Sections of a foreign-trade sale and purchase contract

For any enterprise in the field of foreign trade, concluding international contracts is a necessary condition for implementing commercial plans. To ensure effective control over foreign economic activity, as well as compliance with the rules of currency, customs and tax control by the state authorities, mechanisms and conditions for carrying out such contracts are developed taking into account national legislation.
 

The concept of an international foreign-trade sale and purchase contract

In Ukraine, one of the grounds for declaring cargo is the written conclusion of an international contract. An international contract, or agreement, is an understanding between two or more subjects of foreign economic activity and their foreign partners, aimed at establishing, changing or terminating their mutual rights and obligations.

As a source of risks in foreign economic activity, the contract is an object of attention for the customs authorities, which monitor compliance with its provisions, detect and eliminate possible fraudulent schemes and ensure the correct assessment of taxes to the state budget. Determining the procedure and scope of customs procedures depends on the analysis of the main terms of the contract.

A careful analysis of the contracts provided by participants in foreign economic activity when passing customs procedures has led to the need to clarify certain terms to which greater attention is paid when concluding international contracts. Errors made at the stage of drafting a contract can lead to serious losses exceeding the losses under contracts concluded within a single country.

Therefore, the key task when drafting the terms of a contract is to protect the interests of the enterprise, which can be ensured by including in it additional guarantees and safeguards used in international practice. Different countries have their own rules and customs for concluding international contracts.

In Ukraine, subjects of foreign economic activity are obliged to formalise trade operations with foreign counterparties exclusively in written form. However, it should be remembered that the conclusion of an international contract remains at the discretion of the resident of Ukraine, and its invalidity can be recognised only by a court decision. State regulation also establishes strict rules for the performance of contractual obligations, which should be taken into account when planning and carrying out foreign-trade operations.

All the risks associated with the performance of international contracts can be divided into objective ones, which do not depend on the will of the parties, and subjective ones, which are due to the actions of the counterparties. To reduce risks and ensure the stability of profit, the counterparties need to have several alternative ways of overcoming them, which will allow each party to the contract to be confident in the reliability of their partner and not to lose the expected profit.

Recommendations for drawing up international contracts

When concluding foreign economic contracts, it is recommended to include the following clauses:

Information about the contract: name, number, date and place of conclusion.
The preamble, which introduces the essence of the contract and its purposes.
The subject of the contract, describing the essence of the transaction.
The quantity and quality of the goods, specifying the nature of the supply.
The basic terms of delivery of the goods, defining the delivery conditions and the responsibility of the parties.
The price and the total value of the goods, fixing the financial terms of the transaction.
The terms of payment, defining the timing and procedure of payment.
The terms of acceptance and handover of the goods, including the requirements for the condition of the goods on delivery.
The packaging and marking of the goods, setting the requirements for packaging and marking.
Force majeure circumstances, defining the responsibility of the parties in the event of forces beyond their control.
Sanctions and claims, establishing the procedure for resolving disputes and claims.
Arbitration, defining the body for resolving disputes.
Legal addresses, postal and payment details of the parties, ensuring the possibility of contact and the performance of obligations.

When filling in the various sections of contracts, the specifics of each transaction should be taken into account, especially during customs clearance. It is necessary to determine the nature of the agreement taking into account the legislation and generally accepted practices. It is recommended to choose the types of agreement from the legally established categories, such as sale and purchase agreements, barter, the processing of tolling raw materials and lease.

World trade uses various forms of foreign economic agreement, including sale and purchase agreements, counter-trade, operations for the processing of tolling raw materials and intermediary agreements. Understanding these differences allows you to choose a suitable form of agreement and minimise risks when carrying out foreign-trade operations.
Lease agreements are used for the temporary transfer of property from a lessor of one country to a lessee of another country for a certain fee. They can be divided into three types:

Short-term lease, which includes the transfer of means of transport, tourist and other goods for a short period.
Medium-term lease, also known as hiring, is used for leasing means of transport, equipment and agricultural machinery with or without personnel.
Long-term lease, or leasing, is used for leasing office, construction and technical equipment, as well as for carrying out certain projects.
Clearing agreements are a system of cashless settlements based on the offsetting of mutual monetary claims and obligations. International clearing agreements are used to balance the supply of goods and payments between two countries.

Investment agreements are long-term investments of capital in various sectors of the economy. There are several types of investment, including financial, real, gross, net, private and state.

The choice of the content of a foreign-trade agreement is the first source of risks. Deviation from the types of agreement considered above can lead to the non-performance of the contract and additional costs of bringing it into line with national legislation. Attempts to carry out the customs clearance of goods under incorrectly concluded contracts or to perform operations under bank orders in favour of a foreign partner may provoke a negative reaction from the controlling authorities and lead to the non-performance of the contractual obligations and the possibility of compensating the counterparty for losses.

The counterparty under a contract may represent a risk, especially when the export of goods begins before payment is received or before the shipment of goods in the case of barter transactions. It is also necessary to exercise caution when concluding intermediary agreements, when settlement is planned through an agent or a forwarder.

To reduce the risk, you can request information about the future counterparty from the trade missions of Ukraine abroad, as well as in specialised directories. An effective method of checking the reliability of a foreign partner can be a business trip abroad to meet with them in person.

The political and economic stability in the counterparty's country also has a significant impact on the risk of the agreement. When choosing a partner, this factor must be taken into account.

Determining the subject of the contract is a key point. Uncertainty in the description of the goods makes it difficult to establish the pricing policy, the quality characteristics and other aspects of the transaction. To avoid misunderstandings and additional costs, it is necessary to define the goods precisely in the contract.

Particular attention should be paid to complex goods, such as technological equipment. The contract must contain a detailed description of the components and spare parts in order to avoid problems with customs clearance and additional costs.

A clear description of the goods will help avoid unpleasant situations during customs clearance and payment for the goods, and will also reduce the risk of fraud on the part of the counterparty.

The quantitative characteristics of the goods represent a significant risk when drawing up a contract, especially because of the specifics of the legislation. In accordance with the UKT ZED, the main unit of measurement of goods is the kilogram, but for certain goods customs duty is charged on a traditional unit of measurement. An example is fresh flowers, where attempts at fraud are possible because of the uncertainty of their quantity.

To reduce the risk of an erroneous determination of the quantity of goods, it is necessary to indicate it both in kilograms and in traditional units of measurement (pieces, pairs, etc.).

There is also a particular feature of indicating the quantity of bulk goods, which can change their weight because of weather conditions. To overcome this risk, the contract can provide for possible deviations in weight and indicate additional indicators of the moisture content of the goods.

The quality characteristics of the goods must also be clearly defined in the contract in order to avoid receiving low-quality goods. This is especially important for goods entering the consumer market for the first time, such as toys or construction materials. The quality indicators may include the content of preservatives, biologically active additives, moisture and heat resistance and other characteristics.

To minimise the risk of buying low-quality goods, special conditions agreed with the partner from another country can be provided for in the contract.

The packaging of the goods plays an important role in ensuring their consumer qualities, protecting them from damage during transport, storage, sale and use. Therefore, the requirements for the packaging must be clearly defined in the contract, taking into account the main purposes of the packaging and the specifics of the goods.

The characteristics of the goods, such as their value, purpose, sensitivity to storage and transport conditions, and consumer properties, must be taken into account when determining the packaging requirements. It is also important to take into account the mode of transport, the delivery routes and the national specifics of packaging for the producer and importer countries. It is also recommended to set out in the contract the specifics of packaging for goods stored in warehouses.

The legislation of Ukraine defines requirements for the packaging of food products and for packaging materials. Uncertainty in the packaging requirements can lead to a significant increase in the cost of the goods, especially if the quantity and weight of the goods are not defined in the contract. The cost of the packaging and the packaging material should be set out in the contract.

Packaging risks can arise when goods require external and internal packaging, with the internal packaging being an integral part of the goods and affecting the customs duties. To prevent such risks, the counterparties can define actions with the external packaging, such as the return of the container to the seller or its transfer to the buyer.

To reduce the risks associated with packaging, it is important to determine the price of a unit of goods taking the packaging into account in the contract. Attention should also be paid to the marking of the goods, making sure that it meets the requirements of the national legislation of the importing country and does not contradict the rules of environmental safety.
To ensure uniform standards for the delivery of goods from the seller to the buyer, the International Chamber of Commerce has developed international rules known as "Incoterms" (the interpretation of commercial terms). These rules include 13 terms, each of which has its own instructions and application. However, the counterparties do not always understand the purpose of these rules and often apply them not only to sale and purchase transactions, but also to intermediary services, such as transport and insurance, which can lead to a misinterpretation of the international standards.

It should be noted that each of the "Incoterms" terms applies exclusively to sale and purchase contracts and determines the customs value of the goods. All the risks and costs during the transport of the goods from the seller to the buyer are defined in each of these terms. In addition, each term establishes the moment when the seller fulfils their obligations to deliver the goods, defines the responsibility for their loss or damage during transport, and the party responsible for organising the transport and the customs clearance of the goods on export and import.

Sometimes the counterparties include in the contract terms that differ from the "Incoterms" rules. In addition, there is the possibility of specifying certain provisions of these rules, making the terms of the contract rather than the international rules the main ones.

To avoid misunderstandings with the counterparty and the customs authorities, it is important to define all the delivery terms in the contract in more detail and to indicate the party responsible for fulfilling them. When choosing terms that differ from the international rules, it is necessary to clearly define when and under what conditions the risks pass from the seller to the buyer and to provide for possible exceptions from liability.
 

The price per unit of goods is a key element in a contract, and uncertainty in this price or the absence of protective measures in the contract can represent a serious risk. A number of different price terms are used in international trade contracts, such as basic, invoice, wholesale, exchange and others. Each of these terms has its own specifics and application.

For example, a fixed price per unit of goods indicated in the contract may remain unchanged throughout the entire period of validity of the contract. This can become a source of risk, which can be avoided by indicating the type of price per unit of goods and the conditions for its change.

Another risk is indicating the total amount of the contract in the contract without indicating the quantity of goods. In such a case the interpretation of the value of a unit of goods may differ for each party to the contract. To avoid this risk, it is necessary to clearly define the quantity of goods and the value of a unit of goods in traditional units of measurement.

The risk of understating or overstating the price per unit of goods is also quite high. This is due to an incorrect analysis of the prices of the goods in the export and import countries. To avoid this risk, the parties to the contract can analyse the dynamics of the change in the level of world prices for the given goods and use this as a reference when setting the price.

Another aspect of the pricing policy of a contract is the possibility of reducing the price per unit of goods depending on the volume of purchase and the timing of the performance of the contract. This allows the parties to agree on discounts, such as cash, service, simple and others, which can affect the final cost of the goods and the profitability of the contract.

For the customs authorities it is important to correctly determine the actual value of the goods in order to prevent fraudulent actions related to pricing. Confirmation of the real price of the goods can be carried out by comparing the contract prices with information from customs databases or through specialised agencies that track the prices of goods on world markets.

Thus, the price per unit of goods and the conditions for its change should be clearly defined in the contract, in order to avoid misunderstandings and risks related to pricing.
The conditions for carrying out payments in a contract can create significant risks, especially if the currency of payment and the timing of the payments are not defined. Choosing a price currency that differs from the currency of the payments can also cause additional risks because of fluctuations in exchange rates. This can lead to losses for both the exporter and the importer.

Overcoming these risks is relatively simple if the counterparties to the agreement take measures in advance. They can choose a single currency for the price and the payments or fix the ratio of the currencies throughout the contract. It is also advisable to provide for the possibility of adjusting the prices depending on changes in exchange rates.

It is also important to take into account the requirements of the national currency legislation, which may limit the deadlines for the return of foreign currency proceeds. The timing and conditions of the payments must comply with world trade standards, taking into account the differences between commercial and financial crediting in the contract.

It is also recommended to define in the contract preferential conditions for the advance payment of goods, establishing the possibility of reducing the amount of the payments for early payment. This requires preliminary negotiations and agreement between the counterparties before the conclusion of the contract regarding the currency of the payments, the timing and possible discounts for advance payment.