Clauses in an International Business Contract

LD Vs Penalty Clause

Question 1 – In the event, the exporter is unable to supply the goods on or before 24^th June, 2010, the exporter is liable to pay liquidated damages of 1% per week to a maximum of 5% of the undelivered portion of goods with a grace period of 2 weeks. Note –

· The contract is $ 100

· $ 50 worth of goods has already been supplied on or before 24^th June, 2010.

Calculate the liquidated damages (LD).

Answer 1 -

Dates	LD / Week
15th July, 2010	1% of 50 = 0.5
22nd July, 2010	1
29th July, 2010	1.5
5th Aug, 2010	2
12th Aug, 2010	2.5 (5% of 50)
19th Aug, 2010	2.5

Analysis – This is a bad clause from importer’s point of view, as exporter can supply anytime after 12^th Aug, 2010 with a penalty of $ 2.5 only.

Why exporter is doing that – Exporter has got another buyer who is willing to pay higher price for the same material. Hence, exporter will divert the goods to this new buyer instead of me.

Possible impact on importer - The importer will be in trouble, as he might have to supply the balance $ 50 worth of goods to retailers in his country, which in above scenario, he can’t do.

What can be done – Importer will put a clause in the agreement that the payment of 1^st $50 worth of goods will be released only after exporter releases the balance $50 of goods.

Question 2 - What is the difference between a LD clause and a penalty clause?

Answer 2 –

Penalty Clause – Exporter will be charged a % (2%-3%) on the entire lot of goods (here it is $ 100), if he supplies the balance outstanding goods late ($ 50).

LD (Liquidated damage)– It is in favor of exporter as it takes into account only undelivered portion for calculating the penalty.

Question 3 – What is the biggest risk to the exporter in question 1?

Answer 3 – It may happen, that exporter may not receive the money from the importer.

Question 4– What document(s) is signed before order is taken and executed?

Answer 4 –

· Order sheet (Singapore) – The order sheet is between 2 companies and is signed by the importer and is sent to exporter for his signing / stamping to be finally sent back to importer. Order sheet is also accepted in court of law. Problem with order sheet is its genuineness (letter head of a company can be easily prepared).

· Stamp Paper – More sound as it is signed by witnesses and acceptable in a court of law. It can’t be duplicated – Since, Telgi scam did duplicate stamp paper in India, prefer Singaporian stamp paper.

When is a contract written – After importer has sent an enquiry, exporter has sent the quotation and then both of them have finalized the terms and conditions, after the protracted discussions were over, then the contract would have been signed. Hence, contract is culmination (conclusion / result) of discussion between 2 parties.

List of documents exporter needs to give to importer of goods for collection of goods at port -

· Invoice

· Packing list

· 3^rd party inspection (requested by the importer of goods – like SGS, Llyods, TUV)

· Certificate of origin (Issued by chamber of commerce – who decides the list of importable / exportable goods)

· Bill of Lading