An international transaction between a seller and a foreign buyer is usually conducted as a contract of sale by which the seller will deliver goods or perform services to the foreign buyer, and the foreign buyer will pay the contractual price to the seller. There are some important issues that sellers and foreign buyers should analyse and agree upon when negotiating an international transaction. The list of such issues can be long, depending on the specific circumstances of a particular transaction and the type of goods or services to be delivered to the foreign buyer. Below is a short, but not exhaustive, list of some basic issues that should be observed in each transaction:
- Who are the parties to the contract?
Both the seller and the foreign buyer must clarify the name of the company they intend to deal with and whether that company is properly incorporated and registered in its country. This is the basic check each contractual party must do before discussing other elements of the transaction. The main purpose of this check is to obtain the information necessary to make a proper risk assessment of the intended transaction and to prevent fraud.
See the eLearning course Risks in International Trade.
- The goods or services to be delivered to the foreign buyer
The goods or services that will be delivered by the seller should be clearly identified and described in detail in the contract. If the description of goods or services is insufficient, the foreign buyer may reject the goods or services, alleging that they do not comply with the contract, and refuse to pay the contractual price.
See the eLearning courses Letter of Credit and Documentary Collection.
- The currency in which the contractual price will be paid
The currency in which the contractual price will be paid is an important element of the transaction. This is because the parties may incur currency losses due to the constant changing of exchange rates between various currencies.
See the eLearning courses Risks in International Trade and Currency Risk.
- The terms of payment
The terms of payment of the contractual price are of great importance due to various commercial and political risks that may cause non-payment. The various methods of payment and their combination make this issue complex but unavoidable in international trade.
See the eLearning courses Payment Terms, Letter of Credit, Documentary Collection and Export Credit Insurance, where the terms of payment are explained in a way adjusted to the needs of small- and medium-sized companies.
- The place of payment
The place of payment is important because it determines which party will assume the risk of transferring money from the foreign buyer’s country to the seller’s country. Such transfer may sometimes be prevented by various political risks, especially by political decisions and measures imposed by the foreign buyer’s country. If the seller agrees to receive payment in the foreign buyer’s country, the seller may experience difficulties in converting the paid amount into hard currency and transferring it out of the foreign buyer’s country.
See the eLearning courses Risks in International Trade, Currency Risk and Export Credit Insurance.
- The transfer of seller’s claim for payment to a third party
Since sellers need money for their daily business, they frequently sell their claims for payment of credit against a foreign buyer to a bank. A bank can purchase such a claim for payment at a discount, which means the seller will receive payment immediately, while the bank will wait until the end of the credit period to receive payment from the foreign buyer. The bank will require the seller to transfer (assign) the claim for payment to the bank, and the commercial contract between the seller and the foreign buyer should not prevent such an assignment. This issue is of special importance for small- and medium-sized companies.
See the eLearning courses Pre-shipment Finance, Post-shipment Finance, Export Factoring and Export Credit Insurance.
- The terms of delivery
The terms of delivery, especially the place of delivery, are of great importance in international trade. Depending on the place of delivery agreed between the parties, the costs of transport of goods, insurance, customs duties and other costs can be shared between the seller and the foreign buyer in various ways. The terms of delivery are internationally regulated by Incoterms issued by the International Chamber of Commerce.
See the eLearning courses Risks in International Trade, Letter of Credit and Documentary Collection.
- The transfer of ownership of goods
This element should also be observed in an international transaction because various events may cause damage and destruction of the goods before or after the transfer of ownership. Ownership is usually transferred from the seller to the foreign buyer at delivery, but other solutions are possible. Some contracts contain a so-called retention of title clause, which provides that the seller will retain the ownership of goods after delivery until the seller receives full payment of the contractual price. The retention of title clause requires knowledge of the legal effect of such a clause in the foreign buyer’s country and possible registration requirements.
See the eLearning courses Letter of Credit, Export Credit Insurance and Documentary Collection.
- The seller’s obligation to maintain the goods delivered
In some transactions, the seller agrees to maintain the goods, usually machinery or equipment, during a certain period after delivery and to deliver spare parts to the foreign buyer. Such an obligation of the seller should be clearly defined because the seller may be prevented from performing this obligation by various commercial or political events.
See the eLearning courses Risks in International Trade and Export Credit Insurance.
- Issuance of a performance guarantee or other type of bank guarantee
In some transactions, the seller or the foreign buyer may require the other party to provide a bank guarantee, usually an unconditional on-demand guarantee. The parties should clarify what kind of guarantee is required and the purpose of such a guarantee.
See the eLearning course Demand Guarantees.
- Obtaining export or import licences, paying taxes, etc.
Numerous international transactions require export and import licences and other documents to be submitted to customs and other authorities in the seller’s and foreign buyer’s country. The parties must clarify which licences and other documents are required and which party will be responsible for obtaining each document. The same applies to taxes and fees payable in connection to the transaction. Obtaining the documents mentioned above can be prevented by various commercial and political risks that should be assessed by the parties.
See the eLearning courses Risks in International Trade and Export Credit Insurance.
- Governing law and jurisdiction
The seller and the foreign buyer must choose the national law that will govern their commercial contract. Depending on various factors, the parties may choose the law of the seller’s country, the foreign buyer’s country, or the law of a third country. A similar situation exists with the choice of the jurisdiction where possible disputes regarding the contract will be resolved. This issue also requires a proper analysis of the rule of law of the country whose law and jurisdiction have been chosen by the parties.
As explained above, each transaction is specific, and other issues must be considered by sellers and foreign buyers when analysing and negotiating a transaction. The above list contains some basic issues only and is provided for educational purposes only.
See our eLearning courses Risks in International Trade, Payment Terms and Export Credit Insurance