A Beginner's Guide to Export Contracts

May 2002

New Zealand is a nation of international traders. As the range and value of our exports increases so too does the number and spectrum of countries with which we trade.

Although the export environment provides exciting opportunities for New Zealand businesses, it also introduces new and different risks to those with which businesspeople are familiar and comfortable in a domestic context.

From a seller's perspective, a key objective of any contract is to be paid promptly and fully for goods or services supplied. In an international context, receipt of prompt and full payment can be complicated by new risks posed by currency, language and legal process difficulties together with variations of familiar risks such as credit and transport issues.

It is important to minimise these risks when preparing and negotiating an export contract. Advisors from Trade New Zealand (Tradenz), your professional advisers or your local Chambers of Commerce can provide valuable practical and market specific advice, particularly when you are a first-time exporter. In any event some key matters to provide for in an export contract include:

• Description. It is important to clearly define the goods (and any technical specifications and relevant tariff numbers) or the scope and details of the services you are supplying to a buyer.
  
  
• Price Which Currency. Currency fluctuations can affect the ultimate price you receive for your goods or services. For example, the New Zealand Dollar has appreciated approximately 8% against the US Dollar this year. If you can agree to price in New Zealand Dollars then your foreign currency risk will be removed (although this of course has a reverse effect for the buyer).
  
  If you price in a foreign currency it is often preferable to quote in a major trading currency (such as US Dollars or Euros). You do not want to incur the risk of trading in a currency which is, or could be, subject to exchange restrictions or which could be devalued. You may also wish to build a margin into a quoted price in case the exchange rate moves against you.
  There are more sophisticated and complex instruments (such as forward exchange contracts) which act as a hedge against exchange rate movements.
  
  
• Payment/Credit. From an exporter's perspective it is preferable to be paid in advance. The best and "cleanest" forms of payment are either a telegraphic transfer of funds prior to shipment or, alternatively, an irrevocable letter of credit confirmed by a reputable international trading bank. A buyer, however, will generally only be willing to pay when the goods or services have been supplied.
  
  Your bank should be able to assist with managing credit risk. There are various forms of documentary credit and insurance which can reduce this risk. The Government, for example, established a limited export credit scheme in 2001. Effectively an export credit is a form of insurance that covers the exporter if the importer or their bank defaults on payment.
  
  
• Terms of trade - In an international context, there is a risk that goods will be either lost or damaged in transit. Practices also vary in different parts of the world. As a result parties generally incorporate "Incoterms" into an export contract. The International Chamber of Commerce has developed 13 different "Incoterms" to govern the transfer of risk between buyer and seller, responsibility for such matters as organising transport, insurance and export and import clearance.
  
  
• The most commonly used "Incoterms" in practice are FOB (Free on Board) and CIF (Cost, Insurance, Freight). Under both options the seller is required to prepare all export documentation and arrange other customs formalities. The key difference is that under CIF the seller is required to organise shipment to a named port of destination and arrange insurance for the goods. Such additional costs will obviously affect the quoted price of your goods.
  
  
• Foreign Standards/Custom Duties. A foreign target market may impose different or additional standards on goods or services to those that apply in New Zealand. Some of such standards may appear to be based less on scientific risk assessment and specifically intended to target imports. You should identify and understand such standards and any conformity assessment procedures, such as sampling, inspection, testing and certification, that may apply in a target market.
  
  You should also be aware of any tariffs and other taxes (such as GST type taxes) that apply in a foreign market if these costs are to be met by you. Tariffs and other taxes are generally levied on the FOB or CIF value of the exported goods.
  
  
• Governing law. It is preferable to make provision for New Zealand law, or a reputable third country law such as English law, to govern the terms of a contract and any disputes that may arise. Otherwise, you may encounter problems in collecting debts in countries where the court system discriminates against you as the exporting party. It is also helpful to include a clause stating the English language will prevail when dealing with a buyer from a non-English speaking country as different language nuances can lead to interpretation disputes.