The closeness of a foreign sales contract in Binh Minh Household Joint Stock Company
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In delivery term, the Company has failed to clearly define applicable price. In fact, it merely defined “CIF Hai Phong” (See Appendix for reference) that does not feature any Incoterms. Such vagueness may result in inconsistent price term between the Buyer and Seller, and a dispute then is inevitable. This becomes so problematic if the Company enters transaction with its counterparts who tend to conduct their unique business practices that are not in line with INCOTERMS. In this case, the Company will certainly become the lossing party if the event is brought to the court for arbitration. For instance, as for FOB shipment term, the US counterparts are entitled to adopt one out of two separate conditions, namely INCOTERMS (in accordance with ICC) and FOB-US – a local business custom. Despite of arbitrariness of INCOTERMS, in international transactions, any contract should be subject to a certain INCOTERMS to equate discrepancies, misinterpretation in cost calculation amongst parties.
d characteristics as follows:
Objects of the contract: include Seller and Buyer from at least two different countries. Nevertheless, it is noted that the factor of nationality shall not make non-sense in case the Buyer and Seller have different nationalities but their trading is conducted in only one territory or country.
Type of currency: can be a foreign currency to one or both Parties.
Goods – under the contract: shall be delivered from the Seller’s country to the Buyer’s country or somewhere else required by the Buyer.
2.1.3. Contract Content
In reality, a contract is a rather self-determined business document. In other words, the parties can make contract with provisions in their sole discretion; Of course, such provisions must be agreed by both Parties to become the binding ones. Despite this fact, it is possible to divide them into three separate categories as mentioned hereunder:
184.108.40.206. Key provisions:
These provisions are deemed to form integral parts of a contract. They are constituted of six provisions as follows:
- Quality and specifications
- Term of price
- Term of delivery
- Term of payment
220.127.116.11. Common provisions:
In addition to the aforementioned provisions, depending on real situations and requirements of both Seller and Buyer, a contract may cover some other terms such as:
- Packing and Marking
- Inspection and Claim
- Force Majeure
18.104.22.168. Free provisions:
These provisions, to some extent, are not compulsory ones. However, they can contribute to increase the closeness of the contract. To put in another way, such terms together with those aforesaid ones Giúp minimize any dispute arising between the Buyer and Seller during their transactions. They may be provisions in relation to amendment, notice, contract termination, etc.
Generally, owing to freedom of sales contracts, based on the real context and mutual agreement, involved Parties can draft provisions in the support themselves. By carefully drafting “reasonable” terms, Parties shall be relieved from potential risks and disputes that can act as a basis for a long-term business relationship.
2.2. How to draft precise contract provisions
It can be said that you will not able to cover every gap and fill all loopholes in your contract provisions. Also, you can not make a perfect contract. However, it is reasonable to draft it as clearly as you possibly can. The illustrative clauses hereby are intended to give you some practice in finding ambiguities and tightening up phrases.
2.2.1 Effective date:
The contract or agreement should have a date stated as the contract date or effective date. This date is not necessarily the date when the contract was signed but rather the date from which all the contractual rights and obligations begin and from which point any term of time, usually commences. To determine a sound effective date, it is strongly advised to consider when goods should be delivered and what warranty or maintenance period should apply to work or goods
Poor provision: “This contract becomes binding on both parties when it is signed”
It can be seen that this provision is aimed to provide a designated time and means of contract formation. In other words, it intends to stipulate when the contract will come into effect. However, in the event, the contract is somehow signed by only one party, does it become binding on both, or must both parties sign to determine a common effective date? If the parties sign on different dates, which shall be effective one? If the last party to sign the contract is deemed to change a provision in it before signing, has a contract formed? These hereby can lead to any potential dispute during contract performance.
Better provision: “This contract will be binding on both parties as of the date on which it is signed by the Seller/Buyer, provided that the Seller/Buyer does not alter, delete, or add to the terms of the contract.”
2.2.2 Effective date:
Poor provision: “This contract will become binding on the parties at the time the Seller accepts the order that is detailed in the attached specification.”
This clause fails to define a particular date of acceptance – it is entirely opened-ended. To some extent, it can cause discrepancies in parties’ interpretation of this clause that may lead to the situation that the Buyer may make another same order with other supplier, whereas the Seller continues to fulfill order without notification/acceptance. Consequenly, both parties get no benefits only because of no contact, no information. The general rule is that acceptance must be within a “reasonable time” to ensure a smooth transaction.
Better provision: “This contract will become binding on the parties as of the date the Seller signs it, provided that the Seller does not alter, delete, or add to the terms of the contract and provided that the Seller signs the contract by [date], transmit a copy of the signed contract by facsimile to the buyer by [date], and sends the original signed contract by post.”
Poor provision: “The [Seller/Buyer] must insure the goods while in transit for [currency and amount]. A copy of the policy or other statement provided by the insurer must be provided to the [Seller/Buyer] before the goods are shipped. Failure to insure the goods is grounds for contract termination. Each party is responsible for obtaining on its own account any other insurance coverage for the goods that it may desire.”
This clause may be reasonable in a domestic transaction where parties are familiar with available insurance policies, but it is too strict and necessary for an international transaction. Unless parties are assured that the coverage is available in the amount designated, the failure of a party to obtain insurance coverage should not be grounds for termination of the contract.
Better provision: “The [Seller/Buyer] shall responsible for obtaining and maintaining insurance on the goods while in transit. The insurance coverage must be for the invoiced value of the goods, and the [Seller/Buyer] must be named as a loss payee. A copy of the policy or other statement provided by the insurer must be provided to the [Seller/Buyer] before the goods are shipped. If the [Seller/Buyer] fails to obtain such insurance, the [Seller/Buyer] has rights to purchase insurance coverage and to charge the cost of premiums to the [Seller/Buyer]. Each party shall responsible for obtaining on its own account any other insurance coverage for the goods that it may desire.”
2.2.4. Transfer of title time
In every complete sales transaction, there is a certain moment of time wherein the ownership of the goods by the seller ceases and passes to the others and that of the buyer begins; that is called the transfer of title. In a certain aspect, it is synonymous with transfer of risk to goods during goods delivery. It therefore draws most attention of both the seller and the buyer during their transaction from the place of the Seller to the place of the Buyer.
Poor provision: “Title to goods will pass to the Buyer when the Goods are shipped.”
When title passes, it also means that the Buyer somwhat faces the risk of loss. Therefore, this critical provision should be clear and definite. However, the term “shipped” is deemed to carry various meanings. It could simply mean that the goods have left the seller’s warehouse but not the seller’s possession. Another alternative is that the seller has transferred the goods to a land carrier, such as railway or trucking company. Or it could imply that the goods are shipped when placed on board a vessel, even if first carted over land by another carrier designated by the Buyer or the Seller.
Better provision: “Title to goods will pass to the Buyer at the time the Seller delivers the goods to the Buyer. The goods will be deemed delivered at the time they are stowed on board the vessel.”
2.2.5. Inspection rights
If you have agreed to take the goods without warranties, you should insist on adequate inspection rights, meaning you have the time, labor, and facilities available to conduct a meaningful inspection. Even if warranties are provided, inspection rights are important. Exercising a warranty is likely less convenient than simply returning goods that are not in satisfactory conditions on arrival. Therefore, it is strongly advised to pay due attention to terms of inspection rights.
Poor provision: “Before accepting the goods, the Buyer has right to inspect them at the time and place where they are delivered.”
In the event the designated time and place are convenient to the Buyer, this clause may be deemed appropriate. However, the buyer’s inspection rights will make non-sense if the buyer is unable to carry out such inspection. Thus, in case the delivery is made Ex Works - Incoterms (meaning at the seller’s warehouse), a foreign buyer is unlikely to be a...