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Contracts International Business Transactions

Trade is a major factor in economic development of any country including Russia. More than 145 countries of the world are our trade partners. But it was a very difficult process of forming good relations. One of the most important things in foreign trade is drawing up contracts.

What is a contract in general?

A contract is an agreement of buy-back transaction between the Buyer and the Seller. In foreign trade transactions a contract is drawn up to give legal expressions to the intention of the partners and to ensure that the obligations contained in the contract will be fulfilled.

According to the purpose and contents contracts can cover goods, services, licenses, patents, technology and know-how.

In accordance with a contract the seller has sold and the buyer has bought goods on some kinds of terms from the ports agreed upon at the seller or the buyer’s option. Grades, price and quantity are usually stated in the contract.

The price for goods is understood to be per meter, kg, metric ton, box, case or per other units of goods.

As a rule, a contract is drawn up in two languages: in the languages of the seller and of the buyer. However, there are some difficulties within this process. It concerns the “rare” languages. In this situation a contract will be signed in English and in the “nonrare” language.

Usually a contract is drawn up and then signed in duplicate for each partner. In other words, the seller and the buyer issue 4 copies of a contract.

Contracts usually cover different forms of foreign trade. In turn foreign trade comprises 3 main activities: importing (buying goods from foreign sellers), exporting (selling goods to foreign buyers) and re-exporting (buying goods from foreign sellers and selling them to foreign buyers without processing in one’s own country).

Agreements and contracts made in our country are to be signed by General Director of a foreign trade association or his deputies (first signature) and by directors of firms or their deputies (second signature). Sometimes senior engineers of the firms are legally authorized to sign these documents.

Foreign Trade Activities

Foreign trade activities comprise several stages:

1. Market research work (analysis of the market conditions)

2. Choosing proper methods of trade on this particular market

3. Planning foreign trade operation

4. Carrying out a publicity campaign

5. Preparations and conclusions of a contract of sale with a foreign counterpart

6. Fulfillment of contractual obligations

A written contract of sale is made out in the form of a document signed both by the buyers and the sellers. When there is no necessity of introducing special terms and conditions into the contract of sale. Russian associations use standard forms of contracts containing the following clauses (articles):

1. Naming (definition) of the parties

2. Subject of the Contract and volume of delivery.

3. Prices and the total value (amount) of the Contract 9including terms of delivery).

4. Time (dates) of delivery.

5. Terms of payment

6. Transportation (carriage) of goods (packing and marking, shipment).

7. The seller’s guarantees (the quality) of the goods.

8. Sanctions and compensation for damage.

9. Insurance

10. Force majeure circumstances

11. Arbitration

12. General provisions

Also, there may be standard General Conditions which form an integral part of the contract and are either printed on the reverse side of the contract or at the foot of the face of the contract or attached to it.

Clauses of a Contract

A contract forms the basis of a transaction between the buyer and the seller and great care is exercised when the contract is being prepared that all the legal obligations have been stated. According to the purpose and contents, a contract can cover: goods, services, licenses, patents, technology and know-how.

As a rule the contract contains a number of clauses, such as:

Subject of the contract

Price and total value of the contract

Terms of payment

Delivery

Inspection and test

Guarantee

Packing and marking

Arbitration

Insurance

Force majeure circumstances and others.

The clause Subject of the Contract contains information, what exactly the buyers buy and the sellers sell.

The clause Price and the total value of the contract is the most disputable clause of the contract. As a rule the buyers ask the sellers to grant them a discount on the price, as it’s a trial order or they have been partners for a long time, or decide to place a bulk order, or there can be another situation. The total value of the contract includes for example, the cost of the complete equipment for the plant as well as technical documentation, knowledge and experience, engineering, after-guarantee spares and services.

The next clause is Terms of Payment. Payment in foreign trade may be made in cash and on credit. There are different methods of cash payment: by cheque, by telegraphic or telex transfers or post remittance, by a Letter of Credit or payment for collection.

The Letter of credit is the most frequently used method of cash payment, because it is advantageous and secure both for the exporter and for the importer though it is more expensive. In commercial practice the following types of a Letter of Credit are usually used: irrevocable, confirmed and divisible.

The next come Terms of Delivery. In accordance with the responsibilities of the parties in respect of the expenses of delivery and the risks of accidental damage to or loss of the goods there may be various terms of delivery. Most frequently used terms of delivery in international trade are CIF (cost, insurance, freight) and FOB (free on board).

A CIF price includes apart from the value of the goods the sums paid for insurance and freight (and all other transportation expenses up to the place of destination), which an FOB price does not, that means that the latter must be lower than the former since it only includes the value of goods, transportation and other expenses until the goods are on board the vessel. On FOB and CIF terms the Sellers bear the risk of accidental loss of or damage to the goods until the goods pass the ship’s rail.

Methods of Payment

Today a modern businessman must be very educated in all spheres of market trade. So the knowledge of the main methods of payment under the different contracts becomes very necessary.

There are a lot of methods and manners of payment in private and international trade. They are classified by the numerous features and signs, for example:

1) Cash payment; cashless payment

2) Full payment; separate payment (payment by installments)

3) Advance payment; payment after executing a transaction

4) Payment by credit; immediate payment for the full value of the contract

There are also different special kinds of export –import prices which are used in international trade. These prices depend on the terms of delivery, for example, sea delivery of the goods from the Sellers to Buyers. If the terms are more attractive to the buyers then the price is higher and the other way round. Under this sign of prices here are the following kinds of export prices:

1) FAS (free alongside ship) is the lowest;

2) FOB (free on board);

3) CAF (cost and freight);

4) CIF (cost, insurance, freight) is the highest in this group.

The main methods of payment are: cash payment and payment on a credit basis. Cash payment is divided into several methods:

1) By cheque

As a cheque is payable in the country of origin it is not very often practiced in international business. That’s why cheques are usually used for payment in home trade.

2) By telegraphic or telex transfers or postmail;

This payment is made in the Buyer’s letter of instruction and the terms of the contract. Actually, this method of cash payment may sometimes take several months which is naturally very disadvantageous to the Sellers. Why?

Firstly, if the inflation in economy is considerable. Secondly, a large period of time may cause different price transgresses on the part of the buyers and also on the third part. Moreover, any delay in payment may cause any other risks, even the breakdown of the Contract.

3) By a Letter of Credit (or just: by credit)

A L/C is the most frequently used method of cash payment because it’s advantageous and secure both to the Exporters and to the Importers thought it is more expensive than payment by transfer.

It overcomes the gap between delivery and payment and gives protection to the Sellers by making the money available for them on the fulfillment of the transaction and to the Buyers because they know that payment will only be made against shipping documents giving them the title for the goods. This method is often used in dealings with developing countries.

4) By payment for collection:

This payment doesn’t give any advantages to the Exporters because it doesn’t give any guarantee of a first class bank that payment will be effected in due time.

There is also a long period of time between the delivery of the goods and actual payment. But it is advantageous to the Importer because there is no need to pay big sums of money before actually receiving the goods.

Manners of Payment

But in modern business transactions the following manners of payment are often applied:

1) Payment by drafts (Bills of Exchange –B/E)

The Exporter credits the Importer which is advantageous to the latter. A draft is an order in written form from a Creditor to a Debtor to pay on demand or no named date a certain sum of money to a company which is named on the Bill, or to their order. It’s drawn by the Sellers on the Buyers and is sent through a bank to the Buyers for acceptance. The draft becomes legally binding when signed and dated by the Buyers on its face and it is to be met when due, i. e. 30, 60 or 90 days after presentation.

The draft may be negotiable. If the Exporter wants immediate payment, he can discount the draft. All this makes the draft a very practical method of payment in foreign trade. To sum up its advantages one should say that it simplifies the financing of export and import foreign trade and cuts down numerous movements of currency.

2) Payment in advance:

The Importer credits the Exporter, for example, the contract may stipulate a 10 or 15 % advance payment, which is advantageous to the Sellers. This method is used when the Buyers are known to the Sellers.

3) Payment in an open account:

Open account terms are usually granted by the Sellers to the regular Buyers or customers in whom the Sellers have complete confidence, but sometimes they are granted if the Sellers want to attract new clients. Actual payment is made monthly, quarterly, annually as agreed upon. This method is disadvantageous to the Exporters, but may be good to gain new markets. Payments in cash and on credit are very often combined in a Contract. The currency for payment is a matter for arrangement between the parties to the Contract.

Each economic agent during the execution of the transaction wants to stand the most attractive method of payment to himself, which is the best in appropriate market conditions. In this way parties must always find a compromise.

Terms of delivery

The Contract of sale stipulates the price and the terms of delivery, which constitute the framework of the subsequent agreements on financing, insurance and transportation. In accordance with the responsibilities of the parties in respect of the expenses of delivery and the risks of accidental damage to or loss of the goods there may be various terms of delivery. Most frequently used terms of delivery in international trade are CIF (cost, insurance, freight) and FOB (free on board). A CIF price includes apart from the value of the goods the sums paid for insurance and freight (and all other transportation expenses up to the place of destination). A FOB price only includes the value of the goods, transportation and other expenses until the goods are on board the vessel. On FOB and CIF terms the Sellers bear the risk of accidental loss of or damage to the goods until the goods pass the ship’s rail. Other terms of delivery that may be used in foreign trade are:

1. FAS = free alongside ship, which means that the sellers pay for all the charges up to and including the placing of the goods alongside ship but do not pay for loading.

2. CAF = cost and freight, which means that the Sellers undertake to pay for the cost of transportation of the goods to a specified destination. The risk passes when the goods have crossed the ship’s rail at the port of loading. If the goods are carried by liners, the Sellers have to unload them at the port of destination for their account. If not by liners, the counterparts may agree to this effect, then it is indicated “cost and freight landed”.

3. Ex ship with port of destination indicated which means that the Sellers pay for all charges up to and including the placing of the goods at the disposal of the Buyers on board the vessel at the port of destination. The risk passes accordingly.

4. Ex quay with port of destination indicated, which means that the Sellers pay for unloading the goods and the risk doesn’t pass until the goods are placed on the quay in the port of destination.

5. The choice of the terms of delivery and the terms of payment as a rule remains with the Buyers, so they can insist, while negotiating a contract on choosing those, which they find most suitable for them.

Контрольная работа

Вариант №1

I. Спишите, подчеркните сказуемое. Определите видовременную форму и залог глагола. Переведите предложения на русский язык:

1. He left for Moscow.

2. Dogs bark but do not always bite.

3. New subjects will be studied next term.

4. I shall make coffee for you.

5. The text is being translated at the moment.

6. We have agreed to purchase their machinery.

7. The work will have been done when he comes.

8. We profited by this transaction.

9. We shall inform you.