Trade Contract Formation

The CISG Framework

The UN Convention on Contracts for the International Sale of Goods (CISG) governs most international B2B sales contracts unless parties opt out.

Contract formation process:

Offer:
→ A statement of willingness to enter a contract on specific terms
→ Must be sufficiently definite: goods, quantity, price
→ Becomes effective when received by the offeree
→ May be revoked before acceptance is dispatched (CISG rule)

Acceptance:
→ Full agreement to the offer → contract formed
→ Conditional acceptance = Counter-offer (restarts negotiation)
→ CISG: effective when received by offeror (receipt principle)
→ Common law: effective when dispatched (mailbox rule)
→ Must be within the time stated in the offer

The 3 P's — essential contract terms:
→ Price:    unit price, currency, price term (Incoterms)
→ Payment:  method and timing (L/C, T/T, D/P, D/A)
→ Packing & Delivery: conditions and schedule

Key Contract Clauses

Arbitration Clause:    dispute resolution by arbitrator (binding)
Force Majeure:         excuses performance for unforeseeable events (war, acts of God)
Governing Law:         which country's law applies
Warranty:              defect liability period and conditions
Confidentiality:       protection of trade secrets
Limitation of Liability: cap on damages

Incoterms 2020

The International Commercial Terms (Incoterms) published by the ICC define the division of costs, risks, and responsibilities between seller and buyer.

Sea-Freight-Only Terms (4 terms)

FAS — Free Alongside Ship
  Seller: delivers goods alongside the vessel at the named port; pays export clearance
  Buyer:  bears all costs and risks from the ship's side onward

FOB — Free On Board  ← most widely used
  Seller: loads goods onto the vessel; pays export clearance
  Buyer:  bears all costs and risks once goods are on board

CFR — Cost and Freight
  Seller: pays freight to the named destination port
  Risk:   transfers to buyer when goods are loaded on board at origin

CIF — Cost, Insurance and Freight
  Seller: pays freight + minimum marine insurance premium
  Risk:   transfers to buyer when goods are loaded on board at origin
  Note:   buyer should obtain supplementary insurance if needed

Any-Mode Terms (7 terms)

EXW — Ex Works
  Seller: minimum obligation — makes goods available at seller's premises
  Buyer:  bears all transport, insurance, and export/import clearance

FCA — Free Carrier  ← recommended replacement for FOB in containerized trade
  Seller: delivers to named carrier or place; pays export clearance

CPT — Carriage Paid To
  Seller: pays freight to named destination; risk transfers to buyer at first carrier

CIP — Carriage and Insurance Paid To
  Seller: pays freight + insurance (minimum 110% of invoice value under ICC A)

DAP — Delivered at Place
  Seller: delivers to named destination; buyer pays import duties and unloading

DPU — Delivered at Place Unloaded
  Seller: unloads goods at destination; buyer pays import duties

DDP — Delivered Duty Paid
  Seller: maximum obligation — delivers duty paid to buyer's door

Quick Comparison

E terms → minimum seller duty (EXW)
F terms → main transport paid by buyer (FCA, FAS, FOB)
C terms → main transport paid by seller; risk transfers at loading (CFR, CIF, CPT, CIP)
D terms → maximum seller duty; risk bears until destination (DAP, DPU, DDP)

Letters of Credit (L/C)

A Letter of Credit is a bank’s conditional undertaking to pay the seller on behalf of the buyer, provided the seller presents conforming documents.

Parties:
  Applicant (Buyer):          imports goods; applies for L/C
  Issuing Bank:               buyer's bank; issues payment guarantee
  Beneficiary (Seller):       receives payment against documents
  Advising Bank:              seller's bank; authenticates and forwards L/C
  Negotiating Bank:           purchases (negotiates) documents from seller

L/C payment process:
① Buyer and seller conclude sales contract
② Buyer applies to Issuing Bank to open L/C
③ Issuing Bank sends L/C to Advising Bank
④ Advising Bank notifies seller
⑤ Seller ships goods and prepares documents
⑥ Seller presents documents to Negotiating Bank
⑦ Negotiating Bank forwards docs to Issuing Bank; claims reimbursement
⑧ Issuing Bank releases documents to buyer; buyer collects cargo

Key document types required under L/C:
  Commercial Invoice (C/I), Bill of Lading (B/L), Packing List,
  Certificate of Origin, Insurance Certificate (for CIF terms)

L/C Types

Irrevocable L/C:    cannot be amended or cancelled without all parties' consent (default)
Sight L/C:          payment upon presentation of conforming documents
Usance L/C:         deferred payment (e.g., 60 or 90 days after sight)
Confirmed L/C:      second bank adds its payment guarantee
Transferable L/C:   beneficiary can transfer to a third party
Standby L/C:        used as a performance guarantee (not primary payment)

Discrepancies

A discrepancy is any document that does not strictly comply with L/C terms.

Common discrepancies:
→ Late shipment (ship date after L/C expiry)
→ Invoice amount exceeds L/C amount
→ Description of goods differs between documents
→ Missing endorsement or signature
→ Presentation after L/C expiry

Consequences:
→ Issuing Bank may refuse payment (5 banking days to examine under UCP 600)
→ Seller must either:
   (a) submit corrected documents within validity, or
   (b) request buyer's waiver of discrepancy

Trade Correspondence — Essential Expressions

Inquiry

Opening the inquiry:
"We have been referred to your company by [source]."
"We are interested in your [product/service] and would like to..."
"Please send us your current catalogue and price list."
"Could you also advise us on your minimum order quantity?"

Offer / Quotation

Making an offer:
"We are pleased to offer you the following on the terms stated below:"
"This offer is subject to our final confirmation."
"The offer is valid until [date]."
"Our price is USD [amount] per unit, CIF [destination port]."

Order

Placing an order:
"We would like to place an order for the following:"
"Please ship the goods by [date] to ensure timely delivery."
"Please confirm receipt of this order at your earliest convenience."
"Payment will be made by irrevocable L/C at sight."

Complaint / Claim

Raising a claim:
"We regret to inform you that the goods arrived in a damaged condition."
"Upon inspection, we found a shortage of [number] units."
"We must hold you responsible for the damage incurred."
"We request that you either replace the goods or provide a credit note."

Response to Claim

Acknowledging and responding:
"We apologize for the inconvenience caused by this matter."
"We are currently investigating the cause and will revert shortly."
"As a gesture of goodwill, we are prepared to offer [replacement/discount/credit]."
"We assure you this will not recur."

Practice Quiz

Q1. What is the difference between FOB and CIF?

FOB: seller loads goods onto the vessel at the origin port and pays export clearance. From that point, the buyer arranges and pays for freight and insurance. CIF: seller pays freight and minimum marine insurance to the destination port. However, risk still transfers to the buyer when goods are loaded at origin — just as with FOB. Under CIF, the seller controls the transport contract, which can be advantageous for sellers.

Q2. A buyer requests a Usance L/C at 90 days. What does this mean for the seller?

The seller will not receive payment immediately upon presenting documents. Payment will be deferred for 90 days after the bill is accepted. The seller essentially extends credit to the buyer for 90 days. This is common in longer-term business relationships; the seller can discount the accepted bill at a bank if immediate cash is needed.

Q3. Which Incoterms term carries the maximum obligation for the buyer?

EXW (Ex Works): the seller only makes goods available at the seller’s premises. The buyer is responsible for everything — loading, inland transport, export clearance, main transport, import clearance, and delivery to the final destination.

Ch1. International Trade English — Contracts, Incoterms & Trade Correspondence