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The Basics of International Trade Contracts

By Philip Mavrikis

International trade contracts are more complex than domestic contracts because they must work across multiple country borders, but they are vital to doing business overseas. They help a business avoid disputes and potential litigation, and they lay the foundation for long-term relationships with foreign customers or suppliers.

But international trade contracts can challenge a small or midsize enterprise (SME), given technical challenges relating to the many specific terms and clauses that are necessary to secure the most beneficial contract for both parties, as well as the multiple governing legal jurisdictions and trade agreements. Fortunately, there are resources available to SMEs to help navigate trade contracts, including model contracts and clauses and legal specialists in international trade.

 

Legal Hurdles in International Trade Contracts

 

The first major hurdle to overcome for SMEs doing business overseas is that the two countries may have different legal codes. Each business trading with a company in a different country traditionally found it advantageous to have their domestic laws govern the contract, typically leading to conflict.1

 

To remedy this, the United Nations Convention on Contracts for the International Sale of Goods (CISG) created an international standard for cross-border sales. It provides a framework for international trade contracts, requiring specific details and an offer acceptance from both sides, expectations for both seller and buyer, and a description of when risk passes from seller to buyer.2

 

International trade contracts between two parties in UN member states automatically fall under the CISG framework unless the two parties agree otherwise.3 So far, 89 nations have ratified the framework; the main exceptions are India, Taiwan, Hong Kong, and the United Kingdom.4

 

Specifics Make for a Solid Trade Contract

 

Another key aspect of standardizing international trade contracts is using specific terms to reduce misinterpretations, aided by the use of International Commercial Terms (Incoterms). These are pre-defined commercial terms created by the International Chamber of Commerce to help companies from different countries reduce potential miscommunications or misinterpretations by clearly communicating delivery expectations, shipping fees, insurance payments, and tariffs for international exchange of goods.5 Incoterms include things like DAT for “Delivered at Terminal,” i.e., placing the goods in the buyer’s hands at a named point, or CFR for “Cost and Freight,” meaning that the seller is placing the goods on a vessel and the risks pass to the buyer.6

 

The more specific an international trade contract is, the less room for disputes, notes the Forum for International Trade Training’s (FITT’s) TradeReady blog. It describes four main elements that a contract needs in order to be legally binding:

 

  • An offer, which is a promise to perform specific acts on certain terms, such as selling goods;
  • Acceptance, which amounts to unconditional acceptance of the offer;
  • Consideration, which is the “price” both sides are paying to the other whether in money, goods, or services; and
  • Legal intent, i.e., a statement that the agreement is intended to be legally enforceable.7

FITT advises SMEs to ensure any modifications to an international trade contract are written instead of just verbally agreed, thus avoiding situations in which one party wants to stick with the written contract and the other wants to use the verbal agreement.

 

Other experts note that every trade contract should also specify what duties each party is responsible for, as well as the terms of payment and currency that will be used.8,9 While these basics are necessary for a solid contract, it’s important to also anticipate potential problems in advance, such as which party will pay for insurance, excuses for breach of contract due to a “force majeure” such as natural disasters or war, an arbitration clause that specifies how disputes will be resolved, and steps necessary for contract termination (such as how far in advance parties must notify and how that notification should be delivered).10,11

 

Creating a Contract Within Your Resources

 

With all the specific details required to create a beneficial international trade contract, it can be challenging for an SME to create one that is iron-clad without expertise in the area. Model contracts are available to act as a guideline or template for SMEs. The International Trade Centre, working with the World Trade Organization and United Nations, offers a series of free, multi-language model contracts for different purposes.12 Other organizations, most notably the International Chamber of Commerce, also offer model contracts for sale, along with smaller documents such as a Confidentiality Agreement, or document elements such as clauses.13

 

While model trade contracts save money and reduce the complexity of drafting a contract from scratch, there are still areas of trade law that may necessitate having a lawyer’s advice, according to legal information resource HG.org.14 Attorneys can help prevent inadvertent violations of Free Trade Agreements and other policies that exist from country to country, avoiding litigation or penalties from both domestic and foreign courts. Further, U.S. companies need to ensure they are complying with various regulations, such as antiboycott provisions, which require domestic companies to not only avoid accepting certain requests but, in some cases, actually report them to the government. Non-compliance with these regulations can often result in fines or denial of certain tax benefits.

 

The
Takeaway:

International trade contracts are key to successful foreign trade, but are rife with complexities. Creating a contract that is thorough and specific can help to avoid future misunderstandings or disputes, and anticipating problems before they arise can save a business money in the long-term. Model contracts and international trade lawyers can help an SME navigate the ins-and-outs of international trade contracts and avoid unnecessary disputes or litigation.

Philip Mavrikis - The Author

The Author

Philip Mavrikis

Philip Mavrikis is a business technology writer based in Troy, NY, whose work focuses primarily on financial services technology.

Sources

1. “You need to know about this important treaty before signing international contracts,” TradeReady Blog; http://www.tradeready.ca/2016/trade-takeaways/know-important-treaty-signing-international-contracts-united-nations-convention-on-contracts-for-the-international-sale-of-goods/
2. “United Nations Convention on Contracts for the International Sale of Goods,” United Nations Commission on International Trade Law; http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html
3. “CISG By State,” Pace Law School CISG Database; http://www.cisg.law.pace.edu/cisg/cisgintro.html
4. “Status of United Nations Convention on Contracts for the International Sale of Goods,” United Nations Commission on International Trade Law; http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html
5. “What are Incoterms?,” Logistics Plus; https://www.logisticsplus.net/incoterms-heres-know/
6. “Incoterms Rules 2010,” International Chamber of Commerce; https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-2010/
7. “Master the fundamentals of business contracts with these tips,” TradeReady Blog; http://www.tradeready.ca/2017/topics/market-entry-strategies/master-fundamentals-business-contracts-tips/
8. “Preparing an International Trade Contract,” Alpha International Trade; https://www.alphainternationaltrade.gr/en/methods/international-sales-contract
9. “Checklist For International Business Contracts,” Cantwell and Goldman PA; https://www.hmtlaw.com/International-Business/Checklist-For-International-Business-Contracts.shtml
10. “Take a Hard Look at the Force Majeure Clause in Your International Sales Contract,” Shipping Solutions; https://www.shippingsolutions.com/blog/take-a-hard-look-at-the-force-majeure-clause-in-your-international-sales-contract
11. “6 Best Practices for Negotiating International Contracts,” American Express Grow Global; https://www.americanexpress.com/us/small-business/openforum/articles/6-best-practices-for-negotiating-international-contracts/
12. “Model Contracts,” International Trade Centre; http://www.intracen.org/itc/exporters/model-contracts/
13. “Model Contracts & Clauses,” International Chamber of Commerce; https://iccwbo.org/resources-for-business/model-contracts-clauses/
14. “Free Trade Agreements and a Lawyer’s Assistance,” HG Legal Resources; https://www.hg.org/legal-articles/free-trade-agreements-and-a-lawyer-s-assistance-45663

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