This article is written by Prateek Giri Goswami who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Table of Contents
Introduction
The provenance of Transnational trading can be traced back to centuries, it has been the primary way through which the states and their subjects interacted and bolstered their businesses and economies. With the advent of globalization, transnational trading has been burgeoning ever since. However, an increase in trade comes with the necessary concomitant of rules and laws to regulate the same, Free Trade Agreements have been a conducive regulatory method in support of transnational trade.
Besides these Trade regulatory treaties among the states, the private businessman also enters into various agreements for the effective implementation of trade policies and smooth flow of business, this article will shed light on different types of agreements that are entered by the business engaged in the business of exports. This article aims to define the basic understanding of various export related agreements along with their advantages and disadvantages.
- Basic supply contract: Although it goes without saying that any sort of trading is required to have an agreement towards the same, however, it becomes much more imperative for the transnational trading because domestic courts have uncertain jurisdiction in case a dispute arises between the business parties, it is because of this a pre-existing supply agreement is must wherein the basic terms and conditions of the supply of the exported products are defined along with the accompanied rights and obligations of each party is explicitly defined and most importantly a dispute resolution clause to make it succinct as to the seat and venue for the arbitration or any other sort of alternative dispute resolution mechanism, for example Indian Exporters while engaging with other small Asian countries prefer to govern any dispute by Arbitration and Conciliation act of India and venue in India.
Last but not least, given the prevalent pandemic situation a force majeure clause is required to be as comprehensive as possible with respect to the implications of the same, for example during the advent of Covid, in 2020 the ICC revised their force majeure and hardship clauses of 2003[1],and the pandemic was considered as a Force Majeure[2], similar trend has been evident in the interpretation of force majeure Clauses in the Convention for the International Sale of Goods (CISG) and the UNIDROIT Principles of International Commercial Contracts (UPICC)[3].
- Forward Exchange Contract: It is a common practice in the business fraternity that the payment towards an agreement is not paid immediately upon the execution of the agreement, hence, there is a substantial amount of time gap between the execution of the contract and the securing the actual payment upon fulfillment of promises, now this time gap between the execution of the contract and actual payment can have profound implications on international trading, In transnational trading/business, each party has their own distinct currency(unless the parties agree to a particular currency as a mode of payment such as the dollar or euro), the exporter will want the payment in his or her country`s currency which is subject to fluctuation whereas the importer will seek to pay in his or her country`s currency which is also subject to fluctuation the reason behind this demand by the respective parties can be explained with two examples:[4]
Example 1: Let us assume an exporter-A from the country(America) has agreed to get paid in importer-B country`s (India) currency towards payment of INR 100000/- (having rate at 1 Dollar = 70 INR/-), therefore the exporter was supposed to receive approximately 1,428.571$, however, if by the time of actual payment the Indian Rupee got depreciated 50% further (making the rate 1 $= INR 105/-), now the exporter will only receive a decreased amount of 952.38$ upon conversion. Therefore, due to the international fluctuation in currencies, the Exporter incurred loss.[5]
Example-2: Similarly, let us assume that an importer from America agreed to pay in exporter Country`s (India) currency for payment of INR 100000/- (having rate at 1 Dollar = 70 INR/-), therefore the importer was supposed to pay approximately 1,428.571$, however, if by the time of actual payment the US Dollar got depreciated 50% (making the rate 1 $= INR 35/-), now the importer will have to pay an increased amount of 2,857.14$ to equate. Therefore, due to the international fluctuation in currencies, the Importer incurred a loss.
Therefore, there is an element of risk involved for both the parties and to circumvent this conundrum the parties, a Forward Exchange Contract is entered between the Parties to negate the prospective risk due to fluctuation in currencies, in this agreement the parties agree to a fixed exchange rate towards the consideration at the time of execution of the agreement, thereafter, even if the currency rates fluctuates at the time of payment, the party will receive the amount on the basis pre-agreed fixed exchange Rate. Hence, such an agreement acts as a tool to mitigate future risk, provides certainty, and helps the parties in assessing their profits more accurately.
- Disadvantage of forwarding Exchange Contract: Such Agreements acts as a double-edged sword, while such agreement is a viable tool to mitigate risk for the parties at the same time it prevents both the parties to avail a prospective profit from the fluctuation of the currencies, for example, if an importer agrees to pay the amount in Exporter Country`s currency and at the time of payment the importer`s currency gets strengthens, then the importer will have to pay a decreased amount to the exporter thereby the importer can be easily profited due to fluctuation in currency, in a similar fashion, the Exporter can also avail profit from fluctuation. It is one of the reasons parties sometimes refrain from entering into such an agreement, so it basically depends on the parties their relevant factors to decide whether they wish to mitigate risk or enjoy a prospective profit.
For example, in April 2021, as anticipated due to the pandemic situation the Indian Rupee nosedived 105 paise to mark its biggest single-session drop against the US Currency[6], Indian traders import a lot of products from US and usually pay them in dollars, hence traders who were having FEC since last year will certainly be impervious to such erratic fall of Indian Rupee.
- International commercial agency contract: As the Name suggests this agreement is related to the marketing aspect of the business, the foreign territory sometimes can be unfamiliar territory to adequately and effectively target the correct consumer base or the market, the exporter is sometimes not conversant with the prevalent market practice and demand specified areas to promotes its product and to strategies against this downside, the exporter hires a local agent/agency from the foreign country, the agent can be an individual or a company/firm. The primary obligation of the Agent is to promote the product of the exporter in the domestic market. however, the role of the agent is not limited to this only, the agent will help in enabling the business of the Exporter, some important points to be noted in a Commercial Agency Contract are:[7]
- To promote the sales of the exporter’s product.
- the agent may be allowed by the exporter to negotiate the product with potential buyers or the Exporter may provide a sales pitch to the Agent which is to be followed by the Agent while marketing the product of the Exporter.
- The Agent may facilitate the orders by intimating the exporter about the number of orders.
- The Parties may also agree to fix a certain minimum sale that is to be done by the Agent in the period of the Agreement.
- The payment to the Agent can be on a sales basis or any other equation which the parties deem fit.
- To protect the business of the agent, the Parties may agree to have an exclusivity clause which will state that the Exporter will not engage the services of any other agent or third party to promote its product at the agent’s territory.
- Logistics Service Agreement: This Agreement is related to the practical aspect of the business, exporting through seaways has been the most prevalent practice in international trading, and in order to ensure this a strong and readily available logistics handling is pivotal for unbridled and smooth transborder trading. Therefore, an Exporter is required to ensure entering into an agreement with a logistic service provider for transportation, distribution, or storage of the exporter`s product. Some important aspects of a logistics agreement are:[8]
- The terms of the services have to be explicitly defined especially with respect to timing because time is of the essence in logistics especially if the goods are of perishable type.
- If the product is of a kind which requires a certain special type of handling, the Exporter Firm/Company is required to explain the same in writing with details towards handling (such as Care Specifications, Special Specification or Maintenance Specifications) to the Logistics firm, only if a prior instruction were given to the logistics firm and it fails in adhering to such protocol, it can be held liable to compensate the Exporter Firm/Company in case of any loss or injury to the product. For example, if the product is fragile such as a glass product or delicate electronics then the logistic firm is required to follow the basic standard of care such as to ensure safety cushioning material around the product like bubble wrap or use double boxing technique and all such product must be labelled as fragile[9], similarly, perishable goods such as fruits, vegetables, seafood, meat, dairy products, etc. are generally transported via well-maintained refrigerated containers, whereas, products as medicines, chemicals, flowers, plants, cosmetics, furniture, etc are required to be transported through specialized non-toxic or non-allergic safe containers also the transporting containers are required to maintain the required temperature during the transit process.[10]
- Business Collaboration Agreement (BCA): It is also called as ‘Piggyback Agreement’, this type of agreement is also related to the execution of business activities, such agreement has an essence of an agency agreement as well as a logistics agreement. In BCA and Exporter Company/Firm enters into a collaboration agreement with a foreign firm to use its distribution channel for the supply of the Exporter`s Product in exchange of commission-based payment to the foreign firm towards the same, the primary purpose behind such agreement is to avoid establishing a presence in the market and developing distribution channel from the beginning as the same could be overwhelming for a new foreign entrant.
However, it shall be noted that a BCA may not just be limited to utilize distribution channels of the other party, the word Collaboration can be widely interpreted, and the parties may enter into different types of terms and conditions of Collaboration depending upon the subject matter of the business in hand. In fact, its wide implication distinguishes it from agency agreement because in this agreement the foreign company will be obligated to procure all the sanctions, approvals, permissions, licenses, and other requirements of the Government and of any statutory authorities required for giving effect to all the terms and conditions of this agreement, such arrangements make it a more comprehensive and much-preferred choice for the Exporters.[11]
For example, sectors where 100 percent FDI is not allowed in India, a joint venture is the best medium, offering a low risk option for companies wanting to enter into the vibrant Indian market. All companies registered in India, even those with up to 100 percent overseas equity, are considered the same as local companies. Corporate joint ventures are regulated by the Companies Act, 2013 and the Limited Liability Partnership Act, 2008. Earlier there were monetary caps on remittances (both lump sum fees and royalties) made for technology collaborations and license or use of trademark or brand name. Now, these restrictions and caps have been removed also India allows free of charge repatriation of profits once the entire domestic and federal (tax) liabilities are met.[12]
Advantages[13]
- As explained above it prevents the cost that will be incurred upon the Exporter in establishing a new distribution channel, simple collaborations seem to be much more feasible and pragmatic.
- The already existing channels of the foreign firm can utilize better and target the product more effectively to the prospective consumer base.
- A political advantage of such arrangement is to provide a familiar corporate image to the consumers, a foreign entity (Exporter) faces less hostility from the domestic market player of such countries and the consumer also feels a sense of purchasing their national companies products.
- If a Foreign Entrant (Exporter) collaborates with a domestic one, the compliance work drastically lessened for the Exporter Firm, moreover, depending upon such countries economic policies, it is quite possible that the Exporter Company may get certain concessions in tax because of the collaboration with the domestic entity.
Disadvantages
- The Exporter remains oblivious towards the know-how of doing business in such a country as it does not have its own image or personal presence in the exporting country.
- The Exporter firm gets too dependent upon the other party for their foreign operation, and the business of the Exporter can be seriously affected if there is a sudden collapse of the Agreement between the parties.
- The Exporter firm has to vet the domestic firm before entering into the business because they will be representing the image of the Exporter Company.
Conclusion
It is evident from the glimpse of international trading practices, that outsourcing to domestic players for expanding export business has proven to be a more viable option for the Exporters, it is pertinent to mention that a Dispute Resolution Clause through Arbitration is a must in each of the Agreement discussed above. An exporter firm that formulates coherent terms and conditions of the abovementioned agreements in accordance with their business helps the faster proliferation of their business.
[1] https://iccwbo.org/content/uploads/sites/3/2020/03/icc-forcemajeure-hardship-clauses-march2020.pdf [2] https://europepmc.org/article/PMC/PMC7798591#unaa027-FN31 [3] http://repository.essex.ac.uk/28030/1/016.pdf [4] mbaknol.com/international-finance/forward-exchange-contracts/
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