The Role of Contracts in Business Relations

???????????When we start an international sale and or purchase, we are entering into a complicated business relationship that encompasses four flows between the buyer and the seller. Goods, money, information, and shipment documents are the four items that are normally transferred between the parties in an international sales process. What is the priority for transferring the four elements? Or in which sequence should these four items be transferred? There is no single correct answer, and it depends on many factors such as payment conditions, Incoterms rule, transport mode, level of trust between the parties, norms of the industry, countries of the parties, and the nature of the product.?For example, if you are using payment in advance, you may have the below process:

Figure 1: International purchasing model (Payment in advance)

???????????Based on different assumptions and agreements between the parties of an international transaction, there might be hundreds of the above models. For example, in case the delivery is based on FOB, the process will not be the same as when it is based on CFR, Or the above procedure will dramatically change if the payment conditions are on the basis of the open account or documentary credit. All the above details and the sequence of the activities should be defined in the sales contract.

Negotiation requires real-time analysis and continually changes the sequence of obligations and duties based on the conditions that the parties agree on.

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What Is the Role of a Contract?

???????????Why do we need contracts? A contract or an agreement contains the regulations that govern the future relationship of the parties. We write contracts to execute them. When we enter a relationship, it is crucial to define its norms and rules. What are the rights, duties, obligations, and responsibilities of each party? What happens if a party does not fulfill its obligations, or the parties encounter a dispute? How should they resolve disputes? The parties are expected to define all these issues and other aspects of the relationship in the contract to avoid future misunderstandings and conflicts. A comprehensive written agreement not only facilitates dispute settlement but also helps the parties to avoid disputes. Business relations have four aspects, including technical, financial, legal, and commercial. All these aspects must be clarified in the contract, and each one needs its particular clauses. See the below model, which shows four transfers in business relations, plus four aspects, and the related articles in the contract for each aspect.

Figure 2: International sales contract framework

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We usually read the contracts two times. The first time is when we sign it, and the second time is when we encounter a conflict. When everything is going well, and the parties have no controversial issues, they do not need the contract. Therefore, the contracts' weaknesses and strengths will be proved at the time of conflicts. Needless to mention that the contract is written to work precisely at this time, so it should cover all aspects of the business relationship and probable issues. The contracts should also determine solutions for and consequences of a breach, delay, non-performance, and nonconformity.

Rahim Mohtaram, CITP is the supply chain management program coordinator at triOS College. He is a seasoned global business expert with over 15 years of experience in international trade compliance and supply chain. He is passionate about the export and import process, including negotiation, logistics, finance, customs clearance, and Incoterms 2020.