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INTERNATIONAL CONTRACTS
1 - INTRODUCTION
International trade practice shows that the majority of transactions are carried
out without signing a contract. However, it is strongly recommended to establish
an international contract of sale for international transactions.
One can avoid doubts and misunderstandings concerning what has been agreed
during the negotiation of terms if they are set down in writing. In certain cases a
verbal agreement is legally binding, for example, when an exporter makes a sale
at an international fair.
For an export transaction, apart from the contract of sale between the exporter
and the importer, a number of other additional contracts are needed: with a bank
(e.g. a documentary credit), transport companies (bill of lading), insurance
companies (policies and certificates), etc.
Legal Advice
In come cases the rights and obligations of the contracting parties can be
assumed from the correspondence between the exporter and the importer.
However, negotiation of terms and signing of a formal contractual document are
always necessary.
Due to the complexity of international contracts, it is recommended to seek legal
advice available from law firms specialising in international contracts.
One must not forget that banks are involved in many international transactions
and the exporter is recommended to use the services of a bank with extensive
international trade experience.
Standard Model
Most international trade transactions do not use a formal contract in practice.
However, clauses in the commercial invoice and the incorporation of an
appropriate Incoterm in the export price as well as national legislation will
nevertheless imply certain obligations on the parties. In any case, we recommend
using a formal contract.
A standard model contract for international sales has been drafted by the
International Chamber of Commerce (www.iccwbo.org).
Chambers of commerce, export clubs, etc. may have standard forms, however,
one must bear in mind that these forms are not universal and the contracting
parties may amend or edit them in order to adapt them for each concrete
situation.
Although a company may have a model contract for domestic market, it is not
recommended to use it for international transactions.
Title to Goods
Every country's domestic legislation establishes whether the title to goods and
risks are assumed by the importer at the point agreed or at the point of delivery.
In this respect, we recommend consulting a legal adviser when drafting your
contract, as the money invested now may save you a great deal in avoided
litigation.
It is the task of every international trader to find out about the legal peculiarities
of every country he deals with. Incoterms established by the International
Chamber of Commerce can be invaluable in these cases.
Incoterms
An important step in facilitating international trade transactions occurred when
the International Chamber of Commerce (ICC) established Incoterms to help
parties define their obligations and delivery conditions in a contract of sale.
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Incoterms are a set of international trade rules used to determine the time and
place at which the risks and costs of an international transaction pass from one
party to another. Incoterms are a helpful tool to avoid difficulties that arise from
different interpretations of these moments in different countries or at least to
reduce a possibility of different interpretations by creating a more secure legal
framework.
Incoterms 2000 came into force on 1 January 2000.
International Chamber of Commerce
There had been many attempts by different countries since the World War II to
regulate international trade transactions, however the ICC delivery terms have
had considerable success and are recognized by the majority of countries.
The ICC regularly revises and updates Incoterms as they are used by practically
all developed countries in their international transactions in order to determine
the exact moment at which the transfer of risks takes place as well as the division
of costs relating to the transaction.
There have been several revisions of Incoterms, therefore parties must always
specify which version of Incoterms they use.
The Vienna Convention
The Vienna Convention on Contracts for the International Sales of Goods
regulates the formation of international contracts of sales. The Convention was
signed in Austria on 11 April 1980. It has been adopted by over 40 countries, the
majority of which are developed.
Contract of Sale:
Contract Layout. Acceptance, delivery and inspection.
Rights and Obligations of the Importer
Non-Compliance
Force Majeure
Protection of the Goods
Contract Layout
The layout of a contract is left entirely up to companies, it can also be accepted in
a verbal form; although there are countries signatories to the Vienna Convention
who do not accept verbal agreements and only recognise a written form of a
contract.
Acceptance. Delivery. Inspection
For a contract to be considered accepted the consignee's consent must be
obtained. Silence cannot be interpreted as consent.
The delivery of the goods must be performed according to what has been
stipulated in the contract of sale and the goods must be of the agreed quality,
quantity and type.
The goods must be inspected as soon as possible and, if the goods are noncompliant, it must be communicated to the exporter within a reasonable period of
time.
Exclusions
The Vienna Convention does not apply to sales:
Of goods bought for personal, family or household use, unless the seller, at any
time before or at the conclusion of the contract, neither knew nor ought to have
known that the goods were bought for any such use;
By auction;
On execution or otherwise by authority of law;
Of stocks, shares, investment securities, negotiable instruments or money;
Of ships, vessels, hovercraft or aircraft;
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Of
electricity. (Article 2)
Importer's Rights
If the supplied goods do not comply with the contract of sale, the importer has
the right to take one of the following actions:
Demand the delivery of substitute goods if the failure in compliance is with
regard to a central clause of the contract.
Demand a repair of the goods to resolve the problem.
The importer can also decide to terminate the contract if:
The exporter fails to fulfil one of his essential obligations.
The exporter fails to deliver the goods.
Importer's Obligations
Take the delivery of the goods as stipulated in the contract.
Pay the agreed price. If he fails, in addition to that he will have to pay interest.
Failure to Comply
Non-compliance with a contract of sale must be reported within 2 years from the
date the goods were placed at the importer's disposal. If the guarantee stipulated
in the contract of sale is of lesser length, then this period will have precedence
over the clauses of the treaty, reflecting the legal principal that terms agreed
specifically by the parties take precedence.
The exporter and the importer must be well familiar with their domestic
legislation regarding this issue.
Acknowledgement of "Loss of Potential Profit"
Each of the parties can claim for damages, that is the value of the suffered loss
and the value of the possible profit lost because of the other party's noncompliance.
Force Majeure
The party, which cannot fulfil its obligations due to force majeure, must notify the
other party about the impediment and its effects to the party's ability to continue
with its obligations. If non-fulfillment of the obligations is due to circumstances
other than force majeure, the party will be liable for the caused damages. A party
cannot be exempt from their obligations if non-fulfillment is caused due to a fault
on their part.
Parties can be exempt from their obligations if they prove that failure to fulfil
their obligations has been due to circumstances beyond their control and which
could not have been reasonably anticipated at the moment of signing the
contract.
Protection of the Goods
The exporter will need to provide proper protection of the goods should the
importer delay in taking delivery or making payment. In general one should
avoid making delivery of the goods without some form of secure payment in
place.
The exporter can retain the goods until he has received reasonable
reimbursement for the costs relating to the delay.
Additional Comment
If the importer has received the goods and intends for a valid reason to reject
them, he must take proper measures to protect the goods and can retain them
until he receives reasonable reimbursement from the exporter for the costs
relating to these measures.
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The party that is obliged to take measures to protect the goods can place them
into the warehouse of a third party at the expense of the other party, as long as
the costs are not excessive.
The party that is responsible for the protection of the goods can sell them should
the other party delay unreasonably in collecting the goods, in accepting them
once returned or in paying the costs relating to their storage. In this case the
party must give the other party sufficient notice before it sells the goods.
The goods can also be sold by the party responsible for their protection if the they
are perishable or their protection involves high costs. The party must notify the
other party of its intention to sell the goods as soon as possible.
The party that sells the goods has the right to retain from the obtained value the
sum equal to the reasonable costs resulting from the protection of the goods and
their sale.
2 - CLAUSES
An international contract is drafted based on the following:
Regulations and practice of international trade (for example, Incoterms).
Arbitration in international trade (for example, possible dispute resolution).
Here are the usual clauses of an international contract, however one should call
upon the services of a legal advisor in order to produce a well-prepared contract.
Preamble
Definitions
Duties and Obligations
Communication and Documentation
Prices
Terms of Payment
Penalties
Force Majeure
Official Authorisations and Permits
Dispute Resolution
Language
Other Conditions
* The examples have been taken from all sorts of international contracts, not only
contracts of sale.
- Preamble
This is an introduction designed to summarise the preceding negotiations and
setting out the motives that made the parties take part in the negotiations.
It is like a summary of the parties' pre-contractual activities till the moment of
establishing a contract. It serves third parties as well (for example, a judge in
case of litigation) to understand the general context of the agreement in order to
be able to interpret the clauses of the contract.
In contracts based on Anglo-Saxon law, the phrase "whereas" is often used to
define the background of the agreement and purpose for entering into the
contract.
Example of a "Preamble" Clause
AGREEMENT made as of this ____, [2001] (the "Effective Date") by and between
ABC CORPORATION, with its principal place of business at 7 High Street, Dublin,
Ireland (herein called "ABC"), and XYZ SOFTWARE, INC., with its principal place
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of business at 11 Green Street, San Francisco, California, USA (herein called
"XYZ").
WHEREAS, ABC is the developer and owner of a certain computer program known
as ABC (the "ABC Software");
WHEREAS, XYZ is the developer and owner of a certain computer program known
as XYZ Software;
WHEREAS, ABC is the developer and owner of certain application programmer
interface software and documentation which are used in the development of
interfaces between application software and the ABC Database (the "Interface
Software"), and desires to license the Interface Software to XYZ; AND
WHEREAS, the parties desire XYZ to have the right to distribute the ABC
Software.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties agree as follows:
- Definitions
This is a list of definitions of key concepts in the contract. This clause is necessary
in order to avoid repetitions throughout the rest of the contract and to
understand the intent of certain terms.
Example of a "Definitions" Clause
Definitions
1.1 "Anniversary Date"
Shall mean the following: (i) if the Effective Date is on or between January 1 and
June 30 of a calendar year, then the Anniversary Date shall be June 30 of each
succeeding calendar year; and (ii) if the
Effective Date is on or between July 1 and December 31 of a calendar year, then
the Anniversary Date shall be December 31 of each succeeding calendar year.
1.2 "Documentation"
Shall mean the ABC user manuals, programmer guides, system guides and
related ABC publications which are supplied to XYZ by ABC and the user manuals
for the ABC Software.
1.3 "XYZ Products"
Shall mean application software now or hereafter licensed or distributed by XYZ.
- Duties and Obligations
The duties and responsibilities of each party to the contract must be clearly
defined.
What is each side required to do?
By what date (if applicable)?
If something has to be delivered, whose obligation is it and who bears the
costs? Etc.
Example of a "Duties and Responsibilities" Clause
Responsibilities of Each Party to the Joint Venture
Party A and Party B shall be respectively responsible for the following matters:
Responsibilities of Party A:
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Assisting the co-operative venture company in purchasing or leasing equipment,
materials, raw materials, articles for office use, means of transportation and
communication facilities etc.;
Organising the design and construction of the premises and other engineering
facilities of the co-operative venture company;
Assisting the co-operative venture company in contacting and settling the
fundamental facilities such as water, electricity, transportation etc.;
Assisting the co-operative venture in recruiting management personnel, technical
personnel, workers and other personnel needed;
Responsible for handling other matters entrusted by the co-operative venture
company.
Responsibilities of Party B:
Providing cash, machinery and equipment, industrial property, etc. in accordance
with the provisions of Article 11 and Article 12, 13, and responsible for shipping
capital goods such as machinery and equipment, etc.;
Handling the matters entrusted by the co-operative venture company, such as
selecting and purchasing machinery and equipment, etc.;
Providing necessary technical personnel for installing, testing and trial production
of the equipment as well as the technical personnel for production and inspecting;
In case Party B is the licenser, it shall be responsible for the stable production of
qualified products of the co-operative venture company in the light of design
capacity within the specified period;
Responsible for other matters entrusted by the joint venture company.
(Note: It shall be written according to the specific situation).
- Communication and Documentation
Here one specifies how the parties are to carry out their communications
under this contract.
If a contract is complex, one or several annexes with detailed descriptions, notes,
plans, prices, specifications, standards, etc. can be attached to the contract. The
description of all additional documentation should also be provided. All documents
must come into force at the moment of signing the contract. There must be a
clear statement that any agreement prior to the contract has no legal effect.
Example of a "Communication and Documentation" Clause
Communication and Documentation
In order to fulfil the terms and conditions stipulated in the present contract, the
parties shall use the following means of communication:
Regular correspondence: by airmail for ordinary matters;
Fax or telex for urgent matters;
Telephone for emergencies and very urgent matters.
The documentation shall consist of all operator and user manuals, training
materials, guides, listings, specifications, and other materials for use in
conjunction with the Software, as set forth in Schedule B, annexed hereto.
Licenser shall deliver to Licensee, as specified below, five (5) complete copies of
the documentation set forth in Schedule B. Licensee shall have the right, as part
of the license granted herein, to make as many additional copies of the
documentation for its own use as it may determine.
This contract reflects the state of all agreements at the time of signing and
replaces any previous agreements. Any prior agreement to the present contract
shall be considered void. All the documentation presented under this contract is
fully valid.
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- Price
This clause must specify the contractual value established by the mutual
agreement of the parties.
It is recommended that the currency of payment and that of the contract will be
the same. In this way possible fluctuations and risk of exchange can be avoided.
The currency of payment should be a major international currency such as the
Euro or Dollar.
Prices must be set out in detail, specifying the price for each product, any
possible discounts and pricing scales applicable to volume orders. One must
define everything that comprises the price: services, guarantees, etc.
Example of a "Price" Clause
Price
As full compensation for the rights granted by Seller in the master recording(s),
Company agrees to pay the following:
a. To Seller the sum of one hundred dollars ($ 100.00 ) dollars, receipt of which
is hereby acknowledged as an advance against and recoupable out of any
royalties or license fees which may become payable to Seller pursuant to this
agreement.
b. To Seller, as to records sold within the United States, a royalty as specified in
the attached schedule A for each unit manufactured and sold by Company on
which is embodied any of the selections recorded in the master recording
purchased hereunder.
c. To Seller, as to records sold outside of the United States, and to the extent
that Company receives actual payment, a royalty at the rate of 75% of the
royalty set forth in subparagraph b above.
d. Company is not obligated to pay any of the moneys as noted in this paragraph
to Seller until such time as Company receives a license, permission, or authority,
in writing, from the owner of the copyright in the compositions that embody the
masters and which Seller is selling to Company.
- Terms of Payment
This clause determines how payment for the goods or services provided will be
effected. One must specify the time, place, currency and bank's requisites,
as well as the method of payment, either simple (shipment prior to payment) or
documentary (through bank services, payment against documents or a letter of
credit).
The date of payment can be before, after or at the time of delivery of the
goods. If there are installment payments, they must be indicated. If there is an
interest charged for late payment, it must also be specified. Sometimes, payment
can be retained as a guarantee that the purchased goods function well.
The conditions by which an importer should accept the goods can also be
specified. For example, an importer can stipulate a pre-shipment inspection of the
goods. If the method of payment is against the presentation of documents, the
parties must clearly specify which documents must be presented in order to
obtain payment for the transaction.
In order to define the place of delivery, the current Incoterms in force are used.
After an Incoterm has been chosen, it automatically defines the place of delivery
of the goods, the risk and costs each party assumes. In any case, if Incoterms
are not used, all aspects of the transaction must be covered in the contract.
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Example of a "Terms of Payment" Clause
Terms of Payment
LICENSEE agrees to pay to LICENSOR , as a compensation for the rights
transferred under this agreement, an aggregate fee of 5% (five per cent) of all
types of income obtained by LICENSEE from use of Characters, in accordance
with quarterly reports.
2.1. The minimum guaranteed fee paid by LICENSEE to LICENSOR is Twenty
Thousand United States Dollars. LICENSEE agrees to pay LICENSOR USD 20,000
on signature of contract.
2.2. The minimum guaranteed amount paid as described in paragraphs 2.2. of
this agreement shall not be reimbursed under any circumstances that may
take place during the term of this agreement or in connection herewith.
2.3. The minimum guarantee and all royalty payments shall be made in full
without deduction for bank charges, withholding taxes, or other provisions.
All payments and shall be made to:
ABC Ltd.
71 Queens Street
Forest Hills, New York, NY 11375
Bank of New York
One Wall Street
New York, NY
CBB 096 983 112
Account Number 67 093 64 312 or to such other account as LICENSOR or Agent
shall inform LICENSEE.
- Penalties
This clause is necessary to define penalties applied to the parties if they fail to
comply with the conditions of the contract.
It is recommended that the penalty established would be between 10 and 15% of
the total amount of the contract. The conditions which will incur penalties in the
event of non-compliance must be defined: period of delivery, quality,
performance, etc. In order to be impartial, penalties must be set out for both
parties.
The penalty clause must be above all fair.
Example of a "Penalties" Clause
Penalties
(a) In the event of any breach or default of any of the terms or conditions
described in paragraphs 1.1.,1.2. of this agreement, LICENSEE shall be
reimbursed by LICENSOR for any and all damages resulting from such breach and
default. Damages are understood as costs and expenses incurred by LICENSEE
during the performance of this agreement as well as unrealised profits which
LICENSEE would gain in the event of LICENSORs due diligence in performing its
obligations.
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(b) In the event of any breach or default of any of the terms or conditions of this
agreement, LICENSOR shall be reimbursed by LICENSEE for any and all damages
resulting from such breach and default, including lost profits;
(c) In the event of a delay in payments of fees to LICENSOR as set forth in
Section 2 of this agreement LICENSEE shall pay to LICENSOR as a penalty 0.1%
(one tenth of a per cent) of the total amount of fees for each day that fees are
delayed, but not more than 3% (three per cent) of the total amount of fees.
- Force Majeure
Force majeure are circumstances or occurrences beyond the control and influence
of the parties, which could not be anticipated and prevent either of the parties
from fulfilling of their obligations. This clause is especially essential when trading
with "troublesome" countries.
What to do in the event of force majeure?
In the event of force majeure the other party must be informed immediately and
a period of time must be established for the other party of the contract to check
for themselves the veracity of the claim.
Example of a "Force Majeure" Clause
Force Majeure
Should either of the parties to the contract be prevented from executing the
contract by force majeure, such as earthquake, typhoon, flood, fire, war, strikes
or other unforeseen events, and their occurrence and consequences are
unpreventable and unavoidable, the prevented party shall notify the other party
by telegram without any delay, and within 15 days thereafter provide detailed
information of the events and a valid document for evidence issued by the
relevant public notary organisation explaining the reason of its inability to execute
or delay the execution of all or part of the contract. Both parties shall, through
consultations, decide whether to terminate the contract or to exempt part of the
obligations for implementation of the contract or whether to delay the execution
of the contract according to the effects of the events on the performance of the
contract.
- Official Authorisations and Permits
If the parties know what documents are required to execute the contract, these
must be described in this clause. It must also be mentioned who is responsible for
obtaining the documents, dates by which the documents must be obtained and
when they come into force.
Example of an "Official Authorisations and Permits" Clause
Authorisations
Party A agrees to handle applications for approval, registration, business license
and other matters concerning the establishment of the co-operative venture
company from relevant departments in charge of China; to processing the
application for the right to the use of a site to the authority in charge of the land.
Party B agrees to process import customs declaration for the machinery and
equipment contributed by Party A as investment and arranging the transportation
within the Chinese territory.
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The contract and its appendices shall come into force commencing from the date
of approval of the Ministry of Foreign Trade and Economic Co-operation of the
People's Republic of China (or its entrusted examination and approval authority).
- Dispute Resolution
This clause expressly states the choice of law and jurisdiction to be applied in case
of dispute. Arbitration rather than litigation is recommended to resolve disputes.
Arbitration must be fair for both parties.
In addition to fair arbitration, the parties can indicate what kind of legislation will
be applied in case of dispute: of the country of residence of the parties (Lex
foci), the country where the contract is signed (Lex loci), or of the country
where obligations are performed (Lex executions).
It is recommended to specify in this clause that the rights and obligations of the
parties are governed by what is stipulated in the contract in the first place; issues
not foreseen in the contract are regulated by the Vienna Convention; all the rest is
regulated by the legislation of the country that both parties agree upon.
Example of a "Dispute Resolution" Clause
Disputes
1. Any dispute or controversy arising out of this agreement shall be settled by
means of negotiations, which shall be put down in an additional agreement.
2. In the event of a failure to settle a dispute or controversy by negotiations it
shall be settled through arbitrage according to the rules of the International
Chamber of Commerce, Paris. French law shall be applied. English language is to
be used.
- Language
The language of the contract and supporting documentation must be specified in
this clause.
It is a sign of courtesy to draft a contract in the language of the importer. In this
case one must make sure that the contract is translated correctly in order to
avoid misinterpretations.
A contract can be drafted in one or more languages, in which case it is
recommended to use the services of legal translators. If the documentation is of a
technical nature, the parties are advised to use the services of a translator
specialized in the relevant area. If the contract is drafted in several languages, it
must be specified which language prevails. It can be also mentioned who bears
the costs of translation services.
Example of a "Language" Clause
Language
The contract shall be written in English and in ____________. Both language
versions are equally valid. In the event of any discrepancy between the two
aforementioned versions, the English version shall prevail.
- Other Conditions
This clause contains all other conditions that have not been defined in the
previous clauses.
Example of an "Other Conditions" Clause
Other Conditions
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- Changes and amendments to the present AGREEMENT are valid only if they are
made in written form and signed by empowered representatives of the parties.
- From the day of signing of the present AGREEMENT, all previous oral or written
negotiations and correspondence referring to this AGREEMENT are not legally
binding.
- PRODUCER does not have the right to transfer the rights specified in Article 1 of
the present AGREEMENT to the third parties without the written consent of
SOCIETY.
- If any provision of this AGREEMENT is determined by a court of competent
jurisdiction to be invalid or unenforceable, such determination shall not affect the
validity or enforceability of any other part or provision of this AGREEMENT.
3 - ARBITRATION
It is a method of dispute resolution relating to international contracts of sale. A
well-prepared clause on arbitration provides a basis to duly conduct arbitration in
case of litigation.
Functions of an Arbitration Clause
Exclude recourse to tribunals in order to conduct litigation, until a definitive
arbitration award is received by the parties.
Allow the arbitrators the power to investigate the matter thoroughly in order to
produce a fair award.
Indicate that in case of dispute both parties resort to arbitration conducted by
an authoritative body:
Dublin Chamber of Commerce Court of Arbitration
International Chamber of Commerce in Paris
London Court of Arbitration
American Importers and Exporters Association, etc.
However, it is always recommended to settle disagreements in an amicable
manner.
Example of an "Arbitration" Clause
Arbitration
Any disagreement or dispute arising in connection with the present contract, if
not resolved amicably, shall be finally settled by arbitration according to the rules
of the International Chamber of Commerce.
Official Arbitration Clauses
The following standard arbitration clause is recommended by the ICC:
'All disputes arising in connection with the present contract shall be finally settled
under the Rules of Conciliation and Arbitration of the International Chamber of
Commerce by one or more arbitrators appointed in accordance with the said
Rules'.
It is recommended to add the following specifications to a clause on arbitration:
1 - The place of arbitration shall be ___________ .
2 - The authority to designate one or more arbitrators shall be _________ .
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