Lecture 6: Contract Structure & Provisions Flashcards
Chapter 6 (53 cards)
What are primary operative provisions?
The main terms of a contract that state the core obligations of each party.
They usually include clauses on:
- Price & Payment
- Delivery terms
- Scope of goods or services
These provisions are legally binding and define what the contract is really about.
What is a ‘Sales’ clause?
A part of a contract that defines the sale:
- Who is selling?
- What is being sold?
- To whom?
- In what quantity?
- Under what conditions?
It may also include a reference to price, delivery terms, and product specifications. So, it is often combined with the price and payment clauses.
Clear wording avoids misunderstandings and legal disputes!
How can ambiguity in product specification be avoided in a sales contract?
- Use exact product names or codes
- Refer to technical specifications or annexes
- Include clear definitions
What is a ‘Price’ clause?
A part of a contract that defines the price:
- How much the buyer must pay?
- Per unit or total?
- In which currency?
Optional: rules for price adjustments (e.g. based on quality or market index)
It is often combined with the sales and payment clauses.
Clear wording avoids disputes over cost, currency, and calculation method.
Why is it important to define currency and notation clearly in a price clause?
To avoid confusion due to multiple ‘dollar’ or ‘kroner’ currencies and different decimal notations.
What is the difference between a fixed price clause and a variable price clause?
A fixed price clause sets a static, agreed price.
A variable price clause adjusts price based on factors like quality, index changes, or earnings.
What is ‘quality-based price adjustment’ in a variable price clause?
Price is fixed but adjusted based on product quality.
What is ‘index-based price adjustment’ in a variable price clause?
Price is fixed initially but changes based on an external index.
What is ‘Earnout’ clause’?
Seller gets extra payment if the company meets earnings targets.
What are the key risks associated with Earnout Agreements?
- Manipulation of financial results
- Disputes over accounting methods
- Delays in calculating and paying earnouts
- Ambiguity in performance criteria
What is a ‘Payment’ clause?
A part of a contract that defines the payment terms and conditions:
- When payment is due?
- Conditions for payment (e.g. delivery, invoice)?
- Method of payment (e.g. cash, wire transfer, letter of credit)?
- Target (account)?
- Currency of payment
- Penalties for late payment (i.e. interest)?
- Security mechanisms (e.g. advance payment, guarantees like Letter of Credit)
It ensures both parties know how and when money will be transferred.
It is often combined with the sales and price clauses.
How is payment secured?
In the ideal world:
- The seller wants payment in advance (before shipment of goods) i.e. advance payment.
- The buyer wants payment later (after receival of goods) or even better as a monthly payment for all deliveries in that period i.e. open account.
There is a gap; therefore, one looks for the best option in the middle, like letter of credit or documentary collection. That is documents against payment!
What is a ‘Letter of Credit (L/C)’? What is the buyer vs. seller perspective?
Bank guarantees payment to seller if seller provides bank certain documents related to sold goods.
Buyer’s perspective: Better for buyer than advance payment, but costly.
Seller’s perspective: No trust in buyer is needed, but trust in bank issuing L/C is vital.
What legal framework governs L/C in international trade?
There is no binding international law for letters of credit.
The most commonly used framework is the UCP 600 (Uniform Customs and Practice for Documentary Credits), developed by the ICC.
UCP 600 is soft law, meaning:
- It is not binding by default.
- It has no trade usage status.
- It must be explicitly incorporated into contracts.
Describe how the L/C works.
1. Buyer and seller agree on a deal, and the buyer requests an L/C from their bank.
2. Bank issues L/C: The buyer’s bank guarantees payment to the seller if all agreed conditions are met.
3. Seller ships goods and provides proof (like shipping documents).
4. Bank verifies documents, and if all conditions are met, the bank releases payment to the seller.
5. Buyer pays bank: The buyer reimburses the bank as per their agreement.
What are the advantages of using L/C?
- Sellers feel safe, because they get a bank’s guarantee of payment.
- Buyers gain trust, because payment is only made if conditions are met.
- Reduces risk of fraud or non-payment in international trade.
What is ‘Documentary Collection (D/C)’? What is the buyer vs. seller perspective?
Bank does not guarantee payment to seller, but forwards documents to buyer upon collection of payment from buyer.
Buyer’s perspective: Less costly than L/C, goods may be stuck if not all requirements are met.
Seller’s perspective: More risky than LC, clearing might be difficult if conditions are not met entirely.
What legal framework governs D/C in international trade?
There is no binding international law for documentary collections.
The most widely used framework is the URC 522 (Uniform Rules for Collections), developed by the ICC.
URC 522 is soft law, meaning:
- It is not binding by default.
- It has no trade usage status.
- It must be explicitly incorporated into contracts.
Describe how the D/C works.
1. Seller ships goods and prepares shipping documents (invoice, bill of lading, etc.).
2. Documents sent to bank: The seller’s bank sends these documents to the buyer’s bank with instructions on when and how the buyer should pay.
3. Buyer makes payment: The buyer can receive the shipping documents only after making payment or agreeing to pay later.
4. Documents released: Once the buyer meets the payment terms, they get the documents needed to claim the goods.
Define the two types of D/C.
1. Documents Against Payment (D/P): The buyer must pay immediately to get the documents.
2. Documents Against Acceptance (D/A): The buyer agrees to pay at a later date (credit terms).
What are the advantages of using D/C?
- Safer than open account trade (where goods are shipped without any guarantee of payment).
- Cheaper than a L/C, but with more risk since banks do not guarantee payment.
- Useful for trusted trade partners where some level of risk is acceptable.
Summarise and compare L/C and D/C as payment securitization tools.
- Letter of Credit (L/C): Bank guarantees payment if seller meets conditions (safer for seller).
- Documentary Collection (D/C): Bank forwards documents without guaranteeing payment (less secure).
Summarise what legal instruments govern the delivery of trade documents?
- UCP 600 = Letters of Credit (L/C)
- URC 522 = Documentary Collection (D/C)
Both are soft law developed by the ICC.
What is a documentary breach in international trade? What are the common forms of documentary breach?
Occurs when:
- Non-delivery of documents
- Incomplete or incorrect delivery (do not match agreed terms)
- Defective delivery (content does not conform)
