1. CHAPTER 5 IMPORTANT ISSUEST IN INTERNATIONAL CONTRACT FORMATION 5.1 Introduction There are many issues, beyond the basic ones discussed in Chapter 2 ( “Inter national Commercial Contracts”), that parties should consider when making international commercial contracts. This Chapter briefly discusses some of these other issues.

2. 5.2 Language An important part of creating any contract is making sure that the language is clear, and that all the parties understand it the same way. Evan where all contract parties speak the same language and make the contract in that language, there can be disputes about the meaning of terms! But parties to international contracts often have different native languages. And sometimes the words of one language in a contract may be difficult to translate into another language. So there is a special risk that parties to international contracts will have different understandings of the same term. If a dispute about such a term occurs, then a court or arbitrator may have to decide what it means. Of course, usually each party to the contract will support the interpretation that is best for her.

3. For example, suppose a Japanese seller and a Cambodian buyer want to make a contract for the sale of rice. The Cambodia language and the Japanese language have different words for different types of rice of varying qualities. In the course of negotiations between the parties, the parties use both Cambodian and Japanese words for particular types of rice. However, the final written contract is in English. The contract sys that the seller must provide “husked, raw, white rice” to the buyer, but does not define the word “rice” any further. The parties may not be fluent in English, and they may have different understandings of exactly what this term means. Suppose the seller supplies rice of low quality, saying that all he was required to provide was “husked, raw, white rice,” and therefore he has complied with the terms of the contract. The buyer may object arguing that she understood the term to require a higher quality of rice, perhaps in part because of non-English words used in the negotiations.

4. Another type of language problem may occur when parties use standard abbreviations in their contracts. For example, suppose a contract states that “the seller agrees to sell the buyer 10,000 bicycles FOB Kompong Som, SS Seagull, 5:00 p.m. 15 May 1995.” The abbreviation FOB means, “Free on Board.” However, under the current Uniform commercial code (UCC), which regulates commercial law in the United States, the term FOB has a Slightly difference meaning. Under the UCC, the term FOB (+port of shipment) only requires the seller to deliver the bicycles to the shipping company at the named port, Kompong Som. If the buyer wants to require that the seller be responsible for making sure that the goods actually get onto the ship using UCC terms, then she must be sure the contract states: FOB (+name of vessel).

5. 5.3 Currency Another potential problem in the formation of international contracts is determining the currency to be used in performing the contract. This can be important because the parties may not do most of their business in the same currency, and because rates of exchange can vary. For example, consider the Cambodian currency in April 1995. at that time, the market exchange rate relative to the US dollar valid from around 1800 riels to 2600 riels to the dollar. Suppose that a contact made at the end of February 1995 provides that a Hong Kong company will supply 10,000 basketballs to a Cambodian Company for US$1 each, with delivery to be made within 60 days, and payment to be made at the time of delivery. At the time that the contract is made, one American dollar is worth 2600 Cambodian riels. This means that the Cambodian company needs 26 million riels to buy the 10,000 US dollars that it must pay under the contract. The Hong Kong company delivers the basketballs by mid- April. However, by that time, the US dollar has depreciated relative to the riel. In fact, the exchange rate then is only 1800 riels for one US dollar. T

6. However, suppose the same contract required payment in Cambodian riels. Once again, assume that when the parties made the contract, the exchange rate was 2600 riels for one US dollar. But in the new example, the contract was for 10,000 basketballs for 2600 riels each, for a total price of 26 million riels. Again, the Hong Kong Company delivers the basketballs in mid-April. Under the contract, the Cambodian company must pay the amount due when the basketballs are delivered. At that time, the exchange rate is 1800 riels to the dollar. So at the time that the Cambodian company must pay the 26 millionriels for the basketballs

7. 5.4Countertrade “Counter trade” occurs where on contract party delivers goods, services, technology, or some other thing of value to the other party, and in exchange the other party provides goods, services, technology or something of value to the first party. Many south east Asian, Eastern European and African nations have traditionally been involved in counter trading. In South East Asia, Singapore has been a major regional center for counter trade. There are difference types of counter trade. Below are brief discussions of some of the more important ones. Barter involves a contract calling for one party to provide goods or services in exchange for goods or services from the other party. An example would be where a merchant in South Korea in exchange for a certain number of motor cycles.

8. A counter purchase transaction generally involves an agreement for the mutual supply of goods or services between parties according to two separate contracts, which are related to each other by a third contract. For example, suppose the Bombay Bus Corporation of India agrees to a counter purchase in a contract with the royal Government of Cambodia. The Cambodian government agrees to buy a certain quantity of buses from the Bombay Bus Corporation in a second contract, so long as the Corporation agrees to buy different goods, such as tires, from Cambodia in a third contract. In effect, the parties are exchanging buses for tires.

9. A Buy-back is an agreement involving the sale of equipment or technology from a supplier to a developing country, with the supplier receiving payment in the form of goods produced by that equipment or technology. For example, suppose a foreign company agrees to build a plant and install equipment to produce cotton thread in a developing nation. Instead of receiving money for the installation of the plant, the foreign company may agree to take some of the cotton thread produced at the plant over a period or years.

10. A bilateral clearing agreement is an agreement between two nations that each nation will purchase a specific quantity of goods in separate contracts from the other nation over a specific period. These agreements are similar to the counter purchase arrangement discussed above. However, in a bilateral clearing agreement, both nations maintain bilateral clearing accounts with banks. Each nation monitors the other nation’s bilateral clearing account to make sure there is a balance in trade between the two nations. However, if nation A is purchasing more goods from nation B than Nation B is purchasing from nation A, then nation A stops buying from nation B until the accounts balance again. If at the end of the period defined in the agreement there is an account balance – if one nation has bought more than the other – then the other nation must usually pay the first nation for the imbalance.