What To Check In An Export Contract Before Accepting

If you are a trade finance professional, you should know what to check in an export contract before accepting it. After reading this article, you’ll be able to minimize the risk of export business both for your bank and your customer.

Export starts with the communication between a buyer and a seller. When they reach an agreement for sell and buy, it becomes a sales contract or an export contract. However, all export contracts are not acceptable to bankers. Bankers want to make sure that their customer can secure their interests. Mainly, they want to be sure about protecting the interest of the bank and the exporter.

However, what you may see (as a banker) is that Exporters are always trying to convince you that the Buyer is excellent. But it would be best to keep in mind that export businesses run two significant risks: buyer risk and performance (exporter's) risk. Additionally, a banker must also be careful about money laundering risk and compliance risk.

 

What Is Export Contract?

In the simplest form, an export contract is an international contract for the sale and supply of goods. In other words, we can say an export contract is a contract between the Buyer and the seller of goods (exporter) to export some specific goods of specific quantity and price to a particular destination under some agreed terms and conditions.

Oh, I must mention that some of these contracts are like a proforma invoice and intended to issue a documentary credit. But, this article will focus on the export under contracts or sales contracts only. A sample export contract or sales contract is given below for your ready reference.

Sample Export Sales Contract Word: [Click to Download “.docx” File]

Things To Consider Before Accepting An Export Contract

An export contract or a sales contract bears information regarding buyer, seller, goods and/or services, price and much more. All things may not be equally important. So, let us discuss some focal points. 

 

A. Parties To The Export Contract

The most crucial point is, what are the parties to the sales contract. There are two main parties involved in a sales contract, they are-

1. The Buyer (also called "Drawee") &
2. The Seller or Exporter (also called "Principal")

In the operational procedures, there may be some more parties involved in a sales contract, they are-

1. Sellers' agent and their Bank
2. Buying agent and their Bank
3. Buyers Bank (usually the Collecting/Presenting bank)
4. Sellers Bank (also called "Remitting Bank")
5. Collecting Bank (any bank involved in collection other than the remitting bank)
6. Presenting Bank (is the Collecting bank the makes presentation to the buyer).

B. Buyers' Credit Report

In global practice, sellers themselves are cautious about the creditworthiness of the buyer. But in the case of banking practices, especially in Bangladesh, if you are acting as a banker for the seller, you must carefully check the buyer's creditworthiness. 

You should check the buyer's name and address, line of business; credit limit recommended, payment behaviour, lawsuits, experience etc.

If you are satisfied with the information about the bonafide and creditworthiness, you should proceed. 

 

C. Usual Terms And Conditions In An Export Contract

You may find that there are numerous types of terms and conditions in an Export contract. However, the most common or featuring terms and conditions are listed below.

• Contract Number or Reference
• Contract Date
• Sellers Name and Address
• Buyers Name and Address
• Port of Shipment
• Port of Destination
• Date and Place of Expiry
• Latest Date of Shipment
• Trade Terms (Incoterms)
• Total Contract Price (as per Trade Term)
• Payment Term: Advance Payment before Shipment, TT after Shipment, DP/ DAP/ CAD/ DA or other.
• Description of Goods (Items, H.S.Code, Units, Unit Price (Incoterms), Total Quantity, Total Price (Incoterms) etc.
• Country of Origin
• Inspection
• Consignee Name and Address
• Notify Party(s) Name and Address
• Document Required
• Buyers Bank Details (including Address and Phone number, E-mail/SWIFT etc.)
• Guiding Rules (URC 522, Incoterms or Other)
• Signature of the Seller
• Signature of the Buyer

Watch YouTube Video on Incoterms 2020.

D. The Most Important Terms Of Export Contract

All the information on a contract is essential. However, we'll discuss some of that information because those are extremely important for the acceptability and applicability of the export contract. Let us have a look at them to know why they are so important.

1. Payment Term in an Export Contract

A sales contract may have various types of payment terms; some of those are -

• 100% Advance TT before Shipment, 
• 50% Advance and rest after Shipment and before handing over export docs, 
• TT after receiving a copy of BL, 
• At Sight, 
• 50% advance TT before Shipment and 50% At Sight, 
• 60 days after Shipment, 
• 90days sight, 
• 30 days DA, and much more.

As a banker for the exporter, you will want to secure your customer's interest and your bank's interest. One more big responsibility is to maintain full compliance. The more significant the amount of proceeds received in advance, the lesser the risk of repatriation, and vice versa. But does it guarantee compliance? 

In my opinion, the answer is, No. I'll discuss why it does not guarantee.

For ease of discussion, let us categorize the payment terms into three types-
100% Advance TT before Shipment, At Sight and 30 days DA.

i) 100% Advance TT before Shipment

You'll be comfortable getting all the payments in advance. Now you don't have any tension for repatriation. But, did you think –

a. Export may not take place
b. Advance funds may be released as part of money laundering or terrorist finance
c. Export is done, but the exporter may not be submitting export documents

So, you're running performance risk, money laundering and compliance risk! 

For this reason, in case of export against advance TT please make sure that the TT sender is the ultimate buyer and/or receiver of goods. The remittance information must contain the contract number and description of goods to export. If the buyer is not the receiver, TT must mention the goods receiver's name and address.

ii) At Sight

In the case of export on an “At Sight” basis, export bill collection involves the buyer's bank, also called Collecting Bank or Presenting Bank. So, both your bank and the buyer's bank will remain cautious about money laundering. Thus the ML risk is low. But you cannot guarantee the performance and receipt of payment in due time. 

Moreover, neither the seller's or buyer's banks are responsible for Shipment or payment when export is made against the contract. Think about the situation, you have given the Back to Back LC facility to the exporter, and the exporter is not making Shipment in due time. So, you cannot avoid performance and financial risk. 

Again, export is done, the fund is not received compliance risk is eventual! 

iii) 30 days DA

The term “30 days DA” indicates documents against acceptance, and payment will be made after 30 days. But the question is, Whose acceptance? Is it a banker’s acceptance? 

No, it's the buyer’s acceptance. 

Export is done. Documents were given to the buyer against their acceptance. Now, the buyer is not paying at maturity, what will you do? Compliance risk will follow you (as you're a banker)!

2. Buyers Name And Address Details

A sales contract should contain the buyer's name and address in detail, including telex, fax, e-mail address (where applicable). Because Para b.3, Article 4 of URC 522 requires that a collection instruction should include details of the drawee or buyer, including full name, postal address, telex, telephone and facsimile numbers (if applicable).

URC 522 says it should, but in my opinion, it is a must. This is because if the Contract does not carry the details to be mentioned in the collection instruction, where will you get it? Let us assume your exporter is giving you the details afterwards in a separate letter. Will it be a part of that Contract?

Moreover, you'll not be able to verify the Contract easily, which is a must for the exporter's banker.

 

3. Signature Of The Buyer

Bangladesh and all other countries around the world follow their Contract Acts. However, the common feature is mutual consent or agreement. If the Contract does not carry the buyers signature, how can you say that the buyer has agreed?

So, as a banker of the exporter, you should always verify the signature and the Contract in the most appropriate way you can.

Sometimes you may find that some other person/party has signed the contract on behalf of the buyer! Will you accept that? Yes, you may accept, provided that the person or party can produce their proof of such authority.

 

4. Signature Of The Seller

The signature of the seller is also required just in the same way as I've discussed above for the signature of the buyer. You must verify the seller's signature before accepting the Contract.

 

5. Inspection

You may not see the Inspection clause or such term in all the export contracts. However, if it is there, you must check it carefully.

If you are a trade finance banker in Bangladesh, you must know that you have to follow the Foreign Exchange Regulation Act 1947 and Guidelines for Foreign Exchange Transaction from the Central bank. Till now, you cannot allow releasing goods before receiving total payments or the banker’s acceptance to pay.

Therefore, you must be confirmed that the inspection will take place in Bangladesh.

 

6. Latest Shipment Date

Whether you are going to finance the exporter (funded/non-funded) or not, you've to be careful about the latest shipment date. Now, you may say that you're not financing the exporter, you do not have any responsibility for the export, then why do you have to be careful about these all?

Yes, my dear, you'll have to be careful. If the shipment date is too early for the exporter to perform the Contract, the buyer may reject the goods. When the Shipment is made after the latest date of Shipment, there is a high chance for non-acceptance of goods or non-payment. Sometimes, the buyer may claim a penalty and pay a discounted amount for the goods. 

When you're a banker for the exporter, you have to sign the EXP form for allowing them to export. Thus, you involve yourself in the process. You'll also have some responsibility for repatriation. The central bank will want to know that you've tried in all the possible ways. You may also have to prove that no money laundering or terrorist financing intention was not involved!

 

7. Date And Place Of Expiry

Date and place of expiry is also vital because it will help you to assess whether your export customer will be able to export within this timeframe and submit all required documentation as per the Contract. Failure to complete the entire procedure may lead to non-payment.

You should keep in mind that if the place of expiry is the exporter's country, that will provide the customer with some extra benefit for presentation. Days stuck in the courier will not be counted within expiry.

 

E. Central Bank's Guidelines For Export Under Contract

The central bank of Bangladesh has issued Guidelines for Foreign Exchange Transaction (latest version, GFET 2018) to guide all Bangladeshi trade finance professionals. This guideline outlines straightforward instructions for bankers to follow.

So, you must follow the necessary guidance from GFET, especially those portrayed in chapter 8 and chapter 7 of the latest version. Some of that vital guidance is regarding – 

• Drawing of transport documents
• Endorsement of export documents
• Checking bonafides of the foreign buyer
• Sufficient arrangement for the realization of the export proceeds
• Reporting of activities
• Measures to be taken in case of non-repatriation

They have also provided many other guidance through their circulars and circular letters. Moreover, they have issued a guideline for trade-based money laundering. By firmly adhering to this guideline, you can avoid the risk of money laundering. 

 

Consequences Of Non-Receipt Of Export Proceeds

You should know that there is a long consequence of non-receipt of export proceeds. As a banker, you'll also have to face some difficulties. You’ll have to communicate with different parties, again and again, reporting and replying to the central bank and other regulator’s queries, explaining the whole case redundantly. You may also need to be present at the NBR, Custom Bond Commissionerate and in the Court of Law.

An exporter will be held fully liable for the full repatriation of the export proceeds. Failure to repatriate will lead to punitive action from the law enforcing agencies of the country. In most common cases, non-repatriation is linked with illegal parking of money to a foreign country. It is treated as money laundering. It may also be treated as terrorist financing in other forms. 

All further import and export may be banned for the exporter locking their BIN. Financing support from the central bank and cash incentive facility will be withheld. The ultimate fate of such a case will depend on the judgement by the court of law.

 

Actions To Be Taken For Risk Minimization

As a trade finance professional or banker, you must take some measures to minimize the risk of export under a sales contract. Following few steps can mitigate the risk significantly. 

• Read the Contract very carefully and check all the essential terms and conditions.
• Verify the Contract and signature of the buyer and seller by the best possible means.
• Collect credit reports from a reputed international credit rating agency and check the information.
• Review the exporter's performance.
• In possible cases, arrange for a standby letter of credit or demand guarantee from the buyer covering the export.
• You may try to avoid contracts on a DA basis if not covered by SB LC or Demand Guarantee. 

Final Thoughts

Finally, I’ll conclude by saying that this article will help the trade finance professionals, both bankers and non-bankers. If you already have read the whole article carefully, you already know most of the techniques to safeguard your interests. 

However, when operating under an export contract, you'll have to follow the relevant instructions under the following rules and regulations in Bangladesh.

• URC 522
• GFET 2018
• FERA 1947
• Contract Act 1872 for Bangladesh
• Guidelines for TBML
• Circulars and Circular letters from Bangladesh Bank & other government organs.

 

The real Twist will come when the Contract contains a payment clause like – “This Contract will be replaced by LC and shipment to be made against the LC only”. 

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