= “Essay on – Contract International Payment | Business”;
$description =”Business Essay – Price and payment terms in internation sales contract”;
$subject = “Business”;
Contract International Payment Essay
- What is international business?
Any firm that engages in international trade and investment is called international business.
Looking back to the past, at about 15th century, we know that, the mercantilism had appeared in Western countries, such as Italy, France, United Kingdom, etc. However, it was really developed more in United Kingdom with some typical scholars such as William Stafford (1554 – 1612), Thomas Mun (1571 – 1641). Later, it was spread into the other countries in the world.
Nowadays, with the speed of globalization, international business has grown dramatically and the trade barriers among the countries are going to be eliminated gradually. Therefore, the international sales are very prevalent with a lot of transactions done among the parties from many countries, but they ares also increasingly legally complex.
- The contract between two parties from different countries
Since the international sales by its nature involves to multiple lawyers of law, the contracts that would be perfectly legal in this country, but may be illegal in another and unenforceable in that country’s courts.
Actually, in practice, due to the parties are from different countries, so the laws govern their businesses that are also different. Besides, the customs, the culture, etc. are also altered. Therefore, there may be some disputes or discrepancy among them. According to some businessmen, in case there are some disputes or discrepancy of which affected to each party’s benefit, the best way is that they should sit down and put the issues under the negotiation. If the issues are still not solved, at that time, they should go to the third party, or to the international arbitration centre for solution.
In addition, in order to mitigate or even avoid any dispute or discrepancy for the parties, all the terms and conditions in the contract should be considered very carefully. In this paper, I am going to focus on the price and payment terms.
- Why price and payment terms are so important? A case study
There are several terms and conditions in an international sales contract. However, which price and method of payment terms that when applied can prevent any risk for the parties, still make some people confuse. For the seller, they would like to collect enough money after delivering the goods and at the same time, the buyer would also like to get the goods after paying the money. Besides, how to sell at a good price and reduce the cost arising as much as possible for the parties during the time of delivery, also need to be put under consideration carefully. Everything sounds very simple, but in practice, the disputes or discrepancy between the parties are happened very often.
Given case about the international sales contract between two parties, Unimex, an Exporting & Importing Company from Vietnam, has a deal of exporting rice to PT Hexatama Finindo Pte, – a Trading Company from Indonesia. In the international sales contract, the Price and Payment terms are agreed as follows:
- Price: USD 291.0 FOB Hochiminh City Port, Vietnam, in Container
- Payment: Irrevocable letter of credit (L/C) at sight by an international first class bank, available for negotiation at any bank in Vietnam.
L/C to be advised to:
Bank for Investment and Development of Vietnam, Hanoi Branch
In favour of Unimex, 41 Ngo Quyen Street, Hoan Kiem, Hanoi, Vietnam
Account no.: 21110370012088, Swift code: BIDV VNVX211
Because Vietnam is a developing country, the logistics and shipping activities are not strong and good enough to cover all the necessary steps to provide the delivery services for the goods at the ship’s rail at buyer’s country. Therefore, most of Vietnamese companies that are doing in exporting and importing fields always use FOB when exporting and CIF when importing in the international business. And for the payment, it will depend on the relationships and the market situation (who has the advantages as compared with the other), they will apply the suitable method of payment.
Furthermore, most of Vietnam companies are still very young, have just established for the last some decades, so the experience in doing international business is not good. Consequently, they tend to choose the ways that are safety and easy to do. Besides, in order to have the ability to cover these things (sell CIF and buy FOB instead of sell FOB and buy CIF as done in the current time), they have to be good at the International Maritime Law and have good relationships with shipping companies. But unfortunately, they do not meet these requirements. That is really the weaknesses of which can not solve after one night, it takes time to improve gradually. Moreover, the rules and regulations in Vietnam are unstable, very changeable, so these sometimes make the companies trouble in dealing with foreign partners.
Before going to comment what are the advantages and disadvantages for Unimex when they have agreed to use the method of payment and price term as said earlier, we should take a look at the definition of L/C and what FOB, CIF mean?
According to Singapore Business Law, Chapter 19, the definition of L/C as follows:
A letter of credit can be defined as any arrangement whereby an issuing bank, acting at the request and on the instructions of a customer (the applicant for the credit):
- is to make a payment to, or to the order of, a third party (the “beneficiary”) or is to pay or accept bills of exchange drawn by the beneficiary; or
- authorises another bank to effect such payment, or to pay, accept or negotiate such bill of exchange;
against stipulated documents, provided that the terms and conditions of the credit are complied with Act 2 UCP 500.
As we know that, Uniform Customs and Practice for Documentary Credits (UCP) is issued and regularly revised by the International Chamber of Commerce in Paris. And L/C is governed by UCP when L/C is used as a method of payment in international business. And the latest version is UCP 600 which came into force from 1st July 2007.
According to World Trade Press, Incoterms 2000 is a set of uniform rules for the interpretation of commercial terms defining the costs, risks, and obligations of buyers, and sellers in international transactions. Incoterms were originally developed by ICC (International Chamber of Commerce) in Paris in 1936, and since then undergone numerous revisions.
And what is FOB?
FOB or Free on Board, means that during the time to deliver the goods to the buyer, the seller is only responsible for the goods until it passes the ship’s rail at the point of loading the goods on board of the ship nominated by the buyer. And after this, the buyer has to bear all the costs and risks of loss or damage arising to the goods from that point.
What is CIF?
CIF or Costs, Insurance and Freight, mean that the seller is also responsible for delivering the goods until it passes the ship’s rail in the port of shipment. And the seller also has to provide to the buyer a Bill of Lading (B/L), an insurance policy that covering the goods and an invoice, the costs of insurance and freight. However, the seller has no obligations for risks of loss or damage arising to the goods as well as any additional costs occurred after the goods are loaded on board of the ship.
Looking back to the case given earlier, Unimex exports rice to PT Hexatama Finindo Pte, Indonesia, they chose Irrevocable L/C at sight as the method of payment instead of the others such as T/T (Telegraphic Transfer), DA (Documents against Acceptance) or DP (Documents against Payment) because these methods of payment are not safety, just used when two parties – the seller and the buyer, trust each other and they have a good relationship. While the relationship between Unimex and PT Hexatama Finindo Pte is not long enough, and they have also not known each other much about the reliability and reputation of payment history in doing international business.
In addition, this contract has done between two companies from different countries. Therefore, any dispute or discrepancy occurred will take a long time for arbitration if the negotiation of two parties could not reach to the final decision in the short time.
That is the reason why using letter of credit (L/C) will be safer and more beneficial for two parties. Unimex has the obligation to ship the goods seriously, while the buyer – PT Hexatama Finindo Pte has the obligation to make the payment in time for Unimex. Besides, this method of payment is also flexible, two parties could negotiate carefully before signing the contract. Therefore, this method of payment is nowadays used very popular in international sales contract.
The followings are the advantages and disadvantages of Unimex when they use Irrevocable L/C at sight
- Unimex’s advantages:
- This letter of credit is irrevocable instead of revocable and it is also stated clearly in the payment terms. Otherwise, it is deemed to be a revocable letter of credit (according to Art 7 UCP 600) and the issuing bank can cancel it at any time without giving notice to the seller – Unimex. And with this irrevocable L/C, the issuing bank can not do like that, it means that Unimex’s benefits are still maintained. Besides, this is a L/C at sight, so Unimex does not need to wait for a certain period for payment like deferred L/C.
- The payment risks can be reduced and it is assured for Unimex that as long as they meet the terms and conditions of the L/C, the payment will be made. Actually, whenever Unimex fulfil their obligations as stipulated in L/C, their benefits will be protected. Unlike the other method of payment, it sometimes will depend on the the buyer’s goodwill for making the payment for the seller. Therefore, the risk if any for Unimex in this contract can be considered as zero.
- This irrevocable L/C at sight was issued by an international first class bank. It means that the issuing bank is very reliable and has a good global network of correspondent banks and banking relationships. Therefore, Unimex can go to any bank in Vietnam for negotiation, it is not just limited in some particular banks.
- This method of payment is very modern. It focuses on documents processing for consistent, a high quality service. With the development of science and technology nowadays, such as Internet, has brought a lot of benefits and convenience for the people around the world. Based on that, most of the banks nowadays have offered the L/C Internet-based platforms for speedier in processing, easier to monitoring the amendments (if any) and document negotiation status (this part is really necessary). Therefore, Unimex can enjoy these advantages when using this method of payment.
- Unimex can negotiate the documents during the effective period of L/C while avoiding the reimbursement period.
- Unimex can improve their cash flow whenever they want by discounting the time drafts. This is really a very important factor for the company. With the cash flow discounted, they can solve the problem of shortage of money that happened very often in most of the companies. Besides, it also helps Unimex save money (in case the company borrows money from the bank, the borrowing rate will be higher). Therefore, it can help the company improve the performance as well as maximize the shareholders’ benefits.
- For Unimex’s disadvantages when using Irrevocable L/C at sight: Although this method of payment is considered as one of the best ways in international sales contracts. However, it still has some shortcomings as follows:
- It is slower as compared with the other method of payment such as T/T (Telegraphic Transfer), especially TT in advance. In some cases, with the regular customers, if Unimex is going to use T/T in advance as a method of payment, the time they collect money from the buyer will be shorter and faster. But, it is limited with few customers because of the risk.
- The risks arise when Unimex does not fulfil their obligations, such as the delay in shipping the goods, or the documents they present for payment do not meet the terms and conditions stipulated in L/C. However, it is also very rare.
For the buyer, PT Hexatama Finindo Pte, they also have some advantages and disadvantages as follows:
- PT Hexatama Finindo Pte.’s advantages:
- They only make the payment when Unimex ships the goods and presents the documents that meet the terms and conditions as stipulated in L/C. This makes sure that they can receive the goods, unless any loss or damage arise by force majeure. However, if it happens, they will get the compensation for the loss from the insurance company.
- They can also enjoy the advantages from the development of science and technology like Unimex.
- They can hope that Unimex also tries the best to fulfil the obligations to get the payment from them, and establish the reliability and reputation with them.
And PT Hexatama Finindo Pte. also has some disadvantages as follows:
- They may not receive the goods caused by the force majeure such as earthquake, tsunami, etc. And although they will be compensated but it will affect to their business activity. This is general risk that may happen during the time the goods are delivered.
- And etc.
For the price terms, as I mentioned earlier, Vietnamese companies tend to sell FOB and buy CIF. Therefore, in this case, Unimex agreed to sell rice at USD 291, FOB – Hochiminh City Port. It means that this price just covers all the costs arise during the time of delivery the goods when it passes the ship’s rail at the point of shipment. And their responsibilities and obligations will be stopped at this point. While the buyer – PT Hexatama Finindo Pte has to cover all the things such as: arranging for ship, insurance, etc. to make sure that the goods will be reached to their home store. In this case, if Unimex chooses the way to sell CIF price, they may negotiate with the better price instead of just USD 291/ton. Besides, they could set up the relationships, build up the networking with the other partners from different industries and countries. This will be good not only for the current contracts but also for their business in the future.
By asking my friends who are working in export & import field, and collecting the information through newspapers, magazines, I know that because most of Vietnamese Companies have just established recently, that is why their experience and relationships relating to forwarding, renting a ship or contacting with the insurance companies, etc. are not good enough. Besides, these companies are also not big enough to sign a big deal with the partners. Therefore, they just sell FOB and buy CIF although they have already known that it is not a good price for them. And they also hope that they will change it gradually if any for the next deals.
With an assumption is that, Unimex imports fertilizer from a company in China. This partner is also unfamiliar with them. Therefore, they also use letter of credit as a method of payment. However, with this kind of goods, the company should choose the irrevocable deferred L/C instead of irrevocable L/C at sight. Because this will help them get more beneficial from the time of making the payment. With this L/C, Unimex can negotiate with the seller to prolong the day for payment after one or two or five months, depending on their ability to negotiate and their situation. At the same time, Unimex should negotiate to buy fertilizer with CIF price instead of FOB price. From there, they could diversify the ways of payment and become more flexible in doing the international transactions.
- Recommendations and Conclusions
- Recommendations
In order to better understand and achieve the success in international business, Vietnam companies should do as the following recommendations:
- Study carefully to understand deeply all the rules and regulations in doing international business.
- Select the terms and conditions that are favourable for our side based on maximizing the advantages and minimizing disadvantages.
- Establishing the good and long relationships with the partners, categorize the importance level of the partners during doing business with them to provide a preferable policy for the regular customers.
- Set up and maintain the reliability and reputation with foreign partners by following strictly the terms and conditions in the contract
- With the big companies, should have a plan to diversify the businesses and set up the good relationship with the international shipping companies to maximize the advantages whenever possible
- Conclusion
Doing business nowadays has crossed out the borders of the countries. The companies are not just doing their business in the home country, but expanding their activities to other countries. These are really the good opportunities for them to specialize in the fields that are their advantages, both comparative and competitive ones.
For Vietnam, after opening up the economy, there are more and more international business transactions between Vietnamese companies and the foreign partners from many countries in the world. Therefore, these are the opportunities and the challenges as well for Vietnam companies. They need to learn from the deals signed with the partners day after day to improve their competency, and update continuously the knowledge to develop their leadership skills. If they could do that, it does hope that Vietnam may reduce the gap with the developed countries and will become a new dragon in Southeast Asia as Sun Zi said knowing the other side and knowing ourselves, we will win hundred times in hundred battles.
References
- http://www.iccwbo.org/incoterms/id3040/index.html
- http://smallbusiness.findlaw.com/business-forms-contracts/business-forms-contracts-overview-international.html
- http://www.gtnews.com/
- http://www.i-b-t.net/incoterms.html
- http://www.iccwbo.org/incoterms/preambles/pdf/CIF.pdf
- http://www.chelinvest.ru/corp/currency/UCP_600_2007_208751_v1.pdf
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