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 becomes essential for both parties to fully understand and strategically utilize these clauses in order to minimize potential risks. Being cautious and thoughtful is key when drafting such contracts.
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 Blue Sky. During the negotiation phase, the chemical plant coordinated the funding for supporting equipment and construction. The shipment terms were set based on the seller's notice to the buyer prior to delivery and the buyer’s approval. The seller had no objections and signed the contract accordingly. Afterward, the seller began production as scheduled. In the first batch, 30% of the goods were purchased, while 70% were self-produced. Once the stock was ready, Strength issued a shipping notice to Blue Sky. However, the chemical plant refused to accept the goods because the matching funds were not yet in place and the ancillary facilities could not be started.
After several rounds of negotiations, the chemical plant agreed to accept the first batch, provided that Strength paid an annual storage fee of $20,000. Given the unfavorable local market conditions at the time, the plant decided not to accept the remaining batches. Eventually, the factory found new buyers and renegotiated the contract.
Case 2:
In 1990, an import and 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 allowed. 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 submitted a local inspection certificate claiming that the quality of the goods was below the agreed standards, with aflatoxin levels exceeding limits, and thus refused to accept the goods. Upon investigation, it was found that the quality of the goods was still acceptable for sale, and the refusal was mainly due to a drop in market prices. After lengthy discussions, the contract 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, despite being aware of the clauses, underestimate the risks and end up falling into traps set by the other party. Therefore, understanding and mastering risk clauses is crucial in gaining a competitive edge in international trade.
In Case 1, the clause stating "subject to the seller’s notice and the buyer’s consent" served as a risk clause. As a buyer, the initial decision was made due to objective reasons—coordinating funds and project progress. The seller agreed, and over time, the clause allowed the buyer to negotiate a storage fee, delay the contract execution, and eventually resell the goods to new customers, thereby mitigating the risk and achieving unexpected benefits. This shows that using risk clauses intelligently can be both practical and effective. However, the case also revealed some shortcomings: the buyer failed to conduct sufficient preliminary research and market forecasting, which led to the failure of the loan agreement. Additionally, this situation damaged the buyer’s credibility and had negative consequences for future trade. On the other hand, the seller did not fully consider the implications of the clause and treated it as a routine shipping notice. They proceeded with the shipment without the buyer’s prior approval, leading to rejection and subsequent financial losses.
In Case 2, the payment method and quality clause were particularly risky for the exporter. Although the quality was defined as "marketable quality," there were no specific clauses addressing what to do if the quality varied. Corn, being prone to aflatoxin growth during long transport, was not properly accounted for in the contract, giving the buyer an opportunity to reject the goods. Additionally, the use of forward bills of exchange, although common in South American trade, was too favorable to the buyer and left the exporter vulnerable to misuse. When market conditions turned against them, the buyer used the risk clauses to either refuse the goods or demand a steep price reduction. This case is a clear example of how risk clauses can be maliciously exploited.
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