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Key Clauses in International Trade Contracts: Understanding the Legal Side

05/09/202402/04/2024 by encarna

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.

Legal Precision in Hull Insurance: The Impact of the Wording in Exclusion Clauses

14/03/2024 by encarna

Discussing the nuances of these terms helps clarify the extent of protection and the specific risks that are excluded, which can significantly impact both the insurer’s liability and the insured’s coverage expectations.

Let’s delve into specific examples.

1. The seemingly similar terms

The distinction between closely related terms carries different implications for coverage. For instance, the difference between “faulty design” and “faulty workmanship”, “wear and tear” and “gradual deterioration”, “seaworthiness” and “fitness for a voyage”, and “collision” versus “allision.” Each pair presents subtle differences that affect coverage.

For example, “seaworthiness” implies a vessel’s overall condition for safe maritime operations, whereas “fitness for a voyage” specifically relates to its suitability for a particular journey.

“Collision” involves impact with another moving vessel, contrasting with “allision,” which refers to striking a stationary object. These nuanced differences significantly influence the insurer’s liability and the claims process, highlighting the importance of precise terminology in policy documentation.

2. Modifications in the terminology

The adaptation of terminology within exclusion clauses in hull insurance policies testifies to an evolution in language that reflects not only advancements in maritime technology and operations but also a response to broader legal interpretations and risk management strategies.

In Nordic Rules, the transition from “ship” to “vessel” exemplifies this evolution, broadening the insured scope to include not just the physical structure and machinery but also onboard equipment and spare parts. This change, directly affecting coverage scope and potentially leading to premium adjustments due to increased insured value and covered risk, also caters to integrating advanced navigation systems that may eliminate exclusions for navigational errors.

Additionally, when utilizing older hull insurance forms, additional exclusions often added may pertain to risks that have become more prominent or better understood over time.

Regulatory changes in maritime law or insurance regulations, such as environmental concerns, necessitate policy adjustments to cover risks previously excluded. For example, during policy renewal or the negotiation of a new policy, insurers may adjust the exclusions to reflect their evolving understanding of risk exposure and the increasingly comprehensive regulatory environment. This adjustment might include more robust coverage for environmental damage or stricter liability standards for oil spills.

This shift in language is key for aligning insurance policies with the maritime sector’s current needs and risks, demonstrating an adaptation to the contemporary operational and technological realities of vessels. The aim of adding such exclusions is to clarify coverage limits in response to evolving maritime risks and legal landscapes, ensuring a clear understanding of the policy’s scope for all parties involved.

Conclusion

Exclusions are key in tailoring insurance products to specific risks and accurately pricing policies. The precision in the wording or terms of exclusion clauses is essential for delineating insurance policy coverage. Accurate language mitigates misunderstandings and potential disputes by clearly defining the scope of coverage.

At Marlin Blue, we offer guidance on how insurers can approach the process of modifying or removing exclusions, including risk analysis, market competition considerations, and policyholder communication.

For more insights and guidance, contact Marlin Blue’s team and Marlin Blue’s website at www.marlinblue.com.

Wilful misconduct

21/09/202331/05/2023 by encarna

Marlin Blue's specialist team in survey coordination

As claims handlers, we are seeing a big increase in breaking the #CMR limitation due to #wilfulmisconduct on the part of carriers.

🚚 Article 29 of the Convention on the Contract for the International Carriage of Goods by Road (CMR) specifically states that a carrier may not exclude, limit or otherwise shift the burden of proof under the CMR Convention, if the damage has been caused by their wilful misconduct or default on their part which is considered to be equivalent to wilful misconduct in the eyes of the Court seized (Article 29).

🚫 For instance, for a carrier to stray from their itinerary for no good reason (for a social call) and to leave goods unattended is an inexcusable fault amounting to a default equivalent to wilful misconduct in the meaning of Article 29 of the Convention.

In Spain, the Contract of Carriage of Goods by Road (LCTTM) is applicable to national carriage and it was made in the light of the CMR Convention. For this reason, the LCTTM contains a general principle of limitation of liability similar to the CMR Convention and a provision, Article 62, announcing in which cases such limitation shall be excluded.

Institute Yacht Clauses (IYC), or “Spanish clauses”?

20/09/202330/07/2022 by encarna

In order to sail in Spain, it’s compulsory to take out civil liability insurance for all motorboats, or for sailing boats longer than 6 metres (Royal Decree 607/1999 of 16th April 1999). When the time comes to sign their policy, your customers may be puzzled by the choice between “Spanish clauses” and “English clauses”.

Wondering where the differences lie?

Let’s start with some background information:
📝 The “English clauses”, whose official name is “Institute Yachts Clauses” (IYC) were drawn up by the Institute of London Underwriters in 1985.

📝 “Spanish clauses” is simply the term used to refer to insurance policies issued by default in Spain, which were last updated in 2014.

The main difference between both types of insurance is that…
👉 Spanish conditions work by inclusion, whereas English conditions work by exclusion.

This means that, when you take on Spanish insurance, the risk covered by the insurer are clearly stated in the policy terms and conditions. However, the English clauses include everything that is not explicitly excluded.

In a nutshell, IYC and Spanish clauses differ in terms of the coverage they grant the insured in certain areas:
·        All risks.
·        Insured value.
·        Speed warranty.
·        Theft.
·        Sister ship.
·        Charter
As yachts can vary enormously in shape, size, and use, customers will rely on their insurer or broker to advise them on which policy wording will best suit their vessel and its intended use.

In the attached carousel, you’ll find more detailed information on the criteria that differentiate both sets of clauses.

Maritime Zones: Internal Waters

20/09/202325/05/2022 by encarna

Internal waters are generally defined in relation to the territorial sea as the waters inside the inner limit of the territorial sea.

But internal waters can exist without a territorial sea, and a territorial sea can exist without internal waters. So, internal waters include littoral areas such as ports, rivers, channels, bays, lakes, and other marine spaces landward of the baseline.

Speaking about the limits of the territorial sea, as claims handlers, what might be interesting to know about internal waters?

?States have the same sovereign jurisdiction over these waters as they do over other territory. The subsoil and the aerial space below and above those areas belong to it.

? The normal baseline for measuring the breadth of the territorial sea is the low-water line along the coast as marked on large-scale charts officially recognized by the Coastal State. [UNCLOS Article 5 ].

Importance of baselines:
✅Fundamental to maritime claims
✅Define outer limits of internal waters
✅Starting point for claiming maritime zones
✅Provide basepoints for generation of limits of national maritime claims and maritime boundary negotiations

? Ships entering internal waters must conform with the rules and regulations of the Coastal or Port State (Port State Control). The Coastal State may exclude foreign flag vessels from its internal waters subject to the right of entry of vessels in distress. The right of innocent passage does not apply in internal waters. The entrance for purposes of commerce, navigation or even fisheries is subject to bilateral agreement with the Coastal State.

? For the purpose of delimiting the territorial sea, and in accordance with the Convention, ” the outermost permanent harbour works which form an integral part of the harbour system are regarded as forming part of the coast” (UNCLOS Article 11), which allows them to be used as support points for the effects of drawing the baselines straight.

? Important areas of internal waters such as navigable rivers have often, however, been subjected to special regimes, eg the international rivers regime as well as the Kiel Canal, the Suez Canal and the Panama Canal.

? All “archipelagic waters” within the outermost islands of an archipelagic state such as Indonesia or the Philippines are also considered internal waters, and are treated the same with the exception that innocent passage through them must be allowed. However, archipelagic states may limit innocent passage to designated sea lanes within these waters.

War clauses in Marine Cargo Insurance

20/09/202322/03/2022 by encarna

It has been almost a month since the military conflict in #Ukraine began. This tragic situation has led us to consider the matter of dry shipping, the war regulations under the Institute of Cargo Clauses (ICC).

A Marine Cargo Insurance policy should have an answer for every situation, even when it comes to war risks. Depending on the Country and the market, different wordings and laws are the ones regulating the cargo policies.

However, ICC has the most extensive range of clauses in marine insurance. These clauses were first created by the Institute of London Underwriters. Nowadays,Lloyd’s Market Association via its Joint Cargo Committee (JCC) is the institution in charge of developing and updating the ICC.

The most common ICC are A, B, and C and their associated clauses War and Strike Clauses, among others.

Concerning a war like the one currently happening in Ukraine and the Black Sea, it is absolutely vital to emphasize that the ICC A, B, and C regulate war exclusions on clause number 6.

Given the complexity of war conflicts, and the necessity of covering war risks, different war clauses are available.

Extended types of War Clauses:
? Institute War Clauses (Cargo)
? Institute War Clauses (Air Cargo) (excluding sendings by Post)
? Institute War Clauses (sendings by Post)

Whether you handle claims on behalf of an Insurance Company or Cargo Interest, pay special attention to the risks covered by the IWC as they could apply to the current war situation.

Key Clauses in International Trade Contracts: Understanding the Legal Side