Checklist for Commercial International Trade Contracts

Using a Contract Review Checklist for Commercial International Trade Contracts

By James R. Holbein, Of Counsel

Introduction

In the complex world of commercial international trade, contracts serve as the foundation for successful transactions. A well-prepared contract review checklist provides a basis for lawyers to ensure that all necessary terms and conditions are covered, protecting all parties involved. This article outlines the essential components of a contract review checklist related to goods in international trade. The goal is to provide a structured approach to reviewing and drafting contracts, beyond the basics of INCOTERMS.

Why Use a Contract Review Checklist?

It is my experience that many contracts that I review for clients appear to be sufficient at first glance, but they often are missing key terms that can create substantially more risk for clients than is necessary or wise. In addition, contract templates are often tied to terms and conditions on a company website that differ markedly from the terms in the agreement under review. They can turn fair, reciprocal contracts into adhesion contracts and negate what appear to be legitimate commitments.

A contract review checklist is a tool used to systematically examine the terms and conditions of a contract as well as the terms and conditions that are included by reference from a website or another document. It helps ensure that the contract aligns with the expectations and obligations of the involved parties, mitigating risks and clarifying responsibilities. The checklist provided here may be useful for analyzing international trade agreements, where the terms and conditions are often dictated by carriers and governed by international legal norms such as the United Nations Convention on the Carriage of Goods by Sea, or domestic laws such as the Carriage of Goods by Sea Act (“COGSA”). In reviewing contracts, make sure the client’s compliance and risk management team is brought into the discussion to identify issues that should be addressed. To prepare the checklist, I suggest the following steps are important:

Acquaint Yourself with the Contract Purpose and Objectives

Meet with the client to determine what their expectations are. What is the purpose of the contract? Is it an ad hoc agreement for a specific situation, or is it intended to establish a relationship and process for an ongoing series of transactions?
What is the relative power of each party? Is one party in a position to essentially dictate the terms to the other?
Review the entire agreement, including all provisions, exhibits, and schedules. Analyze the impact on your client. Are any provisions missing? Are any provisions unilateral that should be reciprocal?
Review any provisions that are incorporated by reference, such as Terms and Conditions on a company website that must be downloaded to review and are generally not included as annexes to the contract under review. What is the order of precedence for such provisions, i.e., in the event of a conflict between terms, do the contract provisions prevail over external provisions?
Ensure that all timelines are realistic and align with each party’s expectations.
Confirm whether the companies are dealing at arm’s length or in an affiliated status.

Analyze Terms, Conditions, and Deadlines

Analyze key provisions such as scope, purpose, pricing and payment terms, quantities, quality, INCOTERMS for shipment obligations, indemnification, obligations and warranties, limitations on liability, and termination clauses to ensure they are defined accurately and clearly and meet expectations.
Identify and insert any missing terms, making sure they are consistent with the parties’ understanding.
Are exclusivity and territory material to the contract?
After inserting any missing terms, review the agreement for consistency and ensure that all provisions are clear, concise, and in line with each party’s understanding.

Termination and Contract Renewal Rules

What is the duration of the contract and analyze the conditions and processes for contract renewal, including whether any changes to terms can be made.
Review the grounds for termination, including notice periods and post-termination obligations.

Check for Clarity in Contract Language

Create a list of items that appear unclear or misleading to address with the other parties involved in the contract negotiations, and don’t hesitate to request modifications.
I usually give the client a version in Word Tracked Changes with my comments to assist with reaching agreement as to what is needed.
Ensure that the language is clear, consistent, and tailored to the specific needs of the agreement and your company’s understanding.

Verify the accuracy of legal terminology and the relevance of all terms used.

Broaden or restrict the scope of each clause to best support the client’s goals and concerns

Confidentiality Provisions

Clarify the extent of confidentiality obligations, including the definition (avoid overbreadth), exceptions and exclusions.
Clarify the purpose of the confidentiality provisions, the parties covered, and the extent to which information can be shared.
Are there special handling and storage requirements for confidential information.
Confirm the handling of confidential information upon termination of the contract.

Special Considerations for Commercial Contracts

Parties and Purpose

Contracts in international trade often involve buyers and sellers so the terms are clearly tied to the transactions and the goods or services that are the subject of the transaction(s).
International trade agreements often involve intermediaries such as customs brokers, freight forwarders, distributors, agents and other parties.
These agreements are not always memorialized in the proper form, and involve purchase orders, standard terms and conditions on receipts and other documents. If a purchase order approach is taken, that process should be reviewed with a checklist to ensure the parties understand what is included and what risks are being addressed.
Clearly identify all parties involved and their roles, including addresses and contact information and the key personnel, ensuring they are correctly named and authorized.
State the primary purpose of the contract in plain language to prevent misunderstandings.
Clearly specify the effective date in a preamble linked to a specific triggering event.

Obligations and Rights

International trade agreements require vendors to mark, label, and provide appropriate documentation to permit carriage and importation into the destination country. Ensure that these obligations are stated clearly to avoid ambiguity.
Use INCOTERMS for international carriage as well as for domestic land transport to clarify shipping, insurance, delivery, storage and related terms.
Detail the obligations and rights of each party, including penalties for breaches.
Address all aspects of the business relationship involved in the agreement.
Ensure the dispute resolution clause aligns with the breach of obligations.
Ensure warranties are specific and unambiguous or properly disclaimed. They should include the validity of the organizations and the officers signing,
Audit and inspection rights should be clear, if they are included in the agreement.

Payment Terms and Duration

Specify procedures for ordering, returns, refunds, shipment and delivery,
Outline payment schedules, methods, currency and any applicable taxes or fees.
Clarify payment triggers and dates in a schedule.
Provide a procedure for invoicing with forms, dates, how delivered and received, penalties for late payment, whether setoffs are permissible,
If interest can be assessed, list the grounds and trigger dates in the agreement.
Are any forms of surety, such as bonds, deposits, letter of credit, etc. required?

Force Majeure and Data Protection

Include a force majeure clause to address unforeseen circumstances affecting performance.
Define data protection responsibilities, particularly concerning compliance with regulations like GDPR.

Intellectual Property, Insurance, and Indemnities

Clearly state the ownership and rights to intellectual property arising from the contract.
If licensing is involved, ensure the rights and obligations as well as information about the license’s term, revocability, exclusivity, transferability, fees (if any), and territory.
Particularly in international trade transactions, be clear when title to the goods transfers, and insure the goods for the customs value or more, if financially feasible.
Analyze the indemnity clause, looking at coverage, reciprocity, intellectual property rights, data protection, and confidentiality. Reasonable remedies should be for costs for direct claims.
Indemnification clauses must be clear, unambiguous and address obligations, scope of losses, how to claim, exclusions such as taxes, a procedure for notification and cooperation, and that the process is reciprocal and equitable for the parties.

Limits on Liability

Analyze to determine the extent of protection from errors, accidents, negligence, malfeasance.
What proof is required for a claim? Is it readily generated by your system?

Generally, it should be limited to the contract amount and include any indemnity obligation.

Dispute Resolution and Governing Law

Specify the mechanisms for resolving disputes, such as arbitration or litigation.
Clearly state the governing law and jurisdiction to avoid ambiguity.

Is the dispute resolution process the exclusive remedy for breach or are other mechanisms provided in specific processes? Is equitable relief permitted or excluded?

Boilerplate Clauses

No assignment

Severability
Cumulative Remedies and/or Exclusive Remedies
Survival
No Third-Party Beneficiaries
Notices
Attorneys’ Fees
Entire Agreement

Final Review of the Contract

Check for grammatical errors, formatting consistency, and accurate cross-referencing.
Ensure that all sections, including exhibits and schedules, are clearly labeled and easy to navigate.
Ensure the client objectives are met and that key issues are resolved and understood between the parties.

Conclusion

A comprehensive contract review checklist is an invaluable tool for navigating the complexities of commercial international trade contracts. By ensuring that all relevant terms and conditions are thoroughly examined and clearly stated, businesses can protect their interests and foster positive, long-lasting relationships with their partners. This checklist should be tailored to the specific needs of each contract, reflecting the unique aspects of the business relationship and the industry standards.

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