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Preparation of Contract

International Law and Business Ethics course

Part 1

The agreement between two (bilateral) or more parties (multilateral) upon certain specified terms in trading or other activities leads to the formation of a contract. This section discusses the relevance of the occurrences in the case of Goodscan and Hospitex in the context of the main elements that constitute a contract. It is important to note that that the contract between Goodscan and Hospitex is being governed under the provisions of the UN Convention for Contracts for the International Sale of Goods (CISG). Accordingly, each element would be attributed to the relevant scenario mentioned in the document, in the following manner.

1.1. Offer and acceptance

The business law of contracts is being taken into consideration since the discussion relates to contracts between two organizations. The initial phase of a contract is formed when an offer is made by one party, and subsequently the other party has to accept the offer for the contract to be enforceable (McKendrick, 2005). This refers to the element of offer and acceptance.

The “offeror” is the person/ entity that makes the offer whilst the “offeree” is the entity which has the option of either accepting or rejecting the offer. In this context, Goodscan is the offeror and Hospitex is the offeree. The negotiations conducted on February 1st 2013, involves the offer made by Goodscan’s representative and the subsequent acceptance by the CEO of Hospitex.

1.2. Intention to create legal relations

It is essential for the contracting parties to enter into a legally binding agreement for a contract to be initiated. This establishes a certain set of terms on which both parties need to abide upon, and establishes the grounds on which – in the event of a breach of contract – the contract could be terminated or the avenues for the innocent party to claim damages (McKendrick, 2005). Accordingly, the first instance where the intention to create legal relations is being illustrated is the agreement between the two companies to use the CISG as the basis of the contract. Secondly, the assertion of Hospitex regarding the inclusion of the clause to use the Ontario laws to arbitrate disputes that arise during the execution of the contract, portrays the company’s intention to establish a legally binding contract. Thirdly, the inclusion of the “FOB clause” in the contract, as well as Goodscan’s request for Hospitex to pay via a “letter of credit” enumerates the intention of both parties to create legal relations.

1.3. Consideration

Consideration refers to the price or value paid by the promisor to the promisee in exchange for the goods, services, or any other thing of value provided by the promisee to the promisor (Koffman and MacDonald, 2007). The promisor in this context is Hospitex and the promisee is Goodscan. Accordingly, the consideration given by Hospitex is to pay One million Canadian Dollars (CA $1,000,000) in exchange for the 5 x-ray machines provided by Goodscan.

1.4. Legal capacity

The legal capacity of the contracting parties could be discussed in line with the legal authority individuals – who are the representatives of the respective companies – to enter into contracts on behalf of their companies (Koffman and MacDonald, 2007). In this context, the CEO of Hospitex and the representative of Goodscan have been authorized to enter into legally binding contracts on behalf of their respective companies. Hence, the fact that the two authorities (representing their companies) were able to lay down certain clauses of their business contract illustrates that the said authorities possessed legal capacity to form a contract.

1.5. Consent

A contract becomes binding upon parties subsequent to granting their consent to the terms in the contract (Bronaugh, 1976). Accordingly, both the companies have given their consent towards implementing the contract since they have agreed upon the laws governing the contract, the manner in which the business transactions would be performed, the responsibilities of each contractual party, and the remedies for either party breaching the contract as well as the manner in which contractual disputes would be resolved.

1.6. Illegal and void contracts

The legality of the contract between Goodscan and Hospitex cannot be questioned due to the nature of the contract. This is due to the fact that the two entities that are executing the contract do not violate any statutory provisions (i.e. legislation of the respective governments) nor do they engage in any trade deemed as illegal according to common law. Thereby, the contract does not constitute to being illegal, nor could it be deemed as void.

Part 2

This section discusses the issues that have taken place subsequent to executing the contract. Accordingly, it would necessitate to understand the perception (and arguments) of both sides in order to determine what type of remedies that each party might seek and the extent to which such remedies could be achieved.

2.1. Advantages and disadvantages of using CISG

Advantages –

  • It represents business expectations on an international level and creates a fair and uniform framework for business organizations to operate internationally (McNamara, 2000).
  • It makes international transactions more convenient – especially when companies trade with numerous foreign countries (Cook, 1998).
  • Since the provisions are well drafted it creates less ambiguity in deciding disputes (McNamara, 2000).

Disadvantages –

  • Since the parties don’t have to write the agreement compulsorily to enter into the contract under CISG, both the parties could be vulnerable to be may cheated by each other (Cook, 1998). This also creates avenues for major fraudulent activities to take place.
  • Traders are unfamiliar with the provisions of CISG (McNamara, 2000). This could result in misunderstandings and conflicts amongst the contracting parties.
  • Courts in many jurisdictions are unfamiliar with the CISG provisions, and as a result deficiencies in the enforcement of the law could occur (Cook, 1998).

2.2. Advantages and disadvantages of using letters of credit for international sales transactions

Advantages

  • A letter of credit mainly provides financial security to both the seller and the buyer – since it is been given by a reputed bank, and thereby the buyer is been guaranteed that the seller would honor his end of the contract whilst the seller would be guaranteed the due payments (after fulfilling the contractual terms).
  • It is one of the most secure methods of payment for exporters (provided that all the terms and conditions are appropriately met).
  • The risk of non-payment is transferred from the seller to the bank.
  • The production risk would reduce in the event of the buyer cancelling or changing the order.
  • The seller is able to calculate the payment date for the goods.
  • It allows the buyer to avoid or reduce pre-payment.

Disadvantages

  • The buyer must pay the bank fee for the letter of credit.
  • It does not offer protection to the buyer against the seller shipping inferior quality goods and/or a lesser quantity of goods. Accordingly, the buyer will not be able to refuse to pay due to a complaint about the goods (especially in the event of the goods being damaged).
  • The buyer’s only means recourse for the fraudulent actions of the seller would be through legal proceedings – especially when trading internationally.
  • Some importers may not be able to open letters of credit due to the lack of credit facilities provided by banks, in situations where import growth is restricted.

2.3. Arguments for Goodscan

According to Articles 66 and 68 of the CISG, the risk passes to the buyer when the goods are delivered and the buyer has to pay the price for the goods which are damaged. However, this is relevant if the established shipment terms (i.e. FOB clause) conform to the provisions of passing the risk under the CISG (Ziegel and Samson, 1981). It could also be argued that basing on Article 25 of the CISG, the company did not foresee the unprecedented predicaments (i.e. strike of suppliers, delay in shipment, and damage of goods), and thereby did not breach the contract. Moreover, the company could recover payments for the goods supplied (in the proper condition) – under Article 81 of the CISG – since part performance of a contract has occurred.

2.4. Arguments for Hospitex

Article 35 denotes that if the seller acts negligently or omits the relevant duties the risk stays or returns to the seller. Accordingly the article states that the goods must be of the quality, quantity, and description required by the contract, be suitably packaged and fit for purpose (UNCITRAL, 2010). Also according to Article 70, if the seller commits any fundamental breach of the contract, the buyer is able to claim damages in line with the nature of the breach. These fundamental braches include; delay in shipment and damage of goods. This illustrates that Hospitex would be able to claim damages for the delay that occurred in receiving the shipment as well as for the damaged x-ray machine which they received.

2.5. Arguments for which party is right

The aforementioned factors forward valid arguments for both the parties. An advantage to the buyer in CISG is that all kinds of risks such as economic, legal and physical risk lies with the seller until the delivery of the goods. In this context, Goodscan has breached the contract in terms of articles 35 and 70 of the CISG, due to delaying the shipment from the date agreed upon and providing goods that do not conform to the quality and description required by the contract. This refutes the claim of Goodscan to pass the risk to the buyer upon delivery of goods, under articles 66 and 68. Also, Goodscan has breached the contract in line with article 35 since it has been negligent in performing its duties – in terms of shortcomings in the cargo manifest documents – which led to the company being unable to receive the payments subsequent to the delivery of goods.

However, it should be noted that Hospitex cannot claim for additional payments since its CEO agreed to pay the additional ten thousand dollars – which amounted to acceptance of the alteration of contractual terms. Importantly, the dispute would be resolved in the Canadian jurisdiction since both parties agreed to follow the laws of Ontario in the event of contractual disputes arising.

Therefore, it could be concluded that Hospitex possesses the advantage in terms claiming for damages and breach of contract, since Goodscan has breach the contract in line with articles 35 and 70 of the CISG.

References

Bronaugh R, (1976), Agreement, Mistake, and Objectivity in the Bargain Theory of Conflict, William & Mary Law Review.

Cook V S, (1998), CISG: From the Perspective of the Practitioner, Journal of Law and Commerce, Vol. 17, pp 343-353, http://www.cisg.law.pace.edu/cisg/biblio/cook.html; [Accessed on September 30, 2014].

Koffman L and MacDonald E, (2007), The Law of Contract, Oxford University Press.

McKendrick E, (2005), Contract Law – Text, Cases and Materials, Oxford University Press.

McNamara T, (2000), United Nations Convention on Contracts for the International Sale of Goods, http://www.dgslaw.com/images/materials/334336.PDF; [Accessed on September 30, 2014].

UNCITRAL, (2010), United Nations Convention on Contracts for the International Sale of Goods, http://www.uncitral.org/pdf/english/texts/sales/cisg/V1056997-CISG-e-book.pdf; [Accessed on September 30, 2014].

Ziegel J and Samson C, (1981), ‘Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods’, Toronto, pp 168–305.