Contract is a legal term. In simple terms, contract is an agreement that can be enforced in law. When goods are sold, both seller as well as buyer can enforce the agreement. The term ‘Contract’ has been defined under Section 2(h) of the Indian Contract Act.

How an indigenous contract is different when it is compared to International Business Contract? What is the special significance to deal with in a separate chapter? Let us discuss.

Distinction between Domestic Sales Contract and Export Sales Contract

Both are sale contracts. However, the major point of distinction between a domestic sale contract and international export contract lies in identifying the proper law governing the export contract.

Conflict of Laws

When both buyer and seller are situated in India, both of them are very clearly aware that both of them are bound by Indian Contract Act, 1872 and are subject to jurisdiction of Indian courts. This is not the case when the exporter and importer are located in different countries. Laws and Regulations of both the countries are different and goods are crossing one national frontier to another. So, the question raises which country’s law is applicable. The distinctive feature of international business is ‘Conflict of Laws’, as both the parties have to deal with different legal systems. It is necessary for both exporter and importer to put down the terms of the agreement, in writing, and specify the applicability of the law of the land to their contract to avoid misunderstanding and disputes. The law could be either exporter or importer’s country. In the absence of specific mention of the law, the courts decide about the applicability of the law to the contract. Normally, the law applicable to the contract is where the contract is to be carried out (i.e. the place where delivery of goods takes place). Delivery of goods takes place when goods are placed on the carrier. Normally, goods are placed on the carrier in exporter’s country. So, exporter country’s law becomes applicable to the contract. This is the position unless otherwise the contract states. When goods are exported from India, Indian law is applicable as the goods are, normally, placed in the carrier in the exporter’s country. To make the matters abundantly clear, it is all the more better to specify about the applicability of law clearly in the contract. In export business, the parties involved in the contract agree mutually about the applicability of particular country’s law.

Oral Vs written and constructed contracts: Oral contracts are legally binding, if the contract is for sale of goods in India. However, in Indian context, an export contract has to be in writing as documentary evidence is essential to secure special export facilities and incentives. In the absence of a written contract, even constructed contract is sufficient.

Constructed Contract: A constructed contract is one, which does not have written formal contract but inferred and established from the documents exchanged. The important requirement is evidence of agreement. This can be inferred from telex or fax messages, electronic data interchange with authenticity of messages, exchange of letters, purchase order or letters of credits. If information is available to establish that there has been agreement between the exporter and importer, based on any one or all of these documents, it is adequate. Both written and constructed contracts are, equally, binding on both exporter and importer.

Form of Contract: There are no universally acceptable norms to the form of contract. There is no need of a formal contract, duly signed by both exporter and importer. The contract is not needed to be stamped even.

As a matter of rule, majority of long term supplies contracts and project exports between exporter and importer are based on detailed documentation and in writing. However, at times, contracts related to supply of garments, jewellery and handicrafts are not based on written contracts. It does not mean that there is no contract at all. Contracts in such cases are established on the basis of telephonic contacts, confirmed subsequently by correspondence.




Meaning of Incoterms

There are a number of common sale or trade terms used in international trade to express the sale price and corresponding rights and obligations of the seller and buyer. These terms are defined by the International Chamber of Commerce, which are known as ‘Incoterms.

Purpose of Incoterms

The purpose of Incoterms is to provide common interpretation for the different trade terms used in international trade.

In international business, parties are from diverse nations. Different meanings exist for different terms, due to different trade practices followed in those countries. Specific terms are to be interpreted by all parties in a similar manner; otherwise disputes are bound to arise. This can create misunderstandings and disputes. They may lead to litigation resulting in wastage of time, money and strained relationship, disrupting the long- standing mutally beneficial business contacts. In order to remedy the problem, International Chamber of Commerce has developed Incoterms. The uncertainties of different interpretation have been greatly avoided or atleast reduced by these Incoterms. These terms have been revised several times with the changes in international commercial practices, from time to time. The current version of Incoterms has been issued in 1990. They define the rights and responsibilities of importers and exporters in international trade.

Types of Contracts

Type of contract depends on the basis of price quotation. Mainly, there are three types of contracts, which are often used in international market.

Ex Works Contract: The seller fulfills his obligation by delivering the goods at his factory/shop/warehouse. The buyer bears all the costs and risks in taking the goods from that place to the desired destination. This term represents the minimum obligation on the part of the seller. In this type of contract, the obligations of the seller are the lowest and contract price is always the lowest.

Free on Board (FOB): The seller fulfills his obligation when he delivers the goods on the ship rails at the named port of shipment. The buyer has to bear all costs and risks from that point of time. Cartage up to the port, inland insurance, port dues and loading charges into the ship are to be borne by the seller. The seller has to take care of all these expenses. The term can only be used for sea or inland water transport.

Duties of the Exporter

  • Supply the contracted goods in conformity with the contract of sale and deliver the goods on board the vessel named by the buyer at the named port of shipment;
  • Bear all costs and risks of the goods until such time as they shall have effectively passed the ship’s In other words, once goods are placed on ship’s rail, title to the property passes to the buyer and so risks too;
  • Provide at his own expense the customary clean shipping documents as proof of delivery of goods;
  • Provide export licence and pay export duty, if any; and
  • Pay loading

Duties of the Importer

  • Reserve the necessary shipping space and give due notice of the same to the exporter;
  • Bear all costs and risks of the goods from the time when they shall have effectively passed the ship’s rail;
  • Pay freight;
  • Pay unloading costs and
  • Pay the price as provided in the contract to the

Cost Insurance Freight (CIF): In addition to   the   responsibilities   associated   with FOB contract, exporter has to arrange shipping space, bear the ship freight and marine insurance charges from his contract price.

Duties of the Exporter

  • Supply the goods in conformity with the contract of sale, arrange at his own expense, for shipping space by the usual route and pay freight charges for the carriage of goods;
  • Obtain at his own risk and expense all documentation regarding government authorization necessary for the export of goods;
  • Load the goods at his own expense on board the vessel at the port of shipment;
  • Procure at his own cost in a transferable form a policy of marine insurance for a value equivalent to I.F. plus 10%;
  • Bear all risks until the goods shall have effectively crossed the ship’s rail and furnish to the buyer a clean negotiable bill of lading;
  • Provide export licence;
  • Pay export duty if any and
  • Insure the

Duties of the Importer

  • Accept the documents when tendered by the exporter, if they are in conformity with the contract of sale and pay the price;
  • Receive the goods at the port of destination and bear all costs except freight and marine insurance, incurred in respect of carriage of the goods;
  • Pay unloading costs and
  • Bear all risks of the goods from the time they shall have effectively passed the ship’s rail at the port of





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