1

INTERNATIONAL BUSINESS CONTRACT WHAT YOU SHOULD KNOW

I. Delivery
1. A systematic approach to negotiating delivery avoids the danger of the
parties overlooking important issues.
2. Negotiating delivery is a five step process based on five questions:
When? Where? By what means? How will risk and title pass? What
Incoterm is most appropriate?
3. Many export contracts cannot come into force (become effective) until
certain preconditions (for example, government approvals) are met.
4. If the parties must wait for the contract to become effective, the delivery
date often depends on the date of coming into force.
5. Some contracts (especially fixed price contracts) set a cut off date after
which the contract cannot come into force.
6. A grace period is sometimes used to facilitate early delivery.
7. Sometimes delay in delivery is caused by a force majeure event, i.e., an
event beyond the control of the exporter. A force majeure clause often
relieves the exporter of his duty to deliver until the force majeure event is
over.
8. If the force majeure event continues for too long, both parties should have
the right to terminate the contract.
9. Late delivery causes loss to the buyer loss that must be compensated. To
avoid the cost and uncertainty of legal proceedings, many contracts regulate
in advance the compensation for late delivery.
10. A loss caused by late delivery is not easily quantified, so lump sum
compensation is normal. The lump sum may be set too high (penalty),
about right (liquidated damages), or too low (quasi indemnity). To motive
behind the penalty is to force (terrorize) one party into full performance.
11. A penalty is not enforceable in Anglo American courts, though the quasi
indemnity is usually enforced.
12. The place (and time) of delivery must be unambiguously agreed because
many contract events (including payment and transfer of risk and title) are
tied to delivery.
13. The place of delivery should not be confused with the destination of the
goods.
2

14. Delivery of goods under most export contracts takes place in the country of
the exporter, at the docks in the case of sea transport, and when the goods
are handed over to the carrier in most other cases.
15. CIF and CIP contracts are especially confusing since they name the point of
destination, e.g., CIF (Lagos). Lagos, in this example, is the point up to
which the exporter is responsible for costs, not the place of delivery.
16. The contract should specify the type packaging and the shipping marks
agreed by the parties.
17. On delivery, the exporter receives from the carrier the most important of all
the shipping documents, the bill of lading (or consignment note).
18. Each mode of transport has a characteristic shipping document: the marine
bill of lading, the air waybill, the rail consignment note, and the road
consignment note are the most common. Combined transport (container
transport) uses a combined transport bill of lading.
19. Under certain circumstances, a marine bill of lading can be made into a
negotiable document.
20. The marine bill of lading, to be acceptable as a shipping document under a
letter of credit, must bear the notation that the goods have been shipped on
board a named vessel.
21. Payment under a letter of credit may be delayed if the letter of credit
repeats exactly the contractual packaging requirements but the exporter has
failed to meet them.
22. The carrier will note any defects in the packaging, weight of general
appearance of the goods on accepting them from the exporter. (The carrier
does not inspect the goods themselves, only the packaging.) To be
acceptable under a letter of credit, all shipping documents must be clean
i.e., free of notes about defects.
23. In CIF and CIP contracts, the exporter must pay for insurance from the
point of delivery to the named point of arrival.
24. Unless otherwise agreed, this insurance is minimum cover Cargo
Clause C.
25. In CIF and CIP contracts, the exporter normally assigns the insurance
agreement to the buyer.
26. The insured can make three kinds of arrangement with the insurer: the tailor
made policy, the floating policy and the open cover.
27. Open cover is not a policy: the insurer will write a policy if required.
3

28. The normal insurance document under an open cover is the Certificate of
Insurance; the certificate is, in principle, the equivalent of a policy.
29. A marine insurance policy has three variant clauses: Cargo Clause A, B and
C. Clause A covers anything not excluded; Clauses B and C exclude
anything not expressly covered.
30. Even an all risks policy (Cargo Clause A) excludes many risks.
31. Goods must be correctly and fully described on the insurance document or
cover may be withdrawn.
32. A held covered clause offers some protection against innocent
misdescription.
33. The main principle of insurance is utmost good faith.
34. This agreement shall come into force after execution by both parties on the
date of the last necessary approval by the competent authorities in the
country of the Seller and the Buyer.
35. If the contract has not come into force within 90 days of execution, it shall
become null and void.
36. The date of delivery shall be 28 days, after the date of coming into force of
the contract.
37. Time is and shall be of the essence of this contract.
38. Force majeure events do not include monsoon rains.
39. Liquidated damage: enforceable everywhere but subject to increase of
decrease in some legal system.
40. Penalty: not enforceable in English law or other common law systems.
41. Quasi indemnity: enforceable everywhere but open to challenge as
unconscionabble.

II. Payment
1. In negotiating price and payment, exporters should quote a price that relates
to the complete set of contract terms: size of order, terms of delivery, terms
of payments, warranty provisions and so on.
2. As items in the contract are negotiated, the exporter should assess the
influence of each factor on price, and adjust the price accordingly.
3. Sometimes the exporter improves his terms without adjusting the price, but
only in order to create goodwill for future deals, to ensure that the exporter
gets the order, or for some other business reason.
4. Payment should be negotiated so that the exporter secures prompt, correct
payment.
4

5. Payment on open account is often timed, so that early payment secures a
discount for the buyer; this benefits the exporter by improving cash flow.
6. The exporter prefers the place of payment to be his own bank account;
payment is not deemed to be made until the money is at his disposal.
7. In most contracts nothing, not even force majeure, excuses late payment.
8. Late payment causes harm to the exporter the bank interest he must pay
while waiting for his money. This interest should be compensated to him by
the buyer under the terms of the contract.
9. Export credit insurance covers the risk of non payment.
10. Guarantees are designed to reduce contractual risks.
11. The payment guarantee reduces the risk of non payment. The tender
guarantee reduces the risk of the revocation of an offer; the performance
guarantee reduces the risk of non performance or inadequate performance
by the exporter, the advance payment guarantee reduces the risk of losing
prepayments.
12. If a bank issues a demand guarantee, it must pay the guarantee sum on
first demand without question. Since most payment guarantees are of this
type, they are dangerous for the principal (the buyer) and are seldom used;
the letter of credit is far more common.
13. A letter of credit allows an exporter to collect payment when the goods are
delivered normally at the time of shipment.
14. Credits are of many types. For the exporter, the most advantageous type is
the irrevocable, confirmed, at sight letter of credit.
15. Letters of credit are made safe for exporter and buyer by two principles:
autonomy and strict compliance.
16. Autonomy means that the letter of credit is a contract in its own right,
entirely separate from the contract for the sale of goods.
17. Strict compliance means that the exporter must present to the bank shipping
documents that comply in all respects with the terms of the credit. Small
deviations will result in refusal by the bank to pay.
18. If the credit requires documents that the exporter cannot furnish, or if
compliance is impossible for some other reason, then the letter of credit
must be amended a process that requires the cooperation of the buyer.
19. If the exporter and the buyer complete the ICC Application for the Issue of
a Documentary Credit on agreed terms, and if the buyer then uses this
application when requesting his bank to issue the letter of credit, many
problems are avoided.
5

20. In CIA, the exporter is assured of payment before delivery of the goods to
the importer.
21. In CIA, the importer bears cost of financing and risk of never receiving
goods.
22. Open account is used if the importer is a long time and reliable customer
and has excellent credit rating.
23. In Open account, the exporter may bear credit risk of importer and risk of
importers countrys political condition.
24. Using remittance, the exporter has no assurance that the buyer will pay after
taking delivery.
25. Remittance can be used if there is a high level of trust between the exporter
and the importer.
26. In clean collection, the banks act as intermediaries in payment without
helping to control the payment.
27. CIA may prevent repeat business.
28. CIA is often used for small shipments.
29. Open account can be used if the importer is a subsidiary of exporter or vice
versa.
30. The exporters capital is tied up in Open account.
31. Remittance is the fastest method with simple procedure and low fee.
32. Demand guarantees: there are no serious, objective conditions the
beneficiary must, meet before claiming payment of the guarantee.