Copyright © 2002-2014 Joseph Zaritski. All Rights Reserved.
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
- Unit Price
- Terms of Delivery (Incoterms)
- Terms of Payment
- Delivery Date
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.
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 XX days from the above date".
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.
The trade terms 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.
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.
Terms of Delivery (Incoterms)
Terms of Delivery must indicate the point of destination and should refer to the Incoterms. For example, "CIF Hamburg Incoterms 2010". Terms of Delivery are specifically explained in the International Commercial Terms tutorial.
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 our International Payments and Export Credit Insurance tutorial.
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.
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 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.
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."
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
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.
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.
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.