Avoid Contract Headaches

Follow these five tips for a well-sealed business deal.

For a small business selling to a local firm, a purchase order and invoice may be all the paperwork you need. When selling abroad you’ll often want more substance than that – namely, a contract. In the competitive global marketplace, this commercial contract should clearly reflect a number of typical obligations that both parties have negotiated and agreed on – the scope depending on the size and complexity of the deal.

The opposite, a poorly-drafted contract increases the risk of misunderstandings and disputes which may lead to a refusal to pay or a call on letters of credit or bonds. For small transactions, even if you don’t draft a full contract, it’s a good idea to set out predefined terms in your quote for the business. Then you’ll still have some basis for action if there are complications after your customer has accepted your quotation.

To avoid headaches, make sure you’re covered – for starters — these five typical clauses:

Parties and purpose: Identify the full legal names (i.e. not trade names) of all the parties involved, both on the signature line and elsewhere in the contract. It should also have a clear statement of obligation for the buyer to pay for and exporter (seller) to deliver specific goods and/or services, including a detailed description of their type and scope – such as design, quantity, installation and warranty.

Price: State the total payment price and related details negotiated between buyer and exporter. For example, specify if there a price breakdown related to various components, such as design, goods, training; or if one or more currencies are being used.

Payment terms: State how and when payment(s) will be made. For example: What is the credit period – within 30 days of receipt of documentation or immediately? Are partial payments due on milestones, e.g. final design, partial delivery, installation, and final acceptance? Will you be using payment mechanisms, such as Irrevocable Letter of Credit (ILC), open account, outside financing (EDC or alternative sources of financing)?

Purchase delivery: Clarify the delivery schedule and terms, particularly who will pay for the costs of transportation, loading, transfer of title, customs and other logistics, and loss/damage insurance. Most of the usual terms are predefined in the International Chamber of Commerce’s Incoterms.

Penalties and liquidated damages: Unexpected things happen. This clause identifies financial compensation, usually offered by the seller, if there is an unintended breach in the contract, such as a late delivery. Make sure the penalty is reasonable against the overall value of the goods and the damages the buyer might incur. For example, the penalty is normally calculated as a percentage of the contracted value of the goods/services for a specific period.

This is by no means an exhaustive or legally-binding list of contract terms. Depending on the value and complexity of the contract, you may want to add clauses that cover justified delays, dispute resolution, governing laws and language, etc. For more details, visit: Commercial Contract Terms guide

Visit www.edc.ca for more small business solutions.

EDC is Canada’s export credit agency, offering innovative commercial solutions to help Canadian exporters and investors expand their international business. EDC’s knowledge and partnerships are used by more than 7,400 Canadian companies and their global customers in up to 200 markets worldwide each year. EDC is financially self-sustaining and a recognized leader in financial reporting and economic analysis.

Categories Small Business Insights

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