Standard Checklist for Clauses in International Contracts

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Checklist for Clauses in International Contracts
Prepared by James S. Caldwell, J.D. (18 May 2007).
1. Description of goods/services clause: buyer beware! It is the buyer’s responsibility to
ensure that the contractual description adequately protects his interests. If the parties
have no prior dealings with each other which have already established expectations
about what should be delivered, then the seller has the right to deliver the cheapest
version of the goods/services as long as they comply with the contractual description.
For example, if the contract calls for the delivery of “chicken”, then the seller may
deliver cheaper, tough old birds (called “fowl”), used for stewing rather than more
expensive, tender young birds (called “broilers”), used for chicken parts.
2. Price clause: How much and in what currency?
3. Exchange rate price adjustment clause: If you are to bear the foreign currency
exchange rate risk in the transaction, then consider asking the other party to include an
“ERPA” clause in the contract, whereby the parties agree that:
1) the contractual price is based on an identified fixed exchange rate between
your currency, X, and the second currency, Y, (called the “base rate”), and that
2) if the exchange rate on the actual date of payment differs by more than x %
from the base rate, then
3) the contract price shall be adjusted accordingly.
4. Payment clause: On what date or by when what event occurs? Any interest (penalty)
to be paid if late? Any discount off the price if payment is early? For example, it is
common to see the following payment terms in American domestic transactions:
“Payment due in 30 days after shipment (or delivery, as the parties may agree), 5%
discount if payment is within 15 days.” The obvious goal is to speed up the seller’s
cash flow.
Which of the following payment terms shall be used?
a. payment in advance
b. partial payment in advance: what kind of split? 50% down payment
and then 50% upon delivery? Or will there be a payment schedule
tied to certain stages or events (“milestone payment schedule”)?
Sellers: try to cover your out-of-pocket expenses for materials, parts
and supplies with your customer’s money.
c. documentary sale: buyer agrees to pay upon presentation of certain
documents (in a sale of goods contract, usually the negotiable bill of
lading or other document of title to the goods and certain other
documents). This usually occurs before receipt and inspection of the
goods. Buyers: in a contract for the sale of goods, you want a
properly endorsed, clean, on-board bill of lading which is marked
“freight prepaid” if seller is supposed to pay the freight.
d. irrevocable letter of credit (akreditiv): who pays issuing bank’s fee to
open L/C (usually buyer)? Sellers want a respectable bank located in
a stable country (one not likely to impose currency control).
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e. open account: buyer pays after receipt, inspection and acceptance of
the goods.
5. barter clause: If buyer is located in an unstable country where the risk of currency
control poses a threat, and an irrevocable letter of credit will not be used, sellers
should consider inserting a barter clause into the contract whereby buyer agrees to
deliver some negotiable good to a party named by the seller in sufficient quantity to
pay the unpayable amount, if his country’s government imposes currency control and
buyer cannot legally pay the contractual amount due. Buyer agrees that the consignee
of the goods shall pay seller or seller’s named agent. Buyer agrees that the contractual
price shall be adjusted upward to cover the seller’s agent’s fee if seller has used a
“middleman” to find a buyer for the goods. Also, discuss who will pay freight and
insurance for this shipment.
6. delivery clause: When? Where? Terms of trade: FOB? CIF? DAF? etc. Warning:
CISG default rule is delivery occurs when seller hands the goods over to the first
carrier if the contract calls for carriage of the goods and no particular place of delivery
is identified. Any required shipment date? Any required arrival date?
7. choice of law and of forum clause: Which jurisdiction’s law shall govern the contract?
Any disputes arising under the contract shall be brought before the courts of which
jurisdiction?
8. arbitration clause: if the parties want to take any contractual disputes to arbitration
instead of litigation, then there should be an arbitration clause, otherwise there is no
obligation to go to arbitration.
The clause should cover the following elements:
1) the rules of which body shall control the process? E.g., ICC, London Court of
International Arbitration, etc.?
2) choose either to restrict the arbitrator’s powers in advance (e.g., forbid certain
remedies, etc.), or allow the arbitrator to decide the matter according to what is
ex aequo et bono (equitable and good).
3) the choice of law and choice of location of the arbitration should be agreed
upon.
9. limitation of liability clause: Sellers are particularly protected by this clause. Under
the laws of many jurisdictions, sellers bear unlimited liability for damages for which
they are liable unless the parties agree to limit the sellers’ liability. Many times,
sellers limit their liability to the amount of the contract. They also exclude liability for
lost profits and other consequential or incidental damages.
10. force majeure clause: Usually operates to excuse a seller’s non-performance due to
foreseeable forces beyond his control which prevent him from performing his
contractual obligations. Drafting of this clause is a detailed task: the clause must
individually identify each factor which will excuse the non-performance. Therefore,
this clause will vary somewhat for each industry.
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Sellers: ask your operations managers what could go wrong that is beyond our control
and prevent our delivery under this contract?
Buyers: review this clause to make sure seller has not completely relieved himself of
all risk under the contract. If seller has no risk at all, then why bother having a contract
at all? Bearing risk is the seller’s price for earning the reward called profit. From the
buyer’s point of view, the profit should be commensurate to the risk borne.
Sellers: You are making a serious mistake to not include this clause. If some
foreseeable intervening factor beyond your control prevents you from performing
under the contract, such as an act or order of the government, or a strike by your
workers, or a delay in transportation not caused by you, you remain liable to the buyer
for your non-performance. Beware: many courts consider almost any intervening
factor to be foreseeable, so if you forget this clause, you will probably be liable, even
though it’s not your fault you could not perform!
11. penalty clause: the parties agree on “liquidated damages” in case of breach of contract,
i.e., the amount of liability is fixed in advance by agreement. Be careful: most legal
systems require that the amount of damages be reasonably related to the actual amount
of damages. In other words, the clause cannot provide a windfall profit to the
aggrieved party or it can be held unenforceable.
12. unilateral buy-out clause in joint venture agreements: when the parties agree that one
party has the right to unilaterally buy out the other party upon its discretion, or upon the
occurrence of an identified event. The buyer under this clause will want to either agree on
a fixed price for the seller’s portion of the business, or want agreement on some formula
to determine the price. The seller may not be amenable to a reasonable buy-out, so buyers
want this matter settled in advance.
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