Chapter 9 Sales Contract

International Contracts
Chapter 9
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Lex Mercatoria
International Sales Contracts and the CISG
Agency versus Distributorship Legal Issues
Elements of an Agency or Distributor Contract
Termination
Arbitration and Mediation
Sales Contract Structure
Lex Mercatoria
Termination
Lex Mercatoria
Definition
• Refers to all international trade laws and conventions
• Is made up of a multitude of international agreements and
international trade customs
• Complements domestic laws
• Is used when the contract is between two parties in different
countries
Lex Mercatoria
Termination
International Sales Contract
Convention for the International Sale of Goods –
CISG
• Created in 1980
• Emerged from the Uniform Law for the International Sale of
Goods (ULIS) and the Uniform Law on the Formation of
Contracts for the International Sale of Goods (ULF)
• Has become the Law of International Contracts
• Adopted by most countries as part of their Commercial Law
International Sales Contracts
Differences Between CISG and Uniform Commercial
Code of the United States
Offer Letter:
• The initial step in the formation of a contract
• Under the CISG, the offer made by one of the parties is valid
until its stated expiration date and cannot be cancelled.
• Under the UCC, an offer can be withdrawn at any time before its
expiration date, without prejudice.
Differences Between CISG and UCC
Acceptance Letter:
• The second step in the formation of a contract
• Under the CISG, the second party must completely agree with all
the terms presented in the offer; otherwise, it is a rejection of the
offer.
• Under the UCC, the second party is considered to have accepted
the offer if it generally agrees with its terms, even if it wants
amendments to the quantity of the goods purchased, the delivery
dates, and other details.
Rejection Letter:
• An intermediary step in the formation of a contract
• After an offer has been made by one of the parties, the other
party may not agree with all of the terms of the offer, and may
want to modify them.
• Under the CISG, this response is construed as a rejection of the
original offer.
• Under the UCC, it is an acceptance with a modification of the
terms.
Counter Offer Letter
• An intermediary step in the formation of a contract
• After an offer has been made by one of the parties, the other
party may not agree with all of the terms of the offer, and may
want to modify them.
• Under the CISG, this response is construed as a counteroffer,
which has then to be formally accepted by the other party before
a contract is recognized to exist.
• Under the UCC, it is an acceptance of the original offer.
Written Agreements
• The CISG does not dictate that contracts of sale have to be
written.
• The UCC dictates that contracts have to be in writing (for
transactions above $ 500).
5-2 International Sales Contracts
Breach of Contract
• In the event that one of the parties to a contract does not meet its
obligation, that party can be found in breach of the contract.
• If the party did not fulfill its obligations because of an event
beyond its control, the nonperformance can be excused under
the force majeure clause.
• CISG allows the buyer to unilaterally apply a price reduction to
the amount agreed upon in the contract for non-conforming
goods, without breach.
• No after-the-fact modifications are allowed under UCC.
Lex Mercatoria
Termination
Battle of the Forms
• There is “boilerplate” language pre-printed on every piece of stationery
used in sales offers and counteroffers, most of which do not match
exactly. It is difficult to have both parties agree to all aspects of these
terms.
• In the United States, prior to the UCC, the language contained in the
last form was the one that prevailed. It was called the “Battle of the
Forms”: the last form won.
• After the UCC, the courts agreed that there was a contract, and
differences in specific terms would have to be adjudicated in Court if
necessary.
• Under CISG, since all terms must be agreed upon, the last form is the
one governing the sale.
Agency versus Distributorship
Legal Issues
• These contracts are the contracts between an exporter and its

representatives in foreign markets.
• There is no international agreement on the way each of these
relationships is governed.
• A distribution contract is an agreement between an exporter and
an intermediary; it can take the form of either an agency or a
distributorship agreement
Legal Issues
Contract Law versus Labor Law (Vocabulary)
• Contract Law
A set of a country’s laws that governs relationships and disputes
between the parties who signed a contract. Contract Law essentially
dictates that the Courts must settle the dispute by using the terms of the
contract.
• Labor Law
A set of a country’s laws that governs relationships and disputes
between employers and employees; it assumes that one of the parties
(employee) needs to be protected from the other (employer). Labor Law
can be used in settling disputes between exporters and agents, at the
discretion of the Courts in the country in which the agent is located,
regardless of the terms of the contract between the exporter and the
agent. On occasion, Labor Law can be used to settle disputes between
exporters and distributors.
Legal Issues
• Registration
A process whereby an agent or a distributor has to notify the
government of the importing country that it has entered into an agency
agreement or a distributorship agreement with a foreign manufacturer.
• Home Government Restrictions
 Some countries feel the need to protect agents and/or distributors
against contracts which may not be fair or equitable.
 Those governments can create very complicated systems to
manage agents and distributors operating within their borders.
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Termination
Elements of an Agency or
Distributor Contract
• Contract Language
Since the contract parties rarely share the same language, it is often
necessary to have these contracts written in two languages. Only one is
the contract’s language, the other is a translation and identified as such.
• Good Faith
The assumption that both parties signing an agreement want to enter
that agreement and have no ulterior motives. Almost all contracts have
a clause specifying that the parties are entering the contract in good
faith.
• Force Majeure
An event beyond the control of any of the parties in an agreement that
prevents one of the parties from fulfilling its commitment. The affected
party is then not considered to be in breach of the contract.
• Scope of Appointment
 Defines the functions that the representative will perform
 Is the clause that spells out whether it will be an agent or a
distributor and it is generally the first clause in the contract
 Indicates the products to which both parties agree the contract
applies.
 Refers to the territory of the agreement and to corporate accounts
• Territory
 Defines the geographical limits within which the agent or distributor
is authorized (expected) to sell
• Exclusive Representative
 An agent or a distributor that has been granted the right of being the
sole representative of the exporter in a given territory
• Corporate Accounts
 Refers to (very) large customers which have negotiated terms
 Corporate accounts are handled by the principal, and the
representative cannot sell to them.
• Term of Appointment
 Determines the duration of the appointment of the representative
 Must always be a definite period, with the possibility of renewal if
certain performance criteria are met. Usually a year
• Evergreen Contract
 A contract which, by design or by default, does not have a specific
term of appointment. If a contract lapses but both parties continue
acting as if the contract were still in place, the contract then can be
considered “evergreen.”
• Choice of Law
 Every contract includes a clause that determines which of the two
sets of domestic laws should be used by a Court or by an arbitration
panel when a conflict arises between the parties.
 In some cases, a Court can refuse to consider this clause, as it rules
that Labor Law applies, and the terms of the contract are irrelevant.
• Choice of Forum or Venue
 Both parties agree on the location of the Court that will rule on an
eventual dispute.
• Arbitration Clause
A clause in which both parties spell out that they would rather settle
disputes through an arbitration panel rather than in Court. This panel will
follow most of the rules of a Court of Law, but will render a decision in a
much shorter period of time. In an international contract dispute, the
arbitrators will follow the laws specified in the “Choice of Law” clause.
Arbitration tends to be much cheaper than litigation.
• Mediation Clause
A clause in which the parties to a contract agree to settle disputes
through an independent third party who can suggest a compromise
solution, acceptable to all concerned parties.
• Profitability or Commission
 For agency agreements, the exporter spells out the commission that
the agent will earn for sales in its territory.
 For distributorship agreements, the issue of price can be more
challenging; it can be difficult (illegal) for principals to dictate the
price at which the distributor sells.
• Facilities and Activities
A clause that spells out what specific facilities the agent or distributor
will maintain (retail store, warehouse, repair facilities) and which specific
activities it will engage in (trade show participation, after-sale service,
promotion).
• Advertising
A clause in which the principal spells out who is responsible for
advertising, who has control over the content of advertising and who
owns the creative content of an advertising campaign.
• Competing Lines
A clause that specifies whether the agent or distributor is allowed to
carry competing lines, which are products manufactured by a company
other than the principal that compete with the products manufactured by
the principal.
• Confidentiality
The promise by each of the parties to not divulge what it has learned
about the other party's customers, manufacturing processes, and
business practices
• Trademarks, Patents, and Copyrights
A clause that clarifies who owns the intellectual property that may be
created as a result of the business partnership between the principal
and the agent or distributor. For example, a new process may be
invented by the agent; the clause will spell out whether the agent owns
the patent or whether the principal does.
• Ownership of The Customers’ List
The list of the customers of a particular company is considered a
business asset. A contract between a principal and a distributor spells
out which of the two parties owns the list of the distributor’s customers.
Lex Mercatoria
Termination
Termination
• Termination for Just Cause
 The unilateral decision, by one of the parties to a contract, to end a
contract before its term of appointment expires, because the other
party has not met some of the terms of the contract that it had
agreed to perform
 The term is also used when one party decides to not renew the
contract at its term of expiration, because the preset criteria for
renewal have not been met.
• Termination for Convenience
 The unilateral decision, by one of the parties to a contract, to end a
contract before its term of appointment expires, for reasons
unrelated to the performance of the contract by the other party
 The term is also used when one party decides not to renew the
contract, even if the preset criteria for renewal have been met by the
other party.
Termination
• Contract Law and Labor Law
 Contract Law looks at the terms of the contract to determine
whether a Termination was “for just cause” or “for convenience.”
Labor Law may look at other criteria, such as whether the party in
breach of the contract attempted to meet the terms, but was
unsuccessful.
 Contract Law looks at the terms of the contract to determine the
level of compensation due to the injured party in a case of a
termination for convenience; Labor Law looks at the legislation in
place in the country in which the dispute takes place.
 Labor Law can impose compensation to the injured party, even in
the case of a termination for just cause.
Lex Mercatoria
Termination
• Arbitration uses an arbitration panel, which is a group of

(generally) three arbitrators who are empowered by the parties
involved in a contract dispute to reach a decision on the facts of
the dispute, and whose decision is binding on all parties.
• Mediation uses a mediator, an independent third party who can
suggest a compromise solution, acceptable to all concerned
parties. A mediator’s recommendation is not binding.
• Arbitration and Mediation are often preferred over litigation, an
expensive and time-consuming process for which all judicial
rules must be followed, and which cannot offer compromise
solutions.
Arbitration
• The Advantages of Arbitration:

 Arbitration tends to be perceived as fair
 Arbitration tends to be much more expeditious than litigation
 Arbitration can be more “creative” in its solution
 Arbitration is not open to the public
 Arbitration is cheaper
Mediation
• The advantages of Mediation:

 Mediation is less formal than arbitration (the mediator may meet with
each party independently)
 Mediation is non-binding
 Mediation is more practical for smaller disputes or when parties are
interested in keeping a business relationship
 Mediation is often best for disputes that have arisen from
misunderstandings
Structure of a Sales contract
• Article 1: Commodity
• Article 2: Quality
• Article 3: Quantity
• Article 4: Price
• Article 5: Shipment
• Article 6: Payment
• Article 7: Packing and Marking
• Article 8: Warranty time
• Article 9: Penalty
• Article 10: Insurance
• Article 11: Force Majeure
Article 1 Commodity
• Normal name of the good
• Trading name of the good
• Scientific name of the good
• Attributes of the good: size, features
• Where the good is made?
• Name of producer
• Product functions
• Product codes
Article 2 Quality
• Based on the sample sent to the buyer
• Based on some criteria
• Based on Trademark
• Based on technical documents
• Based on the product ingredients
• Based on natural weight of the product
• Based on “inspected and approved”
• Based on the product description
Article 3 Quantity
• Unit of measurement:
 1 MT = 1 metric ton = 1000 kg
 1 ton = 2204.6 pound (Lb)
 1 gallon = 3.785 Liter (US)
 1 barrel (oil) = 159 Liter
 1 Bushel (cereal) = 36 Liter
 1 ounce = 28.35 gram
 1 troy ounce = 31.1 gram
 1 Inch = 2.54 cm
 1 foot = 12 inches
 1mile = 1.609 km
 1 yard = 0.9144 m
Quantity
• Exact number or approximate numbers (EX: +/- 5%)
• Gross weight
• Net weight
• Gross weight = Net weight + tare
• Commercial weight = weight + standardized humidity
indicators
• Theoretical weight: P = ∑Vi*mi*Si (in MT)
Where: P: theoretical weight
Vi: volume of good i (in m3)
mi: individual weight of good i
Si: quantity of good i
Quantity
• Exact amount
 EX: Q = 1,000 bicycles
• Approximate amount:
 EX: Q = 1,000 MT with +/- 5%
Shipment/ Delivery
• Time of Delivery
 Before (date)
 Shipment by first available steamer
 Subject to shipment space
 Subject to the opening of L/C
 Subject to the Export License
• Form of delivery
 Prompt
 Immediately
 As soon as possible (ASAP)
• Place of delivery: clear statements of Point of

shipment, Point of Destination, transition Points
Price
• Currency Name
• Price Amount (internationally)
• Types of Prices
 Fixed price
 To be announced (TBA)
 Rivesable price : price that can be adjusted later
 Sliding Scale price: price based on the initial one plus effect
of some other factors.
 Discount price
Settlement payment
• Currency of payment
• Time of payment
• Methods of payments
Payment Documents
• Bill of Exchange
• Commercial Invoice
• Bill of Lading
• Insurance policy / insurance certificate
• Certificate of Quality
• Certificate of Quantity / Weight
• Certificate of Origin
• Packing List
• Other documents: Fumigation Certificate, etc
Packing and Marking
• Packing materials
• Quality requirement for packing materials
• Packing price
 Packing charges included
 Packing charges
• Marking:
 Symbols of “Handle with care”, “fragile”, “do not step on”, etc
 Some other information: EX 300 bags per container, Gross
weight, Net weight , etc
Warranty
• Duration of Warranty
• Content of Warranty
Penalty
• Causes of Penalty and measures:
 Late delivery of goods
- Late for 2-5 weeks: 1% on contract value for
each late week
- From the late sixth week: 2% but not over 10%
- Late of one month or more: cancel the contract
and the seller has to pay 5% of penalty.
 Inappropriate/ wrong quantity or quality
- Cancel the contract with no compensation
- Ask to change the wrong goods or quantity at
the seller’s expenses
Penalty
 Late payments:
- A certain percentage on the contract value
- Apply interest charges
Insurance
• According to the Insurance Contract
Force Majeure
• A situation in which the contract can not be
implemented due to objective reasons for which both
parties are not responsible.
• Characteristics of a Force Majeure:
 Can not predicted
 Can not overcome
 Objective reasons
 Others specified in the contract : power cut, strike, late supply
of materials, etc.
• Contract duration may be extended.
Claim
• Sources of Claim:
 Goods delivered are not according to clauses specified in the
contract
 Claim letters must be sent to the seller together with
inspection documents, certification of damage, bill of lading,
certificate of quality, etc.
Arbitration
• As mentioned the Agency and Distributor contracts
Excercises
• Do the exercise from 2 to 7 – your hand-out

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Chapter 9 Sales Contract

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International Contracts

• These contracts are the contracts between an exporter and its

• Arbitration uses an arbitration panel, which is a group of

• The Advantages of Arbitration:

• The advantages of Mediation:

• Place of delivery: clear statements of Point of

• Contract duration may be extended.

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