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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Guillermo C. Jimenez
An export/import transaction is always based on an underlying contract of sale. The contract may be contained in a single document, but more commonly it is created by an exchange of form documents between exporter and importer. The typical documents are the seller’s “pro forma invoice” and the buyer’s “purchase order”. These forms are frequently accompanied by a set of legal conditions known as General Conditions of Sale (or Purchase).
Inexperienced traders often fail to include important provisions in their General Conditions (or fail to use any General Conditions at all).
Another common problem arises when the exporter’s General Conditions conflict with the buyer’s (the so-called “battle of the forms”).
One method which provides for great contractual precision is to use the thorough set of legal terms found in the ICC Model International Sale Contract. ICC Model Contracts are designed to be fair and neutral. The ICC Model International Sale Contract was in addition drafted specifically to accord with the UN Convention on Contracts for the International Sale of Goods (CISG).
Traders should be familiar with the purpose and potential pitfalls of each of the key sales contract clauses.
Since the CISG constitutes the applicable law governing a great number of international sales transactions, it is important for international trade professionals to be conversant with its key provisions.
This chapter reviews one of the most important contracts in international business, the contract for the international sale of goods. Such contracts underlie all international commercial sales transactions (i.e., wholesale, merchant-to-merchant or “B2B” sales).
ICC has developed a Model International Sale Contract (Model Sale Contract) specifically adapted for international sales of manufactured goods intended for resale. The Contract was designed for use in transactions governed by the U.N. Convention on Contracts for the International Sale of Goods (CISG).
This chapter’s discussion of the export sale or purchase agreement will make specific reference to the legal terms and provisions of the Model Sale Contract. However, we also review the standard commercial clauses used in international sale contracts generally, so that this material should be useful to exporters and importers whether or not they use the Model Sale Contract.
The Model Sale Contract focuses specifically on an important subset of internationally-traded goods: manufactured goods intended for resale (such as electronic appliances, hardware and tools, textiles, apparel and footwear, furniture, office products, etc.). Although this is a broad scope of application, international merchandise agreements must nonetheless to be distinguished from other international sales, such as those involving commodities transactions (e.g., grains, ore, foodstuffs, chemicals), or direct sales to consumers.[Page64:]
Although the ICC Model is denominated a “sale” contract, it is equally appropriate for use by importers and buyers. It could also be used for a so-called “purchase” agreement or in place of a purchase order and general conditions of purchase (see further below).
“Spot” or “one-off” commercial contracts (contracts covering a single transaction) in international trade are commonly formed through an exchange of forms or via standard industry contracts. Just as with commercial sales in a domestic context, two of the most important documents are the seller’s pro forma invoice (or purchase order confirmation) and the buyer’s purchase order.
The universal rule underlying contract formation is that there must be an offer and an acceptance, but there are several ways of arriving at that arrangement, depending on who makes the first legally-binding offer:
> Purchase Order as Offer
In one common scenario, transactions are based on the buyer’s purchase order or P.O. Issuance of the purchase order is usually preceded by an exchange of information between export seller and import buyer with respect to price, quality and quantity, etc. For example, the seller may make its product known by circulating price lists or attending trade shows. The buyer may then request a price quotation via a letter or a form known as an “RFQ” (Request for Quote). When the transaction details have been clarified and agreed, the seller may issue an informal price quote or a more detailed pro forma invoice. If the buyer accepts the seller’s price and other contract details, the buyer issues a purchase order.
In these cases, the purchase order represents the first legally-binding offer and the seller’s confirmation of that order (or alternatively, the transmission of seller’s pro forma invoice) will represent the acceptance of that offer. Commonly, the buyer’s purchase order contains a provision which makes it subject to the buyer’s general terms and conditions of purchase (which in some cases will be found in a separate document or handbook called a vendor’s or supplier’s “compliance manual”).
> Alternative: Pro Forma Invoice as Offer
An alternative procedure is based on using the pro forma invoice as the first legally binding offer. In such cases, the buyer requests a price quote via a letter or RFQ (when a complex sale is envisaged the document is often called a “request for proposal” or “RFP”). The seller responds with a pro forma invoice, which indicates to the buyer what the final commercial invoice will look like. In this commercial context, the buyer has only to accept the pro forma invoice in order to form a valid contract. One way of accepting the offer is for the buyer to reply with a purchase order containing terms that mirror those of the pro forma.
Pro forma invoices are widely used in international trade for a number of reasons. The similarity of the pro forma invoice to the final commercial invoice makes it easy for the buyer to understand the final cost of the goods. Banks prefer to open letters of credit on the basis of binding offers contained in pro forma invoices rather than in less formal communications. In some countries, such as the U.S., customs authorities may accept a pro forma invoice as a substitute for the commercial invoice when the goods are being cleared for import.
> Use of General Terms and Conditions
When form documents (like the pro forma and purchase order) are exchanged, they typically only contain the details relevant to the specific transaction being negotiated, such as the price, description of goods, quantity, payment method and delivery terms. General legal terms, such as those dealing with applicable law, warranties, available damages, termination provisions and dispute-resolution methods, are typically dealt with in a separate set of clauses referred to as “general conditions of sale” (or purchase). These clauses are commonly found on the reverse side of the document with a reference to them on the front side.[Page65:]
> Use of Standard Contracts
In many industries and market sectors, standard form contracts have achieved great prominence. For example, U.S. importers of cocoa generally rely on “Standard Contract 1-A of the Cocoa Merchant Association of America”. Global trade in grain, animal feed, rice and oilseeds is largely subject to the 80 standard contracts of the Grain and Feed Trade Association (GAFTA). In the electrical and mechanical engineering sectors, the FIDIC (International Federation of Consulting Engineers) and Orgalime (The European Engineering Industries Association) contracts and general conditions are extremely influential.
It is worth noting that such contracts often provide highly detailed delivery and transport provisions specifically adapted to the type of goods sold. Trade associations may develop industry-specific definitions of FOB or CIF that are at variance with general standard definitions such as those of Incoterms® 2010. This is one of the reasons it is important to specifically refer to Incoterms® 2010 whenever one wants the definitions to apply to a contract.
> Use of Model Contracts
Model Contracts are often intended as sources of inspiration for typical clauses encountered in contract-drafting. A model contract (such as the ICC Model International Sale Contract considered in this chapter) may be useful as follows:
The Vienna Convention on Contracts for the International Sale of Goods (commonly referred to as CISG), is an international law that applies automatically to international commercial sales of tangible goods when the seller and buyer are located in “contracting states” (nations which have signed the CISG treaty), or when one of the parties is located in a contracting state and that party’s law governs the contract.
Since the CISG now has approximately 84 signatory country members, including most of the world’s major trading nations (despite notable exceptions such as the U.K., India and Brazil), it applies to an increasingly substantial volume of international sales. While parties are free to exclude the CISG, most small- and medium-sized parties do not exercise that option. Determining whether or not it is wise to exclude CISG is a complex matter upon which traders should seek the advice of expert counsel. In particular, traders should be aware that in many jurisdictions CISG can only be excluded “explicitly” (meaning that a mere choice of national law, on its own, is not sufficient to exclude CISG).
The CISG is composed of 101 brief articles (the entire document can be printed on 20 pages). Exporters and importers should especially be aware of the following points (keeping in mind that it is possible to expressly vary or exclude the CISG provisions if both parties agree):
> Contract formation
An offer is any proposal that is “sufficiently definite”, meaning that it at least “indicates the goods and expressly or implicitly fixes or makes provision for determining the[Page66:]quantity and the price”. Acceptance of an offer is effective when it reaches the offeror. However, the offeror may not revoke an offer once the offeree has dispatched its acceptance.
> Oral contracts
Oral contracts are permitted and enforceable under the CISG; signed writings are not required.
> The “Battle of the Forms”
When the parties exchange printed forms that differ on certain terms, the question arises as to which form prevails, the seller’s or the buyer’s? The CISG rule is that a buyer’s acceptance that differs materially (e.g., on a key point such as price, quantity, quality or delivery date) from the seller’s offer amounts to a rejection and counteroffer, which the seller must expressly accept. If the buyer’s acceptance only differs on points that are not material, then the acceptance is deemed to form a valid contract unless the seller objects.
Ultimately, the easiest option is to try to always be the one who “fires the last shot”. Thus, exporters may wish to provide a printed acknowledgement form — including the general conditions of sale — in response to buyers’ purchase orders. Obviously, if either party believes that a provision contained in the other’s general conditions is material and unacceptable, they should openly negotiate for a modification of that provision (see discussion on general conditions of sale further on).
> Prior course of dealings and trade usages
The CISG provides that the “parties are bound by any usage to which they have agreed and by any practices they have established between themselves”. Note that increasingly courts have begun to apply the ICC’s Incoterms® rules as international trade usages even in cases where the Incoterms® rules are not explicitly incorporated.
> Delivery and risk of loss/Incoterms® 2010/UCP 600
Delivery and risk of loss are covered much less fully than by Incoterms® 2010; traders, therefore, should explicitly incorporate an Incoterms® rule into the sale contract (see further on). Moreover, in contracts involving letters of credit, banks will generally follow rules in the International Chamber of Commerce’s UCP 600, which require that “banks deal in documents, not goods”. To avoid a discrepancy between the CISG and the UCP 600, a prudent approach would be to specifically refer to UCP 600 in that part of the sale contract setting out the seller’s documentary duties.
> Passage of property/title
Passage of property, sometimes referred to as “transfer of title”, is not covered by the CISG (nor the Incoterms® rules). Therefore, it is a matter of applicable domestic law; traders should specify the point at which they wish title to pass after having checked the compliance of said provision with domestic law.
> Warranties
The CISG provides that the seller must deliver goods that are “of the quantity, quality and description required by the contract ... The goods do not conform with the contract unless they ... are fit for the purposes for which goods of the same description would ordinarily be used [or] are fit for any particular purpose expressly or impliedly made known to the seller at the time ... of the contract”.
> Inspection of the goods
The buyer must inspect the goods and “loses the right to rely on a lack of conformity of the goods if he does not give notice ... within a reasonable time after he has discovered [the non-conformity] or ought to have discovered it”. The exporter may wish to expressly specify a limited period for notification of defects. Moreover, the exporter may wish to expressly override CISG article 27, under which the exporter bears the risk of delay or non–receipt of notices from the buyer.[Page67:]
Most international contracts are performed to the satisfaction of both sides, and minor breaches are commonly waived or amicably settled. Unfortunately, this may lull traders into a sense of complacency. Traders may come to believe that legal and documentary obligations are mere technicalities. Even in stable markets with well-established trading partners, a meticulous approach to contract drafting is the most prudent way of minimizing the risks from those unusual cases in which a counterparty substantially breaches the contract.
Some contractual breaches are legally “curable” — the problem can be fixed or set right. If the seller delivers non-conforming goods before the delivery deadline, and the nonconformity is pointed out, the seller may still make a second delivery of conforming goods. On other occasions, the aggrieved party will simply forgive a particular breach. Thus, if goods arrive a day or two late and the time of delivery is not crucial, the buyer may simply overlook the breach. However, by repeatedly forgiving a particular breach, parties may be taking the risk of establishing a “waiver” of their rights. One solution is to insert a clause in the contract to the effect that all modifications of the parties’ rights under the contracts must be in writing signed by both parties (though not enforceable in all jurisdictions). Another solution is for the aggrieved party to object in writing to the small breaches, thereby establishing a paper record that that party had no intention of waiving its right to insist on performance.
The CISG allows for the full scope of legal remedies, including specific performance, delivery of substitute goods, price reduction and compensatory damages. Exporters may wish to expressly limit recourse to these remedies as, for example, by limiting liability and by excluding consequential damages, price reduction or specific performance options.
> Breaches of Contract
The possible remedies vary according to the:
> Remedies Available
> Two-Part Structure
Most export sale contracts have a two-part structure and this is exemplified also in the ICC Model International Sale Contract. The Model Sale Contract’s two-part structure mirrors the standard commercial practice in which the sale terms and other conditions specific to a commercial transaction are contained in a form document (such as a pro forma invoice, purchase order or purchase order confirmation), while the background legal conditions are contained in a separate document commonly entitled General Terms or General Conditions of Sale/Purchase.
> Commercial Terms
The key commercial terms (price, description of the goods, payment method) are found in a form called Specific Conditions. This form document allows the parties to fill in the basic transaction information commonly found in export quotes, pro forma invoices or purchase orders. The Special Conditions set out the commercial terms specific to a particular transaction.
> Legal Terms
The standard legal terms that traders apply to most of their contract is commonly found in a separate set of provisions which may be known as General Terms and Conditions, and in the ICC Model is referred to as General Conditions.
The General Conditions complement the parties’ choices in the Specific Conditions and also provide a number of fallback provisions in the event the parties fail to agree on contrary express terms.
International traders may simply use the ICC Specific Conditions in place of other common international trade forms such as the pro forma invoice or purchase order. ICC Publishing provides forms in both paper and digital form that parties may fill in and transmit to their counterparty precisely as they would a pro forma invoice or purchase order. Thus, a buyer who is accustomed to starting negotiations or concluding a contract by issuing a purchase order may use the ICC Specific Conditions in place of the purchase order.
Alternatively, the parties may use their own sales forms in lieu of the ICC Specific Conditions, but may still incorporate the ICC Model General Conditions, either by appending them to the contract or by including a simple reference, such as: “This contract is subject to the general conditions of the ICC Model International Sale Contract”.[Page69:]
Large corporations invariably have their own General Conditions of Sale/Purchase and tend not to use general form or model contracts (except in the case of industry-specific standard contracts).
When CISG first began to be applied by the courts in the early 1990s, it was common for legal counsel at large corporations to advise exclusion of the CISG in favour of commercial laws (such as English commercial law, or the U.S. Uniform Commercial Code) with which they were more familiar. With the passage of time and the benefit of experience, legal counsel are moving to a more a strategic use of CISG, adopting it in those cases where CISG legal provisions are preferable to those of the national law which would apply in the absence of CISG. In any event, the Model Sale Contract was not designed for use by large corporations in major transactions.
Rather, the Model Sale Contract is especially suitable for new and small corporations with less experience in international transactions. These users will find that the ICC Model provides a complete and easy-to-use system for entering into international sale transactions. In many cases, it will be preferable to the use of standard forms that were developed for domestic transactions and which may be lacking in provisions required for international transactions. While small–and medium–sized parties may find it helpful to use the Model Sale Contract directly, they may also find it helpful as a source of inspiration for drafting their own clauses or contracts. An additional use during negotiations is to refer to the provisions of the Model Sale Contract when the ICC provisions are closer to one’s preferences than the terms offered by the counterparty.
Our discussion of the key provisions in export sale contracts below is based on the specific example of the ICC Model Sale Contract.
> Parties to the contract
The parties and their correct legal names should be precisely specified. The counterparty identified in the contract should be precisely the same company for which credit and bank references have been fully checked, and not a related or affiliated company, or a person with a similar name. Likewise, an individual who purports to sign a contract on behalf of a company should do so in such a fashion that it is clear which party is to be bound by the contract — the company or its representative.
> Goods Sold
This clause, sometimes referred to as the Description of Goods, is one of the central provisions in any sale contract. Goods should be described briefly but precisely. It is worth the parties’ time to devote attention to this essential clause. The buyer’s right to object to defects in quality may be strictly limited by how precisely the goods are described in the contract. As a general rule, the buyer will prefer more precise and detailed descriptions than the seller. If the goods are not described precisely enough, the buyer may have no recourse should the seller deliver goods which technically meet the contract description but are unsatisfactory for the buyer’s commercial purposes. Thus, in one contract a buyer contracted to buy “USDA Grade A frozen chickens”, but it turned out this term was too general when the buyer received low-value “stewing chickens” rather than the expected “broiler/fryers”. Similarly, a German importer of pork livers for liverwurst was disappointed to discover that “pork livers” was not sufficient to designate female pork livers; the seller delivered unusable male pork livers.
The description should identify the goods with sufficient precision such that the exporter cannot deliver goods which are “almost” good enough. Vague terms are not helpful in the event of a dispute and should be replaced by specific criteria (e.g., “top quality fish meal” will not be as useful in a court dispute under a documentary credit as “inspection certificate issued by XYZ Inspection Company to indicate fish meal with a minimum 70.75% protein content”). For this reason, some contracts include a separate Definitions section for technical terms or terms with legal connotations.[Page70:]
Exporters, on the other hand, are happy to define the goods precisely when they are sure of delivering exactly those goods. In other commercial situations, however, it may be practical to foresee and permit slight deviations from the contract description. Is the contract covering a single type of product or rather a wide range or assortment of products (in which case it is typical to annex a precise list of the assorted items)? Have the goods been advertised in catalogues in particular colours, sizes or materials that may not precisely conform to the goods as delivered? In such cases it is wise for the exporter to refrain from an overly precise description. If statements of colours or dimensions, for example, are not necessary to precisely identify the goods, they should not be included in the product’s description.
In any event, Article 2.1 of the ICC General Conditions provides that dimensions or colours of goods mentioned in advertising or marketing materials do not become part of the contract unless expressly referred to in the contract.
An excessively detailed product description can lead to problems in a letter of credit. Some portion of a lengthy description may be garbled or omitted in documents required under the credit, leading to a discrepancy and rejection by the bank of the documents. If the seller delivers merchandise which is “too good” (in the sense that the goods are of a higher quality than called for in the contract), and the commercial invoice differs from the product description in the letter of credit, the bank will reject the documents, and it will be up to the importer to decide whether or not to waive the discrepancy.
Exporters may wish to stipulate in their sale contracts or general conditions of sale that variations of minimal importance in quality or quantity should not be grounds for termination of the contract. For minor defects in the products, which do not prevent the buyer from using them more or less as intended, the buyer and seller may agree that it is fair that the buyer pay a reduced price or obtain a refund, because the goods delivered were of lesser quality than those specified in the contract at the contract price.
This is the approach taken by the General Conditions in Article 11, which provides that buyers must accept goods with minor or trivial discrepancies common in the trade or in the course of dealing of the parties. The ICC terms seek to strike a fine balance between the interests of the parties when the seller has in good faith attempted (or is still willing to attempt) to deliver conforming goods in a commercially reasonable time period. The ICC approach constrains the buyer from rejecting the goods on the basis of truly minor defects in quality or late delivery which is not commercially significant.
Note that where the contract calls for a preponderant part of the seller’s obligations to involve services or labour, the CISG is not automatically applicable, but the parties may expressly decide to incorporate it notwithstanding the non–merchandise characteristics of the contract (in which case the CISG will govern the merchandise portion of the transaction).
> Price
Parties must clearly indicate the contract currency and the price amount in both figures and words. Should the parties fail to agree on a price in the contract, the General Conditions provide a fallback method for determining the price.
> Delivery Terms
ICC recommends that parties use Incoterms® 2010 as their “delivery terms” or “shipping terms”. If the parties do not wish to use the Incoterms® rules, space is allotted for them to make an alternative choice. Should the parties fail to elect an Incoterms® rule, the contract will be based on the EXW (Ex Works) Incoterm.
The Incoterms® 2010 rules are extremely useful in terms of allocating transport responsibilities, but they are still general terms that lack precision when parties neglect to precisely describe the place and within that place the exact point of delivery. Additional specifications may also be necessary to specify the amount and extent of insurance coverage and any necessary limitations on suitable transport (e.g., shipment under deck, etc.).[Page71:]
> Time of Delivery
The Specific Conditions allow the parties to indicate a specific date for delivery (e.g., “March 19, 2017”) or a period (e.g., “September 2018”).
In the interest of preserving the contract whenever it is commercially reasonable, the General Conditions provide for modest liquidated damages (check the latest version of the Model Contract for the default percentage, which is calculated per week of lateness).
Alternatively, when the buyer is commercially unable to accept late deliveries, the buyer may fill in a firm cancellation date.
> Inspection of the Goods by Buyer
The Specific Conditions allow for the parties to indicate whether they agree to inspection “before shipment” (also pre-shipment inspection or PSI); the parties may indicate the place of inspection as well as other details (e.g., inspection agency or company, inspection details, etc.). If inspection is provided for, the General Conditions require the seller to notify the buyer of the availability of the goods for inspection.
Pre-shipment inspection can provide an extremely important quality control and anti-fraud device for import buyers. However, if inspections are to be contractually required, both seller and buyer are well advised to insist on inspection by a reputed, independent inspection agency. An inspector who is an agent or employee of either side cannot be expected to remain fully neutral in the event of a dispute.
> Retention of Title
The retention of title (RoT) clause is a common one in international trade. It provides that the seller retains ownership of the goods until the full purchase price is paid, and also that seller may reclaim the goods if the price is not paid. The RoT provisions become crucial when buyers become insolvent and other creditors are competing for the buyer’s remaining assets. With a valid RoT clause, the seller can reclaim the goods even if the buyer is bankrupt.
The transfer of legal title to goods in international transactions is covered neither by the Incoterms® 2010 rules nor the CISG, but by national law. Consequently, the parties are free to specify how that title passes subject to the retention of title clause, but they should be careful to verify that the method they have chosen is permitted by the applicable national law.
There are several variations of the RoT clause, but two major types can be distinguished: 1) the simple RoT clause, under which the seller retains title until the price is paid, and 2) the extended clause, sometimes called an “all monies” clause, under which the seller seeks to extend its title to include:
The availability of recourse to extended–type clauses will depend on the applicable national law. Contract drafters, therefore, should prepare the RoT clause in light of the national law as regards the transfer of title, as previously indicated.
The Specific Conditions allow the parties to elect whether or not they wish the contract to be subject to “retention of title”. The Model Sale Contract provides for a simple RoT clause, which should be available in most jurisdictions, but it is always wise — especially in large value transactions — to consult local counsel on this point. In some countries, it may be necessary to register the seller’s interest in the unsold merchandise (often called “perfecting the security interest”).
Retention of title is often required as a condition for issuing export credit insurance by insurance providers such as France’s Coface or the U.S. Eximbank. Since credit insurers step into the sellers’ shoes when they take on the risk that a seller will not be paid, they[Page72:]seek to mitigate the risk by obliging sellers to enter into export contracts which stipulate for RoT, which is sometimes described as a “consolation prize” for the unpaid seller. It is not as good as full payment for the goods, but it can be better than nothing.
> Payment Conditions
The Model Sale Contract permits use of all international payment modes, including open account, documentary collection, documentary credit, payment in advance and the Bank Payment Obligation (BPO). If the parties fail to specify any form of payment, a default provision is based on an open account payment by electronic funds transfer payable 30 days from the date of invoice.
The Model Sale Contract prompts the parties to make minimum necessary specifications related to their choice of payment option:
> For open account payments the parties are prompted to fill in the payment date as a number of days after the invoice date. The parties are alternatively allowed to indicate if they wish the open account option to be backed by a standby letter of credit, a common payment security.
> For payment in advance, Article 5.2 of the General Conditions provides that buyer must provide readily available funds to the seller at least 30 days before the agreed delivery date. The parties are alternatively allowed to indicate if they wish the advance payment option to be backed by an advance payment bond.
> For payment by documentary collection, the parties are allowed to select between basic options of Documents against Payment (“D/P”) or Documents against Acceptance (“D/A”). If the parties indicate agreement that payment will be by documentary collection, but fail to make further explicit agreements, the fallback provisions in the General Condition is for a D/P payment under the ICC Uniform Rules for Collections.
> For payment by documentary credit, the Specific Conditions allow the parties to enumerate such important details as: confirmation, place of confirmation, payment at sight or by negotiation. If the parties fail to make an election, the General Conditions fallback provisions are that: i) buyer must open a credit at a reputable bank at least 30 days prior to the earliest date acceptable for delivery; ii) the credit must stipulate for payment at sight and allow transhipments but may not allow partial shipments; iii) the credit is subject to the ICC Uniform Customs and Practice for Documentary Credits (UCP).
> Documents
The Model Sale Contract provides the parties with a list of the documents most commonly required of seller in international sale/purchase agreements.
It is vital for export sellers to appreciate the strict documentary obligations entailed in a classic “documentary sale” in international trade. The duty to deliver conforming documents may be just as important as the contractual obligation to deliver conforming goods. In sales under the FOB, CFR and CIF Incoterms® rules and/or transactions specifying payment by documentary credit, crucial documentary obligations for the seller are just as important as the seller’s physical delivery obligations. In particular, the seller must deliver the right kind of transport document and, in the case of CIF, the right kind of insurance document as well. Failure to do so may be considered a fundamental breach of the entire contract under the CISG. Sellers are well-advised to be meticulous in their management of export documentation, especially when the contract calls for payment by letter of credit.
The digital version of the new Model Contract is designed so that a warning pops up whenever a less appropriate combination of an Incoterms® 2010 rule, payment technique and/or documentary requirement has been selected.
> Cancellation Date
This clause allows the buyer to specify a deadline which, upon the seller’s failure to deliver, allows the buyer to cancel the contract immediately.[Page73:]
This option is an alternative to the default choice in the General Conditions Article 10.3, which allows the buyer liquidated damages (in effect, a discount) calculated as a percentage of the sale price per week of lateness.
> Liability for Delay
Parties may create their own default rule on lateness (e.g., a clause which entitles the buyer to liquidated damages calculated as a percentage of the sale price per week of lateness) by varying or adjusting the liquidated damages provision. Sellers should be aware, however, that if they set the level too high the courts in certain jurisdictions may consider the provision punitive and rule it unenforceable.
> Limitation of Liability for Lack of Conformity
The seller may choose to limit its liability for consequential damages arising from delivery of non-conforming goods to proven losses up to a certain percentage of the price of those goods. .
> Limitation of Liability when Non-Conforming Goods are retained by Buyer
In the event of delivery of nonconforming goods by the seller, the buyer may wish to retain the non–conforming goods and receive a price abatement or discount.
> Time-Bar
The time-bar refers to the time duration after which the buyer is barred from seeking legal remedies after the arrival of the goods (four years as the fallback provision). The parties may provide for a longer or shorter time bar.
> Applicable Law
One of the basic concepts underlying the Model Sale Contract is that it accords with the CISG. Consequently, there is no need for the parties to choose any additional national law, and to do so risks creating a conflict. However, in Clause 14(a) of the Specific Conditions the parties may provide for a different sale law other than the CISG.
In the event an issue is not addressed by the CISG, the General Conditions provide that the issue will be decided by the law of seller’s place of business. If the parties wish to accept the CISG but do not accept the seller’s law as the fall-back option, Clause 14(b) of the Specific Conditions allows the parties to provide for a different fall-back law, such as that of buyer’s place of business.
> Dispute Resolution
The ICC Model allows the parties to choose between arbitration and litigation as the required mode of dispute resolution. In the event the parties opt for ICC arbitration, the Specific Conditions allow the parties to further specify the place of arbitration and other details. If the parties opt for litigation as the required mode of dispute resolution, the Specific Conditions allow the parties to designate the national or municipal courts in which lawsuits are to be filed.
> Force Majeure
It is common for international trade contracts to be made subject to force majeure or “hardship” provisions that excuse the parties from performance when their failure is due to impediments beyond their control or which were reasonably unforeseeable. Article 13 of the General Conditions contains a basic default provision that allows either party to terminate the contract if force majeure conditions exist for more than six months.
Some kind of force majeure relief may be available even if not included in the contract. Under most systems of commercial law, a party may be excused from a failure to perform a contract obligation caused by the intervention of a totally unforeseeable event, such as the outbreak of war, or an “act of God”, such as an earthquake or hurricane. Under the American Uniform Commercial Code (UCC), the standard for this relief is one of “commercial impracticability”. In contrast, many civil law jurisdictions specifically apply the term force majeure to this problem. Under the CISG, the standard[Page74:]is based on the concept of unforeseeable or unavoidable “impediments” to performance. Because of the differences between these standards, parties may wish to draft their own clause. ICC Force Majeure Clause 2003 and ICC Hardship Clause 2003 (ICC Publication 650), provides an alternative model force majeure clause that can be incorporated by reference in the contract. When the seller wishes to devise its own excusable delays clause, it may wish to specify the most likely impediments, such as those related to obtaining government authorizations, changes in customs duties or regulations, drastic fluctuations in labour, materials, energy or transportation prices, etc.
Test Your Knowledge: International Sales
True/False
Answers: 1. F 2. F 3. F 4. T 5. T 6. F