Do I need a written contract in international trade?

In an absolute legal sense, you don’t actually need a written contract to trade with customers either here in the UK or internationally. A surprising number of transactions take place based on verbal agreements and email correspondence and that will work ok for many, until it doesn’t. The true consequences of not having a clear, written contract could only become apparent when something happens.

What does a contract do?

A contract provides a clear set of responsibilities and expectations that both parties agree to. This includes details of the terms of the sale (goods, quantity, price etc), how and when payment will be made, as well as delivery and transportation. Incoterms® 2020 should be agreed within this to allocate responsibilities and show where risk passes when goods are in transit. We have more information about this elsewhere on the site.

What can happen in the absence of a contract or agreed Incoterms® 2020?

Without a written contract you could be setting yourself up to fail. A contract is one of your greatest tools for minimising risk. These are just some of the potential outcomes of failing to protect your sale in this way:

You may not receive payment

If your goods do not meet your buyer’s expectations, they may withhold payment. This can arrive from a misunderstanding between what you believe you are providing, and they believe they are buying. It could also be an unscrupulous buyer who wishes to avoid payment (see also our section on Due diligence and KYC). A contract sets out each party’s expectations and responsibilities so misunderstandings are much less likely to happen and payment must be made as long as terms are met.

You may be subject to fees and charges you weren’t expecting

Contracts, and Incoterms® 2020 in particular, determine who is paying for what during delivery and transportation. Without this you may find yourself subject to charges you were not expecting such as tariffs, duties, and insurance.

Your goods could be blocked

If you find yourself in dispute over customs charges, or the paperwork has not been completed properly, this can lead to your goods being blocked at ports or borders. This can create delays, increased costs, or even your goods not reaching your customer at all, and therefore you not getting paid. If you are being paid under the terms of a letter of credit, this could lead to you missing deadlines and therefore defaulting on the terms agreed.

Why would people trade without a contract?

Having read all of the above, you should now be wondering why on earth anyone would ever trade without a contract, yet it does happen all the time. Negotiating and agreeing a contract can be time consuming and incur costs, having legal documents drawn up, but the more you trade internationally, the more efficient you will become. Any costs you incur in this way are more than offset by the potential cost of something going wrong. On the platform we have links to template documents and agreements that you can use especially if your products are quite straightforward. If you’re dealing in major construction or tightly controlled engineering projects we would suggest you take advice from specialist lawyers.  www.ICCWBO.org