CONTRACTS IN INTERNATIONAL BUSINESS TRANSACTIONS

Trade is a major factor in economic development of any country including Russia. More than 145 countries of the world are our trade partners. But it was a very difficult process of forming good relations. One of the most important things in foreign trade is drawing up contracts.

What is a Contract in general?

A Contract is an agreement of buy-back transaction between the Buyer and the Seller. It foreign trade transactions a Contract is drawn up to give legal expressions to the intention of the partners and to ensure that the obligations contained in the Contract will be fulfilled.

According to the purpose and contents Contracts can cover goods, services, licenses, patents, technology and know-how.

In accordance with a Contract the Seller has sold and the Buyer has bought goods on some kinds of terms from the ports agreed upon at the Seller or the Buyer's option. Grades, price and quantity are usually stated in the Contract.

The price for goods is understood to be per meter, kg, metric ton, box, case or per other units of goods.

As a rule, a Contract is drawn up in two languages: in the languages of the Seller and of the Buyer, However, there are some difficulties within this process. It concerns the "rare'" languages. In this situation a Contract will be signed in English and in the “non-rare^” language.

Usually a Contract is drawn up and then signed in duplicate for each partner. In other words, the Seller and the Buyer issue 4 copies of a Contract.

Contracts usually cover different forms of foreign trade. In turn foreign trade comprises 3 main activities: importing (buying goods from foreign Sellers), exporting (selling goods to foreign Buyers) and re-exporting (buying goods from foreign Sellers and selling them to foreign Buyers without processing in one's own country).

All commercial activities in foreign trade may be divided into basic ones associated with the conclusion of foreign trade contracts for the exchange of goods and auxiliary ones ensuring their successful performance, associated with the carriage of goods, their insurance, banking operations (financing the deals, settlement of payments between the Sellers and the Buyers, guaranteeing the strict observance of their mutual liabilities), as well as Customs and other activities. Conclusion of agency agreements with the Suppliers for export goods and with Importers for the purchase of goods, agreements with advertising agencies and firms dealing with the market research and with other organizations helping to achieve the targets set for foreign trade also refer to auxiliary activities. There may be about 10 or more auxiliary operations to one basic.

In accordance with commercial laws existing in highly developed countries, contracts of sale and other agreements may be concluded either verbally or in writing.

The laws of Russia do not recognize the validity of any agreement concluded verbally by the Trade Representation of Russia abroad or by export or import organizations in this country. According to Russian laws contracts must always be made in the form of duely signed documents containing the terms of an agreement between two firms or associates – called counterparts (or parties) to supply goods or services as a rule at a fixed price.

Agreements and contracts made in our country are to be signed by General Director of a foreign trade association or his deputies (first signature) and by directors of firms or their deputies (second signature). Sometimes senior engineers of the firms are legally authorized to sign these documents.

In international trade contracts of sale, contracts for construction work (vary-often for the delivery, erection and commissioning of the equipment for industrial enterprises) and lease are most frequent among a variety of basic deals. Contracts of sale include turnkey contracts and large-scale contracts on a compensation basis. There may also be barter deals and compensatory deals.

Foreign trade activities comprise several stages:

1. market research work (analysis of the market conditions)

2. choosing proper methods of trade on this particular market

3. planning foreign trade operation

4. carrying out a publicity campaign

5. preparations and conclusion of a Contract of sale with a foreign counterpart

6. fulfillment of contractual obligations.

A written Contract of sale is made out in the form of a document signed both by the Buyers and the Sellers. When there is no necessity of introducing special terms and conditions into the Contract of sale, Russian associations use standard forms of contracts containing the following clauses (articles):

1. Naming (definition) of the Parties.

2. Subject of the Contract and volume of deliver).

3. Prices and the total value (amount) of the Contract (including terms of delivery).

4. Time (dates) of delivery.

5. Terms of payment.

6. Transportation (=carriage) of goods (packing and marking, shipment).

7. The Sellers' guarantees (the quality of the goods).

8. Sanctions and compensation for damage.

9. Insurance.

10. Force majeure circumstances.

11. Arbitration.

12. General provisions.

Also, there may be standard General Conditions which form an integral part of the Contract and are either printed on the reverse side of the Contract or at the foot of the face of the Contract or attached to it.

In the case of a Contract for sophisticated machinery and equipment there may be other clauses: technical conditions, test and inspection conditions, requirements to technical documentation, supervision of erection and putting the machinery into operation (commissioning), sending the Buyers' specialists for the purpose of training, the Sellers' obligations for technical servicing and the like. These clauses may be included in the Contract itself or in the Appendices to the contract which are an integral part of it.

When detailed special terms and conditions are introduced into the Contract or the agreement, it is customary to draw up an individual Contract or agreement in each particular case (e.g. a turnkey contract, a licence agreement).

Usually some organisations use standard forms of contracts worked out by the biggest federations and associations of merchants and importers abroad, by Exchanges, Chambers of Commerce and the like for use in particular trade. These standard forms of contracts, for example, are used in grain, seed, sugar, cotton and other trades.

Clauses of a contract

A Contract forms the basis of a transaction between the Buyer and the Seller and great care is exercised when the Contract is being prepared that all the legal obligations have been stated. According to the purpose and contents, a Contract can cover: goods, services, licenses, patents, technology and know-how.

As a rule the Contract contains a number of clauses, such as:

Subject of the Contract

Price and Total Value of the Contract

Terms of Payment

Delivery

Inspection and Test

Guarantee

Packing and Marking

Arbitration

Insurance

Force Majeure circumstances, and others.

The clause Subject of the Contract contains information, what exactly the Buyers buy and the Sellers sell.

The clause Price and the Total Value of the Contract is the most disputable clause of the contract. As a rule the Buyers ask the Sellers to grant them a discount on the price, as it's a trial order or they have been partners for a long time, or decide to place a bulk order, or there can, fee another situation. The total value of the contract includes for example, the cost of the complete equipment for the plant as well as technical documentation, knowledge and experienced engineering, after-guarantee spares and services.

The next clause is Terms of Payment. Payment in foreign trade may be made in cash and on credit. There are different methods of cash payment: by cheque, by telegraphic or telex transfers or post remittance, by a Letter of Credit or payment for collection.

The Letter of Credit is the most frequently used method of cash payment, because it is advantageous and secure both for the exporter and\for the importer though it is more expensive. In commercial practice the following types of a Letter of Credit are usually used: irrevocable, confirmed and divisible.

The next come Terms of Delivery. In accordance with the responsibilities of the parties in respect of the expenses of delivery and the risks of accidental damage to or loss of the goods there may be various terms of delivery. Most frequently used terms of deliver)' in international trade are GIF (cost, insurance, freight) and FOB (free on board).

A CIF price includes apart from the value of the goods the sums paid for insurance and freight (and all other transportation expenses up to the place of destination), which an FOB price does not, that means that the latter must be lower than the former since it only includes the value of goods, transportation and other expenses until the goods are on board the vessel. On FOB and GIF terms the Sellers bear the risk of accidental loss of or damage to the goods until the goods pass the ship's rail.

Inspection and Test Clause states, as a rule, that inspection and (or) test of the equipment shall be carried out at the Seller and his sub-contractors' works at the expense of the Seller in the presence of the Buyer's inspectors.

The Seller is to notify the Buyer of the readiness of the equipment for inspection and (or) test not later than 15 days before the proposed time of the inspection and (or) test.

The Buyer's inspector shall issue in due time to the Seller a Release Certificate for Shipment on the basis of the Test Certificate.

If the Buyer's inspector cannot be present on the appointed date, the Seller shall have the right to carry out the test without the Buyer's inspector. The Seller shall issue a Test Certificate, which is to be sent to the Buyer who will issue a Release Certificate for Shipment without delay.

Final tests and acceptance of the equipment for putting it into operation are to be made in the Buyer's country.

Discussing Guarantee, Packing, Marking, Insurance Clauses, let's take an example of equipment. Guarantee Clause specifies that the Seller guarantees that the supplied equipment and technological process as well as the automation and mechanization of the process of production are in conformity with the latest technical achievements which will be known and available to the Seller on the date of acceptance of the Preliminary Project.¹ The period of guarantee shall be 12 months from the date of signing the Final Acceptance Protocol but not more than 30 months from the date of the last delivery⁷ of the equipment. If during the guarantee period the equipment supplied by the Seller proves to have some defects, the Seller undertakes to correct the detected defects or replace the defective equipment at his own expense. The above period of guarantee in respect of the repaired or replaced equipment begins from the date of putting it in operation. According to the Packing Clause the equipment shall be shipped in export seaworthy packing in accordance with the requirements of each particular type of equipment or material. The Seller shall be responsible for any damage or breakage of the goods that may be caused by improper or faulty packing. Marking Clause may state that the cases, in which the equipment will be packed, shall be marked on three sides: on the top of the case and on two opposite sides. The marking shall be clearly made with indelible paint in English and Russian. Insurance Clause stipulates that the Buyer will insure at his expense all the equipment for its full value against all usual marine risks from the moment the goods are put on board at the port of loading.

Arbitration Clause is very important, too, because unfortunately in trade errors may occur and the goods may be mishandled: accidents may happen, usually because of a hurry and mistakes in carrying out orders. They may be caused by mistyping of figures, misreading of numbers and so on, of for more serious reasons.

One of the parties to the contract may consider that the other party has infringed the terms of the contract and may write a letter of complaint containing claims caused by different reasons.

The parties do their best to settle their claims amicably. But if they fail to come to an agreement, the claim is referred to arbitration, that will settle disputes resulting from contractual and other civil-law relations in the course of foreign trade and other international economic and scientific-technological contacts.

Finally, when all the clauses of the contract are discussed and agreed upon, the contract is signed in a definite place on a definite date in 2 copies in the mother tongues of the parties to the Contract.

PRICES

One of the most difficult questions for those, who decided to start their own business or to be self-employed, is the question of price. You can carry out a new really brilliant idea how to make anew product, but if your price doesn't suit your buyers, they won't buy your goods.

The market price is determined by supply and demand in a competitive market. A competitive market is a market in which there is free competition. Each seller tries to outdo other sellers, each buyer tries to outdo other buyers.

By "supply" we mean the number of articles offered for sale at a certain price. By the supply of furniture, for example, we do not mean the total stock of furniture in existence. A large share of this stock is in the hands of consumers who are not offering it for sale. Only that part of the total stock of furniture that is offered for sale is the supply.

By "demand" we mean the number of articles that buyers will purchase at a certain price. Demand does not mean a mere desire for an article. Effective demand means a desire for an article plus the ability to pay for it. Many families would like now better furniture. People often go window-shopping to look at displays or exhibitions of furniture which they would desire to own. For the time being they haven't got the ability to pay for such furniture. Only when their desire is backed up by the readiness to pay for such furniture, do we have demand.

If the number of articles offered for sale at a certain price is equal to the number that buyers would purchase at that price, agreement between buyers and sellers can readily be arrived at. If the number of articles that can be bought at a certain price is greater than the number offered for sale, competition among buyers will result in a higher sale price. If the number offered for sale at a certain price is greater than the number that buyers will purchase, competition among the sellers will bring the sale price down.

Discussing the question of price we should distinguish four ways of increasing your profits. You can cut your costs, you can sell more, you can change or improve your product or you can increase your prices. Clearly your aim should be to set your prices at the level, which gives you your highest profits possible.

There is no clear-cut or agreed method of establishing a price for your product or service.

Some people use the level of their costs as a way of fixing prices. This may seem right, but on the other hand, for example, if your costs are very low, does it also mean that your prices should be low too?

Other people consider that the price should be set by what the market can pay. But there are no quick and simple calculations that you can make what, this should be.

It is probably more realistic to think in terms of a range of prices. The lowest price will be fixed by the cost. On the whole you should not go bellow this price, if you have to, it would be better not to be in business at all. The highest price will be the highest the market can pay. Between the two there will be the price that will give you the highest possible profits.

There is a range of prices open to you to charge for you product or service. Your aim should be to get as near as possible to the price that is going to give you the highest profit. But this is a long-term strategy. There may be short-term considerations, so that another price cold be more appropriate at that time.

The strategy of the highest price means you have decided to go for the cream of the top of the market. It is also called price skimming or prestige pricing. You are pricing your product for those of your customers with the highest incomes or for those who are pleased with buying a very high-priced item. You can also carry out this price-skimming policy if you have a product with a technical advantage or if it has novelty value.

The disadvantage of this method is that high prices attract competitors. Your profitable market place may soon be invaded by those offering lower prices or a better service or product. You need to allow for this competition in a price even when the technical advantage of your product no longer exists because some people consider that the higher price shows the higher quality of the product.

The lowest price you should consider acceptable for your product is the one that covers your direct costs and contributes something to the cost of your overheads. But you should not accept this method if you can sell your product or service at a higher price. How is it worked out?

You need to find the direct cost of your product or service. Direct costs are the costs that you would not have if you were not producing that particular item. Your business will also have other costs, indirect costs or overheads. You will still have to pay for them whether you produce the item or not.

When should we use that price? As little as possible, must be the answer. You would need to sell very large volumes of your product to have enough contribution to cover the overheads. Being a market leader, you can easily charge a higher price.

And also selling the improved product with technical advantages you can quote a higher price until it is likely to remain unique.

So, we see that setting a price is a very important and difficult thing and before quoting some price, you should:

1. Analyze the position your product holds on the market. Are your customers those who are looking for reliability and high quality?

2. Analyze your product. Are you planning any modifications or alternations that can improve its reputation?

3. Analyze the competition. How do the products of other sellers compare with yours?

4. Decide your price strategy. Is it going to be average for the market?

5. Choose some specific prices. Calculate the volume of sales, profit margin and costs for each price.

6. Choose the price.

7. Would you be able to test this price in a small area of your market? This would allow you to see customers' reaction. May be these methods will help you to solve one of the most difficult questions for each firm, the question of price.