The closeness of a foreign sales contract in Binh Minh Household Joint Stock Company

e to thank my advisor Pham Phuong Lan who has been directly responsible for guiding my performance devotedly. Special thanks are for teachers of the faculty who have been willing to contribute their time and efforts to this report by providing necessary information and advice for my preparation. In addition, I would like to give my sincere obligation to my temporary colleagues in Binh Minh Household Joint Stock Company for their dedication and enthusiasm to help me with data collection and professional skill. They somewhat gave me numerous opportunities to be exposed to real practice. My appreciations are also extended to Dr. Nguyen Hong Hai - Deputy Head of International Payment Subject, and M.A Tran Nguyen Hop Chau – Lecturer of Finance Faculty, Banking Academy of Vietnam, for their devotion to me during the short-term course related to import-export operation. By the way, I also wish to express my obligation to Mrs. Vu Thanh Van for the time when I worked as a collaborator for VinatranzPro translation office. She gave me various chances of sharpening my knowledge of sale contract that somehow made me come to a decision to challenge myself in such field. Finally, I would like to thank my parents, friends who are never reluctant to do me a favor no matter what. It is a precious encouragement for me to strive for such finalization. TABLE OF CONTENT EXECUTIVE SUMMARY The term “contract” is likely familiar with almost all of transactions, especially cross-border ones. Depending on its appropriateness or inappropriateness, a contract can somewhat facilitate or dispute a transaction. This, in fact, has interested me a lot during my internship period in Binh Minh Household Joint Stock Company. Taking pains to analyze the Company’s existing sales contract, I myself discovered several shortcomings regarding contract’s closeness that is thought to cause transactional disputes possibly. With a view to contributing my part to the Company and fulfilling my graduation thesis, this paper therefore is intended to clarify problematic provisions. Accordingly, I would like to take the chance to put forward some recommendations to make the Company’s contract more proper in the hope of facilitating transactions between the Company and its foreign counterparts.  ABSTRACT Recent years, globalization is becoming a common trend worldwide. It has proved its crucial influence on almost all economies, especially those of developing countries and Vietnam is not an exception. In the context of global integration, self-sufficient economic model becomes absolutely obsolete, it should be replaced with a modern one in which an opening mechanism is encouraged. In so doing, business transactions both domestically and internationally are popular accordingly. Of which, it can be said that sales contracts, especially foreign ones play an important role in almost enterprises’ carrying-out for their normal operation. In fact, a sales contract is deemed as a legal documents by which involved parties’ obligations and rights are preserved lawfully. Therefore, it is strongly advised that the work of drafting a proper sales contract be paid due attention by all businesses in general and import-export enterprises in particular. Objectives & Scope of work Being aware of the importance of drafting sales contract and based on a useful internship period in Binh Minh Household Joint Stock Company, I am really interested in a research on “The closeness of a foreign sales contract in Binh Minh Household Joint Stock Company”. The research is intended to aim at analyzing some restrictions in the contract form of the Company and proposing several practical measures to sharpen the closeness of all provisions in the Company’s sale contract. Methodology & Data Sources To some extent, the internship period at Binh Minh Household Joint Stock Company allows me to take such a marvelous opportunity to conduct my research as favorably as possible. To build my data base, I myself take pains to gather all information generated from various sources ranging from personal experience concerning sale contract to import-export knowledge shared by my colleagues, and some relevant publications. For the best acquisition, I have also taken part in a course of International Payment to absorb some relevant knowledge. Such combination between theory and real experience via various channels has enabled me to take steps to fulfill the research. Structure Besides abstract, inclusion and appendix, the research is composed of four main Chapters as follows: Chapter 1: Introduction Chapter 2: Literature Review Chapter 3: Findings & Analysis Chapter 4: Recommendation Due to time limitation and certain knowledge, this study may not avoid some shortcomings and inappropriateness beyond my ability. I would highly appreciate any comments and suggestions in relation to the study from the Faculty in particular, and any readers in general.  CHAPTER 1: INTRODUCTION 1.1 Company’s establishment and development Binh Minh Household Joint Stock Company was established in March 2008. For any detail, please make reference to the table hereunder: Name of Company Binh Minh Household Joint Stock Company Head office Address No.5 Lane 75 Hong Ha street, Ba Dinh District Hanoi - Viet Nam Business Registration No. 0103023380 issued by Hanoi Planning & Investment Department in March 31, 2008 Tax Code 0102701149 Telephone +844.3932.8848    Fax: +844.3932.8884 Mobile phone +84912.146.147 Y/M: ntb_802   Skype: bmhanoi   Email bmhanoi@gmail.com Bank Account 11120805087010 TechcomBank-Ha Noi Branch General Director Nguyen Thi Giang The Company serves as an importer and a distributor of household appliances labeled Midea in Vietnam. Although the Company has just entered business for over 2 years, it has performed well in the capacity of a prominent representative distributor for Midea branch. In other words, it has played a crucial role in raising Vietnamese’s awareness of Midea household appliances. Accordingly, it can build up good relationship with almost supermarket systems nationwide as well as wholesale agents in various provinces. In so doing, it has helped increase Midea’s reputation for its supply in Vietnam market in general. To some extent, the development period of the Company can be divided into two separate parts: Period of 2008-2009: This is the period when the Company made its debut in the Vietnam market for the first time. At that time, Vietnam market has been riddled with various brands of household appliance like Supor, Happy Cook, Philip, Panasonic, etc. Conspicuously, it had to face numerous obstacles both internally and externally. In terms of internal conditions, the Company was somewhat in the shortage of capital that required it manage to mobilize capital from various sources. Externally, it had to cope with a fierce competition from other counterparts. Despite these difficulties, the Company has taken steps to penetrate each particular markets ranging from supermarket systems to retail and wholesale agents nationwide. In more details, it determined to pay due attention to customization services and as well as product quality in order to meet increasing demand of the diversified customers. Period of 2009-2010: Owing to gradually surmount such aforementioned hinders, Binh Minh Company now can get a certain foothold in the appliances market. Based on this achievement, it has also determined that the initial priority should be given to sales promotion as much as possible through various exhibition, fairs, and events. So far, it has been said that the Company’s products have been made available almost all provinces in the whole nation. Accordingly, the mass’s awareness of the Company’s products has been on the rise that has contributed to the revenue growth of the Company year to year. Today, the Government gives more and more incentives to encourage operations of import and export enterprises. This somewhat creates various favorable conditions for almost all domestic enterprises in general and the Company in particular to promote its performance. 1.2 Company’s functions and obligations 1.2.1 – Functions The main function of the Company is trading imported goods, including both retail and wholesale through domestic supermarket systems and agents. 1.2.2 – Obligations - Carrying out business in line with the registration. - Registering, enumerating and paying taxation as well as performing other financial obligations in accordance with the prevailing laws. - Ensuring product quality in line with the registered standards, and offering appropriate post-sale services (warranty) to customers. It can be seen that the Company has shown a great self-control in its business, especially in such a market-oriented economy at present. Again, it creates a lot of precious opportunities for the Company, but poses numerous challenges at the same time. For this reason, the Company should bear in mind researching market, especially niche market, and improving management instruments and organization apparatus in conformity with its scale, functions and obligations for the best performance. 1.3 Organization Structure 1.3.1. Organization structure The Company’s management structure is subject to a direct mechanism, it means that there is only one chief officer, and other staffs will pertain to different functional divisions. Diagram 1: - Organization structure of Binh Minh Household Joint Stock Company DIRECTORS BOARD Chairman of Management Board cum Director Deputy Director Chief Accountant DEPARTMENTS Accounting & Finance Department Sales Department Import-Export Department 1.3.2. Functions and obligations of department, divisions * Directors Board: - Chairman of Management Board cum Director is the top leader who is responsible for managing all operations of the Company. - Deputy Director is in charge of assisting and controlling tasks entrusted by General Director, and acting in the capacity of a Director whenever authorized. - Chief Accountant cum Head of Accounting Department takes over accounting and statistic operations, and consult Director financial operations of the Company. * Departments: Accounting & Finance Department: takes responsibility for directly recording accounting manuals, dealing with figures in relation to imported and exported goods and inventory in conformity with the regulations, supporting Director to manage activities relating finance and monetary. Sales Department: directly makes schedules for different orders, and sign contract with both domestic and foreign counterparts, conduct promotion programs, work out sales plans, and carry out market research. Import-Export Department: Based on orders delivered by Sales Department, it makes orders to the suppliers, and engages in signing foreign contracts, works with customs agencies, appoints people to conduct the import and enters transactions with foreign counterparts. 1.4 Company’s counterparts 1.4.1 Suppliers * ZHEJIANG TIANXI INDUSTRY GROUP CO.,LTD  No.7 Baoan Road, Huzhen Town, Jinyun County, Zhejiang, China  Tel: +86578-3559996    Fax: +86578-3156000 Zhejiang Tianxi Industry Group co., Ltd. is a key enterprise specialized in production of pressure-lid type explosion-proof pressure cookers, non-stick cookware pots and aluminum wares of complete series. It boasts production bases of aluminum ware and materials and advanced equipment. Based on its powerful economic and technical strength, and scientific and perfect management system, the company was appointed in 1999 one of the five large enterprises  responsible for drafting out the"2000 national standard of pressure coolers" and passed the authentications of CE and GS safe quality and ISO9001 quality system, Seizing the opportunity of the reform, it has established stable business relationship with over 20 regions and countries such as Europe ,South America, Middle East ,Japan etc, with numerous trading partners and market channels. Its products are gaining popularity for its elaborate workmanship. * MIDEA CONSUMER & INDUSTRIAL GROUP Beijiao Town,Shunde District, Foshan City Guangdong Province, China Tel: +86-757-26605280 Fax: +86-757-26339469 Midea Group is a comprehensive and modern business conglomeration that engages mainly in the industry of household appliances, as well as the domains of real estate and logistics. The group is also one of the largest manufacturing and exportation bases of electric appliances in China. Major products by Midea Group include household and commercial air-conditioners, large central air-conditioners, electric fans, electric cookers, refrigerators, microwave ovens, water dispensers, washing machines, electric heaters, dishwashers, induction cookers, water heaters, cooking stoves, sterilizers, electric chafing pots, electric ovens, vacuum cleaners, and small electric appliances, as well as related products such as compressors, motors, magnetrons, transformers, and enameled wires. 1.4.2 Existing customers In order to obtain optimal revenue, the Company has adopted both methods of retailing and wholesaling nationwide. Consequently, its products have been distributed various supermarket systems and agents mentioned hereunder: Fivimart supermarket system Marko supermarket system Intimex supermarket system Big C supermarket system Metro supermarket system Hapro Mart supermarket system …. Agents in Provinces such as: Hanoi, Nam Dinh, Thanh Hoa, Ninh Binh, Hai Phong, Thai Nguyen, Hung Yen, Bac Ninh, etc. 1.5 Features of Company’s revenue It can be clearly seen that Company’s revenue comes from different sources, including revenue from sales of goods, revenue from financial operation, and other incomes. Of which, revenue from financial operation mainly stems from: deductions for advance payments, commercial discounts, etc. Therefore, revenue from financial operation is much smaller than gross profit from sales of goods. Deductible items of the Company are comprised of: sale returns, sale discounts offered to the customers. At present, the Company’s Charter Capital is: 3.000.000.000 VND 1.6 Mode of transactions with Suppliers and potential risks As mentioned above, the two main Suppliers of the Company come from China. Accordingly, its transactions with Suppliers are characterized by foreign sales contracts in writing by fax, email, or skype. So far, the Company has entered various contracts with counterparts and it is deemed as a manner in which the Company can make orders to manufacturers effectively and lawfully. To some extent, most contracts are based on the reliability amongst parties involved that somehow helps avoid several trivial procedures. Nevertheless, such conduct also reveals highly potential risks for both parties in case of any disputes arising along. As such, the Company in general and the Import-Export Department which is directly in charge of import operations in particular should pay due attention to the work of drafting contracts. In other words, it is necessary to terms and conditions included in such agreements to ensure successful transactions for mutual benefits.  CHAPTER 2: LITERATURE REVIEW 2.1 Basic knowledge of foreign sales contract 2.1.1 Definition of foreign sales contract A foreign sales contract is a legal contract an exchange of goods, services or property to be exchanged from seller (or vendor) to buyer (or purchaser) for an agreed upon value in money (or money equivalent) paid or the promise to pay same. It involves at least two countries which represent separate Parties entering the contract. 2.1.2. Characteristics & role of foreign sales contract 2.1.2.1. Role of foreign sales contract Business contracts are legally binding written agreements between two or more parties. They are an important part of business and such agreements need to be created and/or reviewed carefully. While smaller companies often conduct business based on informal handshake agreements or unspoken understandings, the more that is at stake, the more essential it is to have a signed contract. A contract serves as a guide and a memorial of the agreement that must be followed by both parties. 2.1.2.2. Characteristics of foreign sales contract Basically, a foreign sales contract shares much common with a domestic one. However, there are also some points by which we can be aware of differences between them. Amongst the others, we hereby intend to refer three distinguished characteristics as follows: Objects of the contract: include Seller and Buyer from at least two different countries. Nevertheless, it is noted that the factor of nationality shall not make non-sense in case the Buyer and Seller have different nationalities but their trading is conducted in only one territory or country. Type of currency: can be a foreign currency to one or both Parties. Goods – under the contract: shall be delivered from the Seller’s country to the Buyer’s country or somewhere else required by the Buyer. 2.1.3. Contract Content In reality, a contract is a rather self-determined business document. In other words, the parties can make contract with provisions in their sole discretion; Of course, such provisions must be agreed by both Parties to become the binding ones. Despite this fact, it is possible to divide them into three separate categories as mentioned hereunder: 2.1.3.1. Key provisions: These provisions are deemed to form integral parts of a contract. They are constituted of six provisions as follows: - Commodity - Quantity - Quality and specifications - Term of price - Term of delivery - Term of payment 2.1.3.2. Common provisions: In addition to the aforementioned provisions, depending on real situations and requirements of both Seller and Buyer, a contract may cover some other terms such as: - Packing and Marking - Warranty - Inspection and Claim - Penalty - Force Majeure - Arbitration 2.1.3.3. Free provisions: These provisions, to some extent, are not compulsory ones. However, they can contribute to increase the closeness of the contract. To put in another way, such terms together with those aforesaid ones help minimize any dispute arising between the Buyer and Seller during their transactions. They may be provisions in relation to amendment, notice, contract termination, etc. Generally, owing to freedom of sales contracts, based on the real context and mutual agreement, involved Parties can draft provisions in the support themselves. By carefully drafting “reasonable” terms, Parties shall be relieved from potential risks and disputes that can act as a basis for a long-term business relationship. 2.2. How to draft precise contract provisions It can be said that you will not able to cover every gap and fill all loopholes in your contract provisions. Also, you can not make a perfect contract. However, it is reasonable to draft it as clearly as you possibly can. The illustrative clauses hereby are intended to give you some practice in finding ambiguities and tightening up phrases. 2.2.1 Effective date: The contract or agreement should have a date stated as the contract date or effective date. This date is not necessarily the date when the contract was signed but rather the date from which all the contractual rights and obligations begin and from which point any term of time, usually commences. To determine a sound effective date, it is strongly advised to consider when goods should be delivered and what warranty or maintenance period should apply to work or goods Poor provision: “This contract becomes binding on both parties when it is signed” It can be seen that this provision is aimed to provide a designated time and means of contract formation. In other words, it intends to stipulate when the contract will come into effect. However, in the event, the contract is somehow signed by only one party, does it become binding on both, or must both parties sign to determine a common effective date? If the parties sign on different dates, which shall be effective one? If the last party to sign the contract is deemed to change a provision in it before signing, has a contract formed? These hereby can lead to any potential dispute during contract performance. Better provision: “This contract will be binding on both parties as of the date on which it is signed by the Seller/Buyer, provided that the Seller/Buyer does not alter, delete, or add to the terms of the contract.” 2.2.2 Effective date: Poor provision: “This contract will become binding on the parties at the time the Seller accepts the order that is detailed in the attached specification.” This clause fails to define a particular date of acceptance – it is entirely opened-ended. To some extent, it can cause discrepancies in parties’ interpretation of this clause that may lead to the situation that the Buyer may make another same order with other supplier, whereas the Seller continues to fulfill order without notification/acceptance. Consequenly, both parties get no benefits only because of no contact, no information. The general rule is that acceptance must be within a “reasonable time” to ensure a smooth transaction. Better provision: “This contract will become binding on the parties as of the date the Seller signs it, provided that the Seller does not alter, delete, or add to the terms of the contract and provided that the Seller signs the contract by [date], transmit a copy of the signed contract by facsimile to the buyer by [date], and sends the original signed contract by post.” 2.2.3 Insurance Poor provision: “The [Seller/Buyer] must insure the goods while in transit for [currency and amount]. A copy of the policy or other statement provided by the insurer must be provided to the [Seller/Buyer] before the goods are shipped. Failure to insure the goods is grounds for contract termination. Each party is responsible for obtaining on its own account any other insurance coverage for the goods that it may desire.” This clause may be reasonable in a domestic transaction where parties are familiar with available insurance policies, but it is too strict and necessary for an international transaction. Unless parties are assured that the coverage is available in the amount designated, the failure of a party to obtain insurance coverage should not be grounds for termination of the contract. Better provision: “The [Seller/Buyer] shall responsible for obtaining and maintaining insurance on the goods while in transit. The insurance coverage must be for the invoiced value of the goods, and the [Seller/Buyer] must be named as a loss payee. A copy of the policy or other statement provided by the insurer must be provided to the [Seller/Buyer] before the goods are shipped. If the [Seller/Buyer] fails to obtain such insurance, the [Seller/Buyer] has rights to purchase insurance coverage and to charge the cost of premiums to the [Seller/Buyer]. Each party shall responsible for obtaining on its own account any other insurance coverage for the goods that it may desire.” 2.2.4. Transfer of title time In every complete sales transaction, there is a certain moment of time wherein the ownership of the goods by the seller ceases and passes to the others and that of the buyer begins; that is called the transfer of title. In a certain aspect, it is synonymous with transfer of risk to goods during goods delivery. It therefore draws most attention of both the seller and the buyer during their transaction from the place of the Seller to the place of the Buyer. Poor provision: “Title to goods will pass to the Buyer when the Goods are shipped.” When title passes, it also means that the Buyer somwhat faces the risk of loss. Therefore, this critical provision should be clear and definite. However, the term “shipped” is deemed to carry various meanings. It could simply mean that the goods have left the seller’s warehouse but not the seller’s possession. Another alternative is that the seller has transferred the goods to a land carrier, such as railway or trucking company. Or it could imply that the goods are shipped when placed on board a vessel, even if first carted over land by another carrier designated by the Buyer or the Seller. Better provision: “Title to goods will pass to the Buyer at the time the Seller delivers the goods to the Buyer. The goods will be deemed delivered at the time they are stowed on board the vessel.” 2.2.5. Inspection rights If you have agreed to take the goods without warranties, you should insist on adequate inspection rights, meaning you have the time, labor, and facilities available to conduct a meaningful inspection. Even if warranties are provided, inspection rights are important. Exercising a warranty is likely less convenient than simply returning goods that are not in satisfactory conditions on arrival. Therefore, it is strongly advised to pay due attention to terms of inspection rights. Poor provision: “Before accepting the goods, the Buyer has right to inspect them at the time and place where they are delivered.” In the event the designated time and place are convenient to the Buyer, this clause may be deemed appropriate. However, the buyer’s inspection rights will make non-sense if the buyer is unable to carry out such inspection. Thus, in case the delivery is made Ex Works - Incoterms (meaning at the seller’s warehouse), a foreign buyer is unlikely to be able to inspect the goods before having to accept them. At a minimum, inspection rights should be granted to the buyer or an authorized representative and the buyer should have a reasonable time within which to complete the inspection and make any claim against the Seller in case of any discrepancies. Better provision: “Before accepting the goods, the Buyer has right to inspect them after they reach the Buyer’s [designated time and place]. Acceptance or rejection must be made within [a certain number] of working days from the date the goods reach that destination. The Buyer’s failure to inspect the goods will be deemed a waiver of the right of inspection.” CHAPTER 3: ANALYSIS & FINDINGS In the principle, Binh Minh’s sales contract somewhat meets requirements of a cross-border contract with rather sound provisions compared to those defined in the theory mentioned hereinbefore. Nevertheless, to avoid potential disputes arising out of parties’ expectation, it should be modify to tighten up the closeness at a minimum. For this paper, such findings just drew from personal viewpoints therefore they are intended for the Company’s consideration. 3.1. Unclear unit price In delivery term, the Company has failed to clearly define applicable price. In fact, it merely defined “CIF Hai Phong” (See Appendix for reference) that does not feature any Incoterms. Such vagueness may result in inconsistent price term between the Buyer and Seller, and a dispute then is inevitable. This becomes so problematic if the Company enters transaction with its counterparts who tend to conduct their unique business practices that are not in line with INCOTERMS. In this case, the Company will certainly become the lossing party if the event is brought to the court for arbitration. For instance, as for FOB shipment term, the US counterparts are entitled to adopt one out of two separate conditions, namely INCOTERMS (in accordance with ICC) and FOB-US – a local business custom. Despite of arbitrariness of INCOTERMS, in international transactions, any contract should be subject to a certain INCOTERMS to equate discrepancies, misinterpretation in cost calculation amongst parties. 3.2. Unsupported shipment term In fact, Binh Minh determines to adopt CIF shipment term (See Appendix for reference) (relatively same as CFR shipment term) that allows concession of rights of charter-party to the Seller. Such concession of rights shall be problematic in case of unqualified Seller. It is possible that the Seller at his own discretion can charter a ship with poor shipping conditions or ambiguous origin at a rather low cost and cause loss of damage to the Company when the goods is arrived. Especially when the Company allows transshipment condition, the risk is likely much more potential. It is widely admitted that almost all of Vietnamese import-export enterprises are interested to CIF shipment term despite their awareness of potential risks. For instance, in the late 2006, an enterprise in Hanoi imported a cargo worth more than USD 1 billion from Singapore in accordance with CFR-Incoterms 2000 Hai Phong/Ho Chi Minh City Port. The Seller chartered PLJ ship – a low conditional vessel from Hong Kong BJS Shipping Agency, and quickly presented all relevant documents to collect payment from the authorized bank. Unfortunately, later, the Buyer noticed that this vessel was captured by Malaysian police because it was defined to be involved in a piracy. The Buyer then made a claim against the Seller but he refused to bear such obligation that was not stipulated in the signed contract. The event was brought to the Insurer; However, they claimed that they were spare from insurance obligation in this case under ICC 1982 (Institute Cargo Clauses 1982, Item 6.2, Exclusion). Worse still, the involved shipping agency was relieved from any indemnity due to ship capture in line with Maritime Code of Vietnam and Hague-Visby Rules. Consequently, all costs arising were for the Buyer’s account. As such, it can be clearly seen that various Vietnamese enterprises had to pay a heavy price for their undue attention to vessel’s legal status in particular, practice of CIF shipment term in general. By the way, with regard to Binh Minh sales contract, its requirements for documents presentation remains inappropriate. In fact, such required documents are not enough to reveal almost a._.