General Terms and Conditions in Transaction

“Trade” means the selling and movement of “goods” or “tangible items” and “services” or “intangible items” from one country to another. In trading, “safe transaction” and “insurance” are important because while doing business among the different cultures and communication gap, trade involves many risks. Also if we have to deliver the cargo in a long distance, the cargo can be damage. Therefore, conducting the safe transaction is the primary thing to do in trading matter. In addition, the “economic rationality” is another important thing since trade involves in economic activity because this will help increasing the profits. Therefore, international trade and international transaction is related.

When we are deciding to do international transaction, we have to analyze the international economics and trades. Then the Foreign Direct Investment (FDI) or Export or Import is the one who make the decision method. After that we have to set up the target market by using 4Ps (place, price, product and promotion), then export or import the products to the partnership by two types of distribution; commercial distribution and physical distribution. In the textbook, there are three phrases of international transactions which are contract conclusion, preparations for execution and contract execution.

CHAPTER 1: Selecting Transaction Partner and General Terms and Conditions

International Marketing

Then come to the word “Marketing”, it refers to the distribution and sale of products in the market but since it is related to international transaction, it is called “International marketing”. The first important thing to do in marketing is to find out about the general information of the counterpart. Then collect specific detail of the counterpart in order to make the decisions. However, the international marketing is also related to one word, in which Michael Porter invented in 1980, that word is called “Logistic” which means Strategic physical distribution. Another one is a supply chain which means the distribution from the producer to the end of the user or in another meaning it means how to provide the goods just in time in order to minimize the cost and maximize the profit.

Selecting the trade partner

Transaction partners should be select after the products are identified and everything is decided. However, the company can proceed the direct trade if he knows the partner. But in case of unknown partner, the company can search a list of dealers from Chamber of Commerce and Industry of the country and organization.

In order to do the import and export activities, we have to ask for the license from the government such as JETRO and the company can easily register the up-to-date information via JETRO website. Also, we can ask for other traders information as well from JETRO but it costs around 40,000-50,000 Yen/ case.

Credit Inquiry

The importance of credit inquiry

The credit inquiry is acquired after two counterparts are agreeing to do the business together. It is necessary to conduct the up-to-date transaction from time to time. In international trade, there are a high risks while obtaining the credit of transaction, however, it can be minimize by the availability of trade insurance or the letter of credit.

The contents of a credit inquiry

Credit inquiry means to confirm the reliability of the transaction partner and four ‘Cs’ that we have to check is character (sincerity and attitude of the firm), capacity (the ability of trader in doing business), capital (the asset of the firm) and conditions (the firm’s condition at that time).

Methods of credit inquiry

The reply letter from the partner usually contains “Bank Reference” or “Trade Reference”. “The correspondent bank” is the bank in other countries which provides the credit inquiry for the main bank in order for the transaction purpose by sending the “bank opinion” to the main bank.

The chamber of commerce and industry in each country is the organization which can provide the credit inquiry for the trader and if the trader needs the credit ranking from Overseas Business Firm List for insurance purpose, he can ask from an independent administrative institution in Japan (NEXI). However, sometimes the credit information can contain false information so it is better to carry out the inquiry with the trade references as well as the trader should find many accuracy information of his partner before making a transaction.

General Terms and Conditions

Necessity of General Terms and Conditions

The general terms and conditions are the specific terms and conditions such as price, quantity, quality, payment or insurance that needs to be agreed and sign before doing the trade transaction. If one of the term or condition is missing and the transaction cannot be process, it is called “Minimum Condition”. This general terms and conditions can lead to the argument if the trade partners proceeding it without negotiation because this matter involve a lot of money.

Agency Agreement and Distributorship Agreement

Transaction Basis can be separated to transaction as a principal which includes the independent contract and distributorship contract, and as an agent. For the principal transaction, principal is the person who signs the contract by himself. On the other hand, agents will signs the contract on behalf of another person in the agent transaction and he will get the percentage called “Commission”.

Contents of General Terms and Conditions

Transaction Basis

Transactions which held between two inter independent firms is called “Principal to Principal Basis Transaction”.

Quality and Quantity

There is two terms in each part; Shipped Quantity/Quality Terms (the exporter is responsible until shipment) and Landed Quantity/Quality Terms (the exporter is responsible until the cargo sends to the importer). However, the quantity can be check before shipping unlike the quality that can be checked when the goods being dispatched in the factory.

Payment

Two types of payment are an open account and the documentary payment. The former is the buyer pay the money when the document from the seller arrives. The latter, payment can conducted by using of a “document credit” or “L/C” which issue by the importer’s bank or using the documentary collection such as D/P or D/A.

Shipment

Shipment means delivery which can divide into partial shipment and transshipment. For partial shipment, this way will separate the goods and send to the different ships to the destination. The merit of this shipment is the importer can minimize the inventory stock labor but the demerit is the good maybe delay and the cost could be higher as we have to do it many times. And for the transshipment using the “Hub and Spoke Theory” by shipping all the goods to the port at once then unload it and ship again to the final destination. If sending the goods direct line, the rate could be higher so transshipment is the way to reduce the cost. However, by load and unload goods many times can cause the fragile or damage.

Insurance

Here refers to the cargo insurance which use in trade term such as CIF and CIP. This insurance will cover the risk that could occur during shipping procedure. Such in case of CIF, the insurance will be charge 110% of the invoice amount.

Claim

Claim is not a complaint because claim is seeking for the compensation for the damage of goods. If the buyer found the damage of the goods, he should fill the claim within 10 days after the cargo arrives. However, there are two types of defects; patent defect and latent defect. Patent defect is easily to identify than latent defect.

Intellectual Property

Intellectual property rights include of patent rights (the rights over new inventories or technologies), utility model rights (the rights of using an existing technology), trademark rights (the rights over a trademark or brand), design rights (the rights over a design) and copy rights (the rights on music, books or software).

Warranty

Warranty is the guarantee of the product’s quality that exporter has to be responsible such in case of the latent defect is identified.

Force Majeure

Force majeure is the reason for inability to deliver the cargos to the destination due to the unexpected or uncontrollable events such as earthquake, war, prohibition of exports, etc. so some exporter’s responsibility can be exempted. Also, the delivery deadline can be extending for 15 days under the force majeure.

Arbitration

“Arbitrate” or “Alternative Dispute Resolution” system is the final way to handle everything outside court or solve the problem between the seller and the buyer without going to the court. In case of Japan, there are three places of arbitration organization which are in Osaka, Nagoya and Tokyo.

Entire Agreement

Only the written agreement between seller and buyer is valid (not the oral agreement). However, if there is many problems occur, the letter of intent will be use to illustrate the condition and agreement.

Trade Terms and Governing Law

The international rules are invented as a standard rule to solve the trading problem. Therefore, “Incoterms” are commonly use worldwide.

Battle of Forms

Soon after found the partner, the discussion on general terms and conditions will occur. Then each other have to prepare for the contract in two copies. There is no problem if they both agree in the contract; but if they are not like the contract, the sending back and forth will happen until they are both agreed. In the other word is a battle of changing contract format between the seller and buyer.

CHAPTER 2: Price Quotation and Trade Terms

1. Negotiation of Quality and Price

1.1 Ways of Determining Quality

There are two ways; sale by sample and sale by description, to determine the quality of the products. For the first one, it means the seller has to send the same quality of goods as the sample to the buyer. Then the seller should make a “similar sample” and send to the buyer as a “Counter Sample” after the buyer sends the sample in case of an approval. Catalog, pamphlet, price list, sample are being used during these negotiations. However, sale by description is in use when the sample is difficult to send. In this case, there are four types of sale description; “Sale by Specification” use when the sample product is in a large scale size, “Sale by Standard” use with the agricultural or natural products which has the quality standard such as “USQ” or “GMQ”, “Sale by Grade” use with the internationally well-known products which has a grade from the organization such as “JIS” or “IEC” and “Sale by Brand and Trademark” if the product is already worldwide and can determine the price by using the name or a model number such as “Iphone”.

1.2 Price List

“Price List” is the important documents about price and quality of goods during the negotiation process. We use “E. & O.E.” or “Errors and Omissions are Excepted” in order not to pay for any mistake or omission that occur during the shipping. Then “A Proforma Invoice” is the substitute price list which is more specific in detailed. It can also be used as a contract between the seller and buyer or a temporary customs clearance when the goods reach the destination.

1.3 Price Quotation

It is necessary to determine who will be responsible for the charge. Normally the seller pays for all the process in domestic trade, however, in international trade; trade terms are very useful for deciding what point the seller and buyer have to pay for the expenses.

2. Trade terms

2.1 Functions of Trade Terms

Trade terms are all about transferring of ownership right (the right to freely use or dispose the cargo) and the risk liability (the responsibility in case the cargo lost or damaged). However, if there is a problem such as USA and Japan used the different FOB, the general term will be the evaluator.

For the delivery, it means the transfer of possession of the goods and there are two types of delivery place; shipment contract and destination contract and two types of delivery method; actual delivery and symbolic delivery. However, one trade term can include cost transfer, delivery place, ownership transfer and risk transfer. These happen in the same place and same time.

2.2 INCOTERMS

In overseas trade, the seller has to consider on what trade term he should use while delivering the goods to the overseas buyer in order to avoid the problem. Consequently, the Incoterms has been invented since 1936 and has been revised many times. However, the “Incoterms” is stand for “International Commercial Terms” and there are 13 Incoterms which were newly revised as the contract made from January 1st 2000. Each term are clearly defined the duties and obligations of the seller and buyer as describe below.

2.3 Terms of INCOTERMS 2000

EXW (Ex Works)—Named place

In this term, the obligation of the seller ends after he places the goods at the buyer’s disposal. The seller does not have to clear the goods for export.

FAS (Free Alongside Ship) – Port of Export

The seller is responsible to deliver goods up to the point where the goods are placed alongside the vessel at the designated port of shipment. However, FAS cannot be used in case of container ship.

FOB (Free On Board) – Port of Export

This term is used for ocean shipments only which the seller’s obligation stops when the goods pass the ship’s rail. Buyer has to book the ship until it reaches the destination. Under this term, they can control the ship when the cargo is on board so if in the case of earthquake happens, either importer or exporter cannot be responsible or pay for the damage.

FCA (Free Carrier) – Named Place

This term can be used with any mode of transport by the seller has to responsible for the goods after clearing for export to the carrier instruct by the buyer at the named place or person nominated. Cost transfer is the same as FOB but the risk is different.

CFR (Cost and Freight) – Port of Import

CFR is similar to FOB but the seller must arrange for and pay for the carriage necessary such as freight charges until the goods reach the destination. This term is cannot be use for container ship.

CIF (Cost, Insurance and Freight) – Port of Import

The seller has to pay for the minimum cover insurance and freight cost. Others than this are the responsibility of the buyer. The exporter should delivery the bill of lading and insurance in advance.

CPT (Carriage Paid To) – Named place at the Import Place

The seller arranges and pays for the carriage of the goods for delivery to the specific destination and this term can be use with any mode of transportation.

CIP (Carriage and Insurance Paid To) – Named place at the Import Place

This term is similar to CPT but the seller has to pay for the insurance coverage for the goods during the carriage. It used for air or ocean containerized or any kinds of shipments.

DAF (Delivery at Frontier) – Named place at the Frontier

The seller’s obligation end when the goods have reached the designated point and place at the frontier. This term is used for any mode of transportation but must be delivered by land.

DES (Delivered Ex Ship) – Port of Import

The seller makes shipping arrangements and bears all the costs up to the disposal point at the port of destination. This term is used for ocean shipments only.

DEQ (Delivered Ex Quay) – Port of Import

The seller arranges the shipment of the goods at his own expense and delivers the goods up to the quay at the port of destination. This term is also can be used for ocean shipments only.

DDU (Delivered Duty Unpaid) – Named place at the import place

The seller delivers the goods to the buyer but does not have to clear the goods for import. This term can be used for any mode of transportation.

DDP (Delivered Duty Paid) – Named place at the import place

The seller has to pay for all the expenses that occur from deliver goods until clear the goods for import.

Even though there are many Incoterms in use but only FOB, C&F and CIF is consider as the frequently used trade term in air and marine transportation.