Key Clauses in International Trade Contracts: Understanding the Legal Side

Legal & Regulatory Analysis

Key Clauses in International Trade Contracts: Understanding the Legal Side

In international trade, creating contracts that are clear, secure, and legally binding is key to safeguarding the interests of the involved parties (exporter-seller and importer-buyers). Essentially, this agreement sets out the rights and obligations of the parties and the remedies for breach.

International business transactions are complex in nature because they are subject to the laws of both contracting parties’ countries, making the task of contract implementation more difficult and often calling for dispute settlements. For example, one law may require that a contract be written, whereas another may not.

In this article, we aim to delve into the critical clauses of International Trade Contracts, offering insights into the legal intricacies that govern these essential agreements.

Also Read: Introduction to Charter Party Agreements: The Contracts That Move Cargo

Multinational corporations typically maintain bespoke international sales contracts, along with General Conditions of Sale and Purchase. In contrast, small to medium-sized enterprises often rely on standard forms or model contract templates.

This contract is greatly influenced by the United Nations Convention on Contracts for the International Sale of Goods (CISG), embraced globally across legal traditions, aligning commercial needs with CISG’s rules. Other key sources include the Uniform Law on the International Sale of Goods (ULIS), UNIDROIT Principles, and European Contract Law Principles, ensuring contracts are comprehensive and clear to minimize disputes.

International business contracts must, therefore, be specific and all-encompassing to significantly reduce misunderstandings, misconceptions, and disputes. For a contract to be specific and comprehensive, it must foster clear understanding and mutual agreement, thereby minimizing potential disputes.

Critical to establishing a legally binding agreement is unconditional acceptance, wherein the offeree agrees to the offer’s terms without modifications. This acceptance must be communicated effectively and unequivocally to the offeror to ensure the contract’s enforceability and the certainty of obligations and rights for all parties involved.

Unclear contracts can lead to a multitude of issues, including disputes over interpretation, costly legal battles, and performance delays, which may result in financial loss and damage to business relationships. Ambiguities may also challenge the enforceability of contracts, leading to potential legal recourse being unavailable when breaches occur.

Furthermore, such disputes can harm a company’s reputation and lead to inefficiencies and increased operational costs as parties negotiate clarifications or amendments.

1. Essential Elements for International Sale and Purchase Contracts

For buyers and sellers spanning diverse languages and global locales, certain core elements must be unequivocally outlined in their sale and purchase contracts to ensure comprehensiveness and legal robustness:

1.1. Parties

Identification of all parties involved, including the buyer, seller, and any intermediaries, is especially important when dealing with new contractual partners who may be located in different parts of the world.

This section should detail the legal names, addresses, and contact information, providing a clear point of reference for the contract. The main point is to verify the identity of the business partners.

1.2. Specification of goods

This clause is indispensable to the sale contract’s framework. Setting these out in detail in the sale contract will help both parties understand what is required.

As a general rule, buyers typically seek detailed descriptions to ensure the goods meet their commercial needs, while sellers prefer precision to guarantee delivery of the specified goods. Nevertheless, allowing for minor deviations in non-critical specifications, such as color or dimensions, can provide necessary flexibility without compromising the contract’s integrity.

If the document covers the sale of goods, it is necessary to specify within its content sufficient elements for the identification and determination of the goods in question. The document should include the following main items:

name and quantity of the goods and the unit of measure on which they are made;
description of the goods including their specifications, quality, etc.

Certain cargoes, like foodstuffs and pharmaceuticals, require specific quality standards. The term “international sale of goods” covers these transactions, but international trade also encompasses technology, services, finance, capital, and construction, often involving license contracts. Sometimes it may include additional agreements related to carriage, insurance, and foreign exchange, supplementing the primary sales contract.

1.3. Price

The parties shall clearly indicate:

The contract currency in which payment is expected
The price amount, in both figures and words
An explanation of what the price includes

1.4. Payments terms

Clause to outline how and when payments will be made. This includes payment method (e.g., letter of credit, bank transfer), payment schedule, and any conditions that must be met for payment to be released (e.g., submission of certain documents).

The selection of a payment method is influenced by various factors, such as cash flow concerns and the preference for leveraging banking services as a security measure, rather than directly transferring funds to a potentially unfamiliar business partner.

How does a documentary credit system work?

The buyer initiates a letter of credit in favor of the seller, and the buyer’s bank notifies the seller’s bank upon setup. Upon shipment, the seller submits the bills of lading to their bank, which verifies them against the contract and letter of credit. If the documents align, they are forwarded to the buyer’s bank for final approval. Upon satisfactory review, the buyer’s bank releases the bills of lading to the buyer, who then authorizes the transfer of funds to the seller.

While this system enhances transaction security by ensuring document verification, it is not foolproof. It primarily verifies document congruence, without guaranteeing the physical match of goods shipped to the goods ordered, potentially leading to discrepancies upon receipt.

1.5 Delivery Terms and Transport

Incoterms® shall be incorporated to precisely delineate the delivery terms, highlighting the exact location for goods delivery and assigning responsibilities for each phase of the transport process. This clarification is essential to ensure both parties are aligned on logistics and liability.

Detail the chosen modes of transportation, along with any specific requirements or constraints that may apply. Address which forms of transportation will be utilized and determine the party responsible for organization. It is crucial to establish whether this responsibility extends over the entire transit from seller to buyer or pertains only to specified segments.

The contract should comprehensively cover:

Provisions regarding the shipping, handling, and insurance of goods throughout their journey. This includes identifying the party responsible for securing insurance and the extent of coverage necessary to safeguard the goods against potential risks during transit.
Detailed clauses concerning the obligation to deliver the goods within agreed time frames. Since delivering the goods to the buyer is the seller’s primary responsibility, the contract must include explicit terms that govern the fulfillment of this duty. These terms should outline the processes for shipping, delivery schedules, and the protocols for handling delays or unforeseen challenges.
By establishing clear responsibilities, timelines, and procedures for the transportation and delivery of goods, the contract sets a solid foundation for a smooth and predictable transaction. This detailed approach minimizes risks and ensures both parties have a thorough understanding of their commitments, facilitating a successful exchange.

1.6. Transfer of risk

Clarifying the transfer of risk between parties is essential, as it directly impacts the insurable interest—without risk, there generally isn’t an insurable interest. However, it’s crucial to understand that legal ownership isn’t always required for an insurable interest to exist. It’s important to distinguish between the transfer of risk and the transfer of title or ownership. These are separate elements within the sale contract, with the transfer of title often occurring after the transfer of risk. This distinction ensures both parties are aware of their responsibilities and the timing of risk transfer, safeguarding their interests throughout the transaction.

1.7. Packing and Labeling

Specifying packing and labeling standards ensures that goods are adequately protected throughout transit and comply with the import regulations of the destination country. This also includes considerations for environmental regulations related to packaging materials.

It’s essential for buyers to receive goods in pristine condition, and equally crucial for sellers to mitigate any contract disputes due to damaged goods upon arrival. Therefore, the contract must clearly outline the requirements for packaging and labeling:

Packing standards: The contract should detail the expected packing methods to ensure goods are secure and protected against damage during transportation. This includes specifying the types of materials to be used, particularly if the goods are fragile or require special handling.
Labeling requirements: Clear guidelines on labeling will help in identifying the goods, ensuring they meet all regulatory compliance for the journey and at the destination. This should cover any necessary product information, handling instructions, and hazard warnings.
Packaging ownership and returns: Clauses related to packaging should clarify whether the packaging becomes the buyer’s property or remains the seller’s. If it transfers to the buyer, the contract must specify the included cost. Conversely, if it remains the seller’s property, terms should detail the timeframe within which the buyer must return it.

1.8. Custom clearance

For international shipments, customs clearance is required at both the export and import points. It’s essential to determine who will handle and finance these processes.

The contract should specify who is responsible for customs clearance, including the acquisition of necessary permits and the payment of any duties or taxes. Additionally, this section must ensure compliance with all export and import regulations.

1.9. Insurance

Detail the insurance arrangements, including:

Who is responsible for obtaining insurance. This determination often depends on the agreed Incoterms® in the contract, which dictate the point at which risk transfers from the seller to the buyer. For example, under CIF (Cost, Insurance, and Freight) terms, the seller is required to insure the goods during transport to the named port of destination.
The minimum coverage required. This amount can be influenced by the type of goods, their value, and the route taken.
Specific risks that must be covered. This might include general average, war risks, piracy, and other perils specific to the route or nature of the goods.

1.10. Penalties and Dispute Resolution

Specify the repercussions for failing to fulfill contractual duties, such as delays in delivery or payment, or delivering goods that fall short of the agreed quality standards. The contract should clearly define the mechanisms for dispute resolution, whether through arbitration, mediation, or judicial proceedings, and detail the applicable law and jurisdiction.

Contracts must articulate which actions or inactions constitute a breach and outline the available remedies for the aggrieved party. Additionally, the method for resolving disputes, including specifics like the venue for arbitration and the language to be used, should be mutually agreed upon.

Parties should have the option to choose between arbitration and litigation for dispute resolution. If arbitration is selected, the contract must indicate the arbitration location and the language to be used. Conversely, if litigation is preferred, the contract should specify which national or municipal courts will handle potential lawsuits, ensuring clarity and preparedness for any disputes that may arise.

Marlin Blue is poised to help insurers and reinsurers facing challenges with international trade contracts. Our services range from providing proactive advice to mitigate future risks to offering expert legal representation for ongoing claims.

Contact Marlin Blue for strategic legal guidance and support.