Business Contracts • The distinctive feature of international business is ‘Conflict of Laws’, as both the parties have to deal with different legal systems. It is necessary for both exporter and importer to put down the terms of the agreement, in writing, and specify the applicability of the law of the land to their contract to avoid misunderstanding and disputes. • Normally, the law applicable to the contract is where the contract is to be carried out (i.e. the place where delivery of goods takes place). Delivery of goods takes place when goods are placed on the carrier. Normally, goods are placed on the carrier in exporter’s country. So, exporter country’s law becomes applicable to the contract. Types of contracts • Oral contracts are legally binding, if the contract is for sale of goods in India. However, in Indian context, an export contract has to be in writing as documentary evidence is essential to secure special export facilities and incentives. • Constructed Contract: A constructed contract is one, which does not have written formal contract but inferred and established from the documents exchanged. The important requirement is evidence of agreement. This can be inferred from telex or fax messages, electronic data interchange with authenticity of messages, exchange of letters, purchase order or letters of credits. • If information is available to establish that there has been agreement between the exporter and importer, based on any one or all of these documents, it is adequate. Both written and constructed contracts are, equally, binding on both exporter and importer. • Form of Contract: There are no universally acceptable norms to the form of contract. There is no need of a formal contract, duly signed by both exporter and importer. The contract is not needed to be stamped even. Incoterms • A number of common sale or trade terms used in international trade to express the sale price and corresponding rights and obligations of the seller and buyer. They are defined by the International Chamber of Commerce, as Incoterms. Types of contracts • Ex Works Contract: • The seller fulfills his obligation by delivering the goods at his factory/shop/warehouse. • The buyer bears all the costs and risks in taking the goods from that place to the desired destination. • This term represents the minimum obligation on the part of the seller. In this type of contract, the obligations of the seller are the lowest and contract price is always the lowest. • Free on Board (FOB): • The seller fulfills his obligation when he delivers the goods on the ship rails at the named port of shipment. The buyer has to bear all costs and risks from that point of time. Cartage up to the port, inland insurance, port dues and loading charges into the ship are to be borne by the seller. • The seller has to take care of all these expenses. • The term can only be used for sea or inland water transport • Cost Insurance Freight (CIF): • In addition to the responsibilities associated with FOB contract, exporter has to arrange shipping space, bear the ship freight and marine insurance charges from his contract price. • • • • • • • • • • • • • • • • • • • • Duties of the Exporter Supply the goods in conformity with the contract of sale, arrange at his own expense, for shipping space by the usual route and pay freight charges for the carriage of goods; Obtain at his own risk and expense all documentation regarding government authorization necessary for the export of goods; 36 Export-Import Procedures, Documentation and Logistics Load the goods at his own expense on board the vessel at the port of shipment; (D) Procure at his own cost in a transferable form a policy of marine insurance for a value equivalent to C.I.F. plus 10%; (E) Bear all risks until the goods shall have effectively crossed the ship’s rail and furnish to the buyer a clean negotiable bill of lading; (F) Provide export licence; (G) Pay export duty if any and (H) Insure the goods. Duties of the Importer (A) Accept the documents when tendered by the exporter, if they are in conformity with the contract of sale and pay the price; (B) Receive the goods at the port of destination and bear all costs except freight and marine insurance, incurred in respect of carriage of the goods; (C) Pay unloading costs and (D) Bear all risks of the goods from the time they shall have effectively passed the ship’s rail at the port of shipment. PASSING OF TITLE OF GOODS TO THE IMPORTER In ex works contract Seller’s plant In FOB contract Port of Export In CIF contract Port of Import Major Laws having bearing on Export Contracts • Export contracts are private contracts and Government does not interfere with them so long as the provisions of the contract do not go against the provisions of various laws, which have been enacted for the export-import business contracts in India. • The following are the major laws: • Foreign Trade Development & Regulation Act, 1992: Under this Act, Director General of Foreign Trade brings out the export-import policy and lays down the procedures, from time to time. While entering into a contract, exporter has to draft the provisions of the contract in pursuance of the provisions of the Act. The exporter has to take into consideration Banned Products Quota on products Price Regulations on Products • • • Major Laws having bearing on Export Contracts • Foreign Exchange Management Act, 1999: • As per the provisions of the Act, export proceeds are to be brought into India within a period of 180 days from the date of shipment. Exporter is not to enter a contract providing a period of credit of more than 180 days to the importer unless the exports are made on deferred payment basis or goods are sent on consignment basis. Further, an exporter is not permitted to pay commission more than 12.5% to his agent, abroad for the sales made by him and so provision for payment of commission is not to be made at a higher rate in the contract, unless prior permission of RBI has been obtained. • Major Laws having bearing on Export Contracts • Pre Shipment Inspection and Quality Control Act, 1963: • Once a notification is made under the Act, certificate about pre-shipment inspection & quality control has to be obtained by the exporter. • Quality norms have to be complied with while entering into the contract with the importer. Contract can stipulate higher quality norms but does not allow to mention a lower norm than the one mentioned in the Act. Even if the importer does not insist on the certificate, it is obligator on the part of exporter to obtain the certificate from the approved agency before shipment of goods. Major Laws having bearing on Export Contracts • Customs Act, 1962: • No goods can be sent out of the country without the customs clearance. All consignment of goods can be checked by the customs to ensure that the goods stated in the invoice only are leaving the country and that there has been no over/under invoicing in this process. • The authority to check the cargo involved is vested with the customs, under this Act. Elements have to be incorporated in the export contracts: Names of the Parties 2. Description of the Products 3. Quality 4. Price per unit 5. Total value 6. Currency 7. Tax and Charges 8. Packing 9. Marking and Labelling 10. Mode of Transport 11. Delivery: Place and schedule 12. Insurance 13. Inspection 14. Documentation 15. Mode of Payment 16. Credit period, if any 17. Warranties 18. Passing of risk 19. Passing of property 20. Availability/non-availability of export-import licence 21. Force Majeure (Factors beyond the control of the parties that makes the performance of the contractual obligations impossible e.g. Wars, floods, fire, civil war. Once this specific clause is incorporated, parties are relieved of their mutual obligations, on the happening of the event. Contract comes to an end and no party is liable for damages) 22. Settlement of Disputes 23. Proper Law of the Contract 24. Jurisdiction. • There are several legal dimensions in implementation of export contracts which form part of corporate export marketing plan. These legal dimensions or issues can be broadly classified into four categories: • (i) Those Relating to export-import contracts • (ii) Those Relating to Relationships between exporter and agents/distributors • (iii) Those Relating to Products • (iv) Those Relating to Letters of Credit • Relating to Export-Import Contracts • Relationships between Exporter and Agents/Distributors • Export Agency agreement is a legal document, which establishes and defines the relationship between the principal (exporter) and agent. While drafting the export agency agreement, care is to be exercised in respect of certain points. They are summarized as under: • • • • • • • • Parties to the contract Contractual Product Contractual territory Customers Acceptance or Rejection of Orders Payment of Commission Settlement of Disputes Renewal and Termination Agency Vs Distribution Agreement • • Scope of agency and distribution agreements is different. In both the cases, exporter enters into a contract with a third party from the country, where business is to be promoted and developed. The basic differences are: • • • Title of goods This is the basic distinction between the two. In case of agency agreement, title to the goods vests with the exporter even though goods remain in the possession of the agent. Normally, goods are sent on consignment basis to agent. In case of distributorship, distributor purchases the goods on his account from the exporter and so title remains with the distributor. • • • • • Scope of Services In case of agency agreement, agent procures the order only. After the procurement of order, subsequently, exporter deals with the potential buyers directly. So, contractual relationship exists between the principal (exporter) and final buyers directly. In case of distributorship, goods are sold to the buyers by the distributor and identity of the buyers may not be known to the exporter, unless distribution agreement so provides. So, the contractual relationship is between the exporter and distributor and no contract exists between the exporter and ultimate buyers. So, title and risk lie with the distributor while it is not the case in case of agency. • Credit Terms In case of agency agreement, credit risks are to be borne by the principal only. Agent is not responsible for realisation of sale proceeds, unless Del credre clause exists. In case of distribution agreement, distributor is only responsible for credit risks as goods are, already, sold to him. • • Third Party Liability In case of agency agreement, principal is liable to third parties directly as agent states that he is acting as agent only and discloses the name of principal. Responsibility does not go back to the principal and only distributor is responsible, in case of distribution agreements. • • Control In case of agency agreement, principal enjoys absolute control on the business and buyers. So, principal can manage the business as he desires and agent’s control over the principal is rather difficult. Control of principal is always weak as distributor acts independently, buying and selling goods on his account. Once, distributor becomes powerful, he exercises more control and, at times, dictates his own terms due to proximity and control on the market. • Laws relating to Letters of Credit • Every exporter wants to enjoy the payment before the physical possession and title to goods is passed on to the importer. This becomes possible when the importer opens letter of credit in favour of exporter through the medium of bank. • By opening a letter of credit, bank makes a commitment to the exporter to make payment once the documents contained in the letter of credit are presented and, on scrutiny, found to be in order. • Opening and negotiation of letter of credit are governed by the International Chamber of Commerce Brochure No. 500 entitled”Uniform Customs & Practice for Documentary Credits” commonly known as UCP. DISPUTES SETTLEMENT • Causes for Disputes • Generally, the primary reason for disputes is quality of the goods exported. • Under contractual terms in many export contracts, importer gets the opportunity to inspect the quality of goods only when the consignment reaches him. In many cases, by that time, the exporter would have got money. Even if the consignment is sent on collection basis, importer can check the quality only after retiring the documents. Other reasons for the disputes can be delayed shipment or non-shipment due to change in government regulations or market conditions, restricting exports, etc. • Methods: • Litigation • Arbitration. Law for Enforcement of Foreign Awards in India • India is a party to International Conventions. Countries, which are members to the International Conventions, have to pass the necessary legislation for enforcement. Accordingly, Foreign Awards (Recognition and Enforcement) Act, 1961 has been passed. • Procedure for Enforcement in India: Any person interested in the award can pray the court, having jurisdiction, for filing the award. After giving notice to the parties why the award should not be filed, court pronounces the judgment according to the award, if the court is satisfied that the foreign award is enforceable under the above Act. Upon the judgment so pronounced, decree shall follow. No appeal can lie except when the judgment is in excess or not in accordance with the award. • • Enforcement of Indian Awards in Foreign Countries It is understood that awards made in India are enforceable in Foreign Countries, similarly, if the other country is a member of International Conventions. Where the other country is not a member of the International conventions or does not adhere to similar international regulations, enforcement of arbitration is beset with more difficulties.
