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Understanding international contracts

Once you and your client have agreed to the deal, you’ll need to draw up a contract to cover the transaction. In essence, this means that one party makes an offer and the other accepts it. The arrangements governing this exchange constitute the contract and can be legally enforced.

In international trade, however, contractual arrangements can be much more prone to complications than domestic ones. You and your customer are usually from different countries. Language barriers may cause misunderstandings. Cultural and geographical impediments may crop up. Words may have different meanings in different places.

Most important, you both may be used to different laws and business practices. This is why international business contracts must be precise, specific and all-encompassing. This will go a long way toward reducing misunderstandings, misconceptions and disputes.

For further protection, it would be a very good idea to find a legal professional who specializes in international trade. This will help you sidestep pitfalls of regulation and law and, if necessary, resolve disputes. You, yourself should try to acquire some knowledge of international conventions, the business laws governing your target market, and trade agreements that may exist between this market and Kenya.

Exporting is too risky

It doesn’t have to be, because you can reduce risk to a safe level. Letters of credit will ensure that you get paid. Export credit insurance programmes can protect you against customers who default on their payments. Reference checks through banks and international credit reporting agencies can detect a potential for fraud. Trade laws tend to be straightforward and legal advice about them is easily available. Exporting doesn’t need to be more risky than doing business at home – it’s just different.

Understanding the “proper law”

Certain basic issues are common to all international contracts, but the most fundamental principle is that of the “proper” law of the contract.

Problems in international business contracts occur because of differences in the laws of the countries involved. When different laws are applied, results may be inconsistent, and substantive rights may depend on whose law applies. For example, one law may require that a contract be written, whereas another may not. Or, under one law, persons who are not a party to the contract may have certain rights, whereas under another law they may have no rights. You absolutely must, therefore, establish from the outset which law is the “proper law.”

Resolving disputes

Many issues can become controversial in international trade transactions. For example:

  • disputes with agents;
  • collection of payments due;
  • breach of contract or warranty;
  • intellectual property rights;
  • secured creditors’ rights, e.g. seizure of assets; and
  • enforcing foreign judgments.

Resolving disputes formally through the legal system can be costly. If possible, settle out of court.

Contracts for the sale of goods

A contract covering the sale of goods involves you (the seller) transferring or agreeing to transfer goods to the buyer, in return for a sum of money. The actual transfer of the property is important, because it distinguishes the sale of goods from other transactions such as leases or property loans.

The term “goods” includes all movable things, excluding real estate, and such intangibles as debts, shares, patents and services. Furthermore, the fact that money changes hands distinguishes a sale of goods from other transactions, such as barter or counter-trade.

Transfer of title and the effects of transfer

Several things hinge on the exact legal moment when the buyer takes ownership of the goods (in formal terms, when title passes or is transferred from you to the buyer).

Risk – the transfer of title affects the parties’ rights in case of total or partial loss, damage or destruction of the goods.

Rejection – once it has occurred, transfer of title may preclude your buyer from rejecting the goods, despite valid complaints regarding quality, quantity or description.

Price – once your buyer takes title, you can sue him or her for the full unpaid price, rather than merely for the lost profit.

Rights of Action – after taking title, the buyer can enforce his or her property rights through court action or other methods.

Delivering the goods

You must deliver the goods to your buyer in one of two ways:

  • Physically, by delivering a legal document of title, such as a bill of lading; or
  • Symbolically, by delivering, for example, the key to where the goods are stored.

Your contract should specify where the delivery will take place. In international matters, this is usually defined by using such International Terms of Trade as Cost, Insurance and Freight (CIF) or Free on Board (FOB).

Note that if the contract does not specify the place of delivery, then the place of delivery is understood to be your place of business. In this case, the delivery is considered complete when you deliver the goods to a carrier.

Acceptance or refusal of goods

If you meet all the conditions of the contract, your buyer must accept the goods. Refusal to accept them without justification gives you the right to sue for damages. But if you breach a condition of the sale, the buyer can legally reject the goods.

Upon request, you must allow your buyer to examine the goods. The buyer can accept or reject them by:

  • conveying his/her acceptance to the seller;
  • acting in a manner that is inconsistent with the seller’s ownership of the goods, e.g. by reselling the goods after they are delivered; or
  • by keeping the goods without notifying the seller that he or she has decided to reject them.

Once any of these types of acceptance or rejection has taken place, the buyer can no longer refuse the goods, even if you have breached a condition of the contract.

Unpaid seller’s rights

Your best protection as seller is payment in advance or upon delivery. Next is payment by confirmed letter of credit (preferably irrevocable). If neither is possible, then you should take out security for the unpaid purchase price. This can take several forms, such as a written guarantee or a mortgage against real estate. The most common method is to reserve title or to take a secured interest in the goods.

About BrandKE

The Kenya Export Promotion and Branding Agency (BRANDKE) is a new State Corporation established under the State Corporations Act Cap 446 through Legal Notice No.110 of August 9th, 2019
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