In ex works contract                                    Seller’s plant

In FOB contract                                            Port of Export

In CIF contract                                              Port of Import

If the price quotation is on FOB basis, it  is  a  FOB  contract.  Similarly,  if  the  price quotation is on CIF basis, then  it  is  a  CIF  contract.  The  rights  and  responsibilities  of importer and exporter in both the contracts are different. The International Chamber of Commerce has described the rights and responsibilities in ‘INCO’ Terms.

Major Laws having bearing on Export Contracts

Export contracts are private contracts and Government does not interfere with them so long as the provisions of the contract do not go against the provisions of various laws, which have been enacted for the export-import business contracts in India. The provisions of the export contracts should not flout the existing laws of the land. The following are the major laws:

  • Foreign Trade Development & Regulation Act, 1992: Under this Act, Director General of Foreign Trade brings out the export-import policy and lays down the procedures, from time to While entering into a contract, exporter has to draft the provisions of the contract in pursuance of the provisions of the Act. To illustrate, where there is a price regulation and a floor price is fixed in respect of a product, exporter should not enter into a contract with a foreign buyer for supplying that product below the price fixed. If a product is banned for export, contract should not cover export of that commodity. If Government  releases  certain  goods  on  quota basis, it is necessary for the exporter to provide a clause in the export contract that the supply will be dependent on the release of quota from government. If the contingent clause is incorporated and quota is not released to that exporter and in consequence there is breach of contract in his performance, exporter would not be liable for default in performance.
  • Foreign Exchange Management Act, 1999: As  per  the  provisions  of  the  Act, export proceeds are to be brought into India within a period of 180 days from the date of Exporter  is  not  to  enter  a  contract  providing  a  period  of  credit of more than 180 days to the importer unless the exports are made on deferred payment basis or goods are sent on consignment basis. Further, an exporter is not permitted to pay commission more than 12.5% to his agent,  abroad  for  the  sales made by him and so provision for payment of commission is not to be made at a higher rate in the contract, unless prior permission of RBI has been obtained.
  • Pre Shipment Inspection and  Quality  Control  Act,  1963: In  the  larger  interests of the international trade and in order to protect the image of the exporter as well as  nation,  certain  products  have  been  brought  under  the    Once  a  notification is made under the Act, certificate about pre-shipment inspection & quality control has to be obtained by the exporter. Quality norms have to be complied with while entering into the contract with the importer. Contract can stipulate higher quality norms but does not allow to mention a lower norm than the one mentioned in the Act. Even if the importer does not insist  on  the  certificate,  it  is  obligatory  on  the part of exporter to obtain the certificate from the approved agency before shipment of goods.
  • Customs Act, 1962: No goods can be sent out of the country without the customs All consignment of goods can be checked by the customs to ensure that the goods stated in the invoice only are leaving the country and that there has been no over/under invoicing in this process. The authority to check the cargo involved is vested with the customs, under this Act.

(F) International Commercial Practices: Indian laws, basically, govern the export- import contracts. In addition to these laws, there are International Commercial Practices, which also have a significant bearing on these contracts. The International Chamber of Commerce, Paris has prepared two documents, in the context of international business. The documents are Uniform Customs and

Practices for Documentary Credits (UCP) 1993 and Incoterms, 1990. Banks use UCP in the negotiation of export-import documents. Virtually, it is a bible to bankers for negotiation of documents.



Meaning and Significance

The term “Elements” is a bit confusing that refers to the general conditions in contracts. Export contracts invariably refer to the subject matter of the contract.  In  addition  to  the subject matter, it is  advisable  for  both  the  paties  to  incorporate  several  general  conditions in the contract, in particular, rights of the parties in case of failure of performance or other contractual obligations. The goods may be lost, stolen or damaged during transit. Who would bear the risk in such a situation? If the contract specifies the position clearly, lot of litigation and approaching the court can be avoided. Physical movement of goods involves cost. Who has to bear the costs and up to what point? These issues are resolved by incorporating the elements (general conditions) in export contracts.

Most exporters have developed standard general contracts. It simplifies the day to day operations and also reduces the possibility of missing certain items. The complexity of the conditions depends on what is exported. If the items exported are common items such as handicrafts, garments or normally used consumption items, standard general conditions contract is sufficient. However, if the goods exported are complex item such as petrochemicals, the export contract has to be drafted with a great deal of care, which may  turn  to  be voluminous running into hundreds of pages.

For a majority of  products  being  exported  from  India,  the  following  elements  have  to be incorporated in the export contracts:

  1. Names of the Parties
  2. Description of the  Products
  3. Quality
  4. Price per unit
  5. Total value
  6. Currency
  7. Tax and Charges
  8. Packing
  9. Marking and Labelling
  10. Mode of Transport
  11. Delivery: Place and schedule
  12. Insurance
  13. Inspection
  14. Documentation
  15. Mode of Payment
  16. Credit period, if any
  17. Warranties
  18. Passing of risk
  19. Passing of property
  20. Availability/non-availability of export-import  licence
  21. Force Majeure (Factors beyond the control of the parties that makes the performance of the contractual obligations impossible e.g. Wars, floods, fire, civil war. Once this specific clause is incorporated, parties are relieved  of  their  mutual  obligations,  on the happening of the Contract comes to an end and no party is liable for damages)
  22. Settlement of Disputes
  23. Proper Law of the Contract

The Ministry of Commerce, Government of India, has set up Indian Council of Arbitration. It has developed a model set of Contracts for the benefit of exporters. These model contracts are suitable, in case of most small and medium enterprises.


There are several legal dimensions in implementation  of  export  contracts  which  form part of corporate export marketing plan. These legal dimensions or issues can be broadly classified into four categories:

  • Those Relating to  export-import  contracts
  • Those Relating to  Relationships  between  exporter  and  agents/distributors
  • Those Relating to  Products
  • Those Relating to Letters of Credit

(i)   Relating to Export-Import Contracts

They relate to the general conditions of export contracts and different types of contracts.

Both the areas have been, already, dealt above.

(ii)   Relationships between Exporter and Agents/Distributors

To promote overseas market, most of the exporters enter into Export Agency agreement. Export Agency agreement is a legal document, which establishes and defines the relationship between the principal (exporter) and agent. The conditions mutually  agreed  upon  between both the parties are incorporated in the agency agreement. While drafting the export agency agreement, care is  to  be  exercised  in respect  of  certain  points.  They  are  summarized as under:

  • Parties to the Contract: Names and identities of the parties must be made It is also to be made clear whether the agent has the right to assign contract in favour of a third party.
  • Contractual Products: Scope of the agency agreement must be explicit, indicating the names of the products for which the agency agreement is entered into. If this clause is silent, it implies that the agent is working for all products of the exporter, both present and future. This situation may not be favourable and suitable to the That may turn to be a cause for strained relationship, in future, and may affect the prospects of the existing product.
  • Contractual Territory: The area for which the agency agreement is entered into must be specified. In the absence of specific mention in the contract, the agent may develop business plans, anticipating the other areas for expansion. Exporter may not intend to appoint him for the additional areas that may cause unintended problems in
  • Customers: Customers located in a particular territory automatically come under the agency agreement and business dealings with them entitle the agent for However, problems may crop up with the concept of ‘International Buying Groups’ that has been growing rapidly, recently. The exporter develops the business dealings with that group from India, directly, and executes them without the involvement of the agent in the agent’s territory. As both identification of the group of clientele and contract execution are made by the exporter, exporter would be unwilling to pay commission while the agent stakes his claim as the clientele are located in his territory. Whether the agent would be eligible for the commission or not in such situations, matter has to be made clear in the contract, initially, to avoid future disputes.
  • Acceptance or  Rejection  of  Orders:  Whether  the  principal  has  the  right  to accept or reject the orders secured by the agent has to be clear in the This matter assumes importance where the goods are to be sold on credit, when principal is not sure of the creditworthiness of the potential buyers and agent does not have any responsibility in respect of bad debts.
  • Payment of Commission: Payment of commission is a crucial issue as it is revenue to the agent while it is an expense to the Commission, basis for calculation and when it becomes due are significant issues that are to be made abundantly clear in the contract. Rate is a percentage while base may be the invoice value or net realized proceeds, after deduction of expenses, incurred by the agent. Normally, agent is entitled to commission soon after exporter accepts the order. There is every possibility that the realization of proceeds may not materialize, after payment of commission. It is desirable to incorporate that the agent would be entitled for commission only after the receipt of proceeds in India. Such clause is necessary in view of the regulations of RBI.
  • Settlement of Disputes: In international trade, most of the business is transacted on the basis of written orders and well-drafted Notwithstanding the clarity of the detailed clauses, occurrence of disputes can not be totally ruled out. Contract should have a clear clause for the mechanism for settlement of disputes. Referring the matters to arbitration is the most acceptable solution as it is least expensive, with minimum strained relationship. Above all, both the parties have faith in him. Venue of the arbitrator and applicability of the law are very important issues as both the exporter and importer may insist their own country and law for arbitration. Arbitration clause should be comprehensive enough dealing with these issues in the contract.
  • Renewal and Termination: The contract should provide  suitable  clauses  for renewal of the period, on expiry of the originally agreed period and equally grounds for termination. No principal would be interested, in the normal course, to terminate the agent when the going is good. When the business does not show up as anticipated, principal may desire to terminate the agent and agent may demand compensation for the premature termination. Minimum turnover clause can be a good solution to overcome the contingencies of the poor performance of the agent and get rid off the

Agency Vs Distribution Agreement

Scope of agency and distribution agreements is different. In both  the  cases,  exporter enters into a contract with a third party from the country, where business is to be promoted and developed. The basic differences are:

  • Title of goods

This is the basic distinction between the two. In case of agency agreement, title to the goods vests with the exporter even though goods remain in the possession of the agent. Normally, goods are sent on consignment basis to agent. In case of distributorship, distributor purchases the goods on his account from the exporter and so title remains with the distributor.

  • Scope of Services

In case of agency agreement, agent procures the order only. After the procurement of order, subsequently, exporter deals with the potential buyers directly. So, contractual relationship exists between the principal (exporter) and final buyers directly. In case of distributorship, goods are sold to the buyers by the distributor and identity of the buyers may not be known to the exporter, unless distribution agreement so provides. So, the contractual relationship is between the exporter and distributor and no contract exists between the exporter and ultimate buyers. So, title and risk lie with the distributor while it is not the case in case of agency.

  • Credit Terms

In case of agency agreement, credit risks are to be borne by the principal only. Agent is not responsible for realisation of sale proceeds, unless Del credre clause exists. In case of distribution agreement, distributor is only responsible for credit risks as goods are, already, sold to him.

  • Third Party Liability

In case of agency agreement, principal is liable to third parties directly as agent states that he is acting as agent only and discloses the name of principal. Responsibility does not go back to the principal and only distributor is responsible, in case of distribution agreements.

  • Control

In case of agency agreement, principal enjoys absolute control on the business and buyers. So, principal can manage the business as he desires and agent’s control over the principal is rather difficult. Control of principal is always weak as distributor acts independently, buying and selling goods on his account. Once, distributor becomes powerful, he exercises more control and, at times, dictates his own terms due to proximity and control on the market.

Common feature in both Agency and Distribution

Warranties: Only principal is responsible both in case of agency and distribution agreements.

The above picture shows clearly that the extent of legal liabilities is more to the principal, in case of agency, compared to distribution agreement.  It  may  be  possible  to  get  a  good agent, but virtually impossible to secure a reliable distributor in International Marketing.

(iii)        Relating to Products

Trade Marks: Trademarks are words or designs or combination of both. Names of trademarks may be coined for the purpose of trademark only. Those words are not presently existing and are created that may not convey any meaning. When we hear the word KODAK, we recall photography products and XEROX relate to photocopiers. Trademarks are intended to perform marketing functions. While choosing those names, emphasis is given for;

  • Creating or enhancing  distinctiveness  of  the  product;
  • Identifying the products which it manufactures or markets;
  • Symbolizing the quality of the product; and
  • Stimulating the desire to

Protection of Trade Marks:  Any  person  can  apply  for  registration  of  trademarks  to the registering authority of the country where the product is exported or planned to  be exported. The registering authority publishes the request for allotment of trademark in its official journal inviting the objections for grant of registration. In case no valid objection is received, the registering authority accords approval for the  registration  of  trademark. However, names, surnames, geographical places, numerals, descriptive words are not allowed as trade marks. Registration of trademarks is a specialized field and so it is prudent for the exporter to seek the professional services of an attorney who is a specialized in that field.



Product Liability: Product liability can be defined as the responsibility borne by the manufacturers, distributors and retailers for any consequential injuries/damages from the products they make or sell. If the user of the product suffers, he has the right to sue.

  • In case of Negligence on the Part of the Manufacturer: Negligence in manufacturing makes him The user has to establish negligence on the part of manufacturer in designing or making the product.
  • Principle of Strict Liability: This is an important principle established by the

U.S. Supreme Court in 1953. Even if there is no negligence on the part of the manufacturer, still, the manufacturer is responsible to the aggrieved user if the user sustains injury from a defective product.

  • Express/Implied Warranties: In some contracts of sale, there are express or implied warranties in respect of merchantability of the product which make the manufacturer liable. Exporter must be conversant with the laws and regulations of the country to which the product is exported to ensure their compliance. In case any suit is filed, eventhough the exporter may plead that the foreign country does not have the jurisdiction over him and may succeed even. Still, he has to incur legal Any penalty imposed on the distributor for the fault of exporter spoils the business relations and, finally, ruins the prospects of business. It is desirable for the exporter to take product liability insurance.

Laws relating to Packing and Promotion: Most of the countries  have  laid  down rules in respect of packaging. Rules insist to declare the composition of product, gross/net weight, date of manufacture/ expiry and precautions to be taken while using the product. Even rules of advertisement are strict in many countries. Unsubstantiated claim in respect of the product, while advertising, makes the manufacturer liable for legal action. Exporter has to remember that he can get away with false advertisement in India, but not in overseas market!

(iv)      Laws relating to Letters of Credit

Every exporter wants to enjoy the payment before the physical possession and title to goods is passed on to the importer. This becomes possible when the importer opens letter of credit in favour of exporter through the medium of bank.

By opening a letter of credit, bank makes a commitment to the exporter to make payment once the documents contained in the letter of credit are presented and, on scrutiny, found to be in order. Opening and negotiation of letter of credit are governed by the International Chamber of Commerce Brochure No. 500 entitled”Uniform Customs & Practice for Documentary Credits” commonly known as UCP.

Though letter of credit is based on the sale/purchase contract, the letter of credit transaction is independent of the physical transaction of goods.

Article 3  of  General  Provisions  and  Definitions  states:

“Credits, by their nature are separate transactions from the sales or other contracts on which they may be based and banks are in no way concerned with or bound by such contracts”.

Parties and Relationships in Letter of Credit

  • There is a contractual relationship between the importer and exporter, evidenced by sales
  • Banker customer relationship exists between the importer as applicant to the letter of credit and opening Similar relationship exists between the exporter and advising/negotiating bank.
  • Relationship between the opening bank and negotiating bank. The later acts as the special agent of the
  • Relationship between the exporter and opening Credit contract is established as the opening bank opens letter of credit in favour of the exporter.


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