Risks in the Supply Chain. For companies engaged in domestic or international trade, a major concern is how to protect the company’s business interests in case of failure by the buyer or seller to perform the obligations in a sale and purchasing contract.
For example, how will an importer claim against its supplier in case of dispute in the quality of the delivered goods or in case of loss of goods while in transit? How can these risks across the supply chain be minimized or prevented?
For big companies, there are specialist lawyers that handle such scenarios. This option, however, may not be realistic particularly for small and medium-sized enterprises (SMEs). In fact, many SMEs negotiate and draft their own sales contracts without legal advice. In such cases, how can these companies deal with the legal aspects of doing business internationally? Below is a discussion of the various factors that exporters and importers should consider when preparing international sales contracts.
Managing Risks through International Model Contracts. In cross border transactions, a contract involving the sale and purchase of a merchandise will involve at least two parties – the buyer (importer) and the supplier (exporter). When an importer buys goods overseas or when an exporter sells his merchandise to a buyer abroad, the first task is how to document the transaction to ensure that the risks and benefits are allocated and defined among the parties.
This is not an easy task given the variety of international rules and business laws applicable in international trade. Another issue in such transactions is that the party with the greater bargaining power often imposes its standard terms and its national laws on the other party. In recent decades, there have been efforts to harmonize international trade rules and practices governing cross border trading.
One latest trend is the growing use of model contracts. There are currently two general international model contracts available for the trading community: (1) the International Chamber of Commerce (ICC) Model International Sales Contract for Manufactured Goods; and (2) the International Sale of Perishable Goods Model Contract proposed by the International Trade Center (ITC).
These user-friendly model contracts are ready for use, with limited clauses to be added and with the parties filling in the relevant details of their own commercial arrangements. There are also other various types of ICC model contracts available to govern various trading arrangements, e.g. selling through agents and distributors and joint venture contracts.
Application of Principles in International Contracts. Another key initiative in obtaining a balance and comprehensible contract for the trading community is the 1980 UN Convention on Contracts for International Sales of Goods (CISG), which provides a broad set of rights and obligations for both buyers and sellers, including the various options available in case of problems in the contract. Parties in countries that have not adopted CISG may still opt to base their contracts on the principles of the convention.
The CISG is also accompanied by the UNIDROIT Principles of International Contracts, which covers a much broader range of contracts other than just sales (e.g. partnership sourcing). The use of these instruments in general should minimize the role of national laws as the basis for the contract and should effectively result in a common language for trading.
Use of Standardized Trading Terms. In relation to specific trading terms used in contracts, there are presently two standardized practices developed by the ICC and extensively used by the international business community.The first is the International Commercial Terms, commonly known as Incoterms. Developed in 1936 by the ICC, the current version issued in year 2000 contains 13 terms.
These terms guide the buyer and the seller by defining their respective obligations and by reducing possible legal complications. Specifically, Incoterms also provides the rules for interpreting the trade terms by allocating transport costs and risks as well as determining the responsibility for insurance and customs. For the banking sector, the ICC has likewise standardized the rules on international Letters of Credits (L/Cs) through the Uniform Customs and Practice for Documentary Credits (UCP 500).
Trade Treaties and Model Laws. Many international treaties now also embody common rules and practices for international business. The applicability of these treaties normally depends on whether the same have been ratified by countries of the supplier and the buyer. Other than treaties, there are also model laws developed to harmonize trade laws, particularly by the UN Commission on International Trade law (UNCITRAL). Additionally, there are also efforts being made to standardize and harmonize trade laws on a regional basis. In the Southeast Asian region, the ASEAN has various agreements governing international trade across the region, e.g. AFTA-CEPT, AICO.
Reducing Transaction Risks and Preventing Disputes. Obviously, various risks exist when companies engage in international trade hence, there should be proper documentation of the terms and conditions of a sale and purchasing transaction to limit those risks. While not all companies can engage the services of specialist lawyers for contract documentation and preparation, the use of model contracts provided by ICC and ITC should also reduce transactions risks when preparing such contracts without the assistance of lawyers.
Even in instances when the complexity of the trading arrangement require tailor-made contracts, the various model contracts available now should limit the role of lawyers to simply ensuring that the contract clauses reflect actual agreements and that the filling in of details is properly made.
For many trading companies, the focus now is preventing disputes and court trials by having draft contracts designed to amplify the specific terms and conditions of a particular international transaction and consequently, prevent such disputes. This shift in mindset, while requiring companies to invest in specialist legal advice, should help prevent huge financial and opportunity losses resulting from arbitration or court disputes.
The author is an international trade, indirect tax (customs) and supply chain expert. He is the Editorial Board Chairman of Asia Customs & Trade, an online portal on customs and trade developments affecting global trade and customs compliance in Asia. He was also Bureau of Customs Deputy Commissioner for Assessment and Operations Coordinating Group (2013-2016). For questions, please email at firstname.lastname@example.org and email@example.com