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Defining terms and conditions in import contracts.

DEFINING TERMS AND CONDITIONS IN IMPORT CONTRACTS

One of the important components of a contract for the import of goods is the section in the contract document outlining the general terms and conditions of the transaction. The specific terms and conditions of the contract consist of details on the product being purchased, the quantity being ordered, the delivery schedule, the price and other related information. The general terms and conditions spell out the remaining duties and obligations as agreed to between the importer and the foreign supplier. They are called "general" because of their wider application to a number of similar transactions. The general terms and conditions are thus supplemental to the specific terms and conditions and form an integral part of the contract of purchase.

What they entail

The terms and conditions of an import contract are intended to define with clarity and precision the obligations and the rights of the two parties (the importer and the foreign supplier) so that the scope for misinterpretation and misunderstanding during the transaction is minimized. They also set down the legal framework that will apply in the event of a dispute arising from the transaction (in the case of purchases from foreign sources).

Contract terms and conditions may differ from one buying operation to another, depending on the nature of the goods and services to be procured. Attempts have been made by trade and industry, as well as by various international agencies, to develop standard general conditions of contract for specific categories of products and services. Familiarization with these models can help in drafting terms and conditions for a specific transaction. However each particular case needs to be considered on its own. The relative bargaining strength of the buyer and the seller and market conditions at the time of the sale are among the elements that influence the way in which the terms and conditions are drawn up.

Although the content of the terms and conditions may therefore vary from one situation to the next, the following are among the more common such clauses in a contract:

1. Definitions: The purpose of this clause in the set of general terms and conditions is to define some of the terminology used in the contract so that both parties known precisely what a particular term implies. For example, the clause on definitions may read as follows:

"`The purchaser' means (name of the procurement organization), which is purchasing the goods. `The supplier' means (name of the `The supplier' means (name of the firm), which is supplying the goods under the contract. `The goods' means all of the equipment, machinery and other materials that the supplier is required to furnish to the purchaser under the contract."

2. Marking: When goods are packed, they are marked for easy identification. The use of a specific design or symbol makes it easier to isolate them for clearance at the ports and at customs. The clause on marking may, for example, read:

"Each bag to be marked in English in Roman

characters:

Sun Rise Trading Company

Sugar refined

Net weight

Crop year

Country of origin"

3. Packing: The clause on packing should contain special packing instructions for the supplier that may be required because of the nature of goods and/or the transport modes or routes. (In the absence of a special clause, the supplier may use the packing material and method that is customary in trade.) The clause may be as follows:

"The supplier shall provide such packing of the

goods as is required to prevent their damage or

deterioration during transit to their final destination

as indicated in the contract. The packing

shall be sufficient to withstand, without

limitation, rough handling during transit

and exposure to extreme temperatures, salt

and precipitation during transit and open

storage."

4. Facilities for tests and inspection: A buyer may wish to inspect goods either during the manufacturing process, before or after they are packed and shipped, or after installation (in the case of machinery). The clause on this subject must therefore provide for the manufacturer to facilitate these procedures. Such a clause can also define the distribution of inspection costs between the supplier and the buyer. An example of this type of clause:

"The supplier shall provide, without extra

charge, all materials, tools, labour and assistance

of every kind that the purchaser may

consider necessary for any tests and examinations

that he shall require to be made on the

supplier's premises, and shall pay costs attendant

thereon.

The supplier shall also provide and deliver, free

of charge, at such place as the purchaser may

direct, such materials as he may require to be

tested by chemical analysis or independent

testing processes. The cost of any such tests

will be defrayed by the purchaser, unless it is

stated in the specification that it is to be paid

by the supplier."

5. Patent rights and indemnity: In purchase contracts, particularly for nonstandardized products in which the infringement of property rights (such as patents, trademarks and designs) is a possibility, the purchaser should provide for a clause to protect himself, for example:

"The supplier shall indemnify the purchaser

against all third-party claims of infringement

of patent, trademark or industrial design

rights arising from use of the goods or any part

thereof in the purchaser's country."

6. Warranty: This clause provides details of warranties and the time period over which they will be operative. It is a form of guarantee and an undertaking on the part of the supplier that goods will be free of defects in design, workmanship and materials. An example of such a clause:

"The contractor warrants that everything to be

furnished hereunder shall be free from all defects

and faults in material, workmanship and

manufacture and is consistent with the established

and generally accepted standards for

material of the type ordered and in full conformity

with the specifications, drawings or samples,

if any, and shall, if operable, operate properly.

The warranty shall apply to inspection of,

payment for and acceptance of the goods, but

shall expire (except in respect of complaints notified

to the contractor prior to such date) fifteen

months after their delivery or twelve

months after their arrival at the ultimate destination,

whichever shall be sooner."

7. Payment: Different terms and methods of payment are possible, including cash on delivery, cash against documents, letter of credit, advance part payments and progress payments. A clause on payments indicates the terms and methods of payment that have been agreed to by the parties. An example of a clause on payment terms is:

"The buyer will make payment by demand draft

within 21 days of receipt of a `clean' on-board

bill of lading or through an irrevocable letter

of credit on presentation of documents stipulated

in the contract."

8. Default: This clause defines the circumstances under which the contract may be cancelled. Some buyers require and claim damages following cancellation of a contract on account of default. A suitable phrase can be incorporated into the clause for this purpose, for instance:

"Should the contractor fail to deliver the supplies

as specified in the contract, or commit

any breach or fail to comply with any term or

condition of the contract, or go bankrupt or

make an assignment for the benefit of creditors,

or, being a corporation, go into liquidation,

whether compulsory or voluntary (other

than for the purpose of reconstruction or amalgamation

while solvent), or have a receiver or

manager appointed for its property or any part

therefore, the purchaser may, without prejudice

to any rights that would otherwise arise

hereunder, or in any other way, cancel the contract

in respect of all or any of the supplies that

then remain undelivered."

9. Liquidated damages: Liquidated damages are intended to compensate the buyer for any losses that he may have incurred as a result of delays in delivery by the supplier. They are usually stipulated as a percentage of the contract value and for acceptable periods of delay, e.g.:

"If the supplier fails to deliver any or all of the

goods within the time period(s) specified in the

contract, the purchaser shall, without prejudice

to his other remedies under the contract,

deduct from the contract price, as liquidated

damages, a sum equivalent to 0.5 percent of

the delivered price of the delayed goods for each

week of delay until actual delivery or performance,

up to a maximum deduction of 10 percent

of the contract price of the delayed goods.

Once the maximum is reached, the purchaser

may consider termination of the contract."

10. Force majeure: The purpose of this clause is to protect the supplier if he is not able to fulfill the contract due to circumstances beyond his control, for reasons such as war, fire, floods and strikes, which could not reasonably be anticipated at the time the contract was concluded. There are no internationally accepted rules for the situation of "force majeure." Since different countries have different definitions of this term, the parties to the contract should stipulate what this term means. An example:

"The supplier shall not be liable for forfeiture of

his performance security, liquidated damages

or termination for default, if and to the extent

that his delay in performance or other failure to

perform his obligations under the contract is

the result of an event of `force majeure. For

purposes of this clause, `force majeure' means

an event beyond the control of the supplier

and not attributable to the supplier's fault or

negligence and not foreseeable. Such events

may include, but are not restricted to, acts of

the purchaser either in his sovereign or contractual

capacity, wars or revolutions, fires,

floods, epidemics, quarantine restrictions and

freight embargoes.

If a `force majeure' situation arises, the supplier

shall promptly notify the purchaser in writing

of such condition and the cause thereof.

Unless otherwise directed by the purchaser in

writing, the supplier shall continue to perform

his obligations under the contract as far as is

reasonably practical, and shall seek all reasonable

alternative means for performance not prevented

by the `force majeure' event."

11. Dispute settlement: Such a clause establishes an agreed mechanism for setting any future dispute connected with the transaction if the buyer and the seller fail to resolve it through their own efforts. A clause to this effect could read:

"All disputes or differences between the parties

to the contract with respect to any matter arising

out of or relating to the contract shall be

referred to arbitration in accordance with the

provisions of the Arbitration Convention of the

International Chamber of Commerce."

Need for adaptation

The examples of terms and conditions given above are only illustrative of what can be applied in certain circumstances. Each actual case must be looked at on its own, in terms of the buyer's procurement objectives, the nature of the product, the supply source, the volume and value of the goods, the relative bargaining strengths of the parties and so on. For standardized products it may be possible to use the same terms and conditions from one transaction to another with only minor changes. In the case of nonstandarized products, however, new terms and conditions may have to be drawn up each time, and the advice of a legal expert may be required. (See also ITC's new publication, A Compendium of Contracts on Import Procurement of Goods: Vol. I - Food and Non-food Commodities, Vol. II - General Supplies and Vol. III - Machinery, Plant and Equipment.)

PHOTO : General terms and conditions have a wide application to a number of similar transactions.

PHOTO : The packing clause should contain special instructions related to the nature of the goods.

PHOTO : The clause on force majeure protects the supplier if circumstances beyond his control arise.

PHOTO : A clause on payments gives the terms and methods of payment agreed to by the two parties.
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Title Annotation:Import Operations
Author:Raina, Hari K.
Publication:International Trade Forum
Date:Jul 1, 1990
Words:1968
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