Having the right international contracts and insurance for your exports can help manage your risk, protect your company and ensure you're paid.
You may need different types of international contracts depending on how many partners you work with to get your goods to market. The main ones are:
- contracts for the sale of goods
- contracts for the supply of services
- distribution contracts, also known as a distributor agreement
- agency contracts, also known as an agency agreement
Your contract framework
It's important that the written contract can be understood by all parties involved. Your contract may need to be translated into other languages so that everyone involved understands their role and responsibilities.
Visit the Institute of Translation and Interpreting to find a translator for your contract.
International contracts for the sale of goods or supply of services are usually short-term. They often only cover one transaction.
International contracts with distributors or agents are usually longer-term agreements. They set out the relationship you have with your distributor or agent and the rules for managing this relationship. These agreements usually cover multiple international sales transactions.
You need to understand how business is conducted in your export country when drafting your contract. You may have already explored this during your export research and planning.
Some countries' legal systems are based on civil law and some are based on common law. When drawing up a contract, you'll need to consult with a legal adviser who understands the law and legal system in Scotland and in each of the countries your contract covers.
You could have a standard distributor contract template that's adapted for each market's laws and distribution issues.
Find a legal adviser or solicitor in Scotland. You can search by organisation name, town or area of law.
Have you checked whether your potential partners:
are reliable financially?
are 'legally empowered' to act on behalf of their company?
Some partners may ask to have exclusive rights to your products or services in a certain market. Using what you've learned about your partners, you can decide on whether this works for you. It's also worth checking this with your legal adviser to make sure you are covered if they don't perform.
A well-negotiated contract will ensure everyone involved complies with the right laws and regulations, and that your partnerships are based on trust and deliver growth.
The best format for an international contract is a written document but you also need to check the legal standing of e-documents, if required. Your legal adviser should be able to help you decide on the right format.
Ask your lawyer to supply a standard international contract template or look online for contract templates relevant to your industry. You can adapt this to your situation.
Always ask your lawyer to check that the draft contract you've written sets out what you want it to achieve. Also check that it's legally enforceable both in Scotland and in the overseas country.
If presented with a draft contract by an international customer or business partner, always get your lawyer to look it over before you sign it.
What to include in an export contract
When drafting a legal contract with a distributor, think through the following points.
Is your agreement governed by UK law or the law of the importing country? It's very likely that laws in the receiving country will also govern your agreement. To help with this, ask your lawyer to get local legal advice before signing a contract.
Make sure your legal agreement includes:
Losses you could incur that go beyond the upper limit of compensation in your insurance policy (this dictates the value cap that you decide to set in your agreement)
Any losses caused by third parties.
Agree who should pay for
export and import licences
export and import duties
damage to goods at the various points in transit
insuring the goods and how far your insurance will cover
Make sure you state in your agreement exactly what you are and are not liable for. Also be clear on what point in the product's journey the change-over occurs. This is called the 'title to the goods passes'. Insurance for perishable goods works slightly differently.
For guidance on export insurance read the Export Insurance Policy guidance on gov.uk.
Review all of the payment options carefully before choosing the best one for you. These include:
letters of credit
Also consider adding
payment terms (e.g. 30 days after the invoice date)
late payment interest charges
early settlement discounts
arrangements for paying in installments
if there are any circumstances where the importer can make deductions or withhold payment
Your agreement should also state whether payments will be made in sterling or the import country's currency.
Some distributors may want to be the exclusive seller of your products or services in their market. You'll need to consider whether you should have an exclusive relationship with them - your lawyer and your research on them can help you decide this.
If you do agree to exclusivity and your partner doesn't perform, your exporting venture is at risk. Discuss with your lawyer how you can address this in your contract.
Your products will have to have an import licence (in the receiving country) as well as an export licence if you're exporting from the UK. Your agreement should clearly state which parties will apply for both of these licences to prevent risks associated with currency fluctuations.
You should carry out a full assessment of the companies you make the agreement with to make sure that the business is not likely to fail. Find out more about how to carry out due diligence.
Incoterms are a set of legal codes applied which describe standard terms about who is responsible for the delivery of goods sold abroad.
By making sure you choose the right incoterms for your products you can protect your company against risk.
You may need to add specific additional terms not covered by incoterms into your agreement.
Find out more on the Incoterms page.
Every type of product has a commodity code applied to it. Each commodity code describes:
import/export licences or exemptions
regulations (known as measures)
what duty must be paid on that product
how much VAT is due and if the product is eligible for tax relief
any customs procedures that apply.
You should state in your agreement the method of getting your product to the customers There are 3 main types of export distribution:
Direct selling: you sell your product directly to the customer with no distributors
Selling through intermediaries: these can be wholesalers, distributors, retailers or agents
Dual distribution: selling directly to some customers (e.g. via the web) and through a local retailer.
For more detailed information on distribution methods, go to Incoterms for importing and exporting
Before you sign any deals, spend some time getting to know the laws governing business contracts in that country, and look for legal advice to make sure you're not caught out.
Some Scottish lawyers can advise you on getting advice in the countries you're exporting to.
If you register for the Export Savvy website it has information on legal considerations for contracts with partners.
The International Trade Centre has created free draft contracts for small businesses that want to export.
Clauses and annexes
The clauses and annexes should be negotiated by you and your export partners based on needs.
Some typical clauses you might find in a sales contract or an agency and distribution agreement are:
- names and addresses of parties
- what the agreement covers
- territory covered
- exclusivity – or not
- how long it will last
- notice period
- items to be distributed
- conduct at severance
- distributor obligations
- principal's obligations
The legal system that'll apply to your contract should be negotiated with the support of a solicitor or legal adviser. Your contract should specify which country's law applies and which court has jurisdiction in the event of any litigation.
It's important to get the financial section of your contract correct. The clauses on getting paid should protect your cash flow, business and future export success.
Your contract needs to specify:
which currency is used and how currency fluctuations are handled (you can add an 'indexation clause' to offset any currency risk)
the payment instrument (such as cheque)
the payment method (such as cash on delivery)
the payment terms (such as 30, 60 or 90 days credit, instalments)
early settlement discounts and late payment penalties
Risk management and insurance can help protect your finances. Visit GOV.UK to find out more about export finance and insurance.
Find the export commodity codes you need to ensure you pay the right tax, duty and licences that apply to your goods.
There are 3 main types of export distribution:
direct selling - selling your product directly to the customer with no distributors
selling through intermediaries - such as wholesalers, distributors, retailers or agents
dual distribution - selling directly to some customers and through a local retailer
In certain circumstances, products may need an export licence if you're exporting from the UK. Your export partner may need an equivalent import licence to meet their country's regulations.
Your contract should state which parties are responsible for applying for these licences.
Clauses need to be included on what happens in the case of unforeseen circumstances - known as 'force majeure' - that prevent one of the contract partners from fulfilling the contract.
A hardship clause will cover the renegotiation of the contract if an event such as an economic crisis means that one or more of the parties cannot fulfil their contractual obligations.
A restraint-of-trade or non-competition clause must specify the geographical area it covers and how long it lasts. It plays an important role in the contracts of commercial agents.
A confidentiality clause is subject to time limits, which normally must not exceed a prescribed period. Confidentiality clauses are important when protecting your intellectual property.
It's important that you and your legal adviser check annexes carefully. If necessary, you should have them translated so that you understand them properly.
More help and other things to consider
It's important to have the right insurance to manage your risks and protect you, your company and your goods throughout the export journey. Your insurance and the incoterms agreed clarify which party is responsible for the goods and transport costs during the export journey.
In terms of your legal agreement, make sure it's clear on what happens with losses:
above the upper limit of compensation in your insurance policy
caused by third parties
Your contract needs to state who pays for:
transport costs throughout the goods' journey
export and import licences
export and import duties
damage to goods at the various points in transit
For more detailed information on contracts, check Open to Export's guide to international contracts.
Visit Scottish Enterprise's website for information and advice on doing business outside Scotland.
If you're based in the Highlands and Islands, visit Highlands and Islands Enterprise's website for help and advice on contracts