What you should know about international sales contracts

 

The definition of international sales contract

An international sales contract is an agreement under which goods shall be delivered from the territory of one country to the territory of another country.

The content of the international contract

The content of the contract is the necessary conditions agreed by the parties. The basic elements of an international business contract are:

  • Names of the parties
  • Subject/object of the contract
  • Payment Terms
  • Goods quality conditions
  • Transfer of risks and responsibility from the seller to the buyer under Incoterms
  • Governing law
  • Dispute resolution clause
  • Other conditions.

Generally accepted in international trade is to use the English language in contracts for the international sale of goods. However, the parties are not limited in using additional languages. In this case, it is necessary to determine which language will be a priority, in case of any contradictions on the meaning of the contract.

Let’s take a look at each of these elements of the international sales contract.

Names of the parties

The names of the parties are fixed in the preamble and in the final part of the contract. We recommend to detail information on your counterparty, including the full company name, identification number, registration address, name and position of the signatory.

We also recommend conducting a brief due diligence of your counterparty, by checking the current information on the company, including its status (whether the company is active), powers of the representative of the company to sign the document as well. How to do this, we explained in our article.

Counterparty verification is essential if you are dealing with a new partner, and if you choose risky forms of international transactions. What forms are risky you can know in this article.

Subject/object of the contract

The subject of a foreign economic contract are actions that shall be performed by the supplier and the buyer. Object – products that shall be delivered.

This section also includes components such as the quantity and volume of goods. These characteristics should be described in the way that allows to identify what the seller shall deliver.

Payment Terms

Perhaps one of the most important elements of an international contract. This section includes such items as the amount, terms and form of payment. Regarding forms of payment, the parties can choose the following options:

  • Cash-in-Advance
  • Letter of credit
  • Documentary collection
  • Open Account
  • Consignment

To get more details on the forms of payment, find out in our article.

Quality of the goods

The quality of the goods is essential issues for the buyer. Protect yourself by describing in the international sales contract characteristics related to quality of the goods. This is especially important for agricultural products.

For example, if the object of the contract is wheat, it is necessary to indicate the variety of wheat, the crop year, the allowable percentage of impurities, the percentage of damaged grains, moisture, the allowable content of harmful impurities, pesticides, etc.

You also should not forget on fumigation of the product. It is appropriate to refer to compliance with existing quality standards for products. Be sure to specify the requirement on providing certain certificates.

Write down the conditions on inspecting the goods, taking samples and determining quality, in the event of a dispute.

Transfer of risks and responsibility from the seller to the buyer under Incoterms

For a long time, Incoterms serves as guidelines and rules for exporters, importers, lawyers and others involved in international trade.

For the first time Incoterms were presented in 1936, and today, it was adopted the eighth edition of the Incoterms.

The main functions of Incoterms are:

– determination of the rights and obligations of the seller and buyer in international transactions;

– determination of the moment of risk transfer from the seller to the buyer;

– cost sharing between the seller and buyer.

There are 11 current Incoterms rules: EXW Ex Works, FCA Free Carrier, CPT Carriage Paid To, CIP Carriage And Insurance Paid To, DAT Delivered At Terminal, DAP Delivered At Place, DDP Delivered Duty Paid, including for water transport: FAS Free Alongside Ship, FOB Free On Board, CFR Cost and Freight, CIF Cost, Insurance and Freight.

Choose the most appropriate rules for your foreign trade contract and fix it.

Governing Law

Governing law is an important element of an international business contract. It is obviously, that each party wants to have as the governing law the law of the country where the company is located. By default, the right to choose the law belongs to the party that drafts the contract, usually it is the seller.

If another party is not agreed regarding proposed governing law, you can come to a compromise by applying English law as the most effective law in international trade.

Conditions regarding the governing law are closely related to conditions on the dispute resolution clause. Clearly, that to hear the case in arbitration based in UK by using the law of another country is quite problematic.

Dispute resolution clause

In this section of the foreign trade agreement, it is necessary to define the ways of dispute resolution. It can be both a court and arbitration. If you choose arbitration, I recommend using standard arbitration clauses that you can find at the websites of arbitration organizations.

“Other conditions” include:

– The official procedure for communication between the parties (e-mail, courier delivery, via facsimile);

– the procedure for termination of the foreign trade contract;

– force majeure;

– sanctions for non-performance or improper performance of the contract;

– insurance, etc.

Standard forms of contracts

The number of model contract clauses every year becomes more and more. For example, only the Grain and Feed Trade Association (GAFTA) offers about 80 forms of contracts. You can get these contracts on the official GAFTA website for free of charge.

A large number of forms of international business contract are offered by the International Chamber of Commerce (ICC) and The Federation of Oils, Seeds and Fats Associations (FOSFA). However, to receive these forms it is required to pay fees.

You can use the above forms of contracts or some elements in drafting the contract. Nevertheless, it is necessary to choose the right form, make necessary amendments and add specific items for your transaction. 

5 rules you should take into account in contracting

1.Leave it up to a lawyer with experience in international trade to draw up a contract.

It may seem to you that everything in drafting a contract is quite simple: a lot of samples/model contract clauses and materials on the subject of international sales contract are available in internet.

However, this misunderstanding may cause significant mistakes in the contract. Finally, the party will sustain damages as result of these mistakes.

If you are not confident in your abilities, entrust the drafting of a contract to a professional.

2.Check out your counterparty

3.Think carefully whether you will be able to fulfill the contract

Breach of the contract cases to significant damages and reputation risks. Reputation is important in international trade.

4.Carefully read the contract.

Quite often, ignoring this simple rule has serious consequences. In many cases, parties do not understand their areas of ​​responsibility in the transaction.

5.Check whether the contract is properly agreed

First of all, it concerns the signatories. Do they have the authority to sign the contract, and what is their status in the company? It highly important to pay attention to this. Also, be careful how you send a contract for signing to another party, what forms of communication you use, and to whose email address you are sending the contract.

The practice knows many bad examples when the process of signing a contract took place with an unauthorized representative and, in consequence, the company denied certain actions that were performed by such representatives.

Identify the documents you enclose in the email so that later there will no doubt whether you sent certain documents to the party.

Conclusion

Drawing up an international contract is hard work requiring knowledge in international trade. If the work is done well, then the risks in your transaction will be minimal.

Model forms will help you in drafting the contract. However, it is required to choose the correct form and add necessary items specific to your transaction.

And do not forget about 5 important rules you should take into account when entering into the contract for the international sale of goods.

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