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.pdf•A sight bill is a bill which is payable on presentation (at sight) or on acceptance. Such a bill includes the words “Pay at sight”. The drawees have to pay as soon as they see the draft.
•Time bills are payable at a fixed or determinable future time. There are two types of time bills:
a)a term bill is payable a certain number of days after it is presented to the drawees, e.g. “Pay at 90 days after sight”; b) a date bill is payable a certain number of days after it was drawn, e.g. “Pay at 60 days”.
Time drafts may pass through several hands before maturity and require endorsement by the seller. Endorsement is a signature on the back of a B/E or cheque by the payee (beneficiary), making it payable to another person. There are different types of endorsements used in business transactions.
•Accommodation endorsement: the name and signature are written on the back of an accepted B/E as a guarantee that the payment will be made on the date given.
•Blank endorsement: a signature on a B/E by the payee, making it payable to any other person, i.e. to a bearer (an endorsement on a bill of exchange, cheque, etc., naming no payee and thus making the endorsed sum payable to the bearer).
•Restrictive endorsement: a signature on a B/E by the payee, making it payable only to a named person or account.
•Special (full) endorsement: a signature on a B/E by the payee, making it payable to another person, i.e. to order.
Bills of exchange may also fall under other categories.
•Accommodation B/E is a bill that is signed by someone who promises to pay it to help another person to raise money. A person signing the accommodation B/E is called the accommodation party (i.e. a person with a good financial reputation who signs a bill to make it easier to exchange). Sometimes accommodation bills are called ‘kites’, ‘wind bills’ or ‘windmills’.
•Discounted B/E is a bill bought at a reduced price before it is due for payment.
•Documentary B/E is a bill attached to shipping documents such as Bill of Lading, Invoices, etc.
•Documents against acceptance B/E (D/A Bill) is a bill sent by the exporters with other shipping documents to an agent who will not release the documents until the B/E has been signed (accepted) by the person receiving the goods. This is used when the B/E is a period bill and must be paid by a specific date.
•Documents against payment B/E (cash against documents) is a bill sent by the exporters with other shipping documents to an agent who will not release the documents until the bill has been signed (accepted) by the person receiving the goods. This is used when the B/E is a sight bill and must be paid immediately.
•Endorsed B/E is a bill signed on the back that makes it payable to someone else.
•Foreign B/E is a bill that is drawn or payable in another country.
•Inland B/E is a bill that is payable in the country in which it is drawn up.
•Period B/E is a bill that must be paid on a specific date.
•Short B/E is a bill that must be paid as soon as it is presented for payment or within ten days.
•Trade B/E is a bill that is used to pay for goods.
There are different conditions on which bills of exchange can be drawn up:
1)on demand: a bill of exchange must be paid immediately as it is presented for payment;
2)at sight: an inscription is made by a drawer on a B/E to show that it must be paid as soon as it is presented for payment;
3)after sight: an inscription is made by a drawer on a B/F to show that the bill will be paid within the specified time after the payer (the drawee) is presented with it;
4)after date: an inscription is made by a drawer on a B/E to show that payment will be made at the specified time after the date given on the bill. Such bills are called after-date bills.
Text 7.5. Read the text and discuss pros and cons of different types of letters of credit.
Letter of Credit
A letter of credit is a promise made by the buyers’ bank (the opening or issuing bank) to send a certain sum of money to the sellers’ bank (the advising bank), to be credited to the sellers, known as the beneficiary, provided they fulfil their part of the sales contract. It is also known as a documentary credit.
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The main types of letters of credit are the following.
1)A revocable letter of credit can be cancelled or changed without the sellers’ agreement. As this doesn't offer the seller much control over payment, this type of letter of credit is rarely used.
2)An irrevocable letter of credit can be cancelled or changed, but only with the agreement of all parties. All letters of credit are irrevocable unless expressly stated otherwise.
3)A confirmed letter of credit is always irrevocable. If the sellers feel that the risk of not receiving payment is still too high, for example, because the economy in the buyers’ country is unstable, they can arrange for a bank in their own country to confirm the letter of credit (this bank is then known as the confirming bank; it can be the same bank as the advising bank). This means that the sellers will receive their money from the confirming bank, regardless of whether or not their invoice is paid in the buyers’ country.
From the point of view of exporters a confirmed irrevocable credit is the safest form of credit to
have.
Payment by letter of credit is effected as follows.
1)Buyers and sellers agree on all terms and conditions of the sales contract.
2)The buyers fill out an application form to open/issue a letter of credit at their bank.
3)The opening/issuing (buyers’) bank opens the letter of credit and sends it to the advising/correspondent (sellers’) bank. If appropriate, the opening bank also asks the confirming bank to confirm the L/C. In this case the confirming bank sends the exporters a notification of credit.
4)The advising bank tells (advises) the sellers that the letter of credit has been opened. This is called an advice of credit.
5)The sellers check that all the terms and conditions are correctly listed in the L/C.
6)The sellers collect all the necessary transport documents.
7)The sellers give the transport documents and a sight or time draft to their bank. They can get their money now if the L/C is confirmed.
8)The advising bank checks that all the documents are correct and sends them to the opening
bank.
9)The opening bank checks the documents again and sends the payment to the advising bank.
10)The buyers pay (sight draft) or accept the draft (time draft) and get the shipping documents in return. With these, they can collect the goods from the carrier in their country.
There are three kinds of credit payment.
1)A credit for payments of drafts is when D/P terms have been agreed and an advising bank pays drafts drawn by the exporters, or their bank, on itself, at sight.
2)An acceptance credit is when D/A terms have been agreed and the advising bank or another bank accepts drafts for payment after a period of time, e.g. 120 days after sight.
3)A credit with authorities to negotiate is when the confirming or issuing bank may make a bargain with the exporters for acceptance of a draft drawn in another currency.
Whichever form of credit is used, however, the bank where the credit is available will only pay the exporters when all the shipping documents are correct according to the terms of the contract.
R e m e m b e r !
All terms of payment are divided into currency and financial. In international trade transactions, the most wide-spread form of payment is a Letter of Credit, and the most frequently used means of payment is a Bill of Exchange. Apart from these, for the deal to run smoothly, it is necessary to agree on one of the two methods of payment: either D/A or D/P.
Concept check
1.Explain the difference between ways, forms, means and methods of payment to a non-expert in international payment procedures.
2.Describe the situations in which the partners can afford cash, credit or advance payment.
3.Complete the table with pluses and minuses of different forms of payment for exporters and importers.
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Forms of Payment
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Bank transfer |
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Open account |
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Collection |
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Letter of credit |
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Exp. |
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Imp. |
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Exp. |
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Imp. |
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Exp. |
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Imp. |
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… |
… |
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… |
4.Why is payment by cheque very infrequent in foreign trade?
5.Using your own words, describe the process of paying by an L/C.
6.Complete the table with pros and cons of D/P and D/A transactions for exporters and importers.
Methods of Payment
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Documents against payment |
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Documents against acceptance |
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For exporters |
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For importers |
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For exporters |
For importers |
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7.Report on the stages of D/P and D/A transactions.
8.Explain the correlation between a draft and a bill of exchange.
9.Spell out the following concepts: a) dishonouring a B/E and b) protesting a B/E.
10.Study the various forms of bills of exchange. Which of them are used in D/P and D/A transactions?
11.Explain the notion of discounting bills of exchange.
12.Study the numerical example in Text 7.4 carefully. What does it illustrate?
13.Why are bills of exchange considered to be secondary securities?
14.Text 7.4 enumerates various types of bill of exchange. Do you know any other? If no, find more information about them in dictionaries and reference books and share this information.
15. What makes a bill of exchange a practicable means of payment?
16.Do you agree with these statements? Give your reasons.
1)Payment in cash can be made before exporters’ notification about the readiness of the goods for dispatch.
2)Payment on credit may raise the price for the goods to be delivered.
3)Advance payment equals crediting importers by exporters.
4)International electronic systems simplify bank transfers.
5)Payment for collection is beneficial to exporters.
6)A letter of credit is favourable for both parties.
7)Cheques can be widely used for payment in foreign trade.
8)An L/C is issued by exporters.
9)D/P transactions are riskier for buyers than for sellers.
10)Bills of exchange mean crediting importers by exporters.
11)As a rule, importers accept the draft themselves.
12)The central bank always rediscounts bills of exchange.
13)A D/P transaction implies the usage of a sight draft.
14)A D/A transaction implies the usage of a sight draft.
17.Complete the sentences.
1)Payment in cash is only admissible when …
2)Payment on credit is possible when …
3)A bank transfer may be described as …
4)The open account agreement is usually given by the sellers to …
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5)The safest letter of credit is …
6)The D/P method of payment suggests that …
7)The D/A method of payment suggests that …
8)The parties to a bill of exchange are …
9)If the drawees don’t pay the B/E when it is presented to them at maturity, …
10)Endorsement is …
11)To protest a draft is …
12)The bill is called a sight draft if it is payable …
13)The bill is called a term draft if it is payable …
LANGUAGE STUDY
1. Match the technical terms on the left with their Russian equivalents.
1) payment for collection |
a) банк-инкассатор |
2) document of title |
b) оплата путём инкассо |
3) documents against payment |
c) банк, переводящий средства |
4) documents against acceptance |
d) банк-эмитент |
5) in due time |
e) товарораспорядительный документ |
6) remitting bank |
f) документы против акцепта; документы по |
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принятию, передача права собственности после |
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получения чека к оплате |
7) collecting bank |
g) документы против платежа, документы за |
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наличный расчет |
8) issuing bank |
h) в своё время, своевременно |
9) advising bank |
i) тратта |
10) advice |
j) индоссировать, делать передаточную надпись |
11) time bill |
k) переводной вексель |
12) sight bill |
l) переводный вексель со сроком платежа через |
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определённый промежуток времени |
13) endorse |
m) переуступка прав |
14) hypothecation |
n) банк, извещающий бенефициара об открытии ак- |
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кредитива; банк, производящий выплату по аккре- |
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дитиву |
15) promissory note |
o) вексель до востребования |
16) bill of exchange |
p) простой вексель |
17) draft |
q) авизо, извещение, уведомление |
2. Match the words on the left with their definitions on the right.
1) issue |
a) a bill of exchange drawn on a bank by the holder of a current account; |
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payable into a bank account, if crossed, or on demand, if uncrossed |
2) cheque |
b) bill guarantee |
3) aval |
c) come forth or emerge or cause to come forth or emerge |
4) acceptance |
d) liable to rot or wither |
5) perishable |
e) a formal agreement by a debtor to pay a draft, bill, etc.); the document |
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so accepted; a bill of exchange or draft drawn on and endorsed by a |
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bank |
6) protest |
f) a document issued by a seller to a buyer listing the goods or services |
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supplied and stating the sum of money due |
7) draw |
g) one of the portions, usually equal, into which a debt is divided for |
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payment at specified intervals over a fixed period |
8) negotiable |
h) declare formally that (a bill of exchange or promissory note) has been |
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dishonoured |
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9) confirm |
i) (of a bill of exchange, promissory note, etc.) legally transferable in |
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title from one party to another |
10) invoice |
j) a public official, usually a solicitor, who is legally authorised to |
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administer oaths, attest and certify certain documents, etc. |
11) security |
k) write out (a bill of exchange or promissory note) |
12) instalment |
l) the specific asset that a creditor can claim title to in the event of |
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default on an obligation |
13) notary public |
m) prove to be true or valid; verify; to make valid by a formal act or |
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agreement; ratify |
3. Match the words on the left with their synonyms on the right.
1) adjust |
a) fail or refuse to pay |
2) comprise |
b) reconcile, adapt |
3) hand over |
c) the legal right to possession of property |
4) title |
d) include |
5) dishonour |
e) not total or whole |
6) mode |
f) transfer |
7) partial |
g) method |
8) backlog |
h) evidence |
9) acknowledge |
i) unchangeable |
10) expressly |
j) indebtedness |
11) otherwise |
k) notice |
12) record |
l) appeal |
13) notification |
m) admit |
14) irrevocable |
n) differently, in another manner or way |
15) application |
o) clearly |
4.Replace the italicised phrases with the correct form of the words in 1, 2 and 3.
1)The exporters received a letter telling them about the credit from the importers’ bank.
2)The confirming bank sent the exporters a letter telling them about the credit.
3)The importers were willing to arrange a guaranteed credit in favour of the exporters.
4)The importers sent a request to open a credit to their bank.
5)The bank wrote to another bank they usually work with in the exporters’ country.
6)The importers’ bank has just put out the credit.
7)For the bill of exchange to become transferable the sellers’ bank signs the back of this document.
8)Our partners definitely recognized the total of their debts.
9)The lawyer’s signature is a proof that the drawees have rejected to pay the bill.
10)The information about opening an L/C is to be sent timely.
11)Easily deteriorating goods should be sold instantly.
5.Fill in the gaps in the following sentences with the terms given above in 1–4.
1)It is up to a/an … … to inform the sellers that an L/C has been established.
2)Buyers apply to the … … to open an L/C.
3)A sight draft is used in the transaction if the contract stipulates … … … method.
4)… … … does not guarantee that sellers will receive payment in proper time or at all.
5)While discounting the bill of exchange, exporters have to submit a letter of … which grants the bank the right to demand the goods if necessary.
6)A … … is payable at a fixed or stated time.
7)A … … is paid on presentation to the debtor, regardless of the date on which it was drawn.
8)A … … to the goods gives its holder the right to dispose of the goods stated in it.
9)A bill of exchange before acceptance is a … .
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CONTRACTING
Read the Payment Clause from the Contract of Sale and do the comprehension task below.
Terms of Payment
Payment for the goods to be delivered under the present Contract is to be effected in ________
(currency) in accordance with the Trade Agreement between _______ and _______ dated _______ by an irrevocable confirmed Letter of Credit to be opened by the Buyer with the Bank for Foreign Trade of Russia, Moscow, in favour of the Seller within 10 days of receipt of the Seller's notification of the readiness of the goods for shipment. The Letter of Credit is to be valid _______ days.
The payment of the credit is to be made against the following documents:
•Invoice;
•Full set of clean-on board Bills of Lading issued in the name of the Buyer, with destination being the port in Russia indicated by the Buyer, or railway bill;
•Certificate of Quality of the manufacturing works or the Seller’s Letter of Guarantee;
•Case per case specification or Packing List.
All expenses connected with the opening and possible prolongation of the Letter of Credit if such prolongation arises from the Buyer’s actions and also all bank fees connected with the establishment and payment out of the Letter of Credit shall be borne by the Buyer.
If the opening of the Letter of Credit is delayed more than ____ days, the Seller will be entitled to break the Contract and the losses connected with the non-performance of the present Contract are to be borne by the Buyer.
Comprehension
1.Which documents should be presented by the Seller if payment is effected out of the Letter of
Credit?
2.Who pays bank charges connected with the collection of documents?
3.When is the Seller entitled to break the Contract?
4.When should the Buyer establish a Letter of Credit?
5.Explain the essence of the Payment Clause in your own words to a non-expert.
RENDERING
Render the extracts about terms of payment and letters of credit in English.
1. Условия платежа
Центробанк России рекомендует предусматривать аккредитивную форму платежа или другую форму, гарантирующую безусловное поступление валютной выручки при экспорте товаров, а также предоставлении гарантий на возврат платежа, ранее переведенного в оплату импортируемых товаров, в случае их непоступления. Тщательная проработка данного раздела особенно важна в условиях расширения и углубления таможенно-банковского контроля за исполнением экспортных, импортных и бартерных операций.
Раздел должен включать:
•наименование и код валюты платежа;
•сроки платежа и условия рассрочки (если она применяется);
•способ и порядок расчета за поставленные товары;
•обязательный перечень документов, представляемых к оплате;
•защитные меры против необоснованной задержки платежа либо других нарушений платежных условий контракта;
•полные наименования и почтовые адреса банков (филиалов) сторон, номера счетов, платежные реквизиты на русском и английском (либо национальном зарубежном) языках.
2. Определение аккредитива
В практике международных расчетов применяется оплата поставок аккредитивом. Основные правила систематизированы в документе МТП «Унифицированные правила и обычаи для документарных аккредитивов», которые получили распространение и применяются
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повсеместно. Тем не менее, эти правила не имеют силу правовой нормы или торгового обычая, а только рекомендации, и применяются, если включены в контракт. Аккредитивная форма расчетов — форма безналичных международных расчетов за товары и услуги посредством аккредитивов, при которой оплата расчетных документов поставщика производится в обслуживающем его банке за счет средств, специально депонированных для этой цели в банке покупателя.
Аккредитив представляет собой условное денежное обязательство банка, выдаваемое им по поручению клиента в пользу его контрагента по контракту, по которому банк, открывший аккредитив (банк-эмитент), может произвести поставщику платеж или предоставить полномочия другому банку производить такие платежи при условии представления им документов, предусмотренных в аккредитиве (документарный аккредитив), и/или при выполнении других условий аккредитива: к таковым относятся, например, срок действия в банке, обслуживающем поставщика, наименование поставщика, общее наименование товаров или услуг, за которые производятся расчеты, сумма аккредитива и порядок оплаты счетов поставщика (оплата с акцептом, без акцепта, по предъявлении товарных документов и т.п.).
3. Открытие аккредитива
В общем случае аккредитивы открываются плательщиком на срок от 30 до 150 дней заблаговременно перед отгрузкой товара, спустя несколько дней после подписания контракта и в сроки, указанные в условиях взаиморасчетов, но чаще всего в течение нескольких дней после оперативного сообщения поставщика о готовности товара к отгрузке. О выставлении покупателем аккредитива банк извещает телетрансмиссионным сообщением (телеграммой или электронной почтой) банк поставщика и самого поставщика, который после этого отгружает товары или оказывает услуги в соответствии с условиями аккредитива, выписывает счета на покупателя и предъявляет их банку. Банк поставщика, проверив счета, наличие товаротранспортных документов, свидетельствующих об отправке товара покупателю, и их соответствие условиям аккредитива, производит оплату, зачисляя на счет поставщика причитающиеся ему средства.
Подобный вид оплаты широко практикуется в тех случаях, когда продавец не желает нести финансовый риск. При оформлении контракта продавец чаще всего оговаривает форму аккредитива и ряд специальных условий (оговорок) о точном перечне документов, против которых выставляется аккредитив, о порядке пользования перечисленными средствами и т.д.
4. Финансовые операции по аккредитиву
По своей юридической природе аккредитив представляет собой гражданско-правовую сделку поручения, обособленную от контракта купли-продажи или контракта иного вида, на котором он основывается. Этот важный принцип – суть автономии аккредитива. Банки, осуществляющие аккредитивные формы расчетов, не занимаются ведением или контролем таких контрактов, даже если в аккредитиве есть какая-либо ссылка на контракт. По операциям с аккредитивами все участвующие стороны имеют дело только с документами, а не с товарами, услугами и/или другими видами исполнения обязательств. На бенефициара не распространяются контрактные отношения, существующие между банками или между производителем аккредитива и банком-эмитентом.
Таким образом, аккредитив представляет собой поручение, в силу которого банкэмитент, действуя по поручению своего клиента (приказодателя аккредитива) и на основании его инструкций, должен произвести определенные финансовые операции, а именно:
•платеж третьему лицу или бенефициару;
•оплату или акцепт переводного векселя (тратты), выставленного бенефициаром (бенефициар, бенефициарий – выгодоприобретатель; лицо, получающее доходы с доверительной собственности, или в пользу которого эта собственность учреждена);
•лицо, в пользу которого совершается сделка, выплата, завещание, страховой контракт, открыт аккредитив и др. – передачу полномочий другому банку произвести такой платеж;
•оплату, акцепт или негоциацию переводного векселя (тратты) против предусмотренных документов, если соблюдены все условия аккредитива.
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Unit 8
FORCE MAJEURE AND INSURANCE
DISCUSSION
How much do you know about the ways of making your business less risky and reducing possible losses? Discuss the following questions with your partner.
•What different forces and events can prevent the counterparties from fulfiling their obligations under the contract of sale?
•What does the Force Majeure Clause in the Sales Contract imply?
•What can the parties to the contract insure against?
READING
FORCE MAJEURE CIRCUMSTANCES
Key concepts and terms
Match up the words on the left with the definition on the right.
1) force majeure |
a) a possible but not very likely future event or condition |
2) liable |
b) guarantee or protect from risks or losses |
3) contingency |
c) legally obliged or responsible; answerable |
4) insure |
d) a person, company, etc., that enters into a subcontract, esp. a firm |
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that undertakes to complete part of another’s contract |
5) act of God |
e) an irresistible force, compulsion or coercion against which you |
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cannot act or fight and which excuses a party from performing their |
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part of a contract |
6) subcontractor |
f) a sudden and inevitable occurrence caused by natural forces and not |
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by agency of man, such as a flood, earthquake or a similar catastrophe |
7) vis major |
g) a superior force which under certain circumstances is held to exempt |
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from contract obligations; inevitable accident; a civil-law term used as |
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nearly equivalent to, but broader than, the common-law term act of |
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God |
Text 8.1. Read the text and explain what force majeure is.
Force Majeure Circumstances
What is Force Majeure
Export trade is subject to many risks. Consequently, it has become common practice to insure goods for the full value against losses that may be the result of various detrimental events, including force majeure circumstances. Force majeure (French for ‘greater force’) is a force against which you cannot act or fight. The phrase is used in commercial contracts to describe events possibly affecting the contract and that are completely beyond the parties’ control.
Every contract has a force majeure clause. It is a common article which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties prevents one or both parties from fulfilling their obligations under the contract. It usually includes acts of God – events due to natural causes which are so exceptionally severe that no-one could reasonably be expected to anticipate or guard against them, such as earthquakes, floods, volcano eruptions, hurricanes, fires, etc. The clause can also list such contingencies as acts of foreign enemies, hostilities (whether war is declared or not), invasions and wars (including civil wars), riots, insurrections and other civil unrests, terrorist activities and crimes, embargo, military or usurped power or confiscation, nationalisation, government sanctions or blockade. It may happen that a general strike in the country or in an industry like a strike of coal-miners, transport workers and other labour disputes interfere with the supplier’s performance of an agreement. Along with this, there are some other circumstances beyond the sellers’ control. The sellers may find themselves in a situation when they cannot fulfil their obligations under the contract because of failure of subcontractors to supply
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goods or spare parts under the agreement. Production may be suspended if there is a lockout or shortage of the energy supply, or interruption or failure of a telephone service. Thus, a force majeure is the overpowering force itself, which prevents the fulfilment of a contract. In that instance, there is actually the impossibility of defence.
However, force majeure is not intended to excuse negligence or other malfeasance of a party, as where non-performance is caused by the usual and natural consequences of external forces (e.g., predicted rain stops an outdoor event), or where the intervening circumstances are specifically contemplated. Any party asserting a force majeure as an excuse shall have the burden of proving that reasonable steps were taken (under the circumstances) to minimise delay or damages caused by forseeable events, that all non-excused obligations were substantially fulfiled, and that the other party was timely notified of the likelihood or actual occurrence which would justify such an assertion, so that other prudent precautions could be contemplated.
Time-critical and other sensitive contracts may be drafted to limit the shield of this clause where a party does not take reasonable steps or precautions to prevent or limit the effects of the outside interference, either when they become likely or when they actually occur. For example, a strike might prevent timely delivery of goods, but not timely payment for the portion delivered. Similarly, a widespread power outage would not be a force majeure excuse if the contract requires the provision of backup power or other contingency plans for continuity.
What Is to Be Included in a Force Majeure Clause
When negotiating a contract, a list of contingencies must be normally agreed upon, listed in full and put in the contract to ensure their enforceability. The clause in the sales contract to this effect may run: “Should the Sellers fail to notify the Buyers of a contingency, the Sellers are denied the right to refer to these circumstances”. The importance of the force majeure clause in a contract, particularly one of any length in time, cannot be overstated as it relieves a party from an obligation under the contract (or suspends that obligation). A force majeure clause would normally excuse both delay and a total failure to perform the agreement, all or part of the obligations of one or both parties. What is permitted to be a force majeure event or circumstance can be the source of much controversy in the negotiation of a contract and a party should generally resist any attempt by the other party to include something that should, fundamentally, be at the risk of that other party. For example, in a coal-supply agreement, the mining company may seek to have ‘geological risk’ included as a force majeure event; however, the mining company should be doing extensive exploration and analysis of its geological reserves and should not even be negotiating a coal-supply agreement if it cannot take the risk that there may be a geological limit to its coal supply from time to time. The outcome of that negotiation, of course, depends on the relative bargaining power of the parties and there will be cases where force majeure clauses can be used by a party effectively to escape liability for bad performance.
Some scholars and practitioners say that the expression ‘force majeure’ means some physical or material restraint and does not include a reasonable fear or apprehension of such a restraint. The expression bears more extensive meaning than ‘act of God’ or vis major. As to delay due to breakdown of machinery, it comes within the words ‘force majeure’, which certainly cover accidents to machinery. The expression is undoubtedly a term of wider import than vis major. Judges have agreed that strikes, breakdown of machinery, which though normally not included in vis major, are included in force majeure.
An analysis of ruling on the subject shows that reference to the expression is made where the intention is to save the defaulting party from the consequences of anything over which this party has no control. Under international law, it refers to an irresistible force or unforeseen event beyond the control of a state making it materially impossible to fulfil an international obligation. Force majeure precludes an international act from being wrongful where it otherwise would have been. Force majeure is a cause of irresponsibility that is applicable throughout international law. For a defendant to invoke force majeure in international law, the event proposed as force majeure must pass three tests:
• Externality
The defendant must have nothing to do with the event’s happening.
• Unpredictability
If the event could be foreseen, the defendant is obligated to have prepared for it. Being unprepared for a foreseeable event leaves the defendant culpable. This standard is very strictly applied.
• Irresistibility
The consequences of the event must have been unpreventable.
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Some Procedure Points
In the case of a contingency, the seller must notify the buyer of a force majeure immediately. If it is done in due time, the buyers may take immediate action to protect their interests. They may sign a contract with another supplier on similar terms or, if it is impossible, they will secure the best possible terms they can have at the moment. If prices are rising, they will be quick to act and will do everything possible to negotiate the best price obtainable at the moment.
A force majeure must be a proven fact. The seller is to submit to the buyer a written confirmation issued by the Chamber of Commerce to this effect. The certificate testifies that a contingency really took place. It describes its nature and confirms its duration.
In a dispute between the buyer and the seller, not only the fact of a contingency is to be ascertained. The seller must have evidence that non-execution of the contract or its partial fulfilment is a direct result of this contingency. If it is proved, the seller is not liable and the execution of the contract is postponed until all after-effects causing damage are eliminated. A natural disaster may last only a few minutes but it will take a lot of time to recover the loss.
The duration of a force majeure is as a rule four or six months. After that the buyers have the right to cancel the contract. The sellers in this case have no right to claim any compensation for their losses.
Concept Check
1.Choose the correct definition of a force majeure circumstance:
1)an irresistible event due to natural causes;
2)an exceptionally severe force which is possible to be anticipated and guarded;
3)a superior force or coercion that is completely beyond the parties’ control and against which it is impossible to defend;
4)a calamity preventing the sellers from fulfiling their obligations.
2.Complete the chart and comment on it.
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Force majeure circumstances |
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Acts of God |
Political contingencies |
Other circumctances |
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storm |
rebellion |
shortage of energy supply |
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… |
… |
… |
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3.What should any party asserting a force majeure intend to do?
4.Why is a force majeure clause so significant in concluding a contract of sale?
5.Answer the following questions.
•A force majeure clause can be the source of disputes in negotiations of the counterparties. Why?
•How to deal with this problem?
6.Explain the difference between the two terms: force majeure and vis major.
7.Name criteria for an event to be considered a force majeure and included in international law.
8.Why is it very important to notify the buyer of a contingency?
9.What document certifies the fact of a contingency?
8.Read these statements and decide whether they are true or false. Explain your point of view.
1)Foreign trade is usually subject to many risks.
2)When negotiating a contract, the parties must foresee the contingencies which may be detrimental to fulfilling the agreement.
3)Not every international sales contract contains a force majeure clause, it is up to the counterparties whether to include it in the contract or not.
4)The aim of a force majeure clause is to release the parties from their responsibilities for non-performance caused by any external cause.
5)The wording of a force majeure clause must be very precise.
6)This clause excuses only part of the obligations of one party.
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