Exporters may complete numerous successful trades with buyers without the existence of a written contract. Despite this, there are practical reasons why a written contract can assist the parties both during and after their negotiations.
A contract acts as a guide for the parties to ensure that they have discussed the essential elements of their deal. Where conflicts do occur between the parties, they are often due to the differences in their understanding of particular terms. If these terms have been discussed and are clearly set out then there will be less room for argument.
A contract can also add certainty to a situation where things have gone wrong during or after the completion of the trade. As long as the contractual terms are sufficiently certain, then a contract will more likely be enforceable in such situations.
A sale of goods contract is the founding document between the exporter and buyer. The terms of other contracts between third parties dealing with aspects of the trade such as insurance policies, a bank’s letter of credit, and transport arrangements will be dependant on the terms of the sale of goods contract. Care needs to be taken when making arrangements with third parties that the terms of those contracts are consistent with the sale of goods contract.
An exporter needs to be clear about which party the negotiations are taking place with and which party will complete the purchase. Sometimes this will not be clear. This is especially so in multi party situations where subsidiary companies with little or no assets may complete the purchase for the parent company. Exporters should satisfy themselves that the entity they are contracting with can actually perform the contract. A contract is not enforceable against non parties and so in some circumstances a contract may need to include provision for an additional party to guarantee the buyer’s obligations.
Once the negotiating parties have an understanding of which entity they are contracting with, then the requirements of the contract can be considered. Essentially, for a contract to be binding, value must pass from each party to the other. The passing of value in both directions distinguishes a contract from a gift.
In a sale of goods contract, payment of the purchase price and delivery of the goods are fundamental terms which create a binding contract.
Price and Payment
In addition to the purchase price for the goods there are other expenses such as delivery and insurance costs, taxes and duties which may need to be apportioned into the price.
Payment of the purchase price may occur in full or by making part payments. In either case, payment may occur at a different time to that of delivery. Given the range of payment possibilities, it is important that both parties understand when and how payment will occur.
It is crucial that the goods subject to the sale are described accurately in the contract. There are two key factors to be considered when describing the goods. These are the quantity and the quality of the goods. The quantity is generally not a problematic issue. On the other hand the quality of goods (the specifications) can cause problems if not accurately defined from the outset. There is potential for disagreement if the goods received by the buyer are not what the buyer had expected. The specifications also relate to the warranties given by the exporter.
Delivery and Incoterms
There are three main limbs to delivery. These are the time that delivery takes place, the place of delivery and the method of delivery. Exporters will often refer to the International Commercial Terms (Incoterms). These are designed to provide an internationally recognised set of rules for the interpretation of commonly used international trade terms relating to the rights and obligations of each party for delivery, the passing of risk, duties and transport costs.
There are thirteen different Incoterms. The Incoterm known as DDP (Delivery Duty Paid) provides that the seller will deliver the goods to the buyer, cleared for import, in the country of destination. This provides for the maximum obligation on the exporter. At the other end of the spectrum, is the term EXW (Ex Works). This provides for the minimum obligation on the seller. Delivery occurs when the goods are available for the buyer to collect from named premises (e.g. the seller’s factory) in the country of export.
Exporters need to have an understanding of the Incoterms used in their contract. An Incoterm will govern the type of transport contract required and may also affect insurance obligations. The full text of Incoterms 2000 can be purchased from the International Chamber of Commerce’s publications website, www.iccbooks.com. This is an invaluable reference for an exporter.
OTHER IMPORTANT TERMS
The basic terms of purchase price, payment, the goods and delivery will usually need to be considered in conjunction with some of the other terms specific to a sale of goods contract.
The burden of the risk of the goods getting damaged often passes from the exporter to the buyer when the goods are not in the possession of either party. Each of the Incoterms deals with the time that risk passes. If Incoterms are not used then the parties should agree on when risk passes and provide for this in their contract.
The passing of risk does not necessarily impose an obligation to insure the goods. This obligation is dependant on what the parties intend in their particular circumstances and consideration may need to be given to who will be responsible for obtaining insurance both before and after risk passes.
Some of the Incoterms deal with insurance obligations, although not all of them. An example is CIF Incoterms 2000 which provides that the seller must, at its own expense, obtain insurance for the goods for the benefit of the purchaser.
Title in the Goods
Where goods are paid for on delivery title usually passes to the buyer at the same time. However, sometimes full payment is not received until after delivery. In these situations, it is possible for exporters to retain the ownership of the goods until they have been paid for in full.
Under New Zealand law, in addition to retaining title in the contract, a seller would need to register its interest on the Personal Property Securities Register. If its interest is not registered, then the seller may encounter problems enforcing its ownership in the goods once they are in the possession of the buyer.
Other countries may have similar systems which require registration of an interest in the goods. Where an exporter intends to retain ownership in the goods until payment is received in full, it would need to make enquiry about the relevant country’s law.
Inspection of the Goods
Due to the nature of international trade, a buyer is often not able to inspect the goods it buys beforehand. This may be addressed by including provision for a time frame for notification by the buyer that the goods do not conform to the specifications.
An exporter also needs to consider what its insurance policies cover in relation to its warranties and the rights for the buyer to reject goods that do not conform to those warranties.
An exporter can address its potential contracting liability to the purchaser by limiting its liability to either the replacement or repair of the goods or reimbursing the buyer the purchase price. The extent of the rights of the buyer to reject the goods needs to be agreed. In addition, exporters always need to consider whether relevant consumer protection laws may apply independently of the contractual provisions.
Confidentiality and Intellectual Property
In many export deals confidentiality of the terms of the sale may be an issue. If there is any sensitive information then the parties should also consider a confidentiality provision in their agreement and in some instances a confidentiality agreement may need to be entered into prior to negotiations.
Sometimes the goods being sold include the use of intellectual property owned by the exporter. Where this occurs, the parties need to agree on the extent of the buyer’s rights to use the intellectual property.
An exporter relying on licences from third parties to use intellectual property may need to pass those rights onto the buyer by providing a licence in the contract. On the other hand, an exporter may wish to stipulate that no warranty is given that any intellectual property used by it will not infringe third party rights.
A force majeure event is something that occurs that is beyond the control of the parties to the contract. For example, a war, a riot, or a natural disaster. The concept of a force majeure clause is that relief should be given where a contract is unable to be performed because of such an event occurring.
Depending on the circumstances, the parties to a sale of goods contract may wish to include a force majeure clause which gives a right to either suspend the contract until the event passes or to cancel the contract. A right to only suspend the contract should be considered in light of the type of goods being supplied. For example if the goods are perishables suspension may not be appropriate. If cancellation is an option the parties will also need to consider who has the right to cancel.
A general right to terminate if a party has committed a breach, becomes insolvent or ceases to function as a going concern, should be considered by the parties.
Choice of Law and Disputes
There are usually two or more different jurisdictions that might govern a sale of goods across borders. There is a complex body of law governing the conflict of laws among different countries but often the law of the country where the contract is formed will apply.
The parties should agree on what countries law will apply to the contract. The parties should also consider how disputes will be resolved and where a formal court hearing or arbitration will occur.
The Vienna Convention for the International Sale of Goods 1980 (CISG)
If the parties agree to submit to New Zealand’s jurisdiction then they should be aware that the CISG has been adopted into New Zealand’s domestic law. The parties should consider whether they intend the CISG to apply to their contract. It is possible to contract out of the provisions of the CISG if the parties wish.
When parties negotiate the sale and purchase of goods internationally, they should give attention to the relevant written terms of their contract. This will give more certainty as to whether everyone has the same understanding in respect of each contractual term and ultimately results in less room for disagreement at a later date if things do go wrong