Steps to negotiate a contract

Problem solving

Steps to negotiate a contract

In this scenario, a contract of sale can be created even though the parties involved do not know each other. Both the buyer and the seller will be required to follow several steps in negotiation of the contract. First, the buyer will need to go to a local bank that trusts him and ask that bank to enter into a contract with the seller in country A. If that bank accepts the proposal, it will approach a party that trusts them in country A, especially their agents. Since it is difficult for the seller to trust a foreign bank, though it is in his country, the agent will need to approach a domestic bank in country A that trusts them. Still, the seller may not trust the domestic bank especially if he does not have direct business with that bank. Therefore, the domestic bank will be required to approach the seller’s own bank within the same industry as the international bank (the foreign bank). At that point the seller will easily trust the contract since they will be dealing with a bank that they trust, (Holloway, S et al 2010)

Through the seller’s own bank, he will receive a proposal sent from the foreign bank of the buyer. The proposal will be requiring the seller to surrender the documents described in it within the stated time period. The proposal will also state that upon surrendering the required documents, payment will be irrevocably guaranteed. If the seller accepts the proposal, he will prepare the documents described in it and take them to the same bank. These documents will then follow the same route in reverse through the banking system to the buyer’s bank in country B. Through his bank, the buyer will receive the documents and a contract negotiation will be complete. (Holloway, S et al 2010)

Terms applicable in the contract

Just as many other international transactions, this particular contract would need to incorporate Incoterms 2000 terms, (Malbon, J. & Bishop, B, 2006, p 84). These are terms that were developed and published by the International Chamber of Commerce for universal use in international trade. Incoterms 2000 deal with the contract of carriage, and particularly the possession. They do not deal with ownership. However, these terms are not part of the contract of carriage, but they oblige the shipper to obtain a contract of carriage with particular conditions. Incoterms 2000 gives responsibilities to the parties involved in a contract depending on their intentions as stipulated in that contract. In summary, they deal with the transport costs to be covered by the seller, the point at which risk of damage/ loss will be transferred from the seller to the buyer and the responsibility of the parties to clear customs formalities and payment of duty. In addition, with combination with other details, the seller may be obligated to provide insurance cover under these terms, (Malbon, J. & Bishop, B, 2006, p 84)

Incoterms 2000 rules constitute several different terms, depending on the size responsibility they charge to each of the parties to a contract. For example, the Incoterm EXW (EX Works) represents the minimal responsibility to the seller. Under that term, the seller is only obligated to deliver goods at his/her factory or warehouse. At the same time, the Incoterm DDP (Delivery Deputy Paid) represents the maximum responsibility to the seller. In that case, the seller ought to deliver the goods at buyer’s premises. In this scenario, the seller would choose the term that charges him with minimal responsibility, the EX Works. However, these rules are applied in conjunction with other trade mechanisms such as the contract of sale itself, (Malbon, J. & Bishop, B, 2006, p 84)

Application of CISG rules

For CISG rules to apply to this convention, several preconditions will need to be in place. In the first instance, this convention would apply if both country A and b are parties to the Vienna convention as stipulated under article 1 (1) (a) of this convention. However, the law would still apply to this transaction if both the seller and the buyer expressly state that it will apply. Still the CISG would apply by virtue of operation of law of domestic jurisdiction of the two counties which govern the contract. This would require that either country A or B be a signatory to CISG but the rules of private international law of non-contracting state lead to application of the law of the contracting state (United Nations 1987).

It should be understood that the Vienna convention gives consideration to the parties involved in the contract only (United Nations 1987). This means that this convention gives regard to the place of business of a party and not their nationality. In this particular case, CISG rules will apply only if the places of business of the seller and the buyer are in country A and country B consecutively. To be more precise, the movement of goods across borders has no implication to the application of CISG rules. Instead, the parties’ places of business are the crucial factors in determination of whether CISG rules will apply to an international contract or not, (Australia: Federal Court of Australia, 2009)

The Vienna convention does not apply to contracts sales of consumer goods. Article 2 (a) of CISG expressly states that it does not cover goods meant for personal, family or household use (United Nations 1987). Thus, this convention would apply in this case if the seafood is not meant for any of purposes mentioned under that law. However, it may apply in case where neither of the parties knew or ought to have known that the goods were meant for such purpose before concluding the contract (Australia: Federal Court of Australia, 2009)

The implications of Hague-Visby rules and Montreal convention

The nature of the product to be transported greatly determines the mode of carriage to be used. In this case, the contract involves carriage of fresh seafood which is obviously perishable. Such kind of goods requires the quickest means of carriage. Remarkably, the country of the buyer in this case is landlocked, eliminating the choice of carriage by sea. Further, country B has good aviation facilities. This explains that the most convenient means of carriage of seafood in this case is by air.

In this case, country A is party to the Hague-Visby rules while country B is a signatory of the Montreal convention. In the first instance it should be clear that the Hague-Visby rules apply to transportation of goods by sea only as explained under article 1 of these rules, (ICC, 1968). As explained earlier, the most probable choice of the mode of carriage would be by air in this case. This means that though country A in this case is party to the Hague-Visby rules, these rules may not be applicable here, (Burnett, B. & Bath, 2009 p. 83).

Notably, country A is not party to the Montreal convention but country B is. Article 1 (2) of this convention stipulates that the convention covers all “international carriage” provided there is an agreement between the parties involved about the place of departure and the place of destination, (ICC, 1999). This article states further that the convention is applicable if the place of destination and place of departure are situated within territories of two states that are party to the convention. Still, the convention is applicable if one of these two places is situated in a party state and the other is not, provided there is an agreement between the parties involved. This explains that though country A is not a signatory to the Montreal convention, its rules are still applicable in this transaction, (Burnett, B. & Bath, 2009 p. 83).

The implication of the Montreal convention to the carriage of the cargo is that it imposes obligations to the parties involved in the transaction as well as the carrier. Article 4 of the convention requires that a waybill be delivered to preserve as a record of the carriage to be performed from the consignor, (ICC, 1999). In absence of a waybill, any other document that may act as such may be delivered. The waybill expresses the weight of consigniment, which defines the size of the liability. In addition, article 16 of the convention the consigner is has an obligation to ensure that such documents as waybill and others involved meet the required formalities by customs, police and all other public authorities before the cargo is delivered to the consignee. All these rules are applicable to the case in this scenario, (Burnett, B. & Bath, 2009 p. 83).

Under article 18 of this convention, the carrier will be liable for any damages to the goods on transit up to a fixed amount. However, the carrier may be liable for all the damages to goods if it is proved that the damage is out of its negligence. Otherwise under article 18 (2) of the convention, the carrier will be relieved that duty if there has been contributory negligence from the owner(s). Article 22 (3), puts a limit of $ 17 per kilogram as the amount of compensation that is payable in case of loss, destruction or damage to the cargo, (Holloway, S et al 2010). This explains that under this convention, the compensation is based on weight of the cargo alone and not the cargo. Therefore, the Montreal convention has a direct implication to this case.

The decisions whether to transport animals using aircraft or not will highly depend on the size of these animals. For too large animals, air transport would be inconvenient. Ideally, such animals are bulky and should transported using other more appropriate means. Since country B is landlocked, delivery of such bulky cargo may require the use of load or rail. Unlike seafood, these animals are not perishable and can be transported these other means though they are relatively slow. Of course, the other means of transport are likely to be much cheaper compared to air transport. Still, small animals may be transported using alternative means to air transport. However, if such the animals need to be delivered too quickly, there will be no better alternative than to use air transport. Though still, this will depend on the number of animals to be transported. If carriage by air is opted for, the transaction will be bound by the rules of the Montreal convention as discussed earlier, (Australian government; department of infrastructure and transport, 2010)

Financing options for this transaction

One of the most suitable methods of financing a contract is payment through an open account. In this case, the buyer agrees to pay a specified sum of money to the seller by depositing it into an open account which is accessible by the seller. The payment may be done on a specific agreed date or upon the occurrence of a specific event under the transaction. For example, in this scenario, the parties may agree that payment be done after the seafood is delivered to the point of destination. This option offers the parties an option to set preconditions for payment and therefore it offers each one of them protection, (International Chamber of Commerce, 2010)

Another appropriate method of payment is the use of documentary collection process. This involves a written commitment to pay which can be initiated by either the seller or the buyer. Under this method, payment from the buyer to the seller is done via international banking system. The seller instructs his bank to pass key transport documents to the buyer through a correspondent bank. Upon receiving the documents, the buyer makes payment via his own bank either in cash or a term bill of exchange for the payment to be effected later. After payment is effected, the buyer is able to obtain the goods. This transaction requires exchange of documentary letters between the parties to act as proof of an existing contract. This method can be effective in our scenario though it is relatively slow, (International Chamber of Commerce, 2010)

Use of documentary credit is another mechanism for effecting payment for international transactions that is quite popular. This method operates under the premise that certain documents such waybill represent the goods. As such, the bank undertaking the international transaction will treat the waybill to represent the title of the goods (seafood). Such a bank can perform payment to the seller on behalf of the buyer in respect to the requirements of the contract and in accordance with the documents endorsed to the bank as the consignee. The payment is done after the seller signs certain documents indicating that the goods as per the description of the contract have been dispatched accordingly. Notably, the waybill moves together with the cargo and it consigned to the buyer’s bank and not the buyer itself. Upon receiving the document the buyer will take them to the bank. The buyer then signs a bill of exchange which completes payment to the seller. The bank issues a letter of authorization to the buyer, who then takes it to the carrier for cargo to be released. (International Chamber of Commerce, 2010)

References

Australian government; department of infrastructure and transport, Air Carriers’ Liability, Aviation industry department, Canberra, Australia, 2010, viewed 17 march 2010

http://www.infrastructure.gov.au/aviation/international/liability.aspx

Australia: Federal Court of Australia, CISG Case Presentation; Applicable CISG provisions and issues, Olivaylle Pty Ltd v. Flotweg GmbH & Co KGAA, Federal Court of Australia, 2009, viewed 17 march 2010 <http://cisgw3.law.pace.edu/cases/090520a2.html>

Burnett, B. & Bath, V, Law of international business in Australasia, Federation Press,

Leichardt 2009, viewed 17 march 2010

International Chamber of Commerce (ICC), The Hague-Visby Rules – The

Hague Rules as Amended by the Brussels Protocol 1968, Pace University, New York, 1999, Viewed 17 march 2010

< http://www.jus.uio.no/lm/sea.carriage.hague.visby.rules.1968/doc.html#2>

International Chamber of Commerce, Uniform customs and practice for documentary credits, (UCP 500), ICC publication, Zurich, 1994, viewed 17 March 2010

< http://www.scribd.com/doc/20879087/Uniform-Customs-and-Practice-for-Documentary-Credits-%E2%80%93-Ucp-500

International chamber of commerce (ICC), Convention for the Unification

of Certain Rules for International Carriage by Air- Montreal, Pace University, New York, 1999, Viewed 17 march 2010

< http://www.jus.uio.no/lm/air.carriage.unification.convention.montreal.1999/>

Holloway, S., Murray, A. & Kashubsky, M., International Commercial Transactions Law PG

Study Guide, Canberra: University of Canberra, 2010

Malbon, J. & Bishop, B., the Incoterms 2000, Australian export: a guide to law and practice, Cambridge

University Press, 2006

United Nations, Convention on Contracts for the International Sale of Goods (1980) [CISG],

United Nations Publications, New York, N.Y 1987, Viewed 17 march 2010

<http://www.cisg.law.pace.edu/cisg/text/treaty.html>

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