Terms and Conditions of Purchase or Sale/Applying your Knowledge of the Advantages and Disadvantages

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Globe for WikiEducator.jpg Unit 5.1-Terms and Conditions of Purchase or Sale 

Introduction | Modes of Entry | Terms of Sale | Applying Your Knowledge | Commercial Agreements | Summary | Resources | Activities | Assessment

Applying your Knowledge of the Advantages and Disadvantages

An international manager will normally influence or make the company’s decision as to the most appropriate mode of entry for a particular market. The decision will be based on evaluation of the country risk, both political and economic, and the commercial risk of the customer. Each must be weighed against the available methods of payment. Once an acceptable risk level has been reached, the final negotiations can be conducted, contracts signed and transactions begun.

Country Risk

Economic and political problems in a country affect international trade and put payments at risk. Examples of political risk include war, sanctions, embargos, boycotts, insurrection, strikes, riots, civil commotion, cancellation of import or export permits, visas or quotas, moratoriums on external debt repayment and lack of a convertible currency. The analysis of reliable data on the country and the use of correct financial tools can help control the risk of doing business in other countries.

Commercial Risk

International trade often brings together a buyer and a seller that have had little contact or knowledge of each other. This lack of relationship can present problems for both the buyer and the seller. The buyer may not pay on time or worse become insolvent. The seller may not deliver the goods or provide the services contracted for. Companies can usually manage these risks by doing an appropriate credit review, securing the transaction with insurance or using an appropriate payment method.

Transaction Viability

The costs associated with pricing an export product are greater than the domestic market. This makes the pricing strategy more difficult. Pricing and costing a product are essential in determining whether a transaction is viable. There are many factors that come into play but fit into three categories. Environmental factors such as legislation that will impact factors like inflation and currency conversion. Market factors impact purchasing power, competition and market share. Internal factors within the exporting company determine whether resources and established financial parameters can be met.

Sources of Information

There many ways to evaluate a domestic buyer prior to doing business with them but with international buyers this same information is more difficult to acquire. Depending on the source the information acquired may not be as reliable. Good credit decisions require a developed knowledge base and contacts to collect the credit information needed.

Good sources of commercial information include the following

  • Credit bureaus: Companies such as Dun & Bradstreet operate around the world and can provide detailed information depending upon the time and money provided for the research. Industrialized countries reports will likely look like a local report where a developing country may not have financial information available to make a decision.
  • Banks: Foreign banks will provide basic information if authorized by the company in question to release the information. The information they are likely to provide is how long they have been banking with them, if they have a credit facility, average balances and if the account is in good standing. This is only an indication of how they manage their bank account and not how they pay their vendors.
  • Chambers of commerce: Many companies must be members of chambers of commerce and may be able to help investigate a potential client.
  • Foreign trade commissions: Foreign trade commissions can have broad information that can apply to both commercial and country risk. Files may be maintained especially if the experience is negative.
  • The clients Web site: Web sites can be rich in information and be verified later.
  • Public documents: Public companies financial statements are public knowledge and can be accessed through various sources.
  • Accountants: Large accounting firms have offices worldwide they can assist with collecting information on potential customers and provide information on country issues.
  • Other sources: This is just a starting point. There are many other sources of information to assist in the decision making process.

Good sources of country risk information include the following

  • The Department of Commerce: Specific information and country analysis can be acquired from the Department of Commerce. The Department of Commerce can be an inexpensive solution to the acquisition of the information but they do take more time because of their limited resources.
  • The Internet: The internet is easily accessed with a few key words. This information is often more current and is a good supplement to more comprehensive reports especially if there are any current uprisings in the country in question.
  • Country reports: The Economist magazine provides detailed reports and analysis of various countries. The information provided by them is updated annually without any national bias.
  • Banks: Major banks with foreign offices will prepare country risk analyses and distribute them to their clients. The information provides financial information often helping the exporter decide on which payment method to use.
  • Accountants: The large accounting firms all produce books on specific countries on how to do business abroad.
  • Other sources: This is just a starting point. There are many other sources of information to assist in the decision making process. Country risk is one of the easier risks to research because it is more visible and information is updated regularly.

The advantages and disadvantages of the entry point normally include application of contract law which many consider as the most importance source of guidance on international law. A contract serves as the private law between the contracting parties related to a specific transaction and is drafted and interpreted in light of various essential elements related to it, including the following:

  • the law pertinent to the parties based on their respective jurisdictions
  • the place of execution of the contract and the locale of performance of the contract
  • the remedies provided for in the event of disputes arising out of the contract
  • the defined choice of law related to the contract.

Relevant law under these circumstances may be the law of a specific country, the law of a political subdivision of a country, local or municipal regulations, or other commonly-accepted legal standards that derive from the basic sources of international law, that is, custom or commonly-accepted practice. This perspective on applicable law may be broken down into the following elements:

  • Law of parties to the contract (domestic / foreign). For example, with a Saudi seller and US buyer, as provided by contract, law of either jurisdiction may serve as the controlling law for resolution of any questions that arise under the contract or during performance of the contract. The choice of law needs to be explicit within the contract between the parties.
  • Law of the place of execution of the contract. For example, with goods originating in Brazil for consumption in the US, with the contract signed simultaneously in New York City (State of New York) and Rio de Janeiro, State of Rio de Janeiro, Brazil, the choice of law needs to be made explicit under this contract.
  • Law of arbitration / enforcement of the contract. For example, the mechanism for arbitration in the event of any dispute arising under the contract needs to be provided for, as does the chosen forum (more specifically, its location). In the event of non-performance, provision needs to be made for subsequent efforts to protect the interests of the respective parties.
  • Choice of law. The applicable code is whatever the parties designate by agreement, but in sufficient detail to avoid additional conflict. Such can include the choice of the law of a specific state in the United States, rather than simply the choice of US law (essentially federal law, which generally addresses national interests and issues pertaining to all the states).