CHAPTER 3: NEGOTIATING INSPECTION AND DEFECTS LIABILITY

1. What are 5 steps in negotiating the Defects Liability Period?

 Step 1 - Inspection: When are the goods inspected? And when can the buyer reject
them?
 Step 2 - Terms: Warranty or Guarantee
 Step 3 - Definitions: What is, and what is not, a defect?
 Step 4 - Timing: How long is the defects liability period? When does it begin?
What about other timings?
 Step 5 - Corrective action: What must the seller do to cure defects?

2. What is the benefit of a well-designed set of specifications?

It protects both the buyer and the seller: the buyer is protected against inferior products
as it can reject any products that fail to meet specifications; the seller can protect its
reputation and avoid costs .

3. What is pre-delivery inspection?

Pre-delivery Inspection: Inspection of the Goods in the manufacturer's factory before

delivery

4. What kind of goods needs pre-delivery inspection? Give example?

All kinds of goods need pre-delivery inspection, especially sophisticated items or captial
equipment

5. What are the functions of independent inspection? Why is there independent

inspection?

 Independent Inspection reports on the weight, size and most importantly, the
value of the goods.
 It prevents exporter and importer agreeing an unrealistically low invoice price in
order to avoid customs duties in the buyer's country. Such inspection also prevents
shipment of patently defective goods.

6. How long is the defect liability period?

The defects liablity period is negotiable; this is likely to be several months from the
date of delivery or the date of arrival.
Protection against dishonest claims or excessive demands should be written into the
contract
7. What counts as a patent defect and latent defect? Give examples (Compare)

 Patent defects: Defects that are apparent, e.g., wrong items, broken or missing
parts, scratches, etc
 Latent defects: Defects that only come to light after buyer's acceptance (in use),
or hidden defects, e.g., structural weaknesses, failure to operate at high or low
temp, high fuel consumption

6. What are Implied Warranties?

Implied warranties: Assumptions about the goods made by the Buyer, even if the
exporter gives no express warranty.

7. What are 3 types of Implied Warranties? Give examples

 Implied warranty of conformity with the Contract: In principle, the Buyer can
reject the goods if they do not conform with the Contract Ex: When you buy a new
car from a car dealer, it is specified in the Contract that the car works. If the car
doesn’t work, it would violate the implied warranty of conformity with the
Contract and the Buyer can reject it.
 Implied warranty of merchantability: The Buyer can reject the goods that are not
of merchantable quality Ex: A fruit that looks and smells good but has hidden
defects would violate the implied warranty of merchantability if its quality does
not meet the standards for such fruit "as passes ordinarily in the trade".
 Implied warranty of fitness for intended purposes: If the Exporter knew the
intended purpose, and if the buyer relied on the exporter's judgement, the Buyer
can reject the goods that are not suitable for their intended purposes. Ex: If a
farmer goes to a farm supply store, and tells the salesman he needs a plow for the
rocky soil of his farm, and the salesman directs him to a particular plow, there may
be an implied warranty that the plow in question is fit for use in rocky soil.

8. Compare Product Warranty and Guarantee?

 A product warranty: A promise by the exporter to cure defects in his products.

There are two parties: the buyer and the seller
 A guarantee: A promise by the guarantor to pay the beneficiary, made out at the
request of the principal. There are three parties: guarantor, principal and
beneficiary.

9. What are the 3 types of latent defects? Give examples.

 Defective workmanship: a product with defective workmanship is incorrectly

built.
 o A radio lacks the wire connecting the loudspeaker and amplifier
 Defective Materials: Defective materials are materials or parts of a product that
are inferior or somehow incorrect.
o A drive belt made of inferior rubber falls into pieces after 5 hours use
 Defective design: defective design means that a product does not meet
specifications
o A crane on an oil rig dangerously vibrates in high wind

10. What are the common exclusions of defects? Give example.

 Natural/Normal/ Fair Wear and Tear - the result of normal use. Eg: a plastic
handle scratches after 6 months use.
 Misuse - seriously incorrect handling by the buyer Eg: failure to check oil level in
a motor

11. What is the Defect Liability Period?

The Defects Liability Period: the period during which the Exporter is liable for and must
make good defects that are apparent on delivery or that come to light later.

12. What does a "Disclaimer of warranty" mean?

 Disclaimer of warranty means the item is supplied as (it) is and without support
of any kind.
 Software is often delivered with a Disclaimer of Warranty

13. What types of information are usually contained in a Defects Liability

Provision?/(What does the Defects Liability Provision specify/ regulate?)

 It states the length of the defects liability period and its starting point
 It regulates the period during which the buyer must notify the seller of the defects
(Notification Period)
 It regulates the amount of time the exporter has to cure/make good the defects
(Rectification Period)
 It seldom regulates the legal action period

14. What is “Eternal warranty”? How to avoid problems of an Eternal warranty?

 Eternal Warranty: An endlessly renewed liability for defects.

 The problems can be avoided with a cut-off clause such as: "The total warranty
period shall in no case (shall not in any cases) exceed three years."

15. What are the 5 options for curing defects?/ In what ways can defects be made
good?
  Repair: in domestic trade: cheapest; in international trade: costly
 Allow the Buyer to repair at the exporter's cost: unsafe
 Replace: keep goodwill/ just defective part
 Reduce the price
 Return the goods and refund the price: the least favourable for the Seller

16. Which corrective method is least favourable for the seller? Why?

Returning the goods and refunding the price seems to be the least favourable for the
exporter because this can be considered cancellation of the contract. Often defective
goods are not worth the cost of return shipment to the exporter's country. That means the
deal is a total loss for the exporter.
CHAPTER 4: THE LEGAL FRAMEWORK

1. What are the six steps in negotiating the legal framework of the Contract?

 Step 1: The Applicable Law

 Step 2: Contract or No Contract?
 Step 3: Entire Agreement
 Step 4: The parties
 Step 5: Status of the Contract
 Step 6: Settlement of Disputes

2. What are the main differences between Anglo-American Law & Continental
Law? (4)

3. What are the principles of an enforceable contract?

 The parties achieve a "meeting of minds" through a process of offer and

acceptance (One side makes an offer and the other side accepts it) → mutual
agreement.
 The parties are capable of entering/signing/concluding a contract → contractual
capacity
 The purpose of a contract is legal

4. What creates no meeting of mind?

1, Duress
2, Mistake and Fraud
3, Failure to follow the Rules of Offer and Acceptance

5. Who are unable to sign contracts?

Those who lack contractual capacity; e.g. Children, the feeble-minded and drunks

5. What does “ultra vires” mean?

 Beyond its power

 Under the public law (company law) of many countries, a company only signs a
contract that is within its powers.
 A contract that is ultra vires is unenforceable

6. What does the “Partial Invalidity Provision” say/mean?

The invalidity of one part of the contract does not invalidate the rest. (If one part of the
contract is invalid, this will not affect the remaining parts)

7. Give one example of what is called “one-sided agreement"?

One - sided agreement means an agreement in which one party has only duties and the
other party has only rights.

 Release from an obligation. Example: In principle, when the B makes late

payment, the B will have to pay some interest to the S. But the S agrees to release
the B from an obligation to pay interest in case of late payment. This agreement is
one-sided.
 Agreement to modify a contract. Example: In principle, when the B wants to
make some changes in the Specifications agreed under the Contract, the B will
have to pay additional charges. However, the S agrees to change the specifications.

8. What is The Whereas Recital? Why is it necessary?

The word “whereas" means "because" or "considering that" (xét thấy). Whereas clauses
are not provisions, promises or conditions - they are explanations.

9. Should the Exporter treat the Recital as a chance to promote his skills and the
excellence of his products? Why or why not?

No, he shouldn't. The recital is not a chance for the exporter to promote his skills and the
excellence of his products because if the contract gets into trouble, the buyer will have a
“big stick” to beat the exporter: “You told me you were the best – and I acted on that
belief.”

10. When is a contract discharged by performance?

Both parties perform their duties exactly according to the contract and the last duty is
fully performed.

11. What is termination? Name the two types of termination?

 Termination: one side may have the right under the contract to end the contract
 Types of Termination:
o Termination for convenience.
 Occurs when one party (usually buyer) simply decides to drop the
contract. No reason is required.
 This termination type is common for time-frame/long-time contracts
but not usual for export contracts.
o Terminate for default.
 Occurs when the contract names certain defaults which allow one
side (usually buyer) to terminate.
 However, when the Buyer is entitled to terminate the Contract, the
Buyer must pay for all the work performed or partly performed by
the Seller.

12. What is Cancellation?

 Cancellation: When one party breaches a contract, the other has the right to
demand cancellation of the contract.
 Only fundamental breach leads to cancellation of the Contract.

13. What is the difference between termination and cancellation?

 The contract is terminated under a provision of the contract.

 The contract is cancelled when one side has breached and the other simply
refuses to proceed.

14. What is Rescission?

 Rescission: The parties may simply agree to end their contractual relationship.
 It is a kind of two – sided termination. Both Parties see the continuing of the
contract is useless for them.

15. Distinguish termination, cancellation, rescission

  Termination: The contract allows one side to end the contract
 Cancellation: One side breaches the contract
 Rescission: Both parties agree to end the contract
 Termination & Cancellation: One-sided procedures but Rescission is two-sided
procedure.

16. Define four cases when a contract can be discharged

 Discharge by performance: Both parties perform their duties exactly according to

the contract and the last duty is fully performed.
 Termination: one side may have the right under the contract to end contract
o Termination for convenience: occurs when one party (usually buyer) simply
decides to drop the contract. No reason is required. This termination type is
common for time-frame/long-time contracts but not usual for export
contracts.
o Termination for default: occurs when the contract names certain defaults
which allow one side (usually buyer) to terminate. However, when the
Buyer is entitled to terminate the Contract, the Buyer must pay for all the
work performed or partly performed by the Seller.
 Cancellation: When one party breaches a contract, the other has the right to
demand cancellation of the contract.
 Rescission: The two parties may simply agree to end their contractual relationship
 Impossibility: A contract is discharged when it is impossible to continue with it
 Frustration: A contract is discharged when it is pointless to continue with it

17. What are the ways to solve disputes?

 Conciliation/Mediation: An amicable settlement

 Arbitration: a panel of arbitrators settle the disputes
 Litigation: settlement by the court.

18. What are characteristics of litigation?/ Why is Litigation before the courts
internationally the least attractive?

Litigation before the courts is internationally the least attractive:

 It is public
 It is expensive
 It is time – consuming
 The results are often legalistic rather than business like

19. What are the advantages of using a panel of arbitrators?

  Private
 Quicker
 Costs are predictable
 Decision is business – oriented

20. Compare between Litigation and Arbitration