Incoterms & trade contracts

Sales contract

The core document setting out the parties’ rights and obligations in an international raw material sale. It should cover the product and specification, quantity and tolerance, price and currency, Incoterm and named place, shipment period, payment method, quality and quantity determination (inspection), insurance, force majeure, remedies for breach, governing law and dispute resolution. Where the parties’ countries allow it, the UN Convention on Contracts for the International Sale of Goods (CISG) applies unless expressly excluded.

Related terms

Proforma invoice PI

A preliminary invoice issued by the seller before shipment, listing the product, quantity, unit price, Incoterm, payment terms, delivery time and bank details. Buyers use it to open a letter of credit, pay an advance or apply for import licences or foreign-exchange allocation. It is not a tax invoice; once countersigned by the buyer it can serve as the contract in simple deals, but larger transactions deserve a full sales contract.

Force majeure

A contract clause covering events beyond the parties’ control that could not be foreseen or avoided – war, earthquake, epidemic, embargo, port closure – which temporarily or permanently prevent performance. A good clause lists the events, sets a notice period (often 7–14 days), defines the evidence required (e.g. a chamber of commerce certificate) and gives a right to terminate if the event lasts beyond a set time. Price increases or market changes are normally not force majeure.

Arbitration (international commercial arbitration)

Resolution of a dispute by arbitrators chosen by the parties instead of state courts, in a confidential and final procedure. Institutions such as ICC, LCIA, SIAC or ISTAC, or the rules of commodity associations (GAFTA, FOSFA, LME), are commonly used. Thanks to the New York Convention, awards can be recognised and enforced in more than 170 countries, which usually makes arbitration more effective than litigation between parties in different countries. The clause should name the institution, seat, language and number of arbitrators.

Quantity tolerance (± %, “more or less”)

A clause in bulk and large-volume contracts accepting that the delivered quantity may deviate from the contract quantity by a set percentage, usually ±5 % or ±10 %. It states whose option the deviation is: the seller’s (MOLSO) or the shipowner’s (MOLOO). Over- or under-delivery within the tolerance is normally invoiced at the contract price, and the letter of credit must carry the same tolerance – otherwise UCP 600 allows only ±5 % for bulk goods.

Incoterms 2020

The eleven standard delivery terms published by the International Chamber of Commerce (ICC) that define where the seller delivers, when risk passes to the buyer and who pays for freight, insurance and customs formalities. Incoterms do not set the price, the payment method or the transfer of ownership; those must be written separately in the contract. A rule should always be quoted with a named place and the version, e.g. “FOB Mersin Port, Incoterms 2020”.

Explained in the trade handbook

Trade handbook