Steps for Negotiating an International Contract
Under any contract where parties buy, sell, import or export goods, the bottom line of their intention is to gain something valuable. The end of an agreement is always the outcome of the series of negotiations with concessions that may be done voluntarily or being based on the foreign laws. In some foreign countries, when negotiation involves a foreign country, the local business must retain fifty one percent of the legal ownership of venture (Reich, 2008). Therefore, the steps involved in international business negotiation include:
- Hiring a consultant
- Choosing the negotiating team
- Gauging the bargaining power and negotiation style of the counterpart
- Meeting counterpart in person
- Fixing the agenda and keeping detailed records
If the company does not have any internal skilled expertise that can provide international negotiation, hire one to assist. In case the cost is a problem, it will be vital for the company to search online or purchase literature to subscribe to qualified expert. Other than that, the company should consider a small competent team that will be responsible for managing schedules, expenses, and communication more efficiently, particularly if traveling is essential. Also, for any language or cultural barrier, a translator or customary expert should be part of the team.
Additionally, the purchasing company should gauge the importing company’s bargaining power and negotiation style. It is because in a contract one party always has a considerably more to gain or lose from transnational risk (Reich, 2008). Under or overestimating the equilibrium of bargaining power can lead to pointless failed or concessions negotiations. Correspondingly, antagonistic approach to negotiations when the counterpart is more unreceptive, or when one is technically focused while the supplier is financially focused, venturing in such business will not seem to be good.
Moreover, the fourth step in negotiation would be to try and meet the buyer in person. It would be essential to be careful of the cultural norms. Dress well, be on time, and display proper behavior and respect. Initial physical expression helps in creating the tone and the level of trust for extra negotiations. Equally, selecting an impartial site or inviting the buyer through persuasion to home territory may assist in overcoming cultural biases (Armbruster, 2007).
Additionally, being perceived as informed and professional, a check list assists in keeping time, schedules, and expenses in check. It also reduces the number of the problems that may be ignored, preserves more rounds of negotiation on target, and gives reference for forthcoming negotiations.
The most used among the common governing trade relations is the International Sale Contract (ISC). It is mainly used to govern trade between companies in various countries. It is an agreement that sets forth the rights and responsibilities of the parties involve and remedies for breach. Most of the international contracts are mainly influenced by the Contracts for the International Sale of Goods (CISG). CISG is widely accepted internationally by nations with different backgrounds and traditions. Nevertheless, some of the major international sales contract terms include goods description, contract price, delivery, time of delivery, goods inspection, title retention, Force Majeure, and disputes resolution.
Goods description is one of the major terms in a sale contract. In most cases buyers will prefer a comprehensive and accurate description than the seller. Unclear and poor description of goods leaves the buyer with no recourse if the seller technically delivers the goods that meets the description of the contract but fails to satisfy buyer’s trade purposes. Besides, the exporter would also like to describe the goods accurately if they are sure of delivering the exact goods. Other than that, the contract should indicate openly the currency and the amount to be paid for the goods in figures and words. If the parties failed to reach the agreeable price, there should be a clause explaining the strategy for determining the price stated in the contract.
The best method to deliver the terms is through the use of Incoterms 2010 rules, which was published by the International Chamber of Commerce. Incoterms provides the following regulations to both the buyer and the seller: Firstly, it gives direction to the international transport and administrative costs. Secondly, it shows the point of transfer and risk that goods may are associated with on transit. Thirdly, it outlines the obligations for customs and payment of import responsibilities. Lastly, allocates the responsibilities for obtaining insurance coverage. Using incoterms requires a place description and the exact delivery point.
Additionally, the contract should also include time of delivery whereby the parties indicates the specific date for delivery or period. Besides the delivery time, the contract should indicate the payment conditions by allowing the use of all the international payment methods that includes at least advance payment, open account, documentary credit, and documentary collection. Moreover, the parties show in the contract whether the buyer should inspect the goods before payment. The contract should indicate where the inspection will take place and the company that will do it. It is a prerequisite that the seller notifies the buyer if the goods are available for inspection.
Further, retention of the title (RoT) term gives the seller authority to retain goods ownership until when the full payment and reclaim the goods if the seller fails to pay. Other than RoT, it is a usual thing that the international contracts get subjected to force majeure terms. This term excuses the parties from performance if their failure is as a result of impediments that are beyond their control. For example, if the failure is due to outbreak of earthquake, war, and hurricane among others. The last term that should be indicated in the contract is how the disputes between the parties should be resolved. They should have option between litigation and arbitration. However, if the parties decided to settle for arbitration then they should specify the arbitration place and the language. Similarly, if they opt for litigation, they should decide the municipal or national courts in which the filing of the case should take place.
Incoterms also referred as (International Commercial Terms) are regulations concerning the delivery conditions for goods and are supervised by the International Chamber of Commerce. They are mainly used in dividing and defining the duties of the buyer and the seller as well as reflecting the present practices in the global transport of goods. They are also known as price clauses because of being able to determine the cost components of goods transfer. The price of the contract is affected by the choice of the incoterm (Zahid, Jusoh & Inn, 2014). The main reason for incoterms’ existence is because it provides the international rules that helps in the interpretation of the terms used in international business. It will be essential to use the following two incoterms:
- CIF – Cost Insurance and Freight, and
- DAF – Delivered at Frontier (named delivery place)
With Cost Insurance and Freight (CIF), the exporter must pay for the costs, freight, and insurance that takes the goods to the destination port. However, any risk is transferred to the buyer once the goods get loaded into the ship. The reasons for choosing CIF is because Catdom is still new in the international arena. It is more convenient way shipping since the do not have to work with freight or other shipping details. However, the exporter pays more than what should have been paid. Handling freight might be expensive because the supplier works with his own forwarder and mark up the price given from the forwarder as an extra way of making profits (Zahid, Jusoh & Inn2014). The seller also organizes and provides insurance payment for the goods for carriage to the destination port named in the contract. However, the insurance and carriage payment the rules require the minimum level of cover that may not be realistic commercially. As a result, the level of cover might require to get addressed elsewhere in the contract.
On the other hand, incoterm DAF makes the seller to deliver goods to the agreed place at the border, but the liability ends before the delivery is cleared at the customs and the goods are made available to the buyer in the means of transport. The buyer is responsible for unloading the goods. The term border must be specified because of its ambiguous meaning (Kokoruda, 2011). It can mean the destination country, the port, or even the where house, therefore it needs to be clearly specified. Other than that, this incoterm can be utilized for any mode of transport if the border is on land as in this case. If the delivery is in a dock, port or aboard ship, the incoterms should be used as Delivered Ex Ship (DES) or Delivered Ex Quay (DEQ). Under DES the seller is responsible for all the costs and risks during the delivery of goods at the named port of delivery as stated under the contract (Kokoruda, 2011). On the other hand, DEQ terms are responsibility of the seller ends only after the goods have been unloaded the goods at quay of the contracted destination.
How CISG Applies to International Transaction
The purpose of the United Nations Convention on Contract for the International Sale of Goods (CISG) is to bring uniformity to the global trade transactions with respect to the terms used in trade. The CISG has been understood to contain the incoterms provisions of the International Chamber of Commerce. CISG applies automatically to any agreement parties entered into for the commercial sale of goods (CSG) internationally as long as both party’s countries have ratified CISG (Kokoruda, 2011). It replaces the national commercial contract law that was intended to apply to the transaction in connection to the formation of the deal and the rights and responsibilities of the importer and exporter under the contract. The CISG applies to written and oral contracts for the CSG.
However, express exclusions can be made to the CISG based on the clauses included in the contract stating that the agreement shall be controlled laws of the country involved. The clause may also state that the contract shall not be guided by CISG, but instead governed by the country involved in the contract, for example Eagleton. CISG also provides regulations regarding contract formation, passing of risk, damages, interest, anticipatory breach of contract, obligations of the parties under the contract, and exclusions from the contract performance (Kokoruda, 2011). Further, it gives various States to lodge a declaration requiring a written contract.
Considerations on Transport Options
Some of the things that a buyer or an importer should consider when advising and agreeing on the transport options may include:
- Selecting major forwarders or carries and improving freight tariffs.
- Assessing internal or External resources for the transit program
- The correct equipment for the job
- Consideration of the freight
- Considering incoterms 2010 with the exporter
- Linking the whole supply chain
Deploying fewer dedicated freight major forwarders allows one to: Firstly, decrease the complexity of the administration needs. Secondly, establish relations and connection with the exporter. Thirdly, negotiate the favorable freight tariffs with higher volumes for the affordable costs. Fourthly, create a special interest for the carrier or the forwarder to preserve the business. Fifthly, improve the level of the service, and lastly, decrease the total transportation prices. Because many carries always negotiate freight at their terms, it therefore, calls for negotiating skills.
Additionally, internal and external resources examination for the transport program must be sensibly deliberated. The price related to selecting and communicating to forwarders, maximizing compliance, paying invoices, efficiency assessment of the trade routes, dispatching instructions, entering data into the system and tracking freight can really get out of control (Wulf, 2016). Therefore, it is vital to adopt the best practices to check and control administrative expenditures related to transportation program.
Moreover, for the small and medium sized businesses that are moving freight, the importer should consider moving large volumes of the consignment in consolidated container because smaller shipments are more expensive (Fandl, 2016). For example the cost of shipping one cubic meter crate can be more than four times the price of shipping the same within a consolidated container load. Other than that, the importer needs to choose the right equipment for the transportation. Ensuring that the goods are transported using the right equipment is vital to getting the best value for the conveyance cash.
Using the right equipment while maximizing weight capacity can help the importer recover a substantial cost from the transportation program. Besides, considering incoterms 2010 may help the importer to know the overall freight bill to avoid any extra charge or profit that the supplier may get from the internal mark-ups on the freight charges included in the cost paid. The importer needs to asses his or her incoterms to control costs and optimized scheduling logistics.
Finally, it will be vital for an importer to use a collective approach that may help in getting the most out of transportation volumes and minimizing cost. This can happen through linking the entire supply chain by adopting a comprehensive approach to the total supply chain.
Payment and Insurance Options
Payment options may include Cash-in-Advance, Letters of Credit, and Documentary Collections. Cass-in-Advance is vital for an exporter because he or she can avoid credit risk because payment is done before the transfer of goods ownership. The cash-in-advance options available for exporters are the wire transfers and credit cards. Conversely, letters of credit (LCs) is one of the most secure instruments offered to global traders. The bank makes a commitment on behalf the importer that payment will be made to the seller, provided that the conditions in the letters of credit have been met (1-Methods of Payment | export.gov., 2017). This payment method is convenient when reliable credit information about a foreign buyer is hard to get, but the seller is satisfied with the creditworthiness of the foreign bank of the buyer. On the other hand, documentary collections (DC) are mainly used for ocean shipments. It is a payment method whereby the exporter leaves the payment collection to its bank, which then sends the documents required by its buyer to the foreign bank, with guidelines to issue the documents to the buyer for payment (Wulf, 2016).
The insurance policies that will be essential for an exporter include the Cargo Insurance or Freight Insurance and Marine Insurance. The reasons for selecting cargo insurance is because it provide cover against all the physical loss or damage to freight from any cause during transit, whether by sea, land or air (Guide to Cargo Insurance., 2017). It provides a cheaper way of protecting the physical loss or damage to goods in transit. Its advantage is that the Assured has power to issue his own special policies of insurance. On the other hand, marine insurance may be organized by either the supplier or the buyer depending on the terms of sale. Due to the competitive nature of the marine insurance business, the exporter needs to seek the counsel and guidance from his or her insurance broker who will help in canvassing the marine insurance for the preferred terms of coverage at the best offered rates (1-Methods of Payment | export.gov., 2017).
1-Methods of Payment | export.gov. (2017). Export.gov. Retrieved 26 September 2017, from
Armbruster, W. (2007). Commerce Department publishes Trade Finance Guide. Florida Shipper, 32(24), 10.
Fandl, K. J. (2016). Cross-Border Commercial Contracts and Consideration. Berkeley Journal Of International Law, 34(2), 1-54. doi:10.15779/Z38R278
Guide to Cargo Insurance. (2017). Wyverninsurance.com. Retrieved 26 September 2017, from
Kokoruda, C. C. (2011). The UN Convention on Contracts for the International Sale of Goods - It's Not Your Father's Uniform Commercial Code. Florida Bar Journal, 85(6), 103-105.
Kumar, S. (2010). Logistics Routing Flexibility and Lower Freight Costs through Use of Incoterms. Transportation Journal (American Society Of Transportation & Logistics Inc), 49(3), 48-56.
Reich, A. (2008). International Sales Transactions - A Series of Simulated Negotiation and Drafting Exercises. SSRN Electronic Journal.
Wulf, A. (2016). Who Would Use the Common European Sales Law? An Empirical Analysis of Cross-Border Consumer Contracts in the European Internal Market. SSRN Electronic Journal.
Zahid, A., Jusoh, S., & Inn, N. H. (2014). Obligations of seller in C.I.F. Contract under English law and Incoterms 2010: A comparative study. International Multidisciplinary Scientific Conference On Social Sciences & Arts SGEM, 709-716.