Thursday, October 27 2016


Negotiating contracts to limit risk

Update: June, 02/2016 - 10:09

Risks arising from defective and rejected goods regularly occur in international trade, but parties can limit their risks by negotiating contracts.

Step 1: Agreement in time of goods inspection

The buyer has the right to inspect and reject goods which do not conform to the contract. Under certain circumstances, the buyer is entitled to cancel the contract even though the seller attempts to resolve such problems.

Several goods inspection periods:

-         Inspection by the buyer during the manufacturing process

-         Inspection by the buyer before delivery

-        Inspection by a professional inspection service at the port of departure or destination

-         Inspection by the carrier on dispatch

-         Inspection by the buyer at the port of destination

The inspection helps detect easily identified defective goods such as incorrect types, broken or missing ones before the buyer accepts them. The defects liability period is a defined amount of time for hidden defects to come to light such as structural weaknesses, failure to operate at high or low temperature and high fuel consumption, etc.

Normally, the buyer will inspect the goods with a clear aim, as in if the goods do not conform to specifications, the buyer is entitled to reject them and to cancel the contract. Therefore, the inspection before and after delivery must be closely negotiated on the rights and obligations of the parties.

Step 2: Determination in terms of goods guarantee and warranty

Exporting poor quality goods will entail cost for the repair or replacement of defective ones. To avoid this cost, the seller can apply one of two following forms to ensure the goods, in particular:

-         The sellers provide warrant for their own goods (warranty)

-         The sellers require a third party to guarantee for their goods (guarantee)

In the contract, the sellers will be liable for any defects of their goods in accordance with the defects liability provision, which is understood exactly as warranty.

Although those two terms are different, guarantee is also known as warranty in most countries, which means the seller shall provide warranty for their own goods. However, in case the national law applicable to the contract clearly distinguishes those two terms, the use of guarantee may lead to a higher level of risk to the seller.

Step 3: Definition of defects

With regard to negotiation in terms of goods quality, the seller should focus on every detail stated in the goods description. As not all goods can be qualified, defects liability provision shall help the parties to specify such defects at the moment of delivery. Indeed, the risk of disputes may mostly arise from hidden defects.

There are 3 types of defects, namely:

-         Defective workmanship is the defect which is often hidden and does not come to light until the product is used;

-         Defective materials is the defect which is often hidden and hard to detect;

-         Defective design is defect in which the goods do not conform to the technical specifications.

Such defects do not cover fair wear and tear or misuse by the buyers.

Step 4: Determination on defects liability period

Defects liability period is the period during which the buyer proves the defect presents in the goods. The buyer is liable for proving such defects present in the goods within the stipulated time. After this period, the seller will be disclaimed from liability for the problems arising from such defects.

Step 5: Negotiation on how the seller removes the defects

The right of the seller in removing the defects after delivery should be clearly stated if the parties do not wish to have any disputes on this issue. Since the law usually regulates in the way that is more favourable for the buyer than the seller, the seller is entitled to apply the right to either repair or restore such defective goods in a positive way, which shall be at the convenience of both parties.

According to the Vienna Convention on the International Sales of Goods, even after the time for delivery, the seller may remedy the damage in a quick manner, bear all reasonable costs resulting from the breach of contract without causing any more inconvenience to the buyer. —  PLF Law Firm


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