A Guide to Terms and Conditions in the Sale of Goods
When trades go as planned, nobody looks at the contract after the event. It is only when there are problems that traders look at the terms and conditions. However, before you sign an agreement, it pays to ensure that the terms are clear. A well drafted contract can protect you when things do go wrong. But what are the key terms traders should look to consider in their agreements?
A useful starting point is to consider the worst case scenario: what if my buyer does not pay me, or my seller does not perform? What rights do I have? How do I enforce those rights?
Which Law and what method of Dispute Resolution?
You should aim to have appropriate law and jurisdiction provisions in all your contracts for a particular class of customer, or type of trade.
Contracts do sometimes use laws from a country other than where the contract was signed or carried out. Therefore, if your contract does not state which system of law it is governed by, it will not be clear how to analyse your contractual rights. Do you read the contract as seen through the eyes of Dubai law, English law, or that of some other system?
The same questions apply regarding which court will hear (i.e. have jurisdiction over) your dispute and therefore, what legal processes and timescales will apply. If your contract does not state which courts or which arbitration tribunal has jurisdiction to hear disputes, where do you go to enforce your rights?
There is no one single answer. You need to think about your particular trade and counterparty, for example, where they are, where their assets are and the identity of the goods involved. You may naturally wish to use the law and courts you are familiar with, however sometimes a court in your counterparty's home country may actually be the best forum to resolve a dispute. For example, that country may have an effective procedure for enforcing straightforward debt claims. In other circumstances, a trade association arbitration might be the best forum for resolving disputes.
If your contract is not clear about which law or method of dispute resolution is to be used in the event of a dispute, you will probably need legal advice to help determine which court has jurisdiction by default and which country’s law it will apply to the contract. The answer might not be straightforward or helpful.
Firstly, the default court may not be the most efficient forum to deal with your type of dispute, or the default system of law may be less positive for your type of dispute than other systems of law. Secondly, if the other party is trying to buy time, or expend your resources, you may even find yourself in a court battle to determine which law and court to use. This is before you even begin to address your actual trade dispute, and can be expensive and time-consuming.
It is therefore much better to specify the law and jurisdiction at the outset of contract negotiations and use the most appropriate law and forum for dispute resolution.
Other Key Issues
Once the choice of law and dispute resolution fundamentals are established, there are a number of practical considerations that a good contract should deal with, particularly:
Specification: the contract should clearly state the technical specifications of goods concerned. This will help if there are disputes regarding quality, because the goods can be assessed against easily identifiable, objective criteria.
Quantity: the contract should clearly state what the quantity of goods to be sold is, with any acceptable differences also clearly stated where necessary. This makes it easy to determine whether the seller has provided the correct quantity of goods, and whether the buyer must accept the quantity offered.
Sampling and Testing: for contracts regarding bulk sales it is sensible to include a process for sampling and testing the goods for quantity and quality. Sometimes this is done in great detail by identifying test methods to use, specifying an independent inspector and agreeing that the inspector’s results are deemed final and binding on both parties. That is not always necessary, but if disputes do arise regarding quality or quantity, it may be difficult to prove the necessary facts later, if there was no agreed sampling or testing process.
Delivery: the contract should clearly state a specific time (or window of time) for delivery. Failure to do so is likely to lead to a dispute regarding whether delivery occurred on time. Similarly, if a contract does not specify the place of delivery, disputes may occur regarding where the goods should be delivered and who pays for delivery.
Price: when stating the price, it is always a good idea to state whether the price includes other potential costs such as VAT, customs duties or other taxes, packaging, insurance and delivery and off-loading costs. Failure to do so leads to uncertainty.
Payment: a contract should state the time of payment (either by reference to the date of delivery, date of invoice or a specific date) and means of payment (letter of credit, cash against documents, cheque or otherwise). The contract may also provide for interest for late payment.
Title and Risk: it is a good idea to state clearly when title and risk in the goods are to pass from seller to buyer. Usually they should pass together, and it is often best to ensure that title and risk pass at the time of physical delivery. If there is a problem with the goods (or they are damaged) and it is not clear from the contract when risk and title pass, there may be uncertainty regarding who owned them at the time of the problem and who must pay.
Force Majeure: "force majeure" clauses allow a party to suspend performance or terminate the contract if certain events occur which are outside its control. The clause should be drafted narrowly, so that it would not allow a counterparty to avoid its obligations because of relatively normal occurrences, such a price changes. An effective clause would require the party wishing to terminate or suspend performance to provide the other party with a notice claiming force majeure, soon after the event occurs. An effective clause will also allow a period within which performance is suspended, and should contain a long stop date, after which the contract terminates if the force majeure event continues.
General Terms: sale contracts often refer to a set of general terms and conditions (such as the general terms published by some oil companies for oil sales) and incorporate those terms into the sales contract. This is a useful way of incorporating many of the fundamental terms which a good sales contract requires. Using such general terms and conditions can also save time.
However, care must be taken that general terms and conditions work with the main sale contract itself. For example, if the main contract and general terms and conditions use different terms for the same item, or the same term for different items, the potential for confusion is high. Unclear terms mean unclear clauses, which make it more difficult to enforce your rights.
Incoterms: a common mistake is to assume that incorporating "incoterms" (pre-defined commercial terms issued by the International Chamber of Commerce), or using common incoterm expressions such as FOB or CIF, will incorporate a broad set of standard terms and conditions. It will not. For example, in a FOC sale, using incoterms will place only general obligations on a buyer and seller, and will not specify key terms such as passage of title, how payment is to be made or how to determine quality and quantity.
A well-drafted sales of goods contract will provide both parties with certainty about the key aspects of their trade. This allows both parties to understand what their obligations and rights are, and should make resolution of any future disputes simpler and cheaper.
Patrick Murphy is a partner specialising in trade and commodities at the Dubai office of the international law firm Clyde & Co LLP.