Contract: Type and Formations | International Business

After reading this article you will learn about:- 1. Meaning of Contract 2. Types of Contracts 3. Formations 4. Parties 5. Basic Elements.

Meaning of Contract:

A contract is the result of inquiry, offer and negotiations process. It is a piece of duly signed document, which contains the negotiated and agreed detailed terms and conditions for the export and/or import of goods and/or services.

It is a legal document binding on both the importer and the exporter for a specific deal in a fixed time frame. It specifies the areas of responsibilities and liabilities for the exporter and the importer. It comes into force at the time when both the interacting parties ratify it and stamp their acceptance in written form.

Types of Contracts:

There are several types of contracts; each has its own peculiarities and specialties depending upon the parties involved, legal aspect, important issues, expectations, responsibilities, extent of coverage and duration.

Some of the most common types of contracts are listed below:

(i) Commodity contracts,

(ii) Service contracts,

(iii) Commodity cum technology contracts,

(iv) Technology contracts,

(v) Technical assistance contracts,

(vi) Agency contracts,

(vii) Machinery contracts,

(viii) Project contracts,

(ix) Long term contracts,

(x) Short term contracts,

(xi) Spot contracts,

(xii) Revolving contracts,

(xiii) Futures contracts,

(xiv) Licensing and sub licensing contracts, and 

(xv) Engineering procurement contracts.

In this paper we shall study a general contract for the import and export of commodities. In such contracts the deliveries and payment methods get most important treatment.

Formations or Structure of the Contract:

A contract has to have three main objectives, fairness, flexibility and security in its structure, besides it must be structured in such a way that the contracting parties are transparent in knowing their rights and responsibilities.

For the domestic trade there are a number of standard contract formats but for the international trade there is so far no universally accepted format though efforts are being made by many world organizations like International Chamber of Commerce (ICC) and United Nations Commission on International Trade Law (UNCITRAL) and the International Trade Center (ITC) under United Nations Council for Trade Development (UNCTAD).

What they have proposed is still at infancy stage and cannot be termed as being universally accepted format. Diversity of the commodities, regions, local laws, international conventions, and the interacting importers and the exporters are the limiting and the guiding factors for the formation of a standard format.

The world bodies have tried to streamline its structure but their deliberations only provide a direction and not the destination.

The notable effort of the world bodies includes:

i. The 1980 United Nations Convention on Contracts for the International sale of Goods (CISG).

ii. The 1994 UNIDROIT Principles of the International commercial contracts.

iii. The International Chamber of Commerce persistent efforts since 1953.

Still there are no universally acceptable standard and structured forms available for all purposes. Each type of contract has a set pattern and formation, which is modified to suit the specific requirements of the contracting parties.

In our country a similar guideline was provided by the Council of Arbitration way back in 1966, which was frequently updated suiting the changing business environments, providing only a guideline. Here again the contracting parties have to remodel it to suit their specific requirements.

A contract is structured on following blocks:

(a) The variable:

i. Commodity/service.

ii. Price, payment, profitability, packaging.

iii. Delivery.

iv. Inspection.

(b) The non-variable:

i. Laws of the land,

ii. The process and technology,

iii. Arbitration,

iv. Force majeure,

v. The point of production/origin,

vi. The fixed overheads, and 

vii. The taxes.

Through the process of negotiation the variables are converted into non-variables with specific terms and condition such that the net out comes is a meaningful exchange of goods and services in the form of net non-variables for a given situation.

This forms the actual contract. Once a contract is formed then it becomes a standard form for repetitive usage under similar situations.

Parties to the Contract:

Any contract or agreement must have more than one party. While forming up a contract with another party it is important they must be properly identified by reference to their name (official letterhead) and physical address (mailing address, phone, fax, e-mail, web site etc.).

If the contracting parties have more than one physical address (branch offices, subsidiaries) and one of such offices would be partially or totally involved in the execution of the contract than the physical address of such extensions must also form part of the contract.

The contracting parties must also specify the main communication address and the addresses where copies of the communications have to be sent during the execution phase of the contract. Lastly the name(s) of the key persons with designations who will be handling the day-to-day formalities and communications for the implementation part of the contract must also be mentioned in the body of the contract.

At the onset it must be clarified as to who will be the person to sign the contract with his/her designation and the power of authority to do so, from the competent authority within the organization and his signatures duly certified by the local chamber of commerce (in case of the organization).

In case the contracting authority is an individual than a documentary proof for his/her being the owner (letter from the bank or the related export promotion council, his exporter’s code, etc.) and his signatures being duly attested by the local chamber of commerce.

Basic Elements of a Contract:

A standard contract has following elements:

1. Item,

2. Specifications,

i. Standards IS/JIS/BS/ASTM/din etc.,

ii. Chemical composition,

iii. Physical properties,

iv. Engineering drawing,

3. Dimensions and tolerances,

4. End Usage,

5. Quantity,

6. Quality,

7. Delivery,

8. Currency,

9. Price,

10. Payment,

11. Packing,

12. Inspection,

13. Documentation,

14. Force majeure. Hardship and Termination,

15. Penalties and compensations on account of non-performance of contracted terms,

16. Effective period for completion of the contract (& associated problems),

17. Applicable laws taxes and duties,

18. Warranty and Guarantee,

19. Dispute Settlement, and 

20. Credits pre and post shipment, and ECGC schemes.