Analysis of the international sales contract

Jul, 13 2021

Contents:

The universal form of regulation of trade relations on import and export of industrial goods and services is the international contract of sale.

Legal regulation of such contracts is based on the Vienna Convention adopted in 1980.

First of all, it should be remembered that the Vienna Convention replaced The Hague convention of 1964. It was made to simplify and unify the rules of drawing up contracts. Although not all countries have acceded to the Vienna Convention (the United States, Brazil, India, Great Britain, etc.), but 85 countries have directly signed it and non-signatory countries have the rules and regulations stipulated in the convention. After all, it is the provisions of the convention allows the most complete analysis of the international sales contract before its conclusion.

Russian companies when entering into international agreements, usually use either the provisions signed in Vienna or one of the national laws, and usually use the Anglo-Saxon law, which is used in the UK, Australia, New Zealand and Canada. 

If a party to the agreement does not wish to apply the convention provisions, the “expressed statement” principle applies – the party specifies which law (national or foreign, etc) it intends to apply in concluding the transaction. Such a declaration will not be regarded as an exception to the application of the convention rules. 

The Chamber of Commerce, according to the adopted convention rules, provides a model file, but in accordance with the rules of freedom of contract, the participants have the opportunity to conclude them in any other form, regardless of the essence.

Ddifferences of contracts of sale 

The scope of application of contracts of sale is very wide, but far from universal, and it should be distinguished from other market transactions. There are cases when the participants use a contract form that is not inherently suitable for this transaction. One example of such transaction can be a situation when instead of the conclusion of the contract of sale for a specific batch of products participants conclude another type of agreement, for example, on long-term supplies.

Types of contracts and their contents

The contracts in the international sphere have different appearance and have different semantic burden, despite some external similarity.

Long-term supply contracts

Agreements on long-term deliveries contain specialized clauses regulating delivery schedules, price adjustments in case of changes in the external conjuncture, etc. These clauses are included in long-term contracts in order to create a mechanism, adjusting conditions depending on external factors, viz:

  • supply and demand;
  • market prices; 
  • price fluctuations; 
  • currencies exchange rates; 
  • the volume of supply increases or decreases depending on the state of the consumer market.

Transactions on assignment of rights to intellectual property, technology

Transactions for the transfer of technology or intellectual property licenses under assignment conditions are popular. These include the transfer of the following forms of intellectual property:

  • trademarks; 
  • licenses;
  • patents;
  • publishing rights, etc.

They do not deal directly with tangible property, such as:

  • items;
  • products;
  • raw materials.

Therefore, it is not possible to apply to them the rules that govern trade in goods on the international market.

Contracts for the manufacture of goods to order

Pre-order contracts involve regulation at all stages of the production of goods, and in addition, such transactions involve a pre-agreement. In these types of transactions, it is possible to apply the rules of the Vienna Convention, but it is preferable to conclude atypical contracts for each specific case, which best reflect the interests and requirements of both parties.

Service contracts

Service contracts in their essence are the most similar to the agreements on the assignment of intellectual rights and do not provide for a material component, so the sales contracts are also not very suitable for this area. In this case, the customer is best served by the norms of national law, since services are often rendered in a particular territory and fall under local jurisdiction. And it is its use can provide the best possible observance of rights and interests of the participants.

Agreements for agency services

Agency agreements involve marketing activities and it is preferable to apply the rules and regulations adopted in the national laws of the territories where such activities are carried out.

Merger and Acquisition Agreements

This type of agreement is used in the practice of interstate treaties quite often. As a rule, they are not connected with goods, but reflect actions with securities, stocks, shares, tangible and intangible assets, the transfer of which is connected with issues of rights of management, possession and disposal of a certain part of the property. Such issues are sufficiently regulated by local laws and do not belong to the issues regulated by the Vienna Convention.

Who does not need model agreements

It should be noted at the outset that model sale and purchase documents are not intended for large multinational corporations. Typically, such conglomerates have their own staff of highly qualified lawyers who prepare the necessary documents and usually such contracts are prepared for a long time and they take into account all, even the smallest details of future transactions. At the same time, it is well known that all multinational companies have their own well-developed standard layouts, which they use all the time. 

Therefore, even if we assume that transnational companies decide to use the model papers created according to the Vienna Convention, by the end of the negotiations between the parties, most likely there will be no trace of the original text and it will have been changed beyond recognition.

Who the model sales contract is suitable for

Such contracts are most in demand by new, small participants in international trade. They usually do not yet have enough experience in drafting complex legal documents in international transactions. And therefore, if they want to independently, without conducting a preliminary analysis of the international contract of sale, to prepare the relevant documents on sale, they can commit a number of serious errors. These mistakes will in turn have a negative impact on the deals themselves and expose the possibility of their implementation to serious threats, up to disruption.

It is for such companies a model document, drawn up on the basis of the Vienna Convention, by the Chamber of Commerce, will be the basis, which will provide a standard set of rights, obligations and guarantees of participants.

It is clear that the use of the model contract by the parties is not obligatory, but the model documents can be used as a guideline for writing your own version of the sale agreement.

How to use an international sales contract

The parties may use a standard international sales contract at their discretion, depending on their mutual agreements, interests and the subject of the transaction.

The experts of the Chamber of Commerce have managed to compose the document in such a way that it is sufficient to enter specific data into it: 

  • cost; 
  • payment methodology;
  • principles and methods for resolving disputes;
  • lists and descriptions;
  • conditions and terms;
  • data of the parties.

It acquires a fully completed self-sufficient form and can begin to be implemented.

According to the Chamber of Commerce, however, full application of the documentation it has developed is not the only way to use it.

The text can be used as a basic aid, for a clearer analysis of what constitutes a contract of sale, how it differs from other similar documents.

In such sales transactions, we are usually talking about very significant amounts of money, so it is best for the parties to the agreement to protect their interests as much as possible and to invite a lawyer – a specialist, to represent the interests of the participants in the preparation of documentation. 

But even in the case of participation of a specialist in the drafting of the relevant documents, the model documents will be extremely useful as a basis for the upcoming negotiations, which is especially relevant if the negotiations are conducted between the participants, whose capabilities, experience and resources differ significantly. 

In this case, if one of the parties to the negotiation offers to make a point in the agreement that does not suit the other party, a reference to the model papers can be a powerful argument in the dispute.

Main clauses of the contract

In the document provided by the Chamber of Commerce, at the beginning of each clause there is a detailed explanation of the purpose of the clause, in general, and the way it is regulated in particular.

The Chamber of Commerce’s model document, which deals with sales transactions, is divided into two parts:

  • Special conditions – conditions intended for a specific transaction and inherent only in it, albeit within the general terms of the contract.
  • General conditions – standard conditions common to all such documents within the framework of the contracts.

The model agreements refer to the following aspects:

  • The law that is applicable to the model contract. According to the accepted norms, the provisions of the Vienna Convention and the provisions and regulations of the country in which the seller’s enterprise is located and duly registered apply to such a document (this provision may be amended by mutual agreement of the contracting parties).
  • On the procedure for amending and supplementing the terms of the transaction. These paragraphs are based on the Vienna Convention, according to which they should be recorded in a document. But there are no strict conditions, because according to Article 29 (2) of the Convention “a party may forfeit the right to refer to the requirement of a written statement if it agrees to other conditions, such as their statement orally or by appropriate conduct, and the other party agrees to such an oral agreement or conduct.
  • On the manner and conditions of delivery.
  • On the terms of deliveries.
  • On the terms of payment.

All items are analyzed by the company’s lawyer or a hired specialist.

Documents to be provided by the seller

At the conclusion of the contract, the seller’s side submits the following written documents:

  • A reservation of title allows the seller to retain rights to the merchandise until it is paid in full.
  • Consumer warranties – a warranty issued by the manufacturer to the end consumer for the repair or replacement of the goods, which allows for claims to be made directly to the manufacturer if necessary, bypassing intermediaries.
  • Inspection and Verification – a document that allows the purchaser to have an inspection performed before shipment. This guarantee is given in order to avoid problematic situations in case the goods do not meet the declared parameters.
  • Intellectual Property Rights Obligations – a document in which, in accordance with the Vienna Convention and in accordance with the model agreement, the seller assumes full responsibility for claims from third parties. Claims must be based on intellectual property right and the possibility of their presentation is made known when concluding the agreement. However, the seller is only liable if such claims have been asserted in accordance with the laws of the country in which the goods are to be sold. 
  • Limitation of rights of claim and liability – a document in which, in accordance with convention and customary practice in international trade, the buyer limits his right to claim damages from the seller, to achieve a reasonable agreement and a compromise between the desire of the buyer to demand full payment of any losses. It provides an opportunity to increase the seller’s interest in being liable up to a predetermined limit of funds. 

The buyer’s right to withdraw from the contract if the terms of the model agreement are violated – a document which specifies the cases in which the contract can, is considered to be terminated automatically. The document comes into effect in case of obvious violations by the seller, which include:

  • Failed to deliver the goods before the deadline for termination of the agreement.
  • Failed to make delivery at the time of the maximum payment under the contract or the maximum amount of pre-agreed losses. The time limit for payment of the maximum agreed losses according to the standard documents is ten weeks from the due date of delivery.
  • Failure to replace faulty or defective goods or consignments that do not comply with the delivery note before reaching a possible maximum amount of 5% of the value which is deemed to be non-compliant.
  • Force majeure – the document on the order of distribution of expenses and losses in case of force majeure circumstances, on which the parties cannot see and which are fixed in corresponding legal acts.

Disputes and the procedure for their solving

Disputes under the contract, if it is not possible to solve them by direct negotiations, can be solved by the parties in the order of arbitration or civil law proceedings. The parties themselves decide in which arbitration or court the dispute shall be resolved. If the parties cannot agree on the place and authority for the resolution of the dispute, the arbitration of the International Chamber of Commerce is recognized as the best place for such proceedings.

The model contract for international sales transactions represents the minimum necessary set of terms for almost any agreement of this kind. At the same time, it provides an expert opinion on the specific conditions in international trade that the parties need to take into account. The model document is an indispensable tool for analyzing an international sales contract.

Author of the article
Analysis of the international sales contract
Valentina Khlavich
Managing Partner
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