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Broomhill Industrial Materials Limited: Commercial Contracts Case Study


Alternative Incoterms

Broomhill is in the process of negotiating a sales contract with a new purchaser in America for the supply of a large number of lead sheets. Discussions with regard to transport terms are ongoing, but the purchaser has rejected Broomhills initial proposal that FCA incoterms 2010 should apply to the contract. Advise Broomhill which alternative incoterms 2010 could be used as an appropriate commercial compromise between the parties.

As Broomhill is negotiating with a new company from another country, it should bear in mind that a variety of possible problems may arise during the delivery and acceptance of goods. Thus, it is necessary for the company to choose transport terms that will give Broomhill more freedom and financial security. The purchaser in America did not agree to the terms of FCA incoterm®, but it is clear that the company should pursue options where the buyer has more responsibilities in order to ensure minimal losses. Moreover, the large size of the first shipment also raises the issue of the buyer being unable to meet the terms of the final contract. A number of incoterms® 2010 can be advised for the company to guarantee a deal with a low possibility of financial issues.

Broomhill can propose to carry the transaction out on the terms of CPT (Carriage Paid to) incoterm®. Here, the obligations of a seller include paying for transportation to the chosen destination inside the seller’s country. Thus, Broomhill would agree to take on more financial responsibility and pay for the delivery from their facility to the port of import. This incoterm® varies from FCA in a way that still keeps the buyer the main acting side in all processes of delivery. Broomhill would only have to pay for the delivery to the port. Moreover, insurance for the goods is arranged by the buyer. As it is the first purchase by the American company, Broomhill should remain aware of the fact that it does not know the behaviour of the buyer. The transportation beyond the port should be paid by the American company.

Another incoterm® that would place less responsibility on Broomhill is CIP – Carriage and Insurance Paid to (named place of destination). In this case, the seller’s expenses have to include all terms mentioned above and also add insurance for the delivery. This type of agreement is less economically advantageous for Broomhill as it has to cover transportation and insurance partially. As specified by the incoterm®, the insurance coverage’s amount should be equal to the value of the purchased goods plus 10%. Here, the purchase is large, which could place Broomhill in a challenging position if the American purchaser is not satisfied with the goods or fails to cover other expenses. However, this particular option could ensure the buyer that the company is looking for a long-lasting and reliable partnership.

The same issues apply to the next possible incoterm® – DAT (Delivered at Terminal). Although Broomhill has to pay all delivery costs and arrange insurance conditions and transport the goods to a negotiated terminal, the buyer has to pay for insurance and all expenses that cover the road from the terminal to the buyer’s desired place of delivery. Here, the seller avoids the responsibility of obtaining necessary documents and paying for import duties. These concerns have to be covered by the buyer. Thus, it is still a viable option for both companies as the seller does not pay for international delivery, while the buyer can be ensured that Broomhill will deliver the goods to the arranged place.

All described options separate the responsibilities of the seller and the buyer to their respective locations. Broomhill should avoid such choices as DAP or DDP as they may result in substantial international costs and place all responsibility of obtaining required documentation on the seller. This purchaser of the goods is new for the company. Therefore, Broomhill should consider ways to ensure its financial stability during the negotiation. The most viable incoterm® for recommendation after FCA is CPT as it eliminates the need to pay for insurance and allows the company to cover a small part of the expenses.

Payment Mechanisms

The American purchaser has asked for a 60-day credit period in the sales contract. It is unwilling to make payment in advance as it has experienced delivery problems with several other suppliers in the past. Broomhill is reluctant to agree to this as they have never previously traded with the purchaser. Furthermore, Broomhill does not want to have to enforce payment abroad should the purchaser default with regard to payment. Advise Broomhill as to which payment mechanisms will best protect its interests.

Allowing credit for international deals is rare as these types of transactions usually require payment in advance.> Thus, the offer of the American purchaser can put Broomhill’s operations at risk. As payment details are significant in international transactions, Broomhill has to consider options that would protect its financial stability. It is understandable that the company does not want to allow credit for the purchaser as debt recovery from abroad is difficult to execute. A number of practices can help Broomhill to secure the payments.

First of all, the most secure and the most known type of payment are letters of credit. These documents allow the seller to get paid after it has fulfilled the conditions of the contract and presented all necessary papers regarding transport and products’ quality. This type of payment would protect the interests of the company as it places the responsibility for its arrangement on the buyer. Moreover, the process of payment is not connected to most disputes that may arise after delivery.

For instance, the poor quality of goods or unsatisfactory performance from the seller cannot stop the payment process from being completed. Unless the contract is breached with malicious intent from the seller or the letters of credit are null and void under any circumstances, the payment can proceed. Furthermore, any possibility of fraud has to be proven in court.

This type of payment secures international transactions and allows sellers to be confident in their operations. It is also beneficial to the buyer is it can be sure the goods are delivered as everything is corroborated by necessary documents. However, Broomhill should be aware that choosing letters of credit may not satisfy the buyer who evidently does not want to pay in advance, and is unhappy with its previous suppliers.

The company should not choose a revocable credit option as it gives too much power to the buyer Revocable credits will not ensure the payment and protect the company in the end. On the other hand, an irrevocable credit is a viable option for Broomhill as it does not allow the parties to alter the contents of the agreement without some exceptions. The letter of credit should also be confirmed by two banks – an issuing bank and a confirming bank – to further increase the security of payment.

The next option that Broomhill can use in case of the purchaser defaulting on payment is a standby documentary credit. Here, the bank that issues the credit will have to cover the losses if a buyer is not able to pay. The seller will be able to secure its money and protect its interests. Other types of letters of credit may not work in favour of the seller as they deal with companies that have established business relations.

The letter of credit, if adequately discussed with the buyer, may assure the American business of Broomhill’s stable position and good intent. Currently, the purchasing company has trouble trusting the seller because of its previous deals with other suppliers. However, Broomhill can both protect its interests and create a verified and secure type of transaction that would help the purchaser to accept the proposed terms.

Another commonly used type of payment is a bill of exchange. It may appear to be less secure to the seller, but the failure to honour the bill can have significant consequences. Bills of exchange can have credit periods for purchasers which may be preferable by the American company. Nevertheless, the bill itself has to be signed by them upon the moment of issue regardless of that fact. The documents and the goods will not reach the buyer without the approved bill. In case of the bill being ‘dishonoured,’ the seller may negotiate further payments with a third party. Although this type is less secure for Broomhill, it is more flexible and negotiable for both the seller and purchaser. Therefore, the American company may be more accepting of this agreement than a letter of credit.

Rights in Case of a Shipwreck

Several months ago, Broomhill purchased 2,000 tonnes of lead ingots from a supplier in Brazil, to be shipped on a ship called The Miranda. 10,000 tonnes of lead ingots were stored in the ships hold and were the only cargo on board. The ingots were to be delivered to five separate purchasers, including Broomhill, all of whom had paid for the ingots in advance. Before delivery could take place, however, The Miranda was shipwrecked off the coast of France, losing 4,000 of the 10,000 tonnes of lead ingots. The remaining ingots are now at Dover. Advise Broomhill as to what rights, if any, it has in respect of the remaining lead ingots.

Broomhill’s purchased goods were on the ship which shipwrecked near the coast of France. The company owned 2,000 tonnes of lead ingots out of the 10,000 tonnes present on the marine vessel. However, 4,000 tonnes were lost due to the shipwreck. In this case, it is important to note that Broomhill has already paid for the goods; thus, the company has the rights to own a share of 2,000 tonnes of the supplies from that ship. The company’s products may be classified as unascertained as it can appear unclear which of the ingots out of the bulk exactly were purchased by the company. Therefore, such a distinction may complicate the process of supplies’ recovery. Unless the firms included any information about the operation in case of a shipwreck into the contract, the following actions should be covered by the s. 20A.

It is possible for Broomhill to prove that their part of goods is ascertained and thus can be claimed. First of all, the amount of ingots is specified by both parties as it is known that Broomhill bought 2,000 tonnes of lead ingots. Secondly, the company was aware that its identified share of goods was present on the ship. Moreover, the ship with the supplies had a name, The Miranda, which also made the products ascertained.

According to s.20A, the buyer has ‘common property rights’ to the bulk of supplies that are present on the ship if they are ascertained, identifiable and fully paid for. Broomhill can claim the proportionate share of the bulk that remained on the vessel. If five companies shared the 10,000 tonnes of ingots, and 4,000 tonnes were lost, then the company can claim ownership of the remaining part, which is approximately 1,200 tonnes of lead ingots or 60% of the purchased goods. This portion can be recovered by Broomhill according to the regulations mentioned before.

However, the remaining 40% of the share is not covered by this regulation. Here, it is unclear whether Broomhill and its supplier had any other details specified in the contract. If the companies included any type of insurance for the products in the agreement, then Broomhill can claim the insurance on the lost part in order to recover the cost of the goods. To help the company one should establish the type of insurance that was used in the contract and most importantly identify the reasons for the shipwreck. The Institute Cargo Clauses, which usually cover the risks under insurance, include various classes of protection and specify different conditions which should be met in order for the goods to be covered.

The description of the problem can imply that the ship may have collided with an object other than water. This definition would fall under Class C of the Clauses, which provides the most generic type of coverage. Thus, if Broomhill and the supplier included some form of insurance into the contract, the buyer could use it to recover the money for the lost supplies.

Laws Enforcing Debt payment

One of Broomhill’s oldest and most lucrative customers has been Duret SAS, a diving weight retailer based on the South coast of France. The trading relationship between the two companies is so good that for the past two years no special payment terms have been included in the contracts between the parties, cleared funds having instead been paid directly by money transfer into Broomhills bank account. However, £500,000 is now overdue for payment. It transpires this money is due under an Ex Works contract which had no choice of jurisdiction or choice of law clauses included within it. Advise Broomhill as to what law may govern the agreement, where it may bring a claim in contract against Duret SAS and how it might enforce any debt judgment.

Companies that have international agreements can choose from three mutually exclusive regimes of jurisdiction when trying to address the issue of overdue payment. First of all, the EU jurisdiction applies to the members of the EU states. Second, the European Free Trade Area (EFTA) regime deals with the EU members and the countries of the EFTA. Finally, the common law regime can be used in cases where the two previous systems cannot be applied.

It is necessary to state that the dispute is non-domestic as it deals with companies that are based in two different countries. Therefore, both businesses fall under the EU regime as they are situated in its member states – Broomhill in the UK and the buyer company in France.

The parties did not specify which jurisdiction should regulate their disputes. Therefore, according to the EU jurisdiction, the company may have to address its claims in the country of the defendant. Moreover, this particular issue deals with the enforcement of a debt judgment, which should be heard in the court of the defendant’s country as it is a specific matter covered by Art.24(5). According to this regulation, the state of execution becomes the place for the proceedings.

The defendant’s country is the place of enforcement. Therefore, French courts should oversee the dispute. This condition places Broomhill in a beneficial position as making non-domestic claims can often require many efforts in order to enforce the judgment. Here, the request, if successful, will not leave much room for the French company to appeal. The enforcement will have to follow the rules of French law.

Even if the company fails to prove that the proceedings should be situated in the defendant’s country, it can succeed in its debt enforcement. For instance, Broomhill can try to appeals for immediate implementation of the judgment under the Brussels I Regulation, which deals with the disputes between the EU member states. Here, Art. 36 specifies that special procedures for decision recognition are not required if it was made in the member country.

However, Broomhill has to provide a translated copy of the ‘certificate of enforceability’ to the debtor in order to confirm its original claim and prove to the court that the documents were delivered and presented. As the purchaser can try to appeal to the court against the issued judgment by using its local law, this situation can be more complicated for the company. Nevertheless, this scenario is unlikely as the countries fall under the EU regime with its clear regulation on the proceedings of judgment enforcement.

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