Key Elements of an International Contract of Sale

Buyer / Seller / Manufacturer / End User

The contract must clearly identify the parties: the buyer and seller. However, the seller may not be the manufacturer. An order placed on a seller in Hamburg, for example, may relate to goods manufactured in Madrid. This difference has a direct impact on the cost of movement and must be clarified before costs are calculated.

If costs are based on Ex Works (EXW) terms — with the buyer bearing costs from the place of manufacture — and the actual location of the “works” differs from what was assumed, the variation in location can substantially increase collection costs and alter the overall price of the goods.

Similarly, the buyer’s final delivery address may differ from its principal place of business if the goods are required by an end user at another location. This affects door-to-door insurance arrangements, for which the exact points of origin and destination must be declared to the insurer. It also affects the freight forwarder’s planning, since the function of freight forwarding is to move cargo from point A to point B, and knowing exactly where those two points are is essential to both cost and execution.

Note

The contract must state a specific point of origin and a final destination — given as physical addresses, not merely as towns or ports/airports.

Method of movement

(for example, Air/Sea/Road/Rail)

In indicating the chosen mode of transport, buyers and sellers have several basic options: air freight, sea freight, parcel post, road freight, rail freight, or a combination. Even a single mode may involve sub-options: airfreight may be via a freight forwarder’s consolidation service or direct IATA. Sea freight options include Conference or Non-Conference services and further sub-divisions into full container load (FCL), less than container load with a carrier (LCL), groupage with a freight forwarder, or break-bulk.

The characteristics of the cargo — including timing of production, transit cost, and any special requirements — will often narrow the choice of transport. The most common factors influencing this decision are:

·         The transport options available between origin and destination

·         The mass, volume, and any dimensional abnormalities of the cargo

·         The hazardous nature of the cargo

·         A comparison of transit costs across different modes

·         Special requirements during transit

Quantity / Type / Style / Price

This section forms the substantive body of the contract and should be as accurate and precise as possible without including unnecessary detail. It is directly relevant only to the buyer and seller; most freight forwarders would not be in a position to interpret trade-specific descriptions in this section.

The specific tariff headings required for customs clearance (using the WCO Harmonized System) should be identified, and the seller must be instructed to include those headings on the eventual commercial invoice.. This will assist the buyer with customs clearance at the destination.

Terms of purchase

 

This is addressed in detail in the Incoterms® section. The terms of purchase specify the precise point during cargo movement at which the seller transfers risk and responsibility to the buyer. 

Note

This is a critical piece of information for all parties, as it marks where the seller’s obligations end and the buyer’s begin.

References and dates

The contract should reflect only the key dates and the seller’s and buyer’s respective reference numbers. The common dates are:

·         The date the Contract of Sale was executed

·         The anticipated production or ‘handed to carrier’ date

·         The date the goods are required at the final destination

Appointed forwarders or carrier(s)

Identifying the appointed freight forwarder in the contract establishes a clear communication channel between buyer and seller and designates that forwarder as the authorized point of contact for information relating to the movement. To remove ambiguity, the forwarder should be nominated by: 

  • Name 
  • Address 
  • Telephone 
  • Email 

Methods of international payment

The contract should reference the agreed payment method. Detailed payment terms and procedures will be recorded separately in the documents governing the financial arrangement between the buyer, seller, and their respective financial institutions.

Documentation

The contract must identify which documents are to be provided to which party. This includes commercial documentation required for customs clearance at destination, as well as any specific certificates required for the product in question.

Insurance requirements

The contract must clearly define the insurance arrangements, including: 

·         which party is responsible for arranging insurance (buyer or seller) 

·         the type of cover required 

·         the value to be insured 

Details of the insurance sub-contract would be evidenced separately. 

Packing requirements

The manufacturer of the goods will typically pack them in accordance with the protective requirements of the product and their knowledge of domestic transit conditions. 

Note

Because the manufacturer may have limited knowledge of conditions beyond the country of origin, the buyer must specify any packing requirements that exceed the manufacturer’s standard.

Marks and numbers

Marks and numbers serve one purpose in cargo movement: to associate the item of cargo with the correct documentation. Two specific considerations apply:

·         Product sensitivity: If the product is susceptible to theft — such as electrical household goods or consumer electronics — the marks and numbers should not indicate the contents. A coding system known only to the buyer and seller is recommended. For hazardous goods, international marking and labelling standards must be applied.

·         End use and re-marking: If the buyer has re-marking requirements for stock control purposes, the supplier should be instructed to mark packages accordingly.

Other instructions

 

The contract of sale should be used to capture any additional requirements or instructions from either party that are specific to the transaction.

 

Arbitration

International trade generally begins with the intent to honor the agreed terms. However, unforeseen factors, such as market fluctuations, logistical failures, or circumstances beyond the parties’ control, can lead to disputes. Litigation is concrete in its outcomes, but it is expensive and time-consuming. Arbitration is a more practical alternative: it is less costly than litigation, binding on the parties, and typically faster.

Other Clauses

Long-term or high-value contracts are particularly exposed to market volatility. It is prudent to include adaptation clauses that allow for adjustments to prices and supply terms in response to changing economic or commercial circumstances, enabling parties to maintain their commercial relationship without recourse to formal dispute resolution. 

A force majeure clause is also advisable. It excuses non-performance in the event of unforeseeable events such as earthquakes, wars, or other acts beyond the parties’ control. 

Because of the distances involved in international transactions, the choice of governing law and jurisdiction can be critically important. A properly drafted international contract of sale will address two questions: 

  • Which law governs the contract?  
  • Which court or forum should a dispute be heard in?