Avoiding risks and using risk clauses in foreign trade contracts

In the process of concluding a foreign trade contract, both buyers and sellers often include or imply various "risk clauses" that can significantly impact the transaction. Therefore, it is essential for both parties to fully understand and strategically utilize these clauses in order to minimize potential risks. Being cautious and attentive during the drafting phase is crucial to ensuring long-term business success. Case 1: In 1994, a chemical plant in a province used a Canadian government loan to import $2.8 million worth of chemical equipment from a company called Strength through a firm named Blue Sky. During contract negotiations, the chemical plant coordinated with the seller regarding the availability of supporting funds and construction progress. The shipment terms were based on the seller’s notice to the buyer before delivery and the buyer's approval. The seller agreed to this arrangement and signed the contract as planned. Subsequently, the seller began production, with 30% of the first batch being purchased and 70% self-produced. After completing the stock, Strength issued a shipping notice to Blue Sky. However, the chemical plant refused the delivery because the matching funds had not been secured and the auxiliary facilities were not yet operational. After several rounds of negotiation, the chemical plant agreed to accept the first batch, provided that Strength would pay an annual storage fee of $20,000. Considering the declining local chemical market at the time, the plant decided not to accept the remaining batches. Eventually, the factory sought new buyers to finalize the contract. Case 2: In 1990, an import-export company exported a batch of non-edible corn to Brazil. The contract specified the quality as "marketable quality," with 98% purity as the standard, and less than 2% impurities. The transportation method was by sea, and the payment was made via a forward bill of exchange. Two months after the contract was signed, the buyer presented a local inspection certificate stating that the goods did not meet the required standards due to excessive aflatoxin levels and refused to accept the shipment. Upon investigation, it was found that the goods were still saleable, and the buyer's refusal was mainly due to a drop in market prices. After lengthy discussions, the deal was finalized with a 30% price reduction. From these two cases, we can see how some parties skillfully use "risk clauses" to protect their interests, while others fail to properly assess the risks, leading to losses. It is clear that understanding and leveraging risk clauses can be a powerful tool in international trade. In Case 1, the clause stating “subject to the seller’s notice and the buyer’s consent” acted as a risk clause. Initially, the buyer faced objective challenges in coordinating funds and project construction, which led to the seller’s acceptance. Over time, when market conditions turned unfavorable, this clause allowed the buyer to negotiate a storage fee, delay the contract execution, and resell the goods to other customers, effectively mitigating the risk. This shows that using risk clauses wisely can be both practical and beneficial. However, the case also highlights some shortcomings: the buyer failed to conduct thorough market research, leading to difficulties in securing the loan. Additionally, the buyer’s actions affected its credibility, creating negative consequences for future trade. On the other hand, the seller underestimated the risks associated with the clause and treated it as a routine shipping notice, leading to the buyer’s rejection of the goods. As a result, the seller had to bear the storage costs and face financial strain. In Case 2, the payment method and quality clause posed significant risks for the exporter. Although the quality was described as "marketable quality," there was no specific clause outlining how to handle quality discrepancies. Corn, being prone to aflatoxin growth during long-distance transport, lacked any mention of this risk in the contract, giving the buyer an opportunity to refuse the goods. Additionally, the use of a forward bill of exchange, while common in South American trade, proved risky as it allowed the buyer to exploit the situation and demand a major price reduction. This case illustrates how risk clauses can be maliciously used when not carefully drafted. In conclusion, mastering risk clauses is essential for navigating the complexities of international trade. A well-structured contract, combined with careful planning and awareness of potential pitfalls, can help businesses avoid unnecessary losses and seize opportunities in the global market.

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