International Trade & Banking Institute
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Section I - Contract

Elements of a Sales Contract

For small purchases across borders, you may simply ship the goods by courier using credit card payments or wire transfers. For a larger transaction, however, a well thought out sales contract can help you avoid disputes and reduce your risk exposure later on.

At Minimum, the contract should include:

 

Improving Cash Flow

Paying cash in advance isn't your only option for cross border purchasing. If you are paying your suppliers in advance, you may be needlessly tying up your cash resources while the goods are in transit. Here are two alternatives that can save you from having to extend your line of credit.

Arranging Terms If you are making payment using a letter of credit or foreign collection, the exporter that you are dealing with may be willing to extend credit terms. This will allow you to take possession of the goods while delaying payment for the period until maturity, usually for 30, 60, or 90 days.

Open Account If you have a contract for regular orders from a supplier, you may be in a position to discuss open account trading. In this case, your supplier sends goods along with an invoice, waiting for payment until you have received the shipment. Again, the terms are normally 30, 60, or 90 days.

Managing Trade Risk

Commercial practices and financial systems differ widely between countries and, overall, the risk issues associated with overseas trading are wider in scope than in domestic commerce. Discussion of risk tends to focus on the exporter's position - that is, on the buyer's creditworthiness and ability to pay for the goods once shipped. But what about risks to an importer? When you purchase goods from a foreign supplier, you will need to consider the impact of foreign currency exchange, transport, insurance, and customs duties on your profit margin. The list below summarizes some of the risks that you might encounter.

RISKS IN TRANSIT Will the shipment arrive undamaged and in good order?

CURRENCY RISK Can fluctuations in exchange rates be accounted for? Will the terms that you have negotiated put you at risk of currency fluctuations?

INTEREST RATE RISK If the terms of payment are fixed, will a change in interest rates affect your ability to pay?

DOCUMENTARY RISK Will your shipment be subject to delays at customs if your supplier fails to prepare required documentation? Are the goods perishable?

 

Shipping Guidelines

To harmonize trade practices and prevent misunderstandings, the International Chamber of Commerce (ICC) produces a series of universal guidelines for commercial trade. Incoterms (International Commercial Terms)have been derived by the ICC to enable exporters to quote prices that clearly assign the costs and responsibilities of transporting goods to either the buyer or the seller. The key difference between these terms is the point at which risk is transferred from seller to buyer.

 

Trade Documentation

Documentation can help manage export-import risk by clarifying the rights and responsibilities of each party. If you are dealing with larger overseas shipments or using Letters of Credit to arrange payment, you will need to be familiar with the most common documents and customs rules which govern international trade.

Bill of Exchange

Commonly called a draft. An unconditional order, in writing, requiring a sum of money to be paid on demand or at a fixed future date. The exporter is typically the drawer of the draft, and the importer, the drawee (except in the case of Letters of Credit, where the drawee is normally the importers bank).

Insurance Certificate

Proof of the type and amount of insurance coverage is generally required for payment by Letter of Credit (especially under CIF and CIP Incoterms). Sample.

Commercial Invoice

A summary of the commercial transaction and full description of the shipmentl. It includes a precise account of the goods, the address and identity of exporter and importer, and freight and insurance premiums where applicable. Payment details, destination of shipment, along with shipping marks and the number of pieces shipped may also be provided.

Bill of Lading (B/L) (Transport Document)

The most common transport document is the bill of lading - linking the contract of sale, the documentary payment contracts, and the contract of carriage. It entitles the legal holder to take physical delivery of the goods. Certain types of B/Ls are also transferable or negotiable, hence allowing goods to be sold in transit.. Marine or ocean B/Ls and multi-modal transport B/Ls are typically negotiable. Examples of a non-negotiable B/L are air or sea waybills. WayBill Sample.

Certificate of Origin

A certificate of origin is usually issued by a local Chamber of Commerce, establishing the country where the goods are produced. This certificate is often required for exports from developing countries in order to benefit from preferential tariff treatment. Sample.

Packing List

A highly detailed list describing the weight, volume, content and packaging for each separate export package.

 

Insurance Coverage

Both the buyer and the seller should consider their responsibility to adequately cover the shipment against loss in transit.

For example, a shipment from Montreal to St. Petersburg with terms F.O.B. Montreal, means that the buyer is expected to arrange insurance to the destination.

However, the seller should arrange coverage to the point where the shipment is loaded on board the vessel. An experienced insurance broker can provide advice on the type of coverage you need.