When your business wants to sell goods to a foreign customer, it is generally good practice to negotiate and conclude a well-written overseas sales contract with that customer.
A sales contract is an agreement between a seller and a buyer that sets out their rights and obligations in relation to that sale by describing the following key issues:
- Parties to the transaction;
- Goods being sold;
- Price of such goods; and
- Terms and conditions of the sale.
Importance of a Well-Drafted Overseas Sales Contract
A well-drafted overseas sales contract could help you to avert contractual disputes and establish a mutually beneficial relationship with your counterparties.
This is because most contractual disputes arise when parties to the contract have differing interpretations of key terms in the contract. For example, the type of goods to be delivered or the time and place of delivery.
If parties have discussed and come to an agreement on such issues beforehand, and the contract has been clearly drafted using precise wording to describe such concurrence, this reduces the scope for future disagreement over the interpretation of key contractual terms.
On the other hand, a poorly drafted overseas contract that is filled with ambiguous language may cause parties to misunderstand their contractual obligations.
This in turn may cause parties to fall short of the contractual standard of performance, putting them in danger of breaching the terms of the contract, and ultimately lead to inefficiencies and a possible breakdown in the commercial relationship.
To ensure that your sales contract is clearly drafted and comprehensive, it is advisable to discuss the following key issues with your foreign customer and express the terms of your agreement in the contract.
1. Choice of Language
Both parties should mutually designate a language in which the contract is written and interpreted. This is because differences in terminology used by different languages can lead to ambiguity and result in a future contractual dispute.
When a contract is entirely written in and interpreted using one language, such as English, it is easier for parties (and their legal advisors) to clearly describe and understand the nature and extent of the contracting parties’ contractual rights and obligations.
Said lawyer Samuel Yuen:
“Additionally, for some countries such as Vietnam and Indonesia, the parties must ensure that there is compliance with the applicable regulations concerning the language of the contract, which may differ based on the type of the contract in question.
For example, in Vietnam, the 2010 Law on Protection on Consumer Rights specifies that contracts entered into with consumers must be in Vietnamese.”
2. Description of Goods and Price
From the outset, parties should agree on and include in the sales contract an accurate and precise description of the goods to be sold and the price of such goods.
This description delineates the scope of the seller’s contractual obligations to deliver, and the buyer’s contractual obligations to pay for and receive, goods matching that description.
An appropriately drafted description makes it less likely that parties misunderstand each other and disagree over the interpretation of the contractual terms.
Said lawyer Koh C-u Pinn:
“A contract’s language has to be tightly drafted because, in the event of a contractual dispute, the court is likely to construe ambiguities against the contract drafter. In other words, where there is uncertainty about the meaning of the contract, the court may adopt an interpretation that is less favourable to the person who drafted the contract.”
Even if the price cannot be agreed on at the outset, a provision explaining the method for determining the price should be included in the contract. For example, the provision could specify that the price will be determined by one of the parties, or a third party. This provision could pre-empt subsequent disagreements over the contract price.
The terms of payment, which should also be clearly stated, include the:
- Method of payment; and
- The bearer of remittance charges and fees;
3. International Commercial Terms
The International Commercial Terms (Incoterms) of the International Chamber of Commerce are abbreviated terms frequently used in international sales contracts to describe the responsibilities of the seller and purchaser in relation to matters such as delivery, shipping and insurance.
It is worthwhile familiarising yourself with the Incoterms and including them in your overseas sales contract. In the interest of business efficiency, you could invest in creating a standard sales agreement which you can use for similar sales transactions.
An example of an Incoterm is Cost, Insurance and Freight (CIF), which means that the seller is considered to have delivered the goods to the buyer, when the seller has applied for and obtained permission to export the goods. And, those goods have been loaded onto a designated ship at the port of embarkation, with freight and insurance paid by the seller.
With CIF, the responsibility for risk of damage or loss to the goods transfers from seller to buyer once the goods have been loaded on board the ship (i.e. before the main carriage takes place).
For example, should the goods be damaged when they are on board the ship, the buyer is unlikely to have recourse against the seller. However, should the goods be damaged when they are being transported by the seller from his warehouse to the ship, the seller is still obliged to deliver undamaged goods to the buyer.
4. Choice of Law and Jurisdiction
It is advisable to agree with your counterparty and include in your sales contract a clause specifying the legal system, such as Singapore law, within which the contract will be interpreted (i.e. a “choice of law” clause) and the court which would make a judgment on any disputes relating to that contract (i.e. a “jurisdiction” clause).
According to lawyer Samuel Yuen:
“[International] sales contracts typically span a few countries and parties of a few nationalities, such that issues of conflict of law may arise. Choice of law and jurisdiction clauses would give parties certainty and predictability as to their legal positions. This saves costs, as parties do not need to litigate on the preliminary issue of which forum their case should be heard at.
[Having choice of law and jurisdiction clauses] also provides certainty as to their legal position. For example, they would be able to choose to enforce their contracts in a country where their other party has assets (and hence can be held accountable), and rely on the past cases of the forum to determine how the courts are likely to interpret a particular clause.”
Choice of law – the United Nations Convention on Contracts for the International Sale of Goods
Singapore is a party to the United Nations Convention on Contracts for the International Sale of Goods (CISG). The CISG came into force in and for Singapore on 1 March 1996.
Singapore adopted an implementing statute that gives effect to the CISG under Singapore law, the Sale of Goods (United Nations Convention) Act (referred to as the “Implementing Act” in this article).
Unless the application of the CISG is specifically excluded (see below), international sales contracts involving Singapore businesses are generally governed by and interpreted using the provisions of the CISG.
When will the CISG govern your international sales contract?
The CISG would apply (i.e. becomes the law under which the contract is interpreted) in the following situations:
- Under Article 1(1)(a), the CISG applies when both parties to the contract of sale have their places of business in different States that are both Contracting States.
The “place of business” is the center of the business activity which has the closest relationship to the contract and its performance.
For example, if a company with its place of business in Singapore enters into a contract of sale with another company with its place of business in the People’s Republic of China (PRC), the CISG would be the governing law of that contract because both Singapore and the PRC are Contracting States.
A list of Contracting States is available on the website of the United Nations Commission on International Trade Law.
- Under Article 1(1)(b), the CISG applies when the rules of private international law lead to the application of the law of a Contracting State.
For example, if a company with its place of business in Singapore enters into a contract of sale with an Indonesian company, the CISG will not be applicable as per Article 1(1)(a), since Indonesia is not a Contracting State.
Under private international law (i.e. the law that governs international disputes between individuals,), parties can specify the governing law of a contract through a “choice of law” clause (see above), and courts around the world would generally give effect to that clause and interpret the contract based on that governing law.
In this case, if the parties choose Singapore law as the governing law of the contract, the CISG would apply because Singapore is a Contracting State, and the rules of private international law (as interpreted and recognised by the Singapore courts) have led to the application of Singapore law (which requires the CISG to apply to the contract), notwithstanding the fact that Indonesia is not a contracting state.
What if the CISG’s provisions contradict those of Singapore law?
When the CISG applies, it takes precedence over Singapore law to the extent of any inconsistency. In other words, where there are any laws or regulations in Singapore that conflict with or contradict the provisions of the CISG, a court is likely to apply the applicable CISG rules instead of the relevant Singapore law.
Excluding the application of CISG from your overseas sales contract
Under Article 6, parties to the sales contract can choose to specifically exclude the application of the CISG. However, before doing so, one should carefully consider the advantages that the CISG may offer.
The CISG is an internationally recognised body of law designed to provide consistent rules and legal standards for cross-border transactions.
Commercial parties whose contracts fall under the scope of the CISG can rest easy knowing that key issues such as formation of contract (Articles 14 to 24) and the rights and obligations of the contractual parties and their remedies (Articles 30 to 65) are governed by the CISG.
This is because commercial entities and courts around the world are likely to be familiar with the provisions of the CISG, which may facilitate contractual negotiations and the resolution of any contractual disputes.
5. Dispute Resolution
To reduce the possibility of disputes escalating to the point where an expensive and time-consuming court hearing is necessary, it is important to agree on and provide for a way through which differences and disputes can be resolved amicably and efficiently.
By including a dispute resolution clause within your overseas sales contract, the contracting parties are legally obliged to follow its dispute resolution mechanism in the event of any potential conflicts.
Most contracts would stipulate that parties first resort to mediation or arbitration, due to their perceived advantages over a courtroom trial (as explained below), and if that fails to resolve the dispute, then the parties are obliged to bring their suit to a court in a specified jurisdiction.
Mediation and arbitration may be less costly and more efficient than a full-blown trial. There are no court procedures to be followed, and no court-filing fees and related expenses have to be paid.
In a mediation, the mediator helps parties to settle their disputes by facilitating a discussion to identify areas of disagreement and possible solutions.
Unlike a trial judge, the mediator does not pronounce on the legal rights and wrongs or issue a judgment which, in his opinion, is the most practical, fair and just. There is no winning or losing party in a mediation.
Instead, a successful mediation results in an agreement signed by the parties to the dispute, which contractually binds them to abide by the settlement terms arrived at through the mediation process. Since both parties participate in resolving the dispute, they are more likely to carry out the settlement agreed upon.
In an arbitration, the arbitrator considers the evidence before him, hears parties’ arguments and makes a judgment on the dispute. Once the arbitrator has arrived at a decision, it is binding on parties even if they take issue with it.
Unlike a court hearing, arbitration proceedings do not take place in a courtroom and are generally not open to the public. They may therefore appeal to parties who wish to keep their dispute out of the public eye.
The arbitration clause may also stipulate how an arbitrator is chosen, and in the absence of such stipulation parties may agree on an arbitrator to preside over their dispute. This is unlike in a court of law where the judge is assigned by the court’s administration.
While a judge may not be particular well-versed in a highly technical and specialised area of law, an arbitrator that is an expert in the rules and technicalities could be chosen, increasing the possibility of a fair resolution to the dispute.
While it may be difficult to enforce national court judgments in other jurisdictions, because the defendant may resist the enforcement application, arbitral awards (i.e. the decision of the arbitrator on the dispute) may be enforced in any of the 144 contracting states of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).
Said lawyer Ronald Wong:
“Arbitral awards and Singapore court judgments have both been held to be enforceable in courts in the People’s Republic of China. Similarly, Chinese judgments and arbitral awards are enforceable in Singapore courts. China and most ASEAN countries are contracting party to the New York Convention.”
It is important to be aware of these contractual issues when negotiating and drafting your sales contracts with overseas business partners. Such knowledge would help you to clarify each party’s rights and obligations, thus reducing the risk of contractual disputes that can harm your commercial relationships and derail your business plans.
If you have any questions or concerns regarding overseas sales contracts, consider getting in touch with one of our corporate lawyers.