CONTRACTS IN INTERNATIONAL BUSINESS TRANSACTIONS
Trade is a major factor in economic development of any country including Russia. More than 145 countries of the world are our trade partners. But it was a very difficult process of forming good relations. One of the most important things in foreign trade is drawing up contracts.
What is a Contract in general?
A Contract is an agreement of buy-back transaction between the Buyer and the Seller. It foreign trade transactions a Contract is drawn up to give legal expressions to the intentions of the partners and to ensure that the obligations contained in the Contract will be fulfilled.
According to the purpose and contents Contracts can cover goods, services, licenses, patents, technology and know-how.
In accordance with a Contract the Seller has sold and the Buyer has bought goods on definite terms from the ports agreed upon at the Seller or the Buyer's option. Grades, price and quantity are usually stated in the Contract.
The price for goods is understood to be per meter, kg, metric ton, box, case or per other units.
As a rule, a Contract is drawn up in two languages: in the languages of the Seller and of the Buyer. However, there are some difficulties within this process. It concerns the "rare'" languages. In this situation a Contract will be signed in English and in the “non-rare” language.
Usually a Contract is drawn up and then signed in duplicate for each partner. In other words, the Seller and the Buyer issue 4 copies of a Contract.
Contracts usually cover different forms of foreign trade. In turn foreign trade comprises 3 main activities: importing (buying goods from foreign Sellers), exporting (selling goods to foreign Buyers) and re-exporting (buying goods from foreign Sellers and selling them to foreign Buyers without processing in your own country).
All commercial activities in foreign trade may be divided into basic ones associated with the conclusion of foreign trade contracts for the exchange of goods and auxiliary ones ensuring their successful performance, associated with the carriage of goods, their insurance, banking operations (financing the deals, settlement of payments between the Sellers and the Buyers, guaranteeing the strict observance of their mutual liabilities), as well as Customs and other activities. Conclusion of agency agreements with the Suppliers for export goods and with Importers for the purchase of goods, agreements with advertising agencies, firms dealing with the market research and with other organizations helping to achieve the targets set for foreign trade also refer to auxiliary activities. There may be about 10 or more auxiliary operations to one basic.
In accordance with commercial laws existing in highly developed countries, contracts of sale and other agreements may be concluded either verbally or in writing.
The laws of Russia do not recognize the validity of any agreement concluded verbally by the Trade Representation of Russia abroad or by export or import organizations in this country. According to Russian laws contracts must always be made in the form of duely signed documents containing the terms of an agreement between two firms or associates – called counterparts (or parties) to supply goods or services as a rule at a fixed price.
Agreements and contracts made in our country are to be signed by General Director of a foreign trade association or his deputies (first signature) and by directors of firms or their deputies (second signature). Sometimes senior engineers of the firms are legally authorized to sign these documents.
In international trade contracts of sale, contracts for construction work (very often for the delivery, erection and commissioning of the equipment for industrial enterprises) and lease are most frequent among a variety of basic deals. Contracts of sale include turnkey contracts and large-scale contracts on a compensation basis. There may also be barter deals and compensatory deals.
Foreign trade activities comprise several stages:
1. market research work (analysis of the market situations)
2. choosing proper methods of trade on this particular market
3. planning foreign trade operation
4. carrying out a publicity campaign
5. preparations and conclusion of a Contract of sale with a foreign counterpart
6. fulfillment of contractual obligations.
A written Contract of sale is made out in the form of a document signed both by the Buyers and the Sellers. When there is no necessity of introducing special terms and conditions into the Contract of sale, Russian associations use standard forms of contracts containing the following clauses (articles):
1. Naming (definition) of the Parties.
2. Subject of the Contract and volume of delivery.
3. Prices and the total value (amount) of the Contract (including terms of delivery).
4. Time (dates) of delivery.
5. Terms of payment.
6. Transportation (=carriage) of goods (packing and marking, shipment).
7. The Sellers' guarantees (the quality of the goods).
8. Sanctions and compensation for damage.
9. Insurance.
10. Force majeure circumstances.
11. Arbitration.
12. General provisions.
Also, there may be standard General Conditions which form an integral part of the Contract and are either printed on the reverse side of the Contract or at the foot of the face of the Contract or attached to it.
In the case of a Contract for sophisticated machinery and equipment there may be other clauses: technical conditions, test and inspection, requirements to technical documentation, supervision of erection and putting the machinery into operation (commissioning), sending the Buyers' specialists for the purpose of training, the Sellers' obligations for technical servicing and the like. These clauses may be included in the Contract itself or in the Appendices to the contract which are an integral part of it.
When detailed special terms and conditions are introduced into the Contract or the agreement, it is customary to draw up an individual Contract or agreement in each particular case (e.g. a turnkey contract, a licence agreement).
Usually some organisations use standard forms of contracts worked out by the biggest federations and associations of merchants and importers abroad, by Exchanges, Chambers of Commerce and the like for use in particular trade. These standard forms of contracts, for example, are used in grain, seed, sugar, cotton and other trades.
CLAUSES OF A CONTRACT
A Contract forms the basis of a transaction between the Buyer and the Seller and great care is exercised when the Contract is being prepared that all the legal obligations have been stated. According to the purpose and contents, a Contract can cover: goods, services, licenses, patents, technology and know-how.
As a rule the Contract contains a number of clauses, such as:
Subject of the Contract
Price and Total Value of the Contract
Terms of Payment
Delivery
Inspection and Test
Guarantee
Packing and Marking
Arbitration
Insurance
Force Majeure circumstances, and others.
The clause Subject of the Contract contains information what exactly the Buyers buy and the Sellers sell.
The clause Price and the Total Value of the Contract is the most disputable clause of the contract. As a rule the Buyers ask the Sellers to grant them a discount on the price, as it's a trial order or they have been partners for a long time, or decide to place a bulk order, or there can be another situation. The total value of the contract includes for example, the cost of the complete equipment for the plant as well as technical documentation, knowledge and experience, engineering, after-guarantee spares and services.
The next clause is Terms of Payment. Payment in foreign trade may be made in cash and on credit. There are different methods of cash payment: by cheque, by telegraphic or telex transfers or post remittance, by a Letter of Credit or payment for collection.
The Letter of Credit is the most frequently used method of cash payment, because it is advantageous and secure both for the exporter and\for the importer though it is more expensive. In commercial practice the following types of a Letter of Credit are usually used: irrevocable, confirmed and divisible.
The next come Terms of Delivery. In accordance with the responsibilities of the parties in respect of the expenses of delivery and the risks of accidental damage to or loss of the goods there may be various terms of delivery. Most frequently used terms of delivery in international trade are CIF (cost, insurance, freight) and FOB (free on board).
A CIF price includes apart from the value of the goods the sums paid for insurance and freight (and all other transportation expenses up to the place of destination), which an FOB price does not, that means that the latter must be lower than the former since it only includes the value of goods, transportation and other expenses until the goods are on board the vessel. On FOB and CIF terms the Sellers bear the risk of accidental loss of or damage to the goods until the goods pass the ship's rail.
Inspection and Test Clause states, as a rule, that inspection and (or) test of the equipment shall be carried out at the Seller and his sub-contractors' works at the expense of the Seller in the presence of the Buyer's inspectors.
The Seller is to notify the Buyer of the readiness of the equipment for inspection and (or) test not later than 15 days before the proposed time of the inspection and (or) test.
The Buyer's inspector shall issue in due time to the Seller a Release Certificate for Shipment on the basis of the Test Certificate.
If the Buyer's inspector cannot be present on the appointed date, the Seller shall have the right to carry out the test without the Buyer's inspector. The Seller shall issue a Test Certificate, which is to be sent to the Buyer who will issue a Release Certificate for Shipment without delay.
Final tests and acceptance of the equipment for putting it into operation are to be made in the Buyer's country.
Discussing Guarantee, Packing, Marking, Insurance Clauses, let's take an example of equipment. Guarantee Clause specifies that the Seller guarantees that the supplied equipment and technological process as well as the automation and mechanization of the process of production are in conformity with the latest technical achievements which will be known and available to the Seller on the date of acceptance of the Preliminary Project. The period of guarantee shall be 12 months from the date of signing the Final Acceptance Protocol but not more than 30 months from the date of the last delivery of the equipment. If during the guarantee period the equipment supplied by the Seller proves to have some defects, the Seller undertakes to correct the detected defects or replace the defective equipment at his own expense. The above period of guarantee in respect of the repaired or replaced equipment begins from the date of putting it in operation. According to the Packing Clause the equipment shall be shipped in export seaworthy packing in accordance with the requirements of each particular type of equipment or material. The Seller shall be responsible for any damage or breakage of the goods that may be caused by improper or faulty packing. Marking Clause may state that the cases, in which the equipment will be packed, shall be marked on three sides: on the top of the case and on two opposite sides. The marking shall be clearly made with indelible paint in English and Russian. Insurance Clause stipulates that the Buyer will insure at his expense all the equipment for its full value against all usual marine risks from the moment the goods are put on board at the port of loading.
Arbitration Clause is very important, too, because unfortunately in trade errors may occur and the goods may be mishandled: accidents may happen, usually because of a hurry and mistakes in carrying out orders. They may be caused by mistyping of figures, misreading of numbers and so on, orfor more serious reasons.
One of the parties to the contract may consider that the other party has infringed the terms of the contract and may write a letter of complaint containing claims caused by different reasons.
The parties do their best to settle their claims amicably. But if they fail to come to an agreement, the claim is referred to arbitration, that will settle disputes resulting from contractual and other civil-law relations in the course of foreign trade and other international economic and scientific-technological contacts.
Finally, when all the clauses of the contract are discussed and agreed upon, the contract is signed in a definite place on a definite date in 2 copies in the mother tongues of the parties to the Contract.
METHODS OF PAYMENT
Today a modem businessman must be very educated in all spheres of market trade. So the knowledge of the main methods of payment under the different contracts becomes very necessary.
There are a lot of methods and manners of payment in private and international trade. They are classified by the numerous features and signs, for example:
1) cash payment; cashless payment
2) full payment; payment by installments
3) advance payment; payment after executing a transaction
4) payment by credit; immediate payment for the full value of the contract.
There are also different special kinds of export-import prices which are used in international trade. These prices depend on the terms of delivery, for example, sea delivery of the goods from the Sellers to the Buyers. If the terms are more attractive to the Buyers, then the price is higher and the other way round. Under this sign of prices here are the following kinds of export prices:
1) FAS (free alongside ship) is the lowest;
2) FOB (free on board);
3) CAF (cost and freight);
4) CIF (cost, insurance, freight) is the highest in this group. The main methods of payment are: cash payment and payment on a credit basis. Cash payment is divided into several methods:
1) by cheque:
as a cheque is payable in the country of origin it is not very often practiced in international business. That's why cheques are usually used for payment in home trade.
2) by telegraphic or telex transfers or post:
this payment is made in the Buyers' letter of instruction and the terms of the Contract. Actually, this method of cash payment may sometimes take several months which is naturally very disadvantageous to the Sellers. Why?
Firstly, if the inflation in economy is considerable. Secondly, a large period of time may cause different price transgresses on the part of the Buyers and also on the third part. Moreover, any delay in payment may cause any other risks, even the breakdown of the Contract.
3) by a Letter of Credit (or just: by credit)
A L/C is the most frequently used method of cash payment because it's advantageous and secure both to the Exporters and to the Importers though it is more expensive than payment by transfer.
It overcomes the gap between delivery and payment and gives protection to the Sellers by making the money available for them on the fulfillment of the transaction and to the Buyers because they know that payment will only be made against shipping documents giving them the title for the goods. This method is often used in dealings with developing countries.
4) by payment for collection:
this payment doesn't give any advantages to the Exporters because it doesn't give any guarantee that they will receive payment on time or at all. That is why the Exporter usually requires that the Importer present a guarantee of a first class bank that payment will be effected in due time.
There is also a long period of time between the delivery of the goods and actual payment. But it is advantageous to the Importer because there is no need to pay big sums of money before actually receiving the goods.
But in modern business transactions the following manners of payment are often applied:
1) payment by drafts (Bills of Exchange - B/E):
the Exporter credits the Importer which is advantageous to the latter. A draft is an order in written form from a Creditor to a Debtor to pay on demand or on a named date a certain sum of money to a company which is named on the Bill, or to their order. It's drawn by the Sellers on the Buyers and is sent through a bank to the Buyers for acceptance. The draft becomes legally bindingwhen signed and dated by the Buyers on its face and it is to be met when due, i.e. 30, 60 or 90days after presentation.
The draft may be negotiable. If the Exporter wants immediate payment, he can discount the draft. All this makes the draft a very practical method of payment in foreign trade. To sum up its advantages one should say that it simplifies the financing of export and import foreign trade and cuts down numerous movements of currency.
2) payment in advance:
the Importer credits the Exporter, for a example, the Contract may stipulate a 10 or 15% advance payment, which is advantageous to the Sellers. This method is used when the Buyers are unknown to the Sellers.