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The most ancient form of trade transaction is countertrade, where

goods are directly exchanged for other goods. The use of money is

almost entirely eliminated. Enterprises taking part in such trade

usually have required goods in stock. Thus, in majority of cases,

intermediary agents are not always needed. As a rule, the

exchange of goods is carried out simultaneously, purchase and

counter purchase are agreed by a single contract.

The value of goods exchanged can be stated in the agreed curren-

cy, although such agreement does not really entail any actual

money transfers between the parties. The most usual forms of

transactions in the developing world are where monetary value of

the bartered goods is not expressed.

The contract broadly stipulates only a certain quantity and

quality of commodity that is to be bartered for an agreed

quantity and commodity. Such a barter is usually carried out with

so called non-standardized goods. Its main characteristic is that

the parties thereto try to barter/exchange those goods which are

found in abundance with them, for other requisite goods or


Therefore, it often happens in this type of trade that the goods

have to be bartered again in order to get the goods desired. Many

times, these days, one party to the barter agrees (at the cost of

another) to trade products which are technically and commercially

not well known.


In 1978,the U.N. Commission on International Trade law included

in its programme of work the subject of international barter and

exchange[1]. In 1979, in its twelfth session, the commission

adopted guidelines provided in report [2] of the Secretary

General entitled "barter or exchange in international trade",

that barter included wide and varied transactions/forms to admit

of regulation by means of uniform rules. In 1984, the commission

discussed a report of the Secretary-General[3] on the activities

of international organizations relative to barter like transac-

tions. The Commission then devolved on the possibilities of

considering[4] whether concrete steps in the field of counter-

trade should be undertaken by it. In 1986, in its nineteenth

session, the Commission, on a note [5] by Secretariat, considered

its future work in the area of the New International Economic

Order to be included in future.[6].

What is a Countertrade transaction

As it is understood normally, a countertrade is a composite

transaction in which one party supplies, or procures the supply

of , goods or other economic value to the second party, and in

return, the first party agrees to purchase or procures to be

purchased from the second party, or from a party designated by

the second party, goods or other economic value, so as to achieve

an agreed ratio between the reciprocal performances. Many

countertrade transactions involve the mutual purchase of goods,

other such transactions involve furnishing of services coupled

with a commitment to purchase some or all of the output

(referred to as buy-back agreement) or purchase of manufactured

goods of large value with a commitment that some portion of the

component parts will be manufactured in the purchaser's country.

(an off-set clause).



Countertrade may be an international mechanism[7] in which the

proceeds realized (or expected) from an export are used to

finance imports, specially when an import is to be paid in a

convertible currency, and importer's country is short of foreign

currency. On the other hand, a manufacturer having difficulties

in marketing his own products may, by linking his imports to

exports, secure outlets for his products.

Countertrade acts as an instrument of industrial development when

it is made an integral part of an industrial cooperation arrange-



Economic situations prompting countertrade exists in all forms of

economies, whereby an appreciable share of international trade is

conducted by use of such arrangements. Countertrade is most

prevalent between socialist countries of Eastern Europe and

Western Developed Countries. Since many years it has gained

acceptance in area of high technology trade. The main reason for

the developing world to resort to countertrade could be the

increasing shortage of foreign currency which is often required

for various purposes including foreign trade.


Issues may sprout in international countertrade transactions with

respect to a contract covering individual supplies of goods or

services in question or from over all countertrade agreement

coordinating those segments i.e. contracts of sale, construction,

license, services, or work and labor. The overall countertrade

agreement is a contractual agreement wherein parties thereto

agree on elements contained in the contract governing their

relationship. Majority of the issues in international counter-

trade are almost the same as those in contracts concluded for

discrete independent sale of goods transactions, but confined

more so with the typical countertrade practices of the contract-

ing countries.


The basic issue arising in global countertrade is whether it can

be treated as a universal phenomenon or whether there exists

regional particularities that require differentiated treatment.

It is characteristic of East-West transactions that similar

contract approaches and solutions are often used, and extended to

various countries. This is because countertrade has a tradition

in Eastern Europe where such transactions are conducted by

specialized foreign trade organizations and are monitored by the

competent administrative bodies.

Countertrade in Developed Market Economy

countertrade is rarely used between parties from developed market

economies and inter-regional trade whereat there is no ordinary

exchange of goods. Mainly such transactions involve the sale of

specialized high technology products of exceptionally high value

i.e. a nuclear power plant or an aircraft carrier war ship etc,

creating a direct/indirect offset transaction[8]. These contracts

do not reveal legal issues or regional particularities different

form those involved in countertrade in other regions.


The lack of uniform terminology may be a consequence of differing

commercial linguistic usage or of the use of different criteria

for classifying countertrade practice. Most common terms used are

barter, compensation, counter-purchase, off-set, buy-back and

switch transactions.

In counter purchase agreements two separate contracts are made

and implemented respectively. The agreement could be solely for

the purchase of goods or the goods can be partly exchanged for in

money. The right to counter purchase can be transferred to third


Buy Back Agreements can be for 3 to 20 years period for supply of

plant, component parts or machinery etc. The contract contains a

stipulation that liabilities can be met by some other commodity.

Whereas Triangular Trade is a non-monetary transaction where one

party thereto does not need the goods countertraded and sells

them to third party who needs the same. If such a transaction is

carried out within the framework of a bilateral agreement, it is

called Switch Trade[9]. Counter trade is therefore not limited

to reciprocal promises in sale of goods but also includes other

types of contracts.


The term exporter or counter importer is generally used for party

supplying goods or services (exporter), and is being obligated to

purchase (counter import) other goods or services in return; the

term importer or counter exporter is used for the party purchas-

ing (importing) goods or services, and having a right to supply

i.e.counter export other goods in return.

In practice, it is the party from the developing country that

exports first, since he may not be allowed to import goods until

he has earned the necessary convertible currency by such export.

Contracts in Countertrade

Contracts are named in consistency with parties as above i.e.

export import contract for the first type of contract entered

into and counter-export & counter-import contract for the second

contract entered into by the parties to countertrade.

Subject Matter of Countertrade

The subject matter of countertrade may be finished products,

production equipment, industrial works, technology, or various

services such as carriage of goods, tourist services, and

maintenance or repair[10].

Contractual Approaches to Countertrade

Main question that arises is of structuring contracts for the

export and the counter exports segments in a countertrade

contract. The legal .ls1 aspects of the above are classified


(a) Barter Contract

Barter contracts in the strict sense of an exchange of goods for

goods are occasionally used in international trade. i.e. parties

to contract may trade equivalent amount of commodities located in

different parts of the world in order to secure supplies closer

to the point of ultimate use or delivery to their customers,

thereby saving on transport, and reduce money circulation in

connection with contract deliveries.

Difficulties in Executing Barter Contract

The conclusion of a barter contract requires that the value of

the goods to be exchanged be comparable, which in turn implies

that the quality and quantity of the goods must be precisely

defined at the time of the conclusion of the contract. However,

such conclusion is not commercially feasible. As the contract

remains silent on monetary value of the goods, it is difficult to

assess sub-standard deliveries. Inclusion of a reference price as

an ingredient of barter contract negates the very concept of


It is always not possible to arrange simultaneous deliveries of

two counter purchases, such an intensive interrelation between

the deliveries may have a disruptive effect on planned deliver-

ies, since it may be more complicated to arrange for security of

performance in a barter contract than in sales contract.

Barter limits the use of a documentary letter of credit, the

devise normally used in international sales of goods to ensure

that one obligation has been performed as a condition to the

performance of the counter obligation. Other type of security

used is a bank guarantee, the execution whereof would be more

cumbersome in barter contract and would call for guarantees of

both promises to deliver. If both guarantees were on demand, an

unfaithful party could effectively deter the other party from

calling one guarantee by threatening to call the other guarantee

himself. Owing to difficulties in legality of implementation of a

barter contract, they have not found favor in interna-

tional countertrade.

(b)Matched contracts
Parties conclude two independent contracts that do not refer to
each other, the first for the supply of goods in one direction,
and the second for the supply of goods in other direction. The
main link between the two contracts is the willingness to
continue one contract depends on the conclusion of the other.
This type of a contract is preferred when a continuing relation-
ship between the parties is expected. All normal legal remedies
are available in this form of contract since each one is conclud-
ed and administered separately.

(c) Unified Contract

A Unified Contract is basically an abstract concept embodying
both sales agreements into a single contract. Both deliveries of
goods are priced in terms of monetary value, and normally,
obligations to pay for each of the deliveries would be stated.
In that a Unified Contract is different from a Barter Contract,

it differs from Matched contract also. However, the official

financing and credit insurance agencies are usually reluctant to

finance or insure such a transaction on account of technical

difficulties inherent in it. The legal issues of interpretation

of clauses, rights, duties and obligations of the parties thereto

arise out of linking so closely together the different contractu-

al obligations which causes serious problems of implementation of

the trade contract.

Countertrade Agreement
The Countertrade agreement might be entered into prior to the
conclusion of any definitive export contract. It might specify
total monetary value of the purchases to be made in each direc-
tion, indicate in general terms the types of goods to be pur-
chased, specify the currency in which the goods are to be priced
and payment is to be made and spell the procedure for payment.
However, the main element is that the price is to be paid into a
blocked account that can be used only for payment for counter
Such a provision not only reduces concerns over the expenditure

of foreign exchange, but it also compels the exporter to conclude

counter-import contracts so as to procure those goods for use or

resale, thereby realizing currency to pay for his own export

under the agreement. However, the export contract and the

countertrade agreement might be concluded simultaneously. The

countertrade agreement may be set forth in the export contract,

although rarely done so in practice. The Countertrade agreement,

the export and the counter-export contracts might be concluded

simultaneously as in a Unified Contract category.


Primarily legal problem lies in the fact that the parties to the

contract do not know which goods are to be delivered to fulfill

contractual commitment. Most countertrade agreements do not

embody a definite description of all the performances required by

the parties, but rather provide a framework on the basis of which

the parties should agree on missing contract terms at a later

stage. If subsequent agreement is not reached, the result of a

lack of definiteness of contract terms may make it impossible to

determine breach of contract, whereby, the aggrieved party may

have limited or no means to obtain relief.

One way to overcome this legal anomaly is that the contract may

contain a stipulation that a party will purchase from the other

party unspecified goods, the amount of which may be specified in

monetary terms. A variant of a commitment which indicates only

the value of the future contract but not the goods, is found in a

countertrade scheme, involving a transferable document i.e. an

International trading certificate (ITC)

The ITC would confer on the holder a right to sell goods, up to

the amount specified in the ITC, to a party in the country

issuing the International Trade Certificate without an import

license, and it would constitute a guarantee by the issuing

authority that convertible funds would be available for payment.

The countertrade transaction begins when goods are exported from

the country which requires countertrade exports as a condition

for the importation of goods. An ITC would be issued to the

exporter by an authority such as the Central Bank. The foreign

importer would be free to rely on the instrument himself or to

transfer it to another party. Such multilateralizing of transac-

tion facilitates countertrade[11]. Where guidelines for the

conclusion of definite export or counter export contract are

provided, the countertrade agreement becomes legally enforceable.


It is essential to distinguish between two kinds of contract

terms of the future contract i.e. (1) the essential term which

must be present for the contract to be legally binding, (2) the

terms that are not essential for the contract to be legally

binding, but are regarded by the parties to be necessary or

useful for the implementation of the contract[12].


A countertrade agreement may provide how payment is to be made,

even though the goods and their price may still be unknown.


When a countertrade agreement leaves a contract term open, the

contract may be supplemented on the basis of rules in the

applicable law providing a standard or guideline for contract

supplementation. Many legal systems provide that the price

should be the one "generally charged at the time of the conclu-

sion of the contract for such goods sold under comparable

circumstances in the trade concerned," or that the contract is to

be performed within a "reasonable time" after the conclusion of

the contract[13]. Nevertheless, such contract supplementation

provided by the applicable law may be a source of difficulty in

the implementation of a countertrade agreement, due to divergen-

cies among legal systems as to the techniques of supplementation,

as to the role of the courts, the arbitral tribunal, or the

parties in determining the missing term, as to the judicial

control over a supplementation of the term[14].

Therefore, following contractually agreed ways for determining a

missing term in a contract may be distinguished..

(1) reference to a standard,[15] (2) determination by a party to

the contract[16], (3) agreement to negotiate,

(4) determination by third person. In international counter-

trade transactions, the counter-export goods and the price are

the most important questions left indefinite by the countertrade


Determination of Term by Party to the contract

Many legal systems of the world recognize the validity of clauses

empowering a party to the contract to determine a term of an

obligation[17]. Most legal systems leave it to the parties as to

the determination of the quantity of goods to be delivered under

a contract, but authorization is deemed to be limited to a

reasonable or good faith determination in terms of the

agreement[18]. Many legal systems require the freedom to

determine the price to be limited by a more definite



Most countertrade agreements contain clauses indicating a

commitment of the parties to negotiate with a view to reaching an

agreement on one or more contract terms i.e. price, quality or

quantity of goods, or time periods for delivery.

Conflict Resolution

An agreement to negotiate which does not result in a subsequent

agreement will normally not be given effect by a court or an

arbitral tribunal, because of its indefiniteness as regards the

content of agreement to be reached[20]. However, to establish

breach of the terms of contract, the obligation to negotiate must

be based on definite terms, because the more specific the

negotiation clause, the easier it would be to show that the other

party acted in bad faith if negotiations were to fail.

Fixation of Term of an Obligation by Third Party

Most legal systems generally recognize the right of the parties

to agree that a term of an obligation will be fixed by a third

[21] person. Some legal systems recognize that an arbitral

tribunal or even a court may be entrusted with the fixing of a

contract term, others permit it only if it is not performed as

part of arbitral or judicial proceedings. Where parties cannot

agree on the person who is to supplement the contract or where

designated person fails to act, the parties, under some legal

systems, have to accept the consequences of term of obligation

remaining undetermined. Under some legal systems, the adjudicat-

ing court may appoint an arbitrator[22], or if the missing term

is the amount of a price, treat the case as if there were an

agreement for a reasonable price[23].

Every country's legal system has a different approach to the

availability and extent of courts competence over subject matter

of dispute over such decision by third person or appointed


Contents of contract to be concluded

Where a countertrade agreement does not directly determine the

content of a term of the counter export, but instead provides a

procedure for arriving at such a term, the agreement may contain

substantive guidelines regarding the term, such guidelines may

concern in particular the type of possible counter-export goods,

their quality, quantity and price.

Extent of Countertrade Commitment

The extent of countertrade commitment is frequently expressed by

a monetary value, in terms of percentage of the value of exported

goods or as an absolute amount. Quantification may also be

referred by a specific quantity of a given type of counter export


In buy-back transactions involving successive deliveries, in long

term transactions or where counter-exporter's financing costs are

uncertain at the time of conclusion of the contract (on account

of floating-rate credit arrangement), the clauses provide for

increase or decrease of countertrade commitment. In case of

capital goods it may be provided that the commitment will be

increased in proportion with expenses for spare parts or

technical assistance.

Price of Goods

If the goods to be delivered under the export and counter-export

contracts are known, a definitive price may be stated. If the

goods to be delivered as above are not known, a standard or

procedure for determining the price must be provided on the basis

of price quoted in the market for goods of standard quality,

production cost, counter-importer's resale price, most favored

customer clause, a competitors price, and average price.

Issues in Price Standard Clauses

Sometimes the parties provide a time frame for various stages of

the price-setting procedure and indicate the point of time when

the price clause should crystallize. The criteria is whether

price is to be determined only once or periodically. The struc-

ture of standard price may not be the same as that of counter-

export price[24]. Price clause may contain a formula to deter-

mine the difference in price and who shall pay i.e. buyer or

seller. Quantity of goods and commercial risk (counter importer's

resale risk) also reflects in fixation of price.

Currency and Means of Payment

The choice of currency in which payment is to be made depend on

the means by which payment is to be made. In two party transac-

tion normally local currency of each participant country is

exchanged. The relevant factor in choosing the relevant currency

would be the ease with which prices for the goods in that

currency could be determined and with which any remaining balance

could be repaid.


(i) Provision of counter-Export

For ensuring that purchases made by the exporter from the

importer are credited to fulfillment of the countertrade commit-

ment, the countertrade agreement and the counter export contract

may refer to one another. This will be significant in establish-

ing whether a purchase by the exporter should be considered a

counter-export contract in the sense of the countertrade


(ii) Absence of counter-Export

A countertrade commitment is normally terminated by the

performance of the counter-export contract where the negotiation

of a counter-export contract has not been successful, the prima

facie conclusion may be that countertrade commitment continues to

be binding until a counter-export is performed.

If it is shown that contractual procedures or substantive

guidelines have been violated by the importer , the conclusion

might be drawn that the exporter is no longer under a duty to

continue negotiations concerning a counter-export contract.

Where the counter-exporter has breached his obligation to

deliver, the commitment to counter-import should cease to be

binding on the exporter. It is suggested that non-delivery by

counter-exporter, except in cases of vis-major, should entail in

termination of countertrade commitment. Many times therefore, a

clause is incorporated in countertrade agreement to cover

consequences of non-delivery by counter-exporter.

Visualizations of the Status of International Countertrade in


Many countries have realized that countertrade acts as a major

force in strengthening political ties with allies and is a

balancing factor in satisfying material needs. for example, Nauru

in the Central Pacific has certain minerals (phosphate) in great

abundance and in excess of the needs of that country whereas

there is a grave shortage of water. Therefore, countries in need

of such local minerals/items, bring water and other goods needed

by Nauru in exchange or barter with phosphate etc.

Countertrade is not carried out between two or three enterprises

in developing countries but the national government itself is

usually the party importer or the counter-exporter in interna-

tional countertrade transactions. Most off-set agreements are

concluded under bilateral agreements between two governments.

This is more so in high technology, arms and ammunition sales

that form part of the exchanged goods.

The execution of countertrade agreement is complex and lengthy.

Imports and exports barter can be carried out simultaneously only

when the parties have the goods in stock. In such cases the

parties to countertrade hand over the goods to the forwarding

agents who exchange the documents, transferring the right to

ownership. Specialized trading houses and various financing and

Banking houses in developed countries frequently perform the

function of intermediary agents, and carry out follow up of a

countertrade contract. The economically advanced developing

countries are also developing a consistent pattern of dealing

with countertrade issues. Such agencies and institutions help the

local sellers establish contacts or act as the buyer and the

seller in countertrade. Their successful operation depends on

data/information collection. The specialized knowledge of such

institutions accompanied with availability of convertible

currency and sufficiency of funds enable them to finance major

countertrade operations.
Future of countertrade is evident by the fact that 49 developing

countries (13 from Latin America & Carribean) are actually

engaged in countertrade transactions[25]. According to a survey

such trade is being developed in 88 countries[26] which signi-

fies that 55% of the important countries use at least one or the

other form of countertrade transaction. Many economically

advanced developing countries like Brazil, Mexico, Pakistan,

Yugoslavia, Indonesia, Malaysia, Thailand, Philippines, Equador

and India have shown growing interest in counter-purchase[27].

Yugoslavia, for example, assures exports of certain commodities

which would be difficult to export through regular trade


For the developing world countertrade brings in new technology in

exchange of goods and commodities which they have in abundance.

Latest technological innovations are indispensable factor in

growth and development of a nation. Technological advancement

leads to self-sufficiency which is essential for progress.

countertrade therefore contributes in balancing trade deficits in

the developing world, and is a sound basis for fruitful and long

term international cooperation leading to betterment of transna-

tional relations between the trade partners and friends of


1. Report of the United Nations Commission on International

Trade Law on the work of its eleventh session (1978), Official
Records of the General Assembly, Thirty-Third Session, Supplement
No. 17 (A/33/17).

2. A/CN. 9/159.

3. A/CN.9/253.

4. A/39/17 Para. 132.

5. A/CN. 9/277.

6. A/41/17, Para 243.

7. Such as co-production, product specialization or joint


8. Countertrade, Background note by the UNCTAD Secretariat,

Trade and Development Board, committee on Economic Cooperation
among Developing Countries. TD/B/C.7/82.

9. Strategies for Countertrade success, prepared and published

by Business International S.A. Geneva, Switzerland, Nov.1986,

10. UNCTAD. Secretariat, TD/B/C.7/82 Para 9.

11. Id. Footnote No. 8, para 52-56.

12. The general rules of law, including the U.N. Convention on
Contracts for the International Sale of Goods (Vienna. 1980) [the
U.N. Sales Convention] will supply the non-essential terms that
are not supplied by the parties in their contract or contracts,
to make it legally enforceable.

13. Articles 55, 35(2) (a) and 33(c) of the U.N.Sales Conven-

14. R.B.Schlesinger, Formation of Contracts, A Study of the

Common Core of Legal Systems (Stevens & Sons, London, 1968, Vol.
1, 84-91).

15. Legal Systems normally recognize as valid a provision that

the price or other contract term may be determined by reference
to a standard such as a formula, tariff quotation, rate, index,
statistics or some other factor not influenced by the will of
other party. Id. Vo. 1, at 87. However, the use of a particular
standard may make the obligation invalid where the standard is
prohibited by law (e.g. some legal systems do not permit to use
of gold standard or a standard based on the level of wages).

16. French law requires a greater degree of definiteness of a

standard than some other systems. See M.Fontaine, Aspects
Juridiques des Contrats de compensation; Droit et Pratique du
commerce international, tome 7, No.1, Mar. 1981, 195; and
B.Mercadal, La determination du commerce international, tome 5,
No.3, Sept. 1979, 443-448.

17. Id.Note 14. Vol. I, 433- 534.

18. Id.

19. Id.

20. Id. Nevertheless, where the agreement to negotiate refers to

the price, under some legal systems the price may be determined
as if there were a clause providing for a reasonable price [as in
section 2-305 (1) (b) of the Uniform Commercial Code of the
United States of America].

21. Id. note 14, vol. 1, at 88.

22. For example section 8 & 20 of the Indian Arbitration Act,


23 Id. note 14 at 497,513.

24. At times inclusive of certain overhead expenses such as

freight, insurance, public charges or financing costs.

25. Business in Latin America, Aug. 8th 1984 , p. 255-256.

27. Yugoslavia. Law on Exchange of Goods and Services with other

countries, Official Gazette of SFRY No. 15/77 & 17/78 and by the
Decree on Countertrade with other countries, Official Gazette of
SFRY No. 12/ 82 (Federal Ministry of Foreign Trade).





Efforts of U.N. Commission on International Trade Law

What is a Countertrade

International Countertrade: A Commercial Objective of Industrial



(1) Private Law
(2) general Issues in Global countertrade
(3) Countertrade in Developed Market Economy
(4) Lack of Uniformity in Terminology of International Counter-
(5) Parties to Countertrade
(6)Contracts in Countertrade


(a) Barter Contract
[Difficulties in executing barter contract]
(b) Matched Contracts
(c) Unified Contracts
(d) Counter Trade Agreement


Future Contract Terms
Determination of Price of Contract
Means of Contract Supplementation
Determination of Term by Parties to the Contract


Conflict Resolution
Fixation of Term of an Obligation by Third Party
Contents of Contract to be Concluded
Extent of Countertrade Commitment
Price of goods
Issues in Price Standard Clauses
Currency and Means of Payment


Visualizations of the Status of Countertrade in Future

By: Divyang K. Chhaya