Terms and Conditions of Purchase or Sale/Components and Implications of Commercial Agreements
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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
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Components and Implications of Commercial Agreements
By utilizing the following checklist, you will have a better understanding of the components and implications of commercial conditions.
Currency, relating to commercial conditions, means an appreciation that the foreign exchange (FX) market is an enormous, sophisticated, and efficient global communications system operating around the clock to enable transactions. It is not expected that an international manager will be an expert in currency valuations. Large commercial banks are the dominant players in the FX market, serving as intermediaries between supply and demand; corporations are the principal end users. FX transactions are speculative by nature and thus can be volatile, increasing risk. Three basic transactions for managing FX risk are spot transactions, forward transactions, and options.
- Incoterms are internationally accepted commercial terms defining the respective roles of buyer and seller in the arrangement of transportation and other responsibilities that clarify when the transfer of ownership of the merchandise takes place. They are used in conjunction with a sales agreement or other methods of transacting the sale.
- Who is paying taxes, duties, and insurance--the buyer/seller/agent/distributor/vendor- should be spelled out in the business contract and defined by the Incoterms associated with each transaction.
- Transfer of title is normally processed by an invoice with a bill of lading frequently as part of a title transfer. A B/L is a document signed by a transportation company ("carrier") to show receipt of goods for transportation from and to the points indicated. Although US law recognizes such a thing as a non-negotiable bill of lading, international law distinguishes bills of lading from waybills in that a bill of lading is a title document issued to order of a "consignee" who can then transfer title (legal ownership of the goods) by endorsement and delivery ("negotiation") of the bill of lading. Someone must present the bill of lading at the point of delivery in order to claim the goods. A waybill is not negotiable in this way. The transportation company will simply deliver the goods to the consignee. A transport document issued "consigned to order of..." is a negotiable bill of lading; one issued simply "consigned to..." is a non-negotiable waybill.
- Methods and terms of payment from the most risky for the buyer, “open account,” to least risky, “cash in advance,” determine who is responsible for approving, controlling and monitoring the risks.
- Force majeure is a term used to describe a "superior force" event. The purpose of a force majeure clause is two-fold: it allocates risk and puts the parties on notice of events that may suspend or excuse service. The essential requirement of force majeure is that the invoking party's performance of a contractual obligation must be prevented by a supervening event that is unforeseen and not within the control of either party. Typical force majeure events include acts of God, superseding governmental authority, civil strife, and labor disputes. However, there is no uniform set of events that constitutes force majeure. Instead, force majeure remains a flexible concept that permits the parties to formulate an agreement that corresponds to their unique course of dealings and industry idiosyncrasies. Events since 9/11 have increased the necessity to include additional, unthinkable events, such as terrorism and the threat of biological and chemical warfare.
- Warranties are an undertaking, ether expressed or implied, that a certain fact regarding the subject matter of a contract is presently true or will be true. In addition, a warranty is a document that states certain facts and conditions about a product's operation and correct use and clarifies the limits of its performance under various circumstances. For a risk manager, a warranty can result in non-payment of an invoice or delayed payment while a replacement product or service is provided to the customer.
- Liability, in its broadest legal sense, means legal liability, any obligation one may be under by reason of some rule of law, usually spelled out in the contract.
- Liability for delay is normally part of a contract. A seller (be it manufacturer, agent, distributor, joint venture) will reach an agreement with a buyer as to delivery of the goods or services which can reduce the amount paid by the buyer to the seller.
- Terminations involve a buyer and seller agreeing that with notice to one or both parties the agreement can be terminated. An international manager must insure that the contract has not expired if pursuing outstanding funds which, while still possibly legally collectible, become more difficult to collect when a contract has expired.
- Law governing the contract is 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; and the defined choice of law related to the contract. It is critical for a credit manager to seek legal counsel to cover the components of contract law and insure that the commercial risk is lessened.
- ICC arbitration/resolution of disputes, utilizing the internationally recognized guidelines issued by the ICC, allows for a more global approach to conflict resolution should it arise.
- Specific issues relating to distribution agreement include
- Agency/distributor agreements, commission arrangements, exclusive/non-exclusive arrangements—all must be included in the agreement to ensure that all parties are aware of their responsibilities and costs.
- International joint ventures, licensing or franchising agreements, tax, finance, accounting, intellectual property--all are additional issues to be considered when a complex arrangement is entered into.
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