Commerce department international trade

The Defects Liability Period shall be a period of six months.

If any defect occurs during the Defects Liability Period, the Buyer shall forthwith inform the Seller in writing the details of the defect.

The Seller shall be responsible for making good with all possible speed any defect as notified which arises from defective materials, workmanship or design.

The provision of this clause shall apply to any goods repaired, replaced or otherwise made good by the Seller, but not so as to extend the Defects Liability Period for more than twelve months from the commencement date of original defects liability period.

1. .Arguments likely to be used by Espsranza Respray:

………………………………………………………………………………………………………………………………………………………………………….

2. Arguments likely to be used by Verbena Paintshop:

………………………………………………………………………………………………………………………………………………………………………….

3. Points requiring better regulation in this defects liability provision:

………………………………………………………………………………………………………………………………………………………………………….
1. Espcranza Respray will argue that the compressor is obviously a poorly made item since it failed twice—there is probably a defect in design. Further it will say that the exporter's liability for defects extends to all replaced items. The second failure occurred—and was notified—within the maximum agreed defects liability period, i.e., twelve months from the commencement of the period.

2. Verbena Paintshop has two arguments: firstly there was a delay of four weeks between the second failure and the required notification: this is not notification "forthwith:" the failure to offer timely notification cancels the seller's duty to cure the defect; Secondly, the defects liability period began with delivery (3^rd August 2004); the failure of the compressor thus occurred when it was no longer under warranty.

3. The clause would be clearer if it stated when the defects liability period began. Under most applicable laws the period begins with delivery. More exact specification of the notification period is not common or necessary.

CONCEPT REVIEW: WHO chooses?

The defects liability provision below is taken from a set of general conditions in common use by Chinese companies. Read the answer the questions

The Seller warrants that goods are made of the best materials, with first class workmanship, and comply in all respects with the specifications given in Annex B. The Seller warrants that the goods when correctly mounted and properly operated and maintained, shall give appropriate performance for a period of twelve months.

If a defect in materials, workmanship or design, or any discrepancy with specifications comes to light during the warranty period, the Seller shall at his own cost satisfy the claim, subject to the agreement of the Buyer in one of the following ways:

a. Agree to the rejection of the goods and refund to the Buyer the value of the goods thus rejected;

b. Reduce the price of the goods according to the degree of inferiority, extent of damage, or amount of loss suffered by the buyer;

c. Replace the defective goods with new goods which conform to the quality and performance given in Annex B;

d. Repair the defective goods to bring them in conformity with the quality and performance specifications given in Annex B;

e. Allow the Buyer or a third party appointed by the Buyer to repair the defective goods and to bring them in conformity with the quality and performance specifications given in Annex B at Seller’s risk and cost.
1. Are these general conditions Conditions of Sale or Conditions of Purchase?

SALE PURCHASE

2. If there is a defect, who chooses the method of cure?

BUYER EXPORTER

3. Is this a warranty of freedom from defects on delivery or a warranty of durability?

FREEDOM FROM DEFECTS DURABILITY

Verbena Medical makes hospital beds and other hospital furniture. It exports 40 beds to South Central Hospital in Espcranza City. The defects liability provision in the contract includes this wording:

Assume that the coniract is subject to the law of Espcranza which is modelled on U.S. law. During the defects liability period, one of the beds collapses with unfortunate results:

1. The bed itself is unusable and must be replaced;

2. The patient who was in the bed is injured, with extra medical costs of $5,000;

3. The injured patient, a rich politician, threatens the hospital with a lawsuit for his

"pain and suffering"—the. hospital pays the patient $9,000 to avoid the lawsuit;

4. Hospital equipment around the bed is damaged—the equipment cost $4,000;

5. The ward where the bed was situated is a private ward—it cannot be used for 3

days with a loss to the hospital of $3.000:

6. Two orderlies at the hospital start a fight over who broke the bed—one of them is

hospitalized at a cost of $5,000;

7. During the fight, equipment is smashed at a cost of $8,000.

1.  3.  5.  7. 

2.  4.  6.  ^:
1. Yes 3 Possibly 5. Yes 7. No

2. Yes 4 Yes 6. No

SUMMARY: What You Should Know

1. The purpose of the defects liability provision is to allow the exporter to cure defects in delivered goods: the provision'must therefore explain the corrective action he must take.

2. The normal options are to repair, to replace, to allow reduction in the price of the goods, allow return of the goods, or to allow the buyer to repair the defect at the exporter's expense.

3. The exporter likes to have full discretion over what corrective action he takes; buyers, however, resist this.

4. The exporter usually, though not always, pays for curing defects.

5. The consequences of a defect can be costly; the panics often negotiate at length to decide who pays for consequential loss or damage.
CONCEPT REVIEW: buttoned up

Verbena Paintshop makes spray-painting equipment. It sells a unit costing $55.000 to Esperanza Respray, a small company that resprays busses and tracks. Delivery (FOB) takes place on 3rd August 2004. The machine is inspected in Esperanza on 18^th September 2004. On 10^th January, Esperanza Respray notifies the exporter that the compressor in the spraying unit has failed, and that the machine cannot be used. Verbena Paintshop sends a replacement compressor by air; it arrives on 5^th February, 2005. On 16^th September 2005, Esperanra Respray notifies the exporter that the compressor failed for a second tirne on 20^th August and asks for a further replacement. Verbena Paintshop refuses.

Study the Defects Liability provision below. What arguments are the two two sides likely to put forward in making their cases?
Defects Liability Period

The Defects Liability Period shall be a period of six months.

If any defect occurs during the Defects Liability Period, the Buyer shall forthwith inform the Seller in writing the details of the defect.

The Seller shall be responsible for making good with all possible speed any defect as notified which arises from defective materials, workmanship or design.

The provision of this clause shall apply to any goods repaired, replaced or otherwise made good by the Seller, but not so as to extend the Defects Liability Period for more than twelve months from the commencement date of original defects liability period.

1. .Arguments likely to be used by Espsranza Respray:

………………………………………………………………………………………………………………………………………………………………………….

2. Arguments likely to be used by Verbena Paintshop:

………………………………………………………………………………………………………………………………………………………………………….

3. Points requiring better regulation in this defects liability provision:

………………………………………………………………………………………………………………………………………………………………………….
1. Espcranza Respray will argue that the compressor is obviously a poorly made item since it failed twice—there is probably a defect in design. Further it will say that the exporter's liability for defects extends to all replaced items. The second failure occurred—and was notified—within the maximum agreed defects liability period, i.e., twelve months from the commencement of the period.

2. Verbena Paintshop has two arguments: firstly there was a delay of four weeks between the second failure and the required notification: this is not notification "forthwith:" the failure to offer timely notification cancels the seller's duty to cure the defect; Secondly, the defects liability period began with delivery (3^rd August 2004); the failure of the compressor thus occurred when it was no longer under warranty.

3. The clause would be clearer if it stated when the defects liability period began. Under most applicable laws the period begins with delivery. More exact specification of the notification period is not common or necessary.

CONCEPT REVIEW: WHO chooses?

The defects liability provision below is taken from a set of general conditions in common use by Chinese companies. Read the answer the questions

The Seller warrants that goods are made of the best materials, with first class workmanship, and comply in all respects with the specifications given in Annex B. The Seller warrants that the goods when correctly mounted and properly operated and maintained, shall give appropriate performance for a period of twelve months.

If a defect in materials, workmanship or design, or any discrepancy with specifications comes to light during the warranty period, the Seller shall at his own cost satisfy the claim, subject to the agreement of the Buyer in one of the following ways:

a. Agree to the rejection of the goods and refund to the Buyer the value of the goods thus rejected;

b. Reduce the price of the goods according to the degree of inferiority, extent of damage, or amount of loss suffered by the buyer;

c. Replace the defective goods with new goods which conform to the quality and performance given in Annex B;

d. Repair the defective goods to bring them in conformity with the quality and performance specifications given in Annex B;

e. Allow the Buyer or a third party appointed by the Buyer to repair the defective goods and to bring them in conformity with the quality and performance specifications given in Annex B at Seller’s risk and cost.
1. Are these general conditions Conditions of Sale or Conditions of Purchase?

SALE PURCHASE

2. If there is a defect, who chooses the method of cure?

BUYER EXPORTER

3. Is this a warranty of freedom from defects on delivery or a warranty of durability?

FREEDOM FROM DEFECTS DURABILITY

Verbena Medical makes hospital beds and other hospital furniture. It exports 40 beds to South Central Hospital in Espcranza City. The defects liability provision in the contract includes this wording:

Assume that the coniract is subject to the law of Espcranza which is modelled on U.S. law. During the defects liability period, one of the beds collapses with unfortunate results:

1. The bed itself is unusable and must be replaced;

2. The patient who was in the bed is injured, with extra medical costs of $5,000;

3. The injured patient, a rich politician, threatens the hospital with a lawsuit for his

"pain and suffering"—the. hospital pays the patient $9,000 to avoid the lawsuit;

4. Hospital equipment around the bed is damaged—the equipment cost $4,000;

5. The ward where the bed was situated is a private ward—it cannot be used for 3

days with a loss to the hospital of $3.000:

6. Two orderlies at the hospital start a fight over who broke the bed—one of them is

hospitalized at a cost of $5,000;

7. During the fight, equipment is smashed at a cost of $8,000.

1.  3.  5.  7. 

2.  4.  6.  ^:
1. Yes 3 Possibly 5. Yes 7. No

2. Yes 4 Yes 6. No

(Page 42) TRANSPORT

THE PROBLEM

For the exporter, transportation has two aspects: the physical safety of goods – which means appropriate packaging and correct marking – and correct documentation. Unless the shipping documents are in perfect order, prompt payment under a letter of credit is difficult or impossible. What are the dangers?

THE PRINCIPLE

The parties should state in their contract what packaging should bear. The exporter must follow the agreement scrupulously or payment may be delayed. The exporter should ensure that the shipping documents correspond exactly with the conditions of the letter of credit and that the bill of ladding is “clean,” otherwise, again, payment can be seriously delayed.

(Page 169) THE CONTRACT AS THE ENTIRE AGREEMENT

THE PROBLEM

An ancient rule of Anglo-American law states that the final written version of the contract replaces all previous agreements between the parties. What implications does this rule have for the exporter?

THE PRINCIPLE

Most international contracts – whatever legal system they adopt – include an “entire agreement provision. “This clause has important results: the background of the contract must be established within the contract itself, important letters and memoranda must be listed as “contract documents,” and definitions play an important part in contract drafting.

Hầu hết các hợp đồng quốc tế - cho dù đó là hệ thông pháp lý nào đã được vận dụng – đều phải bao gồm điều khoản “hợp đồng hoàn chỉnh.” Điều khoản này có tác động hết sức quan trọng: bối cảnh của hợp đồng phải được nêu rõ trong hợp đồng, các thư từ, memo phải được liệt kê là “chứng từ của hợp đồng”, và định nghĩa cũng rất quan trọng khi soạn thảo.

When an exporter and a buyer sign a contract, are they simply adding the final link to a chain of agreements? Or are they putting into words a final and definitive version of everything agreed so far? The Continental and Anglo-American systems differ widely in their answer to these questions.

In most exporter deals, the contract is the “entire agreement.” Unfortunately, however, the text of a contract seldom answers important background questions: Why did the parties sign the contract in the first place? What made the deal attractive? How long had the parties known each other? What future business did they hope for? And so on. If a dispute arises, the judge must ask such questions in order to understand the contract fully; often the parties give different answers. How can the court establish the truth? If the contract is the entire agreement, then earlier letters and documents cannot be used as evidence. To overcome this uncertainty, lawyers write the answers to background questions into the contract. Through the whereas-recital. Contracts often begin:

between

and

Witnesseth that

Sometimes the exporter is tempted to treat the recital as a chance to promote his skills and the excellence of his products. This is a mistake. If the contract gets into trouble, the buyer will have a "big stick" with which to beat the exporter "You told me you were the best — and I acted on that belief." If big claims are in the recital in black-and-wnite the exporter is trapped.

In a contract written under a Continental Law, a recital (or "preamble") is useful—it prevents misunderstanding—but it is not essential. Continental lawyers often avoid the complicated grammar of the whereas-clause; they prefer simple sentences under the heading Preamble. The legal result is, of course, exactly the same.
DEFINITIONS

Another result of the entire agreement provision is the need for a definitions section. Many terms are discussed during negotiations- faxes and letters andlikely to be exchanged asking “What exactly do you mean by…?”

It is common practice to group all definitions in a section of their own near the beginning of the contract. Every word that the two sides discuss during their negotiations is likely to require a definition.
CONCEPT REVIEW 3: MAKING claims

Verbena Leather makes leather carrying cases for cameras, lap-lop computers and other hi-tech personal equipment. It has successfully exported one consignment of its products to Japan, but it has otherwise sold mostly in the local market. A buyer in the United States is interested in making a large purchase. During the negotiations, the American buyer mentions the whereas-recital and offers the wording he wants to include in the contract. Read it and then answer the questions.

Whereas Verbena Leather has a highly trained workforce and the most modern leather-making machinery;

And whereas Verbena Leather has wide experience is supplying products to all parts of the world; . .

And whereas Verbena Leather is fully familiar with regulations regarding import of leather goods into the United States;

The parties nereby agree...

1 Why does the American buyer want this wording in the recital?

…………………………………………………………………………………………..

2. Why might such high claims be dangerous for Verbena Leather?

…………………………………………………………………………………………..

3. Does this whereas-recital have any advantages for Verbena Leather?

YES NO

The clause below is taken from a set of tender documents for the supply (and installation) of a lighting system. It has three obvious weaknesses. What are they?

1. …………………………………………………………………………………………….

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2. …………………………………………………………………………………………….

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3. …………………………………………………………………………………………….

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1. The list has no order of precedence: if there is a conf.ict among the documents, nobody will know which prevails.

2. The list is carelessly put together—it includes anything that might be important; it should be cut back to essentials.

3. By using the words "if any," the list includes documents which may not even exist.

CONCEPT REVIEW 3: Hide and Seek

Let us stay with the leather goods contract from Concept Review 1, Making Claims. During negotiations the two sides spend a great deal of lime discussing the type of leather to be used. One product, as it is agreed, is to be made of "antelope hide" and the specifications in the contract include that phrase. But what is an antelope? There is a long exchange of faxes on this subject; finally the two sides agree a list of breeds that are "antelopes as far as the contract is concerned. The list is important, and it is signed by both sides. After this the contract is signed.

Relying on this signed list, Verbena Leather uses gazelle skin (which is included in the list) for some products. The American buyer objects and tries to reject the delivered goods. The dispute goes before a judge in California.

1. …………………………………………………………………………………………….

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2. …………………………………………………………………………………………….

………………………………………………………………………………………………..

3. …………………………………………………………………………………………….

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The essential question is this: is the list of breeds part of the contract or not? To decide this, we must first ask if the list of breeds is mentioned in the contract as a contract document. If it is, then it is pan of the contract and enforceable. If it is not mentioned as a contract document, then we must ask if the contract contains an

entire agreement provision or, failing that, if the applicable law assumes that the contract is the entire agreement. If—for whatever reason—the contract is the entire agreement, then the list of breeds, which was agreed before the contract was signed, has no validity.
SUMMARY: What you Should Know

1. The Anglo-American contract is, traditionally, the entire agreement. To avoid confusion, most international contracts contain an "entire agreement" clause (re)stating this position.

2. The entire agreement clause means that all documents that predate the concract become invalid when the contract is signed.

3. One result is that the background to the contract—often needed by a court to interpret the contract—is provided in the form of a whereas-recital.

4. Any important documents (tellers, memo rand-urns, and so on) that predate the contract are listed in the contract as "contract documents." Such documents must be given an order of seniority in case of contradictions.

5. Definitions of terms agreed during negotiations are included in a definitions sections in the concract.

TERMINATION

“Termination” occurs when either party pursuing power created by agreement or law puts an end to the contract otherwise than for its breach. Thus runs America’s UCC. If the two sides agree in the contract that one of the parties may, under certain circumstances, end the contract, then this is an act to terminate. In practice, there are two kinds of termination: termination for convenience and termination for default.

Termination for Default

The Buyer may by written notice of. default to the Seller, terminate the whole or any part o£ this contract in any one of the following circumstances:

(i) If the Seller fails to make delivery of the Goods within the time specified herein;

(ii) If the Seller fails to perform any of the other provisions of this contract, or so fails to make progress as to endanger performance of this contract in accordance with its terms, and in either of these two circumstances does not cure such failure within a period of 10 days.
CANCELLATION

When one party breaches a contract, the other has the right to demand cancellation of the contract.'" Cancellation' occurs when either party puts an end to the contract for breach.Note the difference between termination and cancellation. The contract is terminated under a provision of the contract: a contract is cancelled when one side has breached and the other simply refuses to proceed.

Docs every breach allow cancellation by the other party? Clearly not. The law dues everything it can to enforce contracts- cancellation on trivial grounds makes no legal sense. Accordingly, most laws see a breach as either fundamental or noi fundamental. A fundamental breach goes ''to the heart of the contract" and allows the other side " to say—"Enough. The contract is over." How can you decide what is and what is not "fundamental breach"? Some cases are easy to decide, but there is a large gray area—under every well-established law, the courts are frequently .askcd to make decisions on hard cases.

When a contract is cancelled, a payment problem arises: should the party in breach receive compensation for duties performed so far? Courts worldwide find it difficult to establish a principle on this, and judgment is usually on a case-by-case basis. Naturally the party in breach has a weak case: even so, there is some chance of recovering what has genuinely been earned.

Termination and cancellation are both one-sided procedures. When the two parties agree to end a contract, the generally used term is rescission. Lei's say, for example, that a supplier of electric cable has difficulty supplying the quality his customer requires, and the customer has meanwhile found a cheaper supplier elsewhere. Both sides now have an interest in dissolving the contract. In legal theory, they enter a new contract to annul the old contract. (The mutual surrender of rights is seen as providing the necessary consideration.) Unfortunately the term rescission is used in other contexts than a mutual agreement to end a contract; international contract drafting would benefit if it were not.

Occasionally a contract is discharged because it is impossible or totally pointless to continue with it. The classic cases are a contract to rent a music hall which burns down—no music hall, no contract—and a contract to rent scats along the route of a procession which is cancelled—once again, no procession, no contract. Most legal

systems recognize that sometimes a contract has lost its point and give one of the parties the right to end it. But the courts are reluctant to allow this—contracts are signed to be kept, not to be broken. The exporter is wise to assume that performance will be required.
THE LANGUAGE OF THE CONTRACT

Whenever versions of a single document exist in two languages, there are

Conflicts: no translation is ever perfect. Ideally, the parties should agree on a contract language, making it clear that translations do not have the same authority as the original version in the contract language.

What happens, though, if the parties cannot agree? There are two roads: (a) the parties say nothing at all—in a dispute, the judge decides which version to trust; (b) the parties make two (or more) versions equally authoritative; again, the judge decides which version to favor.