International Business Contracts

International Business Contracts

An international contract refers to a legally binding agreement between parties, based in different countries, in which they are obligated to do or not do certain things. International contracts may be written in a formal way. Most businesses create contracts in writing to make the terms of agreement clear, often seeking legal counsel when drawing important contracts. Contracts can cover all aspects of international trade. In international trade, the UNIDROIT Principles establishes general rules applicable to commercial contracts. They shall apply when the parties have agreed that their contract be governed by them. They also may be applied when the Parties have not chosen any law to govern their contract. In other cases they may be used to interpret or supplement domestic law. A contract is the result of inquiry, offer and negotiations process. It is a piece of duly signed document, which contains the negotiated and agreed detailed terms and conditions for the export and/or import of goods and/or services. It is a legal document binding on both the importer and the exporter for a specific deal in a fixed time frame. It specifies the areas of responsibilities and liabilities for the exporter and the importer. It comes into force at the time when both the interacting parties ratify it and stamp their acceptance in written form.

Types of International Contracts

There are several types of contracts; each has its own peculiarities and specialties depending upon the parties’ involved, legal aspect, important issues, expectations, responsibilities, extent of coverage and duration. Some of the most common types of contracts are listed below:
• Commodity contracts,
• Service contracts,
• Commodity cum technology contracts,
• Technology contracts,
• Technical assistance contracts,
• Agency contracts,
• Machinery contracts,
• Project contracts,
• Long term contracts,

Structure Of An International Business Contract

A contract has to have three main objectives, fairness, flexibility and security in its structure, besides it must be structured in such a way that the contracting parties are transparent in knowing their rights and responsibilities. For the domestic trade there are a number of standard contract formats but for the international trade there is so far no universally accepted format though efforts are being made by many world organizations like International Chamber of Commerce (ICC) and United Nations Commission on International Trade Law (UNCITRAL) and the International Trade Center (ITC) under United Nations Council for Trade Development (UNCTAD). What they have proposed is still at infancy stage and cannot be termed as being universally accepted format. Diversity of the commodities, regions, local laws, international conventions, and the interacting importers and the exporters are the limiting and the guiding factors for the formation of a standard format.

Parties to the Contract

Any contract or agreement must have more than one party. While forming up a contract with another party it is important they must be properly identified by reference to their name (official letterhead) and physical address (mailing address, phone, fax, e-mail, web site etc.). If the contracting parties have more than one physical address (branch offices, subsidiaries) and one of such offices would be partially or totally involved in the execution of the contract than the physical address of such extensions must also form part of the contract. The contracting parties must also specify the main communication address and the addresses where copies of the communications have to be sent during the execution phase of the contract. Lastly the name(s) of the key persons with designations who will be handling the day-to-day formalities and communications for the implementation part of the contract must also be mentioned in the body of the contract. At the onset it must be clarified as to who will be the person to sign the contract with his/her designation and the power of authority to do so, from the competent authority within the organization and his signatures duly certified by the local chamber of commerce (in case of the organization). In case the contracting authority is an individual than a documentary proof for his/her being the owner (letter from the bank or the related export promotion council, his exporter’s code, etc.) and his signatures are being duly attested by the local chamber of commerce.

Elements of a Contract

A standard contract has following elements:
• Item,
• Specifications {Standards IS/JIS/BS/ASTM/din etc., Chemical composition, Physical properties, Engineering drawing,
• Dimensions and tolerances,
• End Usage,
• Quantity,
• Quality,
• Delivery,
• Currency,
• Price,
• Payment,
• Packing,
• Inspection,
• Documentation,
• Force majeure. Hardship and Termination,

International Items

This refers to the product name both the commercial and technical. The best way is to use the one, which is referred to in the inquiry. The word item as referred in international business or any business, relates to various products, which are in variably also referred to as the commodities. “Commodity” is a representative system of classification, which makes it easier to understand the movement of products across the national borders. This classification was essential for the proper statistical data formulation of the trading nations.

The need for this classification was felt long ago when global trade started picking up especially after the formation of the United Nations in which some of the governments of the nations were represented. As the membership steadily grew and covered most of the globe the need for such standards was felt strongly than ever. The statistical commission of the Nations finally created a standard form of classification as the Standard International Trade Classification or in short SITC. Under SITC commodity grouping system each group is assigned a number. The single digit code number representing the broad category. These are called the sections. The double digit representing the sub groups called the divisions of the single digit groups. The three digit numbers are sub groups of the corresponding double-digit sub groups. All the commodities and the products have their specific markets, which are defined as primary commodities markets, industrial goods markets, and consumer goods markets. Volume wise primary goods are traded the maximum, but value wise the consumer goods are traded the maximum

Specifications

Any item, which has a name, has well defined specifications as well. In fact there cannot be any product, which has no specifications. The advancing technology has given birth to numerous products and the number is increasing day by day. Not only the products but their applications are also diversified constantly. As such the need for their proper classification is a must for proper understanding and study. This is done through standardization, which is based on the chemical composition, physical properties and the end usage. The term “specification” of a product relates to their chemical composition, physical properties and end usage. This identification is done through well-documented standards. The chemical information covers the % contents of the various elements like carbon, iron, manganese, copper etc. The physical properties cover the tensile strength; yield point and the strength of the item. The variation in the chemical composition is used for determining the net properties of the end product. Under each standard there are many sub groups or grades, each referring to different product. Though there are various standards but for given product there are equivalent standards, in business when supplier cannot supply against one specific standard, he asks for its equivalent in other standards for which he is familiar. Though the standards relate to technical studies and usually the engineers are supposed to have thorough knowledge but it is a must for a business man as well especially for the products that he is dealing with.

Dimensions and Tolerances

The dimensions and tolerances are directly related to the performance and economy of operations. These look very elementary but in reality they are the root cause for rejections and/or male functioning of the end product. As a matter of fact most of the rejections at the international level are caused by this factor only. When any product is designed and is ready for production it is given specific dimensions, which may include length, breadth, height, curvatures etc. These are calculated keeping in view the inter-relationship of various components and sub-assemblies, which must work in unison to perform, pre-determined work or the output. If any component or sub-assembly is out of tune than the whole unit fails to work in a specified manner. On the other hand suppose you manufacture the pipe with +2 mm tolerance than your pipe will be okay but consider the situation when your competitor can manufacture the same pipe with +0.5mm tolerance. His price will be competitive as compared with yours because he used lesser material to make the same pipe.

Quantity

After price and specification, the weight of the contracted goods is perhaps the most important point because it refers to the net goods to be physically transferred to the importer. As such care must be taken to indicate the specific quantity as mentioned in the contract and based on which the total value of the goods have been calculated. The unit of weight used for price calculation must be same with the one mentioned by the importer in his/her inquiry. There are two international systems of weight & measures, the imperial and the metric system. Now a day only the metric system is universally used at the international trade level, but in USA and in some other countries the imperial or some other system is also used. While specifying the measure or weight is specific in what you mention and mean, or what the other party is requesting and what you are offering. The difference between Long ton, Short ton and Metric ton must be clearly understood and used cautiously to avoid any confusion at a later stage.

Quality

Quality is the integration and utilization of Facilities and minds for perfection of reproducibility of performance with zero defects and compromises. Quality can also be regarded as performance without fault at affordable price. This is perhaps the most crucial point as far as international business is concerned. Your quality of product and service will decide whether you are in or out of the market. The thumb rule is that quality is what the customer needs. Your responsibility is to understand those needs and translate them into tangible products, which are acceptable to the customer. On the other hand if the customer is satisfied with your quality level than you have to deliver the same to the customer, nothing less and nothing more.

Delivery

The delivery terms also define the price to be calculated for the contracted goods depending upon how the goods are to be delivered. The supplier needs time to make goods ready for delivery to the importer. This time is calculated either from the date of the receipt of the detailed purchase order or the payment order likes Letter of Credit or both, from the importer. In some cases the importer may insist on calculation of the delivery period from the date of the purchase order, but mentioning in the purchase order that the L/C will be established say 2 months prior to shipment. The advantage with the importer is that his money is not blocked for the duration of the shipment period. The disadvantage with the exporter is that till the time they receive the L/C they have to use their own funds or borrow from the bank and/or the financial institutions for meeting the raw material and other utilities requirements. In some cases there are chances that the exporter has to import certain raw material for meeting the export production commitments. In such cases also he has to depend on the credits from the banking and/or institutions. In all such cases it is up to the exporter to agree or not to agree depending on the business potential and past record of exports to the importer.

Currency

The international trade is carried out for earning (and investing) the hard currency, which can be stored and exchanged as per the needs. The international currency, or as a matter of fact any currency can also be treated at par with other commodities like brand names, durability, market position, demand and supply etc. This requires a serious consideration on part of the exporters and importers to understand the term currency in its full identity and use it judiciously for the conduct of their global trade. In order to develop the basic concept and understanding of the currencies it would be better for the students, especially those without any financial educational back ground, to understand the terminology used in foreign exchange sector. Some of the most commonly used terms are discussed here under. The two may be same but not necessarily be the same. The forward rate is influence by the interest rates charged and expected to charge by the banking system. The future rates are influence by the demand and supply situation in the currency market. A hard currency is the one which can be trusted by majority of the international trading communities as dependable and freely exchangeable with minor fluctuations, the country issuing that currency must be financially solid and has depth of financial and commercial transactions world over, the country has political stability, and the country’s financial institutions are free from any restrictive controls.

Price

It may be defined as the value of a commodity or service expressed in terms of money. The survival of the organization depends on this very factor. The price in its generic term does nothing but a value indicator, but when applied to competitive market conditions of demand and supply, it shows up its worth. As an exporter or an importer you have to be very careful about the ultimate price to the final customer for getting a positive result. Therefore whether as an exporter you quote on EXW or DDP terms you have to take into consideration the impact of your price on the market and the final customer or the point of consumption. If the importer asks you for an EXW or FOB price than he has some idea of the various price loading factors up to the point of sale in the target market. An exporter who is concentrating only on the price asked for is just working on the surface of the market, but the exporter who studies the market and then decides on the pricing strategy has better chances of success. This exercise is required irrespective of whether you are working on the consumer goods or the industrial goods though for the consumer goods segment this exercise needs micro level studies as compared to the other segment where macro level studies would be sufficient. In order to understand the price structure we better understand its various units or the single elements, analysis of these elements will help us to decide the pricing strategy (also for the export marketing) for the market and/or the customer specific. And when he asks for the DDP price then he is not confident to competitively control the rest of the price elements. However this is not the rule. There are specific cases when the exporter wants to exercise control over the movement of the goods in the destination market, in that case he opts for DDP terms instead of any other term.

Factors Affecting the Export Pricing Strategy

Pricing is perhaps the most difficult factor for the international business. The starting point in any case is the corporate policy and main objective, once a decision is taken to enter a market than there are various variables, which affect your pricing strategy. What then you quote for a specific market is largely affected not only by your competitors in the market but also by the market situation itself at that particular point of time. Also if your price is subject to certain minimum quantity to be ordered of for specific delivery period than you must mention the same in your price very clearly and boldly. Anything, which is not mentioned directly, would lead to problems sooner or later depending upon which becomes the aggrieved party, the exporter or the importer.

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