a) Any reference to any of the parties herein include their assignees and/or successors-in-title and/or personal representatives
b) Words importing the singular tense include the plural tense' and vice-versa
c) Words importing the masculine gender include the feminine gender and neuter gender and vice-versa
d) Person(s) includes a Corporation and vice-versa
e) The Clause headings in this Agreement are for ease of reference only and will not affect the interpretation hereof
Any notices required to be served hereunder shall be sufficiently given if forwarded by registered post recorded delivery cable telex or telegraph to the address set out at the head of this Agreement or such other address as may have been notified in writing to the other party for such purposes
This Agreement may be executed in any number of counterparts, any single counterpart or a set of counterparts executed in either case by all the parties hereto shall constitute full and original agreement for all purposes
IN WRITNESS WHEREOF the parties hereto have caused this Agreement to be executed in counterpart original by their duly authorised representatives on the day and year first set forth above
SIGNED by SIGNED by
On behalf of On behalf of
AGIP FETROLI SPA DISTRIBUTOR
(Page 126) 3.3 WARRANTY AND GUARANTEE
Are a warranty and a guarantee the same thing? Why do some contracts replace a warranty with a defects liability provision”?
A guarantee is a promise about somebody else’s performance; a warranty is a promise about your own. When businessmen speak of the “seller’s guarantee” or “warranty” they mean the exporter’s liability for defects; to avoid confusion, many drafters today use the term “Defects Liability Provision.”
IN MORE DEPTH
A warranty is a promise you make about your own performance. The word is used in many contexts. A warranty of title, for example, is a promise to a buyer that the exporter really owns the contract goods. A product warranty is a promise by the exporter to cure defects in his products.
There are two parties to a warranty: buyer and seller. A guarantee, on the other hand, involves three parties, as the diagram shows. The guarantor makes a promise to one party at the request of another. There is a major confusion of terminology. Black’s Law Dictionary comments:
Internationally, the distinction between warranty and guarantee is often blurred. First, businessmen loosely use the words as though they mean the same thing. Another common belief is that a warranty covers materials and workmanship, while guarantee covers specifications. This is not true. Does it matter? In fact, yes. Confusion between warranty and guarantee can be dangerous. When?
Let’s say a contract is written in English, but German law applies. German law makes a clear distinction between a “seller’s warranty” and a “seller’s guarantee” – the seller’s obligations are more extensive under a “guarantee.” So loose English will get the exporter into trouble if German law, or any closely related law applies to the contract.
As a general rule, incorrect use of “guarantee” causes trouble; use the word only if you mean a third party guarantee.
When businessmen speak of the “seller’s guarantee” or “warranty” they mean the exporter’s liability for defects; to avoid confusion, many drafters today use the term Defects Liability Provision.
A defects liability provision (or warranty) covers defects that are present at the moment of delivery. Normally quality control prevents products with obvious defects from leaving the factory; in the next step, products with obvious or “patent” defects are identified during open package inspection and rejected. The defects that give rise to the most serious problems between exporter and buyer are hidden or latent defects.
Defects may be (a) in workmanship, (b) in materials, or (c) in design. However, fair wear and tear and misuse by the buyer are not covered by the provision.
The defects liability period is the period during which the exporter is liable for- and must make good- defects that are apparent on delivery or that come to light later. The buyer, of course, must prove that the defect was present in the goods at the date of delivery- often a difficult task. It is important for both sides in a contract negotiation to understand that a defect is a fault provably present in the goods on delivery- nothing more. In principle, under most laws, the exporter is liable only for problems that arise from defects.
CONCEPT REVIEW: GET WEAVING
Verbena Textile is replacing twenty of its looms. The looms are thirty years old, and spare parts are hard to find. The factory engineer chooses the best of the old looms and cannibalizes the others to make twelve looms in good working order. Verbena Textile negotiates to sell these looms to Esperanza Cotton Mills. Esperanza Cotton wants twelve-month warranty with the looms; Verbena Textile is prepared to sell them on “as is.”
1. What arguments are the two sides likely to put forward in negotiating the warranty (defects liability)?
2. Which side do you think is “in the right”?
1. Second-hand machinery is usually sold internationally "as is.” From the buyer's point of view this has an obvious disadvantage—if the machine goes wrong, repair may be expensive or impossible. However, it makes little sense for the seller to offer a warranty. Firstly he is not in the business of selling or repairing machines. Secondly, assuming he is prepared to offer a warranty, the cost would be prohibitive—in some cases the total cost might be more than the cost of a brand-new machine using the latest technology.
2. Both sides have a point. The most common solution is for the buyer to check the machines carefully for full functionality before buying them- and then to accept the sale without warranty.
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GENERAL TERMS AND CONDITIONS
1) Shipment or delivery
The obligations of Seller to ship or deliver the goods specified on the face of this Contract ("Goods") by the time or within the period specified on the face of this Contract shall be subject to the availability of the vessel or the vessel's space
If, under the terms of this Contract, Buyer is to secure or arrange for the vessel or vessel's space, Buyer shall secure or arrange for the necessary vessel or vessel's space on berth terms basis and give Seller shipping instructions within a reasonable time prior to shipment, including but not limited to the name and detailed schedule of the vessel. If Buyer fails to give such instructions within a reasonable time prior to shipment, Seller may, at its sole discretion and at Buyer's risk and account, arrange for the vessel or the vessel's space and make shipment of the Goods, without prejudice and in addition to any other rights and remedies Seller may have under this Contract or at law or in equity or otherwise.
In case of shipment or delivery installments, any delay or failure in shipment of one installment shall not be deemed a breach of this Contract giving rise to a right of Buyer to cancel this Contract or refuse to accept performance with respect to other installments.
If payment for the Goods shall be made by a letter of credit, Buyer shall establish in favor of Seller - an irrevocable letter of credit through a prime bank of good international repute immediately after the conclusion of this Contract in a form and upon terms satisfactory to Seller.
If Buyer fails to make any due payment, to establish a letter of credit or otherwise to perform its obligations hereunder, Seller may demand that Buyer provide, within a reasonable time, adequate assurance satisfactory to Seller of the due performance of this Contract and may with old shipment or delivery of any all of the undelivered Goods until such assurance is given.
Buyer shall pay the price specified on the face of this Contract without set-off counterclaim, recoupment or other similar rights which Buyer may have against Seller, which rights shall be exercised in separate proceedings between Buyer and Seller.
Any new, additional or increased freight rates, surcharges (bunker, currency, congestion or other surcharges), taxes, customs duties, export or import surcharges or other governmental charges, or insurance premiums, which may be incurred by Seller with respect to the Goods after the conclusion of this Contract shall be for the account of Buyer and shall be reimbursed to Seller by Buyer on demand.
If Buyer fails to pay for the Goods in accordance with this Contract, Buyer shall pay to Seller as liquidated damages and not as a penalty overdue interest at the rate of the lower of eighteen percent (18%) per annum or the maximum interest rate permitted by the laws of Buyer's country, calculated from the date for such payment until the actual date of payment calculated on the 360 day-a-year basis for the actual number of days elapsed.
3) Force Majeure
If the performance by Seller of its obligations hereunder is directly or indirectly affected or prevented by force majeure, including but not limited to Acts of God, flood, typhoon, earthquake, tidal wave, landslide, fire, plague, epidemic, quarantine restriction, perils of the sea, war declared or not or threat of the same civil commotion, blockade, arrest or restraint of government, rulers or other labor dispute, explosion, accident or breakdown in whole or in part of machinery, plant, transportation or loading facility, governmental request, guidance, order or regulation, unavailability of transportation or loading facility, bankruptcy or insolvency of the manufacturer or supplier of the Goods, or any other causes or circumstances whatsoever beyond the reasonable control of Seller or manufacturer or supplier of the Goods, then Seller shall not be liable for loss or damage, or failure of or delay in performing its obligations under this Contract and may, at its option, extend the time of shipment or delivery of the Goods or terminate unconditionally and without liability the unfulfilled portion of this Contract to the extent so affected or prevented
In case of (i) Buyer's failure to perform any provision of this Contract; (ii) Buyer's inability to pay its debts generally as they become due; (iii) Buyer's bankruptcy or insolvency or (iv) appointment of a trustee, receiver or liquidator of Buyer of any material part of Buyer's assets or properties ("Events of Default"), Seller may, at its sole discretion, (i) terminate this Contract or any part thereof; (ii) declare all obligations of Buyer immediately due and payable; (iii) resell the Goods; (iv) hold the Goods for Buyer's account and risk; (v) pospone the shipment of Goods; or (vi) stop the Goods in transit, and Buyer shall reimburse Seller for all losses damages arising directly or indirectly from such Events of Default.
The rights and remedies of Seller hereunder are cumulative and in addition to Seller's rights, powers and remedies existing at law or in equity or otherwise.
5) Intellectual property rights
Nothing herein contained shall be construed as transferring any patent, trademark, utility model, design, copyright, mask word or any other intellectual property rights in the Goods, as such rights being expressly reserved to the true and lawful owners thereof.
Seller shall be neither responsible nor liable for any infringement or unauthorized use with regard to any patent, trademark, utility model, design, copyright, mask work or any other intellectual property rights.
6) Warranty, claim
Unless expressly stipulated on the face of this contract, seller makes no warranty or condition, expressly or impliedly, 'as to the fitness or suitability of the goods for any particular purpose or use or the merchantability thereof.
If any warranty exists. Seller's liability shall be limited to replacement or repair of the defective Goods.
Any claim by Buyer of whatever nature arising under or in relation to this Contract shall be made by registered airmail within thirty (30) days after the arrival of the Goods at the port of destination, or solely in respect to a claim alleging the existence of a latent defect in the Goods, within six (6) months after the arrival of the Goods at the port of destination, and any such claim shall contain full particulars with evidence certified by an authorized surveyor.
Seller shall not be responsible, whether in contract or warranty, tort or on any other basis, to Buyer for any special, incidental, consequential, indirect or exemplary damages, and in no event shall Seller's total liability on any or all claims from Buyer exceed the price of the Goods.
(1) All disputes, controversies or differences arising out of or in relation to this Contract or the breach thereof which cannot be settled by mutual accord without undue delay shall be settled by arbitration in Tokyo, Japan, in accordance with the rules of procedure of the Japan Commercial Arbitration Association; the award of arbitration shall be final and binding upon both parties, and judgment on sucli award may be entered in any court or tribunal having jurisdiction thereof; this Contract shall be, in all respects, governed by and construed in accordance with the laws of Japan; the trade terms herein used, such as FOB, CFR and CIF, shall be interpreted in accordance with "INCOTERMS 2000".
(2) The failure of Seller at any time to require full performance by Buyer of the terms hereof -shall not affect the right of Seller to enforce the same; the waiver by Seller of any breach of any provision of this Contract shall not be construed as a waiver of any succeeding breach of such provision or waiver of the provision itself.
(3) This Contract constitutes the entire agreement between the parties hereto and supersedes all prior or contemporaneous communications, agreements or undertakings with regard to the subject matter hereof; this Contract may not be modified or terminated except by a written agreement of Seller and Buyer.
(4) Buyer shall not transfer or assign this Contract or any part thereof without Seller's prior written consent.
(page 149) CHAPTER 4: THE LEGAL FRAMEWORK
The Big Picture
Many exporters are gifted salesmen, and their contracts reflect this emphasis on sales. Unfortunately, there are a number of legal loose ends that must be tied down if a good sales technique is to mature into a profitable way of doing business.
Like the other phases of an export negotiation, the legal framework can be negotiated in clear steps- in this case six.
IN MORE DEPTH
A contract is not merely a list of ideas agreed by the exporter and the buyer during negotiation: it is an enforceable, legal instrument. The two sides ignore the legal dimensions of the contract at their peril.
STEP 1. THE APPLICABLE LAW: choice of law
STEP 2. CONTRACT OR NO CONTRACT? Meeting of minds, capacity, legality, consideration.
STEP 3. ENTIRE AGREEMENT. Whereas recital, contract documents, definitions.
STEP 4. THE PARTIES. Identity, naming, notices, assignment.
STEP 5. STATUS OF THE CONTRACT. Termination, cancellation, recission, language.
STEP 6. SETTLEMENT OF DISPUTES. Amicable settlement, arbitration, litigation.
The first question about the legal framework of the contract is always: what law have the two sides chosen to fill the gaps in their agreement (Step 1). Then the question arises is the document the parties are signing really a contract, or is just a piece of paper (Step 2)? If it is a contract, is it the entire agreement? And if it is the entire agreement, how do the two sides ensure that it includes everything they want it to include (Step 3)?
Once the full legal nature of the contract is established, it is time to turn to the parties signing it. Are the parties all they seem to be? And will they remain the same during the lifetime of the contract (Step 4)?
Good relations usually prevail during the negotiation of a contract. Later, however, things can go wrong. A good contract allows for this by foreseeing circumstances under which the parties might wish to end their agreement (Step 5). If a dispute arises, some means of settling things should be agreed beforehand: that way at least some goodwill might be preserved and the cost of the dispute minimized (Step 6).
CHOOSING AN APPLICABLE LAW
What considerations should an exporter bear in mind when negotiating an applicable law?
Although national laws differ greatly in detail, most laws belong to one of two families: Anglo-American or Continental. The Anglo-American family is based on case-law (the law develops over centuries through court decisions); the Continental family is based on a legal code (the law is expressed in a code). The two systems work in different ways and produce different kinds of contract.
Anglo-American contract law is case law: judges decide cases on their merits (the rights and wrongs of the cases; decisions create precedents. A precedent is binding: future judges (subject to complex rules( are obliged to follow it. After a while, so many precedents exist that even the best judges become confused. The case-law principle has a remarkable result: nobody knows the law in a given case until the judge reaches a decision. The Anglo-American lawyer can suggest the outcome of a case- but certainly is impossible. Under Continental systems, outcomes are more predictable: judges simply apply the code- they are not required to use their sense of justice to seek the fairest solution to the case.
Scenario: Nonamia was until recently, a socialist country with-no developed commercial law—in fact, the necessary law is still not published. Abet Johnson runs a factory in Nonamia that makes quality jogging shoes. He receives several inquiries from European countries. One customer, Frankimport. is interested enough to suggest some broad contract terms: price, delivery dale, length of defects liability period. Johnson now asks a lawyer in Nonamia to draft a contract.
Early in the discussion, the lawyer asks Johnson: "What law applies to the contract?" Johnson has no idea. The lawyer explains the principle: a contract covers many issues; anything left undecided is regulated by the applicable law. The lawyer lists three possibilities:
- The exponer's law (the law of Nonamia):
- The buyer's law (the law of Germany);
- A third-party law (e.g.. the law of Sweden or of England).
Each option is radically different: . !
Option 1: Nonamia has no contract law—there is no water round the fish. If there is a dispute, the Nonamian judge must make a decision, " but this decision is unpredictable: To gain some degree of certainty, the parties must write a contract detailed enough to cover most eventualities. This is difficult and expensive; even when it is completed, the Nonamian judge may not enforce it as the parties intended.
Option 2: German contract law is codified. The code (the BGB) has been clarified by a hundred years of interpretation in the courts. The contract can be short and to the point—on the other hand using the law, of the buyer's country gives the buyer a perhaps unfair advantage in the event of a dispute.
Option. 3: Choosing a third-party law—English law perhaps or Swedish law—gives neither side an advantage. But the law must be chosen carefully. Swedish law is a member of the Continental family. The contract can be short and to the point—Swedish law (we can suppose) will fill gaps in the contract fairly and reasonably. English law, on the other hand, is a member of the Anglo-American family.
The advantage of English law is that its principles have been refined over many centuries to deal with international trade: it is internationally familiar and extremely flexible; if the parties draft the contract carefully, they can achieve almost any result they wish. On the other hand, a contract under English law is usually lengthy and
derailed: English law is case law, so the parties normally decide many issues ahead of time rather than leaving the judge to make decisions on the basis of precedents.
The choice of an applicable law is not easy—but it is wiser to choose a law than to leave the issue open. A summary of the factors involved:
Justice in the individual case
Consistency and uniformity of enforcement
PREDICTABILITY AND CONSISTENCY OF COURT DECISIONS
Unless matters are carefully regulated in the contract, the decision of the judge is not fully predictable. Different judqes may give widely different judgments.
Decisions in all but the most difficult cases are precictable with some accuracy. Decisions are generally consistent from court to court.
LENGTH AND DETAIL OF CONTRACT
To be clear, contracts must regulate many issues, so they tend .to be long and detailed.
Because the law regulates most problems, contracts can be short and lacking in detail.
English and Amencan law have been refined over the centuries to cope with issues of intemational trade. The principles are widely understood and respected.
Continental laws do not have the prestige of Angto-Arnencan laws in international practice. They tend to focus on national rather than internalionat issues
Sometimes the parties cannot agree an applicable law, so they leave the matter open- the contract contains no provision at all on applicable law. What then? If the contract does not specify an applicable law, then a special branch of law known as “international private law” comes inyo play and decides the law of the contract. In the case of an export contract, especially an E-, F-, or C- term contract, the law chosen is nearly always the law of the exporter. In our Nonamian jogging-shoe scenario above, that means the choice of Nonamian law- and, a great deal of uncertainty.
The contract clause that specifies the applicable law should be carefully worded. It should state not only that the chosen law that supplements the provisions of the contract, but also that it regulates some difficult issues- Do the partes actually have a contract? What rules of interpretation shall apply? And so on.
CONCEPT REVIEW 1
Swords and Shares
Plough Shares is a Verbenan company making non-mechanical farm equipment. On 3rd July 2004 it receives a letter from Wide Horizon Farm Tools in Esperanza. The letter asks Plough Shares to quote its latest price on two of its catalog items; 1005X3 Mattocks and 2068Z2 Shovels. Order size is 500 of each item. The two companies have never done business together.
Plough Shares quotes $4,000 for the mattocks and $2,500 for the shovels. On the quotation is clearly stamped: "Our General Conditions of Sale apply to all deliveries.".
An order arrives exactly in line with the offer except that it is stamped: "Our General
Conditions of Purchase apply to this Order." Plough Shares confirms the order, stamping it, as before: "Our General Conduions of Sale apply to all deliveries." The goods are delivered FOB on 4th September; they are inspected and accepted by the buyer on 4th October. The invoice sent by Plough Shares is also stamped with the familiar stamp. Wide Horizon pays for the goods.
Then there is a serious warranty claim: the handles of both the mattocks and the shovels break easily. On 14th March Wide Horizon notifies Plough Shares of the problem. Plough Shares says "Too bad— the defects liability period has expired." Wide Horizon replies: "Not at ail—the period runs for another two weeks." The disagreement arises, as you have probably guessed, because the Seller's general conditions allow a six-month warranty from the date of delivery, and the Buyer's Conditions a six-month warranty from the date of acceptance.
1. Is the original letter from Wide Horizon an "offer to buy"?
2. Is the quotation from Plough Shares an offer to sell?
3. Is the order placed by Wide Horizon an offer to buy or is it an acceptance?
OFFER TO BUY ACCEPTANCE
4. Is there a clear and full acceptance of an offer at any stage of the negotiation ?
5. Do the two sides have a contract?
YES NO LEGAL POSITION NOT CERTAIN
6. If yes. who is right on the warranty case?
PLOUGH SHARES WIDE HORIZON LEGAL POSITION NOT CERTAIN
1. No. It is a request for quotation. 2. Yes
3. Offer 10 buy. There is a major discrepancy between the terms of the oner and the "acceptance.” 4. No
5. The legal position is unccertain.
6. Again uncertain. If there is a contract, the terms are unclear.
CONCEPT REVIEW 2 Out Of The Window
Verbena Farm Power is taking delivery; of 300 gasoline powered mini-generators (5 kW) for farm use. The supplier is a German company, Supergrid. After signing the concract, Verbena Farm realizes that Supergrid's price is too high: the same equipment is available in the United States at half the price. So Verbena Farm is delighted when a new Government Order prohibits all machines louder than 90 decibels. Verbena Farm argues that since the German machine produces 95 decibels, it is illegal and the contract is null and void. Supergrid offers to thicken the sound insulation on the machine; Verbena Farm refuses this offer. Imagine now three versions of the contract. Version 1 contains this clause:
In the event that any provision of the Agreement is held to be illegal or otherwise unenforceable, such provision shall be deemed to have been deleted from this Agreement, while the remaining provisions shall be and shall continue in full force and effect.
Version 2 contains this wording
If any provision or provisions of this contract are invalid, or become invalid, this has no effect on the validity of the remaining provisions.
If any provision of this contract is invalid, or becomes invalid, tne parties have the duty to replace the invalid provision with a new valid provision that fulfills the original intent of the invalid provision
Version 3 says nothing ai all on this subject.
Which version of the contract is most favorable to Verbena Farm's argument? Which version is least favorable?
Least favorable: VERSION 1 version 2 version 3
Most favorable: VERSION 1 version 2 version 3
Least favorable for Verbena Farm is Version 2: this wording clearly obliges the parties to redraft the disputed clause.
The most favorable version is possibly version 3—but everything then depends on the applicable law. Is a partly illegal contract wholly illegal under the law that applies to this contract? If German law applies, for example, the answer in case of doubt is "Yes."
CONCEPT REVIEW 3 Taken into Consideration
General Supplies, a Verbenan company, trades in food, clothing, household goods, and so on. It has an export contract with Frankimport, a German company, to sell 400 cartons of pineapple rings in 500 gram cans. Two weeks before delivery is due, Frankimport sends the following fax to General Supplies:
Will you please change our order to 131 cartons of pineapple juice, 110 cartons of pineapple chunks, and 200 cartons of pineapple rings. According to the price list you sent us, the total invoice price is now exactly the same as the original price. Please confirm the new arrangement immediately.
General Supplies confirms the new order with the following fax:
We hereby confirm your change of order. We shall now send 131 cartons of pineapple juice, 110 cartons of pineapple chunks, and 200 cartons of pineapple rings. There is no change in the price.
The goods are delivered FOB (Port Verbena) and paid for under a letter of credit. When the goods arrive in Bremen, however, Frankimport finds 400 cartons of pineapple rings. It informs General Supplies immediately that it is rejecting half the consignment, as deviating from the agreement as modified. General Supplies replies that the original contract was never modified according to the law of Verbena, and that Frankimport must accept the whole consignment.
1. What is the source of this dispute? ………………………………………………….
2. The law of Verbena (which is a member of the common-law family) applies to the
contract. Who is right about the validity of the modification?
GENERAL SUPPLIES FRANKIMPORT
3. Section 2-209.1 of the Uniform Commercial Code states:
An agreement modifying a contract..needs no consideration to be binding.
If there were a similar regulation in Verbena, how would it affect this dispute?
1. The dispute arises because ah agreenk'ni to modify a contract requires, under some laws, consideration: both sides must have new risks and duties under the new agreement. In this case. only General Supplies has a new duly and only Frankimport has a new right.
2. General Supplies
3. Consideration would not be required, and Frankimport would be justified in relying on the modification and rejecting the goods.
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