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 andfor 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.
3) payment in an open account:
open account terms are usually granted by the Sellers to the regular Buyers or customers in whom the Sellers have complete confidence, but sometimes they are granted if the Sellers want to attract new clients. Actual payment is made monthly, quarterly, annually as agreed upon. This method is disadvantageous to the Exporters, but may be good to gain new markets. Payments in cash and on credit are very often combined in a Contract. The currency for payment is a matter for arrangement between the parties to the Contract.
Each economic agent during the execution of the transaction wants to stand the most attractive method of payment to himself, which is the best in appropriate market conditions. In this way parties must always find a compromise.
TERMS OF DELIVERY
The Contract of sale stipulates the price and the terms of delivery, which constitute the framework of the subsequent agreements on financing, insurance and transportation. 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). An FOB price only includes the value of the 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. Other terms of delivery that may be used in foreign trade are:
1. FAS
= free alongside ship, which means that the Sellers pay for all the charges up to and including the placing of the goods alongside ship but do not pay for loading.
2. CAF
= cost and freight, which means that the Sellers undertake to pay for the cost of transportation of the goods to a specified destination. The risk passes when the goods have crossed the ship's rail at the port of loading. If the goods are carried by liners, the Sellers have to unload them at the port of destination for their account. If not by liners, the counterparts may agree to this effect, then it is indicated "cost and freight landed".
3. Ex ship
with port of destination indicated which means that the Sellers pay for all charges up to and including the placing of the goods at the disposal of the Buyers on board the vessel at the port of destination. The risk passes accordingly.
4. Ex quay
with port of destination indicated, which means that the Sellers pay for unloading the goods and the risk doesn't pass until the goods are placed on the quay in the port of destination.
The choice of the terms of delivery and the terms of payment as a rule remains with the Buyers, so they can insist, while negotiating a contract, on choosing those which they find most suitable for them.
PACKING AND MARKING
Packing and marking are important clauses of a Contract. Packing is a means, which helps to keep goods safe during transportation and storaging. There are a lot of kinds of packing. For example, some goods have inside and outside packing: perfume has inside packing (a bottle) and outside packing (a box). Packing can also be made of different materials: paper, glass, plastic, cardboard, iron and so on. Goods must be packed in full conformity with the specifications of each particular type. You can't transport glass in paper, it needs a firm kind of packing, or packing of food must keep it dry. And if packing correctly conforms with the featuresof goods, the latter would arrive safe and sound and can even withstand rough handling.
In a Contract all the above characteristics of packing should be stated. Improper or faulty packing may cause damages and breakages of goods.
Marking is usually made on packing. It must include the name and address of the Buyer, the Seller and the manufacturer of the goods, numbers of standards or technical documentation, numbers of roads, kinds of transport and some other details concerning this particular consignment of goods: weight, quantity and others. There are also various kinds of marking for goods that need careful handling, for example, WITH CARE, TOP, DO NOT TURN OVER, USE NO HOOKS and so on. There may be also pictures in marking. Some of them require careful handling too: "fragile", "avoid heat", "open here", etc.
There is also marking that states that the products or their packing are ecologically pure and don't make harm to environment: "green point", "produced of used materials", "this marking says for itself”, etc. Marking should warn of poisoned and harmful materials contained in packing.
If goods are transported by sea, their packing must be seaworthy and marking should be made with indelible paint. It is also very important that marking should be made right. Wrong marking can lead to short-shipment and short-delivery, improper handling, misdirection of the goods and many other unpleasant problems. Usually all these characteristics are stipulated in standards. Contracts only contain numbers of appropriate standards.
GUARANTEE CLAUSE OF A CONTRACT
The Guarantee Clause is one of the most important points of the Contract made on the sale and purchase of different machinery and equipment. Guarantee clauses may differ but they have features. Here is a typical Guarantee Clause. The Sellers guarantee:
1. a) that the equipment supplied corresponds to the highest achievements of the world technics for the given type of equipment;
b) high quality of the materials being used for the manufacture of the equipment (spare parts); first-rate workmanship and high quality of the technical performance and assembly;
c) that the equipment supplied (spare parts) is manufactured in full conformity with the conditions of the present Contract;
d) completeness of the delivered equipment in accordance with the conditions of the Contract.
2. The guarantee period of the normal operation of the equipment is to be 12 months from the date of putting the equipment into operation, but not more than 24 months from the time of its delivery.
3. If during the guarantee period the equipment proves to be defective or not in conformity with the terms and conditions of the Contract, the Sellers undertake immediately, at the Buyer’s request, to eliminate free of charge the detected defects by repairing or replacing the defective parts of the equipment with the new ones.
In this case the Sellers should pay the agreed and liquidated damages in accordance with the Contract terms at the rates stipulated in the contract starting from the date of the claim and up to the date when the defects have been eliminated or the new equipment has been supplied.
However, the amount of the penalty shouldn’t exceed 10% of the contractual price of the equipment.
4. The defective equipment will be sent back to the Sellers at their request and for their account within the dates agreed by the parties.
5. All transport expenses, insurance and other expenses, connected with return or replacement of the defective goods on the territory of the Buyers’ country and of a transit country as well as on the Sellers' territory are to be borne by the Sellers.
6.The above-said guarantee period in regard to the repaired equipment or newly supplied equipment will start again from the moment of putting it into operation.
7. If the Sellers fail to eliminate the claimed defects at the Buyers' request immediately or within 30 days after the date of the claim, the Buyers will have the right to eliminate the defects on their own account, the Sellers being charged with the normal actual expenses.
Small defects, the elimination ofwhich is urgent and does not require the presence of the Sellers, will be repaired by the Buyers charging the Sellers with the normal actual expenses.
8. If, while considering the claim or eliminating the defect, it will be stated that the defect cannot be eliminated or the replacement of the goods cannot be done within the dates acceptable to the Buyers the goods may be used by the Buyers without the elimination of the defect, the claim may be settled at the request of either party by means of downward revision of the price of the equipment within the rates agreed by the parties.
In case of impossibility for the Buyers to use the supplied equipment the Buyers will have the right to cancel the Contract in part of the said equipment or in whole.
INSPECTION AND TESTS
Inspection and tests play a very important role in business relations. They help to avoid many problems, which can arise in respect of the quality of the goods in future. Therefore before shipment the Sellers are to test the goods and the Buyers have the right to inspect and check the goods. They usually test theworkmanship and quality of the contractual equipment and the materials used.
Inspection and tests are carried out at the expense of the Sellers or their subcontractors. It is stipulated in the Contract.
The Buyers have the right to send their inspectors to the Sellers their subcontractors and their subcontractors' premises.
Before the inspection and test the Sellers can provide an opportunity for the Buyers' inspectors to study the similar operating equipment manufactured by the Sellers.
The Seller is to notify the Buyer of the readiness of the goods (equipment, machines) for the inspection and test. The Notification of Readiness is to be sent, for example, to the Trade Mission in the Sellers' country, and the Buyer is to be provided with a copy. The Sellers must notify the Buyers not later than 15 days, for example, before the beginning of the test.
The Contract is to stipulate that if the Buyers or their representatives within 15 days from the date of receipt of the Sellers' notification that the goods are ready for shipment, inform the Sellers that the Buyers' inspector cannot be present at the test, or if the Sellers fail to receive any information within the said period, the Sellers are entitled to perform the test without the Buyers' inspector. Sometimes the Buyers can supply the Sellers with the certificate stating that the goods are released for shipment without inspection.
The Sellers may render any assistance that can be required in obtaining visas by the Buyers' inspector and may at their expense furnish the Buyers' inspector with flats or apartments at the hotels during their stay. The Sellers are to place at their expense at the disposal of the Buyers' inspector all the facilities required for inspection of the equipment and materials as well as an interpreter if necessary.
If the tests have proved that the equipment meets the requirements specified in the Contract, the Sellers shall present to the Buyers the Test Report. One copy of the above Report is to be sent by the Sellers to the Buyers' representatives at the Trade Mission in the Sellers' country to obtain the Release Note for Shipment.
If during the tests and inspection any infringements in the technical conditions of the Contract or poor quality of the goods manufactured are found, the Sellers shall eliminate all the defects detected without delay or replace the defective goods at their expense. When the defects have been eliminated, the equipment shall be tested again if required by the Buyers.
The final tests and acceptance of the goods are to be performed in the Buyers' country after finishing the installation and adjustment of the equipment and achieving quantity and quality requirements stipulated in the Contract.
After the tests have been performed, "Report on the Final Test and Putting the Equipment into Operation" is made and signed by the Sellers and the Buyers' representatives, the detailed results of the tests performed being put in this report.
The date of signing the "Report on the Final Test and Putting the Equipment into Operat
INSURANCE OF GOODS
The export trade is subject to many risks. Ships may sink or collide; consignments may be lost or damaged. All sensible businessmen now insure goods for the full value. The idea of insurance is to obtain indemnity in case of damage or loss. Insurance is against risks.
While the goods are in a warehouse the insurance covers the risk of fire, burglary, etc.
As soon as the goods are in transit they are insured against damage by water, breakage or leakage. Other risks may also be covered.
The insured is better protected if his goods are insured against all risks. The goods may also be covered asainst general and particular average.
In the insurance business the word "average" means loss.
Particular average refers to risks affecting only one shipper's consignment.
General average refers to a loss incurred by one consignor but shared by all the other consignors who use the same vessel on the same voyage.
To insure the fulfillment of the basic contracts successfully and profitably a number of auxiliary agreements are to be concluded:
1. Marine Insurance Policies and Certificates
2. Charter Parties
3. Agency and Distributorship Agreement.
There is some difference between Marine Insurance Policy and Marine Insurance Certificate. The first is a document, which contains the terms of insurance and can be given for such a durable period of time (as usual for a year) and for a big quantity of the goods. The goods can be delivered in several lots. Marine Insurance Certificate is given for each consignment of goods. Charter Parties is a treaty on chartering the vessel. It can be concluded for one voyage and it's named "Voyage Charter Party". A treaty on a certain period is named "Time Charter Party”.
Goods can be insured with one of the insurance companies.
CLAIMS
Unfortunately as in other walks of life in trade, too, error may occur and the goods may be mishandled. Accidents may usually happen because of hurryand lack of sufficient supervision and mistakes in carrying out orders may creep in.
These may be caused by mistyping of figures, misreading of numbers or for 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 aletter of complaint containing a claim for damages, for a reduction in the price, etc.
There are various reasons for complaints. The following kinds of claims are often made by Buyers:
1) claims arising from the delivery of wrong goods, damaged or substandard goods;
2) claims connected with delays of one kind or another;
3) claims owing to goods missing from delivery (short-shipment or short-delivery);
4) claims that concern errors in carrying out an order, etc.
If the Buyer has to face a claim, he must write a statement and mail it to the Seller together with the supporting documents. Bill of Lading, Airway and Railway Bill, Survey Report, Quality Certificate may serve as documentary evidence. If necessary, drawings, photos, samples are enclosed as proofs of claims. The date of a complaint is the date on which it is mailed.
Claims can be lodged during a certain period of time, which is usually fixed in a Contract.
During the claim period the Seller is to enquire into the case and communicate his reply. He either meets the claim or declines it. The Seller declines liability if the B/L is “clean”, that is the shipping company hasn't made any remarks about the quantity or condition of the cargo shipped. The Seller has also a full right to decline a claim if the goods are disorderly stored, mishandled or misused by the Buyer.
The parties do their best to settle their differences and claims amicably, but if they fail to agree, in accordance with the corresponding clause of the Contract, the claim is submitted for arbitration in Russia to the Arbitration Commission at the Russian Chamber of Commerce and Industry.
SETTLING COMMERCIAL DISPUTES
A Contract defines rights and obligations of the parties involved. In case of breach of the Contract the sufferer makes a claim on the party, which fails to meet their contractual obligations. It is more often the case that it is the Buyer who makes a claim on the Seller.
Most often the Buyer makes quality and quantity claims on the Seller. The cause for complaints may be poor quality, breakage, damage, short-weight, leakage, etc.
In case of short-weight it is recompensed by a load sent separately or at the time of follow-up shipments. In case of damage or faults, the goods at the Buyer's option can be repaired all at the Seller's expense.
Sometimes if deviation in quality is within certain limits, the goods can be retained but with an allowance proportionate to the discrepancy in quality. This is usually the case with raw materials, foodstuffs or any other goods sent in bulk.
If the goods are missing, the Seller must necessarily locate them. Sometimes it is quite a problem as consignments may be lost when transshipped at some intermediate port or if sent to a wrong address. If the goods are not recovered, compensation must be paid by the party directly responsible for it.
If the Seller fails to deliver the goods by the date due, he is penalized. The rate of penalty is fixed in the Clause of Agreed and Liquidated Damages.
If the delay is longer than 2 months, the Buyer has the option of canceling the Contract altogether but the Seller is to compensate for the loss incurred.
The Seller in his turn is entitled to make a claim on his counterpart if the Buyer fails to meet his contractual obligations.
The Seller may inflict penalties on the Buyer if there is a default in payment.
In an FOB transaction the Seller is entitled to compensate for extra storage expenses if the Buyer's vessel bound to pick up the goods fails to call at the port in time.
In a CIF transaction the Seller may claim the demurrage if his own vessel stays idle at the port awaiting unloading.
The demurrage claims may emerge from the Buyer as well if a Contract is signed on FOB terms of delivery. If it is a CIF contract, the Buyer is liable to extra storage expenses when through the Seller's fault he cannot clear the goods from the customs within the certain period.
Financially, legitimate claims are in large part settled by debit or credit notes.
Settling commercial disputes by arbitration is practiced if the parties cannot reach mutual understanding. In this case in accordance with the corresponding clause of the Contract the claim is submitted for arbitration, in Russia to the Arbitration Commission at the Russian Chamber of Commerce and Industry. Its Statute says that it is a standing arbitration tribunal, which shall settle disputes resulting from contractual and other civil-law relations in foreign trade, and other international economic and scientific-technological contacts.
If the parties do not agree upon a single arbitration, each of them appoints (or chooses from the list of Arbitrators) their own. In this case the latter should elect the chairman from the same List.
The three of them form the arbitration tribunal, which considers the case and makes an award by a majority of votes. The awards ofthe Arbitration Commission are final and binding upon both parties and are not subject to appeal.
Arbitration expenses, which are sometimes very high, are usually borne by the loser unless otherwise agreed upon.
THE ARBITRATION CLAUSE
The Arbitration Clause is an obligatory clause of every contract in international business transactions. It includes the terms ofsettling commercial disputes, which may arise out of making the Contract. This clause also contains indications about the proper law of the Contract applied.
The Arbitration Clause is drawn up most frequently in the following way: "Should the Sellers or the Buyers fail to settle in an amicable way any dispute or difference, which may arise out of or in connection with the present Contract the same shall be referred, without recourse to law courts, to arbitration in Stockholm” (for example). That may be the Seller or the Buyer's country; the parties may also apply to arbitration in third countries. The choice depends on the amount of the arbitration expenses. Then the clause usually stipulates that the arbitration tribunal shall consist of two arbitrators and an umpire. The party, which wishes to refer the dispute for arbitration, shall notify the other party of it by a registered letter stating the name and the seat of the appointed arbitrator who may be the citizen of any country, as well as the subject of the dispute, date and number of the Contract. The other party within 30 days of the date of the said letter shall appoint the second arbitrator who may also be the citizen of any country and shall notify the first party by a registered letter of the name and the seat of the arbitrator appointed by it.
Should the party, which has received the notification of the dispute being submitted for arbitration, fail to appoint the second arbitrator, within the period indicated, the latter at the request of either party shall be appointed by the President of the Chamber of Commerce. The arbitrators shall appoint an umpire.
If the arbitrators within 30 days after their appointment fail to come to an agreement in respect of the umpire, the President of the Chamber of Commerce shall appoint the latter at the request of either party.
If the arbitrator or the umpire appointed are not able or refuse to fulfil their duties, a new arbitrator or an umpire should be appointed instead within 30 days in the same way as the other replaced.
The arbitration award shall be adopted in accordance with the conditions of the present contract by a majority of votes within 3 months of the date of the appointment of the umpire. The award should be made out in written form, state its reasons, the distribution of arbitration costs and be signed by all the members of the arbitration tribunal.
The arbitration award shall be final and binding upon both parties and without appeal. The parties undertake to fulfill the award in time and without enforcement.
FORCE MAJEURE
Force majeure is a force against which you cannot act.
Every contract has a force majeure clause. It usually includes natural disasters such as an earthquake, flood, fire, etc. It can also list such contingencies as war, embargo, and sanctions. Along with this there are some other circumstances beyond the Seller's control. The Seller may find himself in a situation when he can't fulfill his obligations under the Contract. It may happen if there is a general strike in the country, a strike of coal-miners, transport workers, etc. Production may be suspended, if there is a shortage of the energy supply. When negotiating aContract a list of contingencies must be agreed on and put into the Contract.
When a manager makes up a contract he must not think only of his one-sided interest. He must think in terms of common interest with his counterpart. Only then will he prove loyal to his partner.
In case of a contingency the Seller must notify the Buyers of a force majeure. The Clause of the Contract to this effect may run:
"Should the Seller fail to notify the Buyers of a contingency the Seller is denied a right to refer to these circumstances". The Seller is to notify the Buyer of a contingency right away. If it's done in due time, the Buyer may take immediate action to protect his interest. He may sign a contract with another supplier on similar terms or if it's impossible, he will secure the best possible terms he can have at the moment. If prices are rising, he will be quick to act and will do everything possible to negotiate the best price obtainable at the moment.
A force majeure must be a proven fact. The Seller is to submit to the Buyer a written confirmation issued by the Chamber of Commerce to this effect. The certificate testifies that a contingency really took place. It describes its nature and confirms its duration.
In a dispute between the Buyer and the Seller not only the fact of a contingency is to be ascertained. The Seller must have evidence that non-execution of a Contract or its partial fulfillment is a direct result of a contingency. If it is proved, the Seller is not liable and the execution of a Contract is postponed until all the after-effects causing damage are eliminated. A natural disaster may last only a few minutes but it'll take a lot of time to recover the loss.
The duration of a force majeure is, as a rule, 4 or 6 months. After that the Buyer has the right to cancel the Contract. The Seller in this case has no right to claim any compensation for his losses.
amendments to
the contract
It is common for Buyer's representatives to visit Seller's premises for technical or commercial discussions, either before or after a Contract has been made. Pretty often the engineering department of the Seller finds it necessary to improve the model, which the Buyer ordered under the Contract, by making a few modifications (usually shown in the attached drawings). The modifications can be very slight or considerable, but, as a rule, they are very effective and improve performance.
Any alterations to the Contract become valid if they are made in writing and signed by authorized representatives of both parties as per appropriate Clause of the Contract.
Therefore in order to finalize the matter the Seller invites the Buyer to visit his premises. And if the Customer approves of the modifications, the Seller makes an appropriate amendment to the Contract.
If the Buyer has to go abroad, the Seller usually assures him that there will be no difficulties in issuing a visa through providing an official invitation in support of the Customer's application for a visa.
The Seller reequips his workshops from time to time. As a matter of fact they may be the latest word in technology. The level of automation is usually increased and the output becomes considerably higher. As a rule the Buyer's representatives find the modifications reasonable and the Buyer doesn't object to them. After the visit the Seller sends the Buyer a draft amendment for signature.
The following Clauses of the Contract are usually more liable to changes: terms of payment, price, inspection and tests, time of delivery.
So judging from the above information you can get the procedure of making amendments to the Contract which contains 5 points:
1. Amendments to the Contract are necessary if any modifications were made after signing the Contract.
2. The Seller invites the Buyer or his authorized representatives to his premises to make sure these modifications are necessary, effective and improve performance or design.
3. If the Buyer gives his approval for these modification and finds them reasonable, both parties draw up a draft amendment
4. This draft should be coordinated and agreed on.
5. Appendices, addenda and amendments to the Contract are only valid and shall make an integral part of the Contract if issued in a written form and signed by authorized representatives of both parties.
Enquiries and offers
A lot of business transactions are opened with an enquiry. A general item of information, a price-list, a catalogue may be asked for. Detailed enquiries may express requests for the prices of specified goods, terms of delivery, etc. They are mostly short and to the point. The size of the future order may be pointed out because large-scale sales tend to reduce prices. In such cases the seller usually grants the buyer a discount or quantity discount on the list-prices. If made by telex, telephone or in a personal interview, enquiries should be confirmed by a letter.
It's impolite to leave the letter unanswered even if at the moment you are not ready to give a definite reply. A reply to an enquiry (if the seller cannot send an offer immediately) states reasons why the seller cannot send an offer at once and what is being done at the moment. It also points out alterations, if any, as to the quantity of the goods, their model, delivery dates.
If the seller can meet the Buyer's requirements, he sends an offer. The price, the terms and conditions under which a company is willing to sell goods is called an offer. It usually includes the description, the quantity, quality, and the prices of the goods, as well as the delivery or shipment period, and the delivery and payment terms (who pays the cost of delivery, of shipment and insurance and how payment will be made), marking and packing.
An offer may be firm (for a specified period) or may be free (in this case it is usually called a quotation).
A tender is a special kind of offer. It is sent in response to an invitation to submit such an offer in competition with other companies. It is usually public bodies or governments that invite tenders (in form of advertisements) for large-scale business deals, for example, construction work. Tenders are to be submitted by a fixed date, and the advertiser will select the best offer.
When an offer is not an answer to an enquiry, it is sometimes called a sales letter or circular. These are means of advertising a product or service. A sales letter is sent to prospective buyers who you may never have done business with.
Since the aim of a sales letter is to convince the reader that he should do business with you, it is essential that the letter should attract his attention. Remember how many circulars or sales letters find their way into a waste paper basket without being read.
It is also possible to attach an order form to the offer.
Competition is keen nowadays, and businessmen cannot afford to wait for people to come to them. The circulars in the letter-boxes, the commercials on TV, advertisements in the newspapers, company's letters to their counterparts (letters of introduction), etc. are instances of offers made by the business world to the public.
QUESTIONS FOR DISCUSSION
BOOK 1
Lesson 1
What do you usually do at your office?
What matters do you usually discuss with foreign businessmen?
Lesson 2
Speak on the goods you sell.
Speak on the talks you're going to have.
Lesson 6
When cannot the Seller give you a discount on the price?
On what terms do you deliver the goods to your Buyers?
What terms of payment suit you, as a rule?
What details must you clarify during the talks?
When can you sign a Contract with a Company?
Lesson 7
Why do people make reservations for flights in advance?
When do you have to pay customs duty?
What things are liable to duty?
BOOK 2
Lesson 4
When do you usually sell goods on CIF (FOB) terms?
Why do you sometimes agree to take part deliveries?
Lesson 7
Why do many companies often improve their models?
Why does the Buyer want to visit the manufacturing plant, as a rule?
When are you satisfied with your transactions?
How do you choose the Company which you'll sell your goods to?
What do you usually do if the Buyers don't want to accept prices?
What are you regular terms of payment?
Speak on a Letter of Credit.
What is a trial order?
When do the Sellers give a discount to their customers?
Lesson 9
Is it convenient to travel overnight? Why?
Why does the Buyer sometimes ask to give him drawings of the latest model?
Are your goods popular abroad? Why?
How do your goods compare with the goods of other companies?
What shops would you visit at a manufacturing plant? Why?
What can you see in different shops?
How does your latest model compare with the previous one?
BOOK 3
Lesson 2
What kind of stand can impress you when you visit an exhibition?
Why are exhibitions and fairs growing in size from year to year?
Why do we say that every exhibition is a good method to advertise different goods?
Why do fairs and exhibitions pave the way for the consolidation of peace and friendship among different nations?
What's the purpose of arranging fairs and exhibitions?
Why do foreign companies show interest in the exhibitions which are held in Russia?
Why is it necessary to have qualified stand-attendants at exhibitions?
Lesson 4
Why does the Seller sometimes have to develop special features in their goods?
Why does the Buyer often want the Seller to quote FOB terms of delivery?
Why is it necessary for our trading organizations to be in close touch with the world market?
What information can Buyers find in offers?
In what case do Buyers agree to increase an order?
What influences the price increase?
When can't the Seller offer goods for prompt delivery?
Are orders usually placed with the companies who give the lowest prices?
Lesson 5
Why are leaflets often enclosed with offers?
Why does the Buyer want the guarantee period to be extended?
Why do the Sellers arrange service visits of their engineers after the guarantee period?
Are leaflets and catalogues supplied to the Buyer only in the case of the first transactions or regularly? Why?
What kind of information do leaflets provide?
What kind of offers do Buyers find attractive?
What points do Buyers look into before they accept an offer?
In what cases are export prices revised?
What are the Seller's obligations during the guarantee period?
What is the Buyer responsible for during the guarantee period?
In what cases can the guarantee period be extended?
Why must faulty parts be replaced urgently?
In what case are defects in the equipment corrected during the guarantee period at the Buyer's expense?
Is it necessary for large and popular companies to advertise their goods through leaflets and catalogues?
Lesson 8
Why does the Buyer sometimes ask to quote for spare parts?
What information is included in specifications?
When do Sellers usually enclose specifications with offers?
What kind of document is a Bill of Lading?
Why is it very important?
What does the validity period of an offer mean?
When is it necessary for the Buyer's inspectors to be present at the test at the Seller's plant?
When can tests be carried out without the Buyer's inspectors?
What kind of document is a Notification of Readiness for Tests?
Why is it to be sent to the Buyer in advance?
What kind of document is a Test Report?
What kind of document is a Release Note for Shipment?
Why are Sellers interested in getting a Release Note for Shipment without delay?
Why do Sellers always have to pay special attention to packing?
BOOK 4
Lesson
1
What considerations are usually taken into account when an enquiry is sent?
What points does an enquiry include?
Are enquiries usually sent to one or a few different firms?
Lesson
3
How are offers initiated?
What items are usually included in an offer?
Are prospective Buyers usually invited to inspect the equipment before the Contract is signed?
Dooffers usually contain an element of advertising? What factors determine a discount?
Lesson 4
What do Contracts guarantee?
Into what 2 groups can Contracts be divided?
What important items do Contracts cover?
What are the most important clauses of the Contract?
In what way is payment to be made under the Contract?
What kind of Letter of Credit is to be opened by the Buyer?
When is the Letter of Credit to be opened by the Buyer?
For what value is payment to be made?
How long is the Letter of Credit to be valid?
In what case do the contracting parties have the right to renegotiate the price?
Why does the Contract state the right of both parties to renegotiate the price?
What factors can affect the prices for the goods (e.g. asbestos, equipment, coffee, nylon, chemical, etc.)?
What can affect the construction projects?
What factors can affect the production capacity of the plant (the delivery schedule, production programme, etc.)?
What information does a shipping schedule contain?
When are shipping schedules drawn up?
Why is it important to draw up Contracts in foreign trade? In what way do they protect the interests of the partners?
Who charters a vessel if goods are sold on FOB terms'? What terms of delivery do Russian import (export) organizations practice?
Les
son 5
Why do Buyers often visit Sellers' premises before (after) a Contract is signed?
Whatclauses of the Contract are more liable to changes? What is the procedure of making amendments to Contracts?
In what cases are amendments, alterations and modifications made?
Is much work done before a Contract is concluded? Support your point of view.
Do Sellers often extend invitations to visit their premises?
How are programmes for visits worked out?
Whyare visit programmes sometimes modified?
Are Buyers invited to Sellers' premises more often before or after the Contract has been signed?
For what purpose are they invited?
What arrangements are usually made before specialists come to the Sellers' premises?
Are Sellers usually willing to show their customers round their premises? Why?
Do businessmen always send letters to express thanks for the hospitality shown to them?
Lesson 6
Why do Sellers inform their Buyers of their decision to raise the prices?
Why do Sellers indicate the exact date when the new prices will come into force?
What factors affect the price?
Why are visits necessary for the promotion of business?
Which party usually arranges the programme of the visit?
At whose expense are visits arranged?
Why are Buyers interested in visiting Seller's premises?
BOOK 5
Lesson 1
Which clause of the Contract seems most important? Give your reasons.
In what way can each of the clauses be amended?
For what reasons can Buyers sometimes delay the visit of inspectors?
In what cases do Buyers waive inspection?
What are the main clauses of the Contract?
What manners of payment are practiced by importing and exporting trade organizations?
Why is the guarantee sum often stipulated in the Contract?
Is the time of delivery subject to changes?
What is the importance of inspection and tests?
When and where are inspections and tests carried out?
Lesson 2
For what purpose are amendments added to Contracts?
What documents are usually presented for payment?
What is the procedure of issuing a Release Note for Shipment?
Lesson 3
Against what risks are goods usually insured?
Why must shipments be insured?
What kind of document is a Letter of Guarantee?
When are Sellers not responsible for the quality of the goods during the guarantee period?
What information do Guarantee Clauses usually contain?
On what factors do Sellers' guarantees depend?
Why are two dates specified in the Guarantee Clause of Contracts for equipment?
What are usual responsibilities of Sellers in respect of packing and marking?
What packing problems may arise in the course of executing orders?
Why should extra care be taken to mark the shipments properly?
Lesson 4
Why is it preferable to settle claims in an amicable way?
Why is it wrong policy to reject unjustified claims off-hand?
What does the sum claimed depend on?
When does the dissatisfied partly claim compensation?
When does the Buyer have the right to claim a penalty?
What penalty can be claimed for the first 4 weeks of delay?
Does the Buyer have the right to claim a higher penalty after a month's delay? What does it amount to?
What is the maximum penalty that can be claimed?
Do force majeure clauses cover such complications as government decrees?
How can Buyers refund the charges incurred through the fault of Sellers?
Why do claims frequently arise in business?
What claims are made by Buyers (Sellers)?
How are claims classified?
How should a justified claim be documented?
What can the responsible party undertake after receiving the claim?
What are the ways of handling justified claims?
When do the parties in dispute resort to arbitration?
Lesson
5
What losses could be involved in the execution of the order?
Who can cover travelling expenses?
Do the parties concerned often refer their disputes to the Arbitration Commission?
Lesson 6
Do claims connected with shortage of goods often arise in foreign trade practice?
What usually causes shortage of goods delivered?
How can claims affect the relationship between trading partners?
Why do businessmen try to avoid referring claims to arbitration?
Lesson 7
What might be the cause of overdue payment?
What may be the reasons for cancelling the visit of Sellers’ experts?