Exporting AND THE EXPORT CONTRACT By Jamesa •Pinnells PRODEC PROGRAMME FOR DEVELOPMENT COOPERATION AT THE HELSINKI SCHOOL OF ECONOMICS EXPORTING ANTI TIIE EXPORT CONTRACT This book is not intended as a commentary on any national law. Extracts from laws, regulations and other documents are cited only as illustrations of points made in the text. Nothing said or implied in this book can be taken as an expression of any opinion whatsoever on the part of PRODK concerning the legal status of any country. city or other area or of its authorities, or concerning the delimitation of its frontiers or boundaries.
The views and opinions contessed in the book are those of the author and should in no case be attributed to PitopEc or to any of its allied agencies. This book was prepared front camera-ready copy supplied by the author using Apple@ hardware and software from Micro%ofte and Denchae. IMPORTANT: Although every effort has been made to ensure the reliability of the information and advice published in this book. neither PRODEC nor the author accepts any responsibility whatsoever for costs, expenditures, damages or other losses resulting from the use of this book or of specimen contract clauses contained in it.
Before signing any agreement, the person br persons concluding the agreement should take appropriate legal advice. COITRIGIIT NOTICE: The copyright on these materials is registeredby James R. Piturells with the Library of Congress in Washington D. No part of these materials may he reproduced or translated for publication.
sale, or non-profit distribution without the express written permission of either the copyright holder or of the publisher. Cover Design: Inneli Ilmanen Illustrations: Erkki Kukkoncn ISBN: 951-702-232-8 Printed in Finland by Kyriiri Oy, Helsinki, 1994 Should you require a copy of this book, please contact: PItODEC. Development Cooperation Tiiiiiiinkatu 11 FIN—(10100 lelsinki, Finland Fax: +358-0-409880 PREFACE. TABLE OF Coraarrs, ACKNOWLEOGEM S Preface This new publication, Exporting and the Export Contract, introduces the reader to the export contract and its legal framework.
In 1991, PRODEC published a book entitled International Procurement Contracts: An Introduction; the present book represents the "other side of the coin," concentrating on the contract from an exporter's point of view. The emphasis of the book is largely managerial, in that it focuses on contractual aspects of exporting; it is intended for the use of non-lawyers entrusted with drafting and negotiating contracts in export-oriented companies. This book provides readers with a concise and easy-to-read guide to the main features of international export contracts; consequently it will help them avoid common pitfalls, minimize risks, and create profitable, long-term business relationships with foreign customers. The reader requiring detailed advice on a particular legal matter is referred to the specialized sources of information mentioned in this book.
In matters of great significance and high risk, consulting a lawyer is strongly advisable. The need for this type of publication is widely acknowledged. For many exporting companies in developing countries, the legal aspects of commercial_ transactions are problematic. given the scarce information available to them.
The language of lawyers is often difficult for a business person to understand. A situation where -there is no written contract at all or where the contract fails to clarify key issues can be very costly for the exporter. the highest cost often being the loss of a customer or a dent in the company's reputation. For these reasons, PRODEC (Programme for Development Cooperation) at the Helsinki School of Economics and Business Administration published this book.
The entire book has been written by Dr. Pinnells, international consultant, and author of International Procurement Contracts. Pinne lIs has researched the subject-matter with the needs of developing countries particularly in mind. Draft versions were tested in a number of PRODEC seminars in Africa and Asia before the final version was written.
The test period has added to the practical value of the hook as many crucial problems in export transactions came to light only during discussions with exporters. The book is financed by the Government of Finland, through FINN1DA (Finnish International Development Agency). PRODEC wishes to express its appreciation and heartfelt thanks to the author as well as to the persons who have contributed to this publication. This book will mainly be used in PRODEC seminars on export marketing and business management, to provide a useful new tool for company executives.
PRODEC Saara Kehusmaa-Pekonen Executive Director iv EXPORTING AND 111E EXPORT ComntAcr Table of Contents Introduction: Exporting and the Management of Risk 1. The Meeting of Minds 1 2. Exporting: Where are the Risks? 7 3. Risk, the Contract, and the Law 11 Chapter 1: Negotiating Delivery I.
The Five Steps in Negotiating Deliver) , 19 2. Place of Delivery 38 4. Risk, Title and Insurance 55 6. Terms of Trade: Incoterms 1990 65 Chapter 2: Negotiating Price and Payment • I.
Export Pricing Strategies. The Five Steps in Negotiating Payment 77 3. Third-Party Security for Payment 82 4 , The Letter of Credit 87 Chapter 3: Negotiating Inspection and Defects Liability I. Exporting and the Problem of Quality 115 2.
Inspection, Acceptance and Rejection 121 3. Warranty and Guarantee: Terminology 126 4. The Defects Liability Period: A Chance to Put Things Right 128 5. Timing of the Defects Liability Period 134 6.
Corrective Action 141 Chapter 4: The Legal Framework 1. The Big Picture 149 2. Choosing an Applicable Law 150 3. Contract or No Contract? 158 4.
The Contract as the Entire Agreement 169 5. Provisions Concerning the Parties 176 6. Provisions Concerning the Status of the Contract 181 7. Settlement of Disputes 189 Chapter 5: The Export Contract I.
Making the Contract Safe 195 2. Using a Model Contract 203 Afterword 221 Answer Key 222 List of Works Cited 229 Index 232 PRITACE. TAKE OF CON11. ACKNOWLEDGE:Al:NI S V Acknowledgments This book is the result of the cooperation of many people and organizations.
The author and the publisher wish to thank, in particular, the following people who gave up their _time to help the author will) his research in Africa: Keith Atkinson, D. Bid, Hiran Bid, Faraya Chamba, Victor Chando, Edmund Chawira, Nicholas P. Gor, Charles Gwinji, David J. Hall, Rhett Hill, Mike Humphrey, Trevor Ingrain, Farouk Janmohamed, Nizar Juma, Charles Karanja, Owen Kaseke, James Kinyani, Riku Konstari, Virginia Matabele, Matthias S.
Meroka, Danny Meyer, Isaiah C. MItunbo, Phil Munro Agrina Mussa, Lucy Ng'ethe, G. Njeru, Monica Nzioka, Rem 0. Ogana, Raphael Omusi, Seth Amos Otieno, Dr A.
Palley, pirris Papaspirides, S. Sharma, Stanford Sibanda, Jim Torond, J. van Niekerk, John Walachia, Tom Wells. In addition, the participants at two PRODEC seminars contributed greatly to work on a pilot version of the book.
Because of their enthusiastic and far- ranging criticism, little of the original text survived intact in these pages: Miriam Abdelki, Sara Abera, Berhanii Aberra Alemu, Nathan Bicunda, Hemantee Boodhoo, Isabel Dias dos Santos. Zemedkun Fantaye, Tracy Gatawa, Paramasiven Govinden, Abubakar Matakar Hafidh, Halima 1-latibu, Sam K. Kallungia, lvlikrod Karima, John Kawamba, Alfred B. Kowo, Danwantee Luchmun, Joseph Luganga, Salome Wairimu Macharia, Mathe Naomi Majara, Ionia Makene, Ruth Nlandala, Desideria K.
Mhamilawa, Stanislaus Franz Mwalongo, Beatrice Bondo Mwandila, Josephine Ayugi Okot, Mandakini Patel, NIulenga D. Sitnwanza, Harriet Ssali, Aloys Joseph Wanyama, Angelina Wapakahulo. The author owes a particular debt of thanks to the staff of PRODEC. Their support with pilot testing, field research, and the production of the book itself has been tactful, helpful, and unfailing.
The concept of the book originated with Piiivi Saarikoski who also organized the field research. A team of three worked through the book with the author, making suggestions and catching errors of both commission and omission: Pirjo 1 -luida led the team and reviewed the content in the light of her extensive experience as trainer in many parts of the world—my special thanks to her. Tiina Vainio acted as a particularly astute copy editor, and Kata Nuotio checked the book thoroughly for readability and coherence. If this book achieves any of the goals it has set itself, it will be in large measure due to their efforts.
Pinnelis Heidenfahrt, 1994 vi EXPORTING AND TUE EXPORT COKTRAC r Conventions and Abbreviations This book is based on research and many years of experience with sales and procurement contracts involving at least one party from a developing country. To turn this experience—some of it negative—into profitable examples for the reader, three imaginary countries have been created: Verbena, Esperanza and Nonamia. These are countries all too familiar with the day-to-day difficulties of exporting; the solutions they adopt are sometimes clever, sometimes less than clever, but always—it is hoped—instructive for the reader. The currency of all of these countries is the local "$"—which you can pronounce dollar or (haler at your discretion.
These currencies bear no relation to any fixed exchange rate and are liable to float widely from chapter to chapter. Where actual currencies are , intended. the ISO system is used: USD for US dollars, GBP for pounds sterling, and so on. One other convention is worth mentioning.
Women are seriously under- represented in the business life of many countries, developed and developing alike. That is not the case in this book where women entrepreneurs play a roughly equal role in the scenarios and examples. On the other hand, occasional use has been made of he, him, and his with the traditional unisex meztning. The reason is that this book will he read by many people whose first language is not English: in choosing between what is called "sexist" language and the complex English sometimes necessary to avoid it, the author has decided against complexity.
The use of the word businesspeople rather than businessmen is just one example of a marginal case where the author has made the opposite decision. Abbreviations are inevitable in modern business life, though the author has tried to keep them to a minimum. Each abbreviation is expanded the first time it is used. Even so, a list of the abbreviations in the book may be useful: ASEAN Association of South-East Asian Nations BGB BOrgerliches Gesetzbuch (German Civil Code) 131.
Bill of lading CFR Cost and Freight (Incoterm) OF Cost, Insurance, Freight (Incotenn) CIP Carriage and Insurance Paid (Incotenn) COCO M Coordinating Committee on Multilateral Export Controls CPT Carriage Paid To (Incotenn) DAF Delivered At Frontier (Incotenn) DDP Delivered Duty Paid (Incotenn) DDU Delivered Duty Unpaid (Incotenn) DEM Deutsche mark DEQ Delivered Ex Quay (Incotenn) DES Delivered Ex Ship (Incoterm) DIIIT Deutsche Industrie and Ilandelstag DIN Deutsche Industrie Nonnen (German Industrial Norms) EXW Ex Works (Incoterm) FAS Free Alongside Ship (Incotenn) FCA Free Carrier (Incoterm) PREFACE, TABLE OF CON1ENTS, ACKNOWLEDGF.MENTS v ii FOB Free on Board (Incoterm) GBP Great Britain pound (sterling) EIGB Ilandelsgesetzhuch (German Commercial Code) IATA International Air Transport Association ICC International Chamber of Commerce, Paris Incoterms International Commercial Terms (published by ICC) ISO International Standards Organization kW kilowan L/C Letter of credit PC Personal computer PTA Preferential Trade Area -SITPRO United Kingdom Simplification of International Trade Procedures Board SGS SociOtd. Gdndrale de Surveillance SoGA Sale of .Goods Act (UK) UCC Uniform Comthercial Code (of United States) UCP - Uniform Customs and Practice for Documentary Credits (published by ICC) UK United Kingdom of Great Britain and Northern Ireland UNCITRAL United Nations Commission on International Trade Law USD United States dollar INTROIXICIIptt EXPORTING AND7.11E it4vAGEgpstr OF RISK 1 Introduction Ex porting and the. Ma0agement of RiMc. The Meeting of Minds THE PROBLEM An exporter and a buyer negotiate together.
At some point there is a "meeting of minds" their discussion becomes an agreement— with important legal Consequences for both .a dangerous moment for first-time.exporters: they know their local market ,. but exporting poses new problems in production, delivery and, above all, pricing. A hasty , agreement can cause heavy losses. THE PR rup1PLE Once scope (the goods to be 'delivered) and price (the price to be paid) are agreed, the bare bones.
of a legally enforceable agree- ment .are in place.