International contracts


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International contracts

  1. 1. Developed & Powered by: 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 ( 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. © GTI & The electronic Business School of Ireland 2000-2003
  2. 2. Developed & Powered by: 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 non- compliant, 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; © GTI & The electronic Business School of Ireland 2000-2003
  3. 3. Developed & Powered by: 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 non- compliance. 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. © GTI & The electronic Business School of Ireland 2000-2003
  4. 4. Developed & Powered by: 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 © GTI & The electronic Business School of Ireland 2000-2003
  5. 5. Developed & Powered by: 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: © GTI & The electronic Business School of Ireland 2000-2003
  6. 6. Developed & Powered by: 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. © GTI & The electronic Business School of Ireland 2000-2003
  7. 7. Developed & Powered by: - 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. © GTI & The electronic Business School of Ireland 2000-2003
  8. 8. Developed & Powered by: 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. © GTI & The electronic Business School of Ireland 2000-2003
  9. 9. Developed & Powered by: (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. © GTI & The electronic Business School of Ireland 2000-2003
  10. 10. Developed & Powered by: 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 © GTI & The electronic Business School of Ireland 2000-2003
  11. 11. Developed & Powered by: - 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 _________ . © GTI & The electronic Business School of Ireland 2000-2003