures caused by:
- natural disasters or other “Acts Of God” (earthquakes,
hurricanes, floods)
- wars, riots or other major upheaval
- Government restrictions
- performance failures of parties outside the control of the contracting
party (subcontractors, suppliers and/or carriers)
It is important to remember that “Force Majeure” clauses
are intended to excuse a party only if the failure to perform could not
be avoided by the exercise of due care by that party.
Example “Force Majeure”
Clause
Neither Party shall be liable or responsible for any failure or delay in
performance under the present Contract if such failure or delay is caused
by Act of God, Government restrictions (including the denial or cancellation
of any export or other necessary license), riots, civil commotions, wars,
insurrections and/or any other cause beyond the reasonable control of the
Party whose performance is affected.
The Party experiencing the difficulty to meet the obligations under the
present contract due to the causes beyond its control shall give the other
Party prompt written notice, with full details following the occurrence
of the cause relied upon. Dates by which performance obligations are scheduled
to be met will be extended for a period of time equal to the time lost
due to any delay so caused.”
Other Terms
Additional terms and conditions depend on the agreements reached between
you and the buyer. They may include, for example:
“1. The Import Licence, if required, is the Buyer’s responsibility.
If the Buyer fails to obtain the Import Licence within reasonable time,
the Seller has the right to terminate the present contract.
Under no circumstances will the Seller incur any losses caused by the
Buyer’s failure to obtain the Import Licence.
2. All amendments and supplements to the present contract are integral
parts of the present contract and become effective after signing by Parties.
3. After signing of the present contract all previous negotiations between
Parties are superseded.
4. Neither Party shall assign its rights and obligations under the present
contract to a third party without written consent of the other Party.
5. Melbourne (Australia) is considered to be the place of signing of the
present contract.”
And so on.
Other Important Issues
Plain English
Always use clear, simple and straightforward language in your trade
contracts. Avoid using poetic and artistic expressions, idioms, slang
and too many abbreviations. These will confuse the buyer and can create
misunderstandings.
Different Date Formats
The date 2/3/02 is February 3, 2002, in some countries and it is March
2, 2002, in others. This can create chaos for you and the buyer. Always
write the month in words, instead of numbers.
Units of Measurement
A unit of measurement like the ton may refer to the metric ton (2204.6
lbs or 1000 kg), short ton (2000 lbs or 907 kg), or long ton (2240 lbs
or 1016 kg). You must clearly differentiate units of measurement to avoid
problems.
Currency
Most international transactions are conducted in U.S. currency. If
$US is the currency of your contract, you will lose money in the event
of $AU appreciation, and, on the contrary, will receive extra money in
the case of $AU devaluation. 1-2% should be added to the sum of contract
to cover the exchange rates risks. To avoid these risks you can also negotiate
with the buyer to deal in Australian currency, instead of U.S. funds.
Interpretation or Translation
Sometimes buyers may require signing a bi-lingual contract. In this
case, the accuracy of business translation is crucial. Varied use of terminology
in different countries can have an entirely different meaning and cause
costly disputes.
Signing of the Contract
If the contract contains more than one page, I recommend you sign
each page separately and require your buyer to do the same.
Preparation of the Trade Contract
You have to be sure that all terms and conditions to be included in the
contract are negotiated and agreed with your buyer before you start preparing
a contract. If you feel that there are any uncertainties and/or misunderstanding,
you should contact the buyer and clarify the terms, which are not undoubtedly
understood.
Trade contracts should be prepared or at least reviewed by a lawyer specialising
in International Trade. It will cost you some money; some times it may
cost a lot of money depending on the complicity of the contract. However,
it still would be a fraction of the amount of the goods you are selling
and can save you a fortune in the case of a dispute and legal action.
Acknowledgements:
Brett McGuire, Senior Associate
Coudert Brothers,
Solicitors and International Attorneys
Gateway Building
1 Macquarie Place
SYDNEY NSW 2000
Phone: 61 2 9930 7500
Fax: 61 2 9930 7600
Legal Notice
This tutorial has been developed for information purposes only and shall
not be construed, implicitly or explicitly, as containing any legal, commercial
or financial advice. Under no circumstances shall the author, Newsta Pty.
Ltd. or its directors, employees, shareholders or affiliates be liable
for any direct, indirect, incidental, special or consequential damages.
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