The closeness of a foreign sales contract in Binh Minh Household Joint Stock Company

The research is intended to aim at analyzing some restrictions in the contract form of the Company and proposing several practical measures to sharpen the closeness of all provisions in the Company’s sale contract.

ACKNOWLEDGEMENT

To some extent, I can say for sure that this thesis is the end of my long journey toobtain my degree in the National Economics University In this journey, I did nottravel alone, but my advisor, teachers, colleagues, parents and friends have beenalways by my side to give me lots of precious support In other words, this reportwould not have been possible without ongoing guidance and support provided bythem during the last time

From the bottom of my heart, I would like to thank my advisor Pham Phuong Lanwho has been directly responsible for guiding my performance devotedly

Special thanks are for teachers of the faculty who have been willing to contributetheir time and efforts to this report by providing necessary information and advice for

my preparation

In addition, I would like to give my sincere obligation to my temporary colleagues

in Binh Minh Household Joint Stock Company for their dedication and enthusiasm tohelp me with data collection and professional skill They somewhat gave menumerous opportunities to be exposed to real practice

My appreciations are also extended to Dr Nguyen Hong Hai - Deputy Head ofInternational Payment Subject, and M.A Tran Nguyen Hop Chau – Lecturer ofFinance Faculty, Banking Academy of Vietnam, for their devotion to me during theshort-term course related to import-export operation

By the way, I also wish to express my obligation to Mrs Vu Thanh Van for thetime when I worked as a collaborator for VinatranzPro translation office She gave

me various chances of sharpening my knowledge of sale contract that somehow made

me come to a decision to challenge myself in such field

Finally, I would like to thank my parents, friends who are never reluctant to do me

a favor no matter what It is a precious encouragement for me to strive for suchfinalization

TABLE OF CONTENT

EXECUTIVE SUMMARY

The term “contract” is likely familiar with almost all of transactions, especiallycross-border ones Depending on its appropriateness or inappropriateness, a contractcan somewhat facilitate or dispute a transaction This, in fact, has interested me a lotduring my internship period in Binh Minh Household Joint Stock Company Takingpains to analyze the Company’s existing sales contract, I myself discovered severalshortcomings regarding contract’s closeness that is thought to cause transactionaldisputes possibly With a view to contributing my part to the Company and fulfilling

my graduation thesis, this paper therefore is intended to clarify problematicprovisions Accordingly, I would like to take the chance to put forward somerecommendations to make the Company’s contract more proper in the hope offacilitating transactions between the Company and its foreign counterparts

Recent years, globalization is becoming a common trend worldwide It has provedits crucial influence on almost all economies, especially those of developing countriesand Vietnam is not an exception

In the context of global integration, self-sufficient economic model becomesabsolutely obsolete, it should be replaced with a modern one in which an openingmechanism is encouraged In so doing, business transactions both domestically andinternationally are popular accordingly Of which, it can be said that sales contracts,especially foreign ones play an important role in almost enterprises’ carrying-out fortheir normal operation In fact, a sales contract is deemed as a legal documents bywhich involved parties’ obligations and rights are preserved lawfully Therefore, it isstrongly advised that the work of drafting a proper sales contract be paid due attention

by all businesses in general and import-export enterprises in particular

Objectives & Scope of work

Being aware of the importance of drafting sales contract and based on a usefulinternship period in Binh Minh Household Joint Stock Company, I am really

interested in a research on “The closeness of a foreign sales contract in Binh Minh Household Joint Stock Company” The research is intended to aim at analyzing

some restrictions in the contract form of the Company and proposing several practicalmeasures to sharpen the closeness of all provisions in the Company’s sale contract

Methodology & Data Sources

To some extent, the internship period at Binh Minh Household Joint StockCompany allows me to take such a marvelous opportunity to conduct my research asfavorably as possible To build my data base, I myself take pains to gather all

information generated from various sources ranging from personal experienceconcerning sale contract to import-export knowledge shared by my colleagues, andsome relevant publications For the best acquisition, I have also taken part in a course

of International Payment to absorb some relevant knowledge Such combinationbetween theory and real experience via various channels has enabled me to take steps

to fulfill the research

Structure

Besides abstract, inclusion and appendix, the research is composed of four mainChapters as follows:

Chapter 1: Introduction

Chapter 2: Literature Review

Chapter 3: Findings & Analysis

Chapter 4: Recommendation

Due to time limitation and certain knowledge, this study may not avoid someshortcomings and inappropriateness beyond my ability I would highly appreciate anycomments and suggestions in relation to the study from the Faculty in particular, andany readers in general

CHAPTER 1: INTRODUCTION

1.1 Company’s establishment and development

Binh Minh Household Joint Stock Company was established in March 2008 Forany detail, please make reference to the table hereunder:

Nguyen Thi Giang

The Company serves as an importer and a distributor of household applianceslabeled Midea in Vietnam

Although the Company has just entered business for over 2 years, it has performedwell in the capacity of a prominent representative distributor for Midea branch Inother words, it has played a crucial role in raising Vietnamese’s awareness of Mideahousehold appliances Accordingly, it can build up good relationship with almost

supermarket systems nationwide as well as wholesale agents in various provinces In

so doing, it has helped increase Midea’s reputation for its supply in Vietnam market

in general

To some extent, the development period of the Company can be divided into twoseparate parts:

Period of 2008-2009: This is the period when the Company made its debut in

the Vietnam market for the first time At that time, Vietnam market has been riddledwith various brands of household appliance like Supor, Happy Cook, Philip,Panasonic, etc Conspicuously, it had to face numerous obstacles both internally andexternally In terms of internal conditions, the Company was somewhat in theshortage of capital that required it manage to mobilize capital from various sources.Externally, it had to cope with a fierce competition from other counterparts Despitethese difficulties, the Company has taken steps to penetrate each particular marketsranging from supermarket systems to retail and wholesale agents nationwide In moredetails, it determined to pay due attention to customization services and as well asproduct quality in order to meet increasing demand of the diversified customers

Period of 2009-2010: Owing to gradually surmount such aforementioned

hinders, Binh Minh Company now can get a certain foothold in the appliancesmarket Based on this achievement, it has also determined that the initial priorityshould be given to sales promotion as much as possible through various exhibition,fairs, and events So far, it has been said that the Company’s products have beenmade available almost all provinces in the whole nation Accordingly, the mass’sawareness of the Company’s products has been on the rise that has contributed to therevenue growth of the Company year to year

Today, the Government gives more and more incentives to encourage operations

of import and export enterprises This somewhat creates various favorable conditions

for almost all domestic enterprises in general and the Company in particular topromote its performance

1.2 Company’s functions and obligations

1.2.1 – Functions

The main function of the Company is trading imported goods, including bothretail and wholesale through domestic supermarket systems and agents

1.2.2 – Obligations

- Carrying out business in line with the registration

- Registering, enumerating and paying taxation as well as performing other financialobligations in accordance with the prevailing laws

- Ensuring product quality in line with the registered standards, and offeringappropriate post-sale services (warranty) to customers

It can be seen that the Company has shown a great self-control in its business,especially in such a market-oriented economy at present Again, it creates a lot ofprecious opportunities for the Company, but poses numerous challenges at the sametime For this reason, the Company should bear in mind researching market,especially niche market, and improving management instruments and organizationapparatus in conformity with its scale, functions and obligations for the bestperformance

1.3 Organization Structure

1.3.1 Organization structure

The Company’s management structure is subject to a direct mechanism, it meansthat there is only one chief officer, and other staffs will pertain to different functionaldivisions

Diagram 1: - Organization structure of Binh Minh Household Joint Stock Company

1.3.2 Functions and obligations of department, divisions

* Directors Board:

- Chairman of Management Board cum Director is the top leader who is responsible

for managing all operations of the Company

- Deputy Director is in charge of assisting and controlling tasks entrusted by General

Director, and acting in the capacity of a Director whenever authorized

Finance Depart ment

Sales Depart ment

Export Depart ment

Import Chief Accountant cum Head of Accounting Department takes over accounting and

statistic operations, and consult Director financial operations of the Company

* Departments:

Accounting & Finance Department: takes responsibility for directly recording

accounting manuals, dealing with figures in relation to imported and exported goodsand inventory in conformity with the regulations, supporting Director to manageactivities relating finance and monetary

Sales Department: directly makes schedules for different orders, and sign

contract with both domestic and foreign counterparts, conduct promotion programs,work out sales plans, and carry out market research

Import-Export Department: Based on orders delivered by Sales Department, it

makes orders to the suppliers, and engages in signing foreign contracts, works withcustoms agencies, appoints people to conduct the import and enters transactions withforeign counterparts

1.4 Company’s counterparts

1.4.1 Suppliers

* ZHEJIANG TIANXI INDUSTRY GROUP CO.,LTD

No.7 Baoan Road, Huzhen Town, Jinyun County, Zhejiang, China Tel: +86578-3559996 Fax: +86578-3156000

Zhejiang Tianxi Industry Group co., Ltd is a key enterprise specialized in

production of pressure-lid type explosion-proof pressure cookers, non-stick cookwarepots and aluminum wares of complete series It boasts production bases of aluminumware and materials and advanced equipment Based on its powerful economic andtechnical strength, and scientific and perfect management system, the company wasappointed in 1999 one of the five large enterprises responsible for drafting outthe"2000 national standard of pressure coolers" and passed the authentications of CE

and GS safe quality and ISO9001 quality system, Seizing the opportunity of thereform, it has established stable business relationship with over 20 regions andcountries such as Europe ,South America, Middle East ,Japan etc, with numeroustrading partners and market channels Its products are gaining popularity for itselaborate workmanship.

* MIDEA CONSUMER & INDUSTRIAL GROUP

Beijiao Town,Shunde District, Foshan City Guangdong Province, China

Tel: +86-757-26605280 Fax: +86-757-26339469

Midea Group is a comprehensive and modern business conglomeration that

engages mainly in the industry of household appliances, as well as the domains ofreal estate and logistics The group is also one of the largest manufacturing andexportation bases of electric appliances in China Major products by Midea Groupinclude household and commercial air-conditioners, large central air-conditioners,electric fans, electric cookers, refrigerators, microwave ovens, water dispensers,washing machines, electric heaters, dishwashers, induction cookers, water heaters,cooking stoves, sterilizers, electric chafing pots, electric ovens, vacuum cleaners, andsmall electric appliances, as well as related products such as compressors, motors,magnetrons, transformers, and enameled wires

1.4.2 Existing customers

In order to obtain optimal revenue, the Company has adopted both methods ofretailing and wholesaling nationwide Consequently, its products have beendistributed various supermarket systems and agents mentioned hereunder:

- Fivimart supermarket system

- Marko supermarket system

- Intimex supermarket system

- Big C supermarket system

- Metro supermarket system

- Hapro Mart supermarket system

- …

- Agents in Provinces such as: Hanoi, Nam Dinh, Thanh Hoa, Ninh Binh, HaiPhong, Thai Nguyen, Hung Yen, Bac Ninh, etc

1.5 Features of Company’s revenue

It can be clearly seen that Company’s revenue comes from different sources,including revenue from sales of goods, revenue from financial operation, andother incomes Of which, revenue from financial operation mainly stems from:deductions for advance payments, commercial discounts, etc Therefore, revenuefrom financial operation is much smaller than gross profit from sales of goods Deductible items of the Company are comprised of: sale returns, sale discountsoffered to the customers

At present, the Company’s Charter Capital is: 3.000.000.000 VND

1.6 Mode of transactions with Suppliers and potential risks

As mentioned above, the two main Suppliers of the Company come fromChina Accordingly, its transactions with Suppliers are characterized by foreignsales contracts in writing by fax, email, or skype So far, the Company has enteredvarious contracts with counterparts and it is deemed as a manner in which theCompany can make orders to manufacturers effectively and lawfully To someextent, most contracts are based on the reliability amongst parties involved thatsomehow helps avoid several trivial procedures Nevertheless, such conduct alsoreveals highly potential risks for both parties in case of any disputes arising along

As such, the Company in general and the Import-Export Department which isdirectly in charge of import operations in particular should pay due attention to the

work of drafting contracts In other words, it is necessary to terms and conditionsincluded in such agreements to ensure successful transactions for mutual benefits

CHAPTER 2: LITERATURE REVIEW

2.1 Basic knowledge of foreign sales contract

2.1.1 Definition of foreign sales contract

A foreign sales contract is a legal contract an exchange of goods, services or

property to be exchanged from seller (or vendor) to buyer (or purchaser) for anagreed upon value in money (or money equivalent) paid or the promise to paysame It involves at least two countries which represent separate Parties enteringthe contract

2.1.2 Characteristics & role of foreign sales contract

2.1.2.1 Role of foreign sales contract

Business contracts are legally binding written agreements between two or moreparties They are an important part of business and such agreements need to becreated and/or reviewed carefully While smaller companies often conductbusiness based on informal handshake agreements or unspoken understandings,the more that is at stake, the more essential it is to have a signed contract Acontract serves as a guide and a memorial of the agreement that must be followed

by both parties

2.1.2.2 Characteristics of foreign sales contract

Basically, a foreign sales contract shares much common with a domestic one.However, there are also some points by which we can be aware of differencesbetween them Amongst the others, we hereby intend to refer three distinguishedcharacteristics as follows:

Objects of the contract: include Seller and Buyer from at least two different

countries Nevertheless, it is noted that the factor of nationality shall not make

non-sense in case the Buyer and Seller have different nationalities but their trading

is conducted in only one territory or country

Type of currency: can be a foreign currency to one or both Parties.

Goods – under the contract: shall be delivered from the Seller’s country to the

Buyer’s country or somewhere else required by the Buyer

2.1.3 Contract Content

In reality, a contract is a rather self-determined business document In otherwords, the parties can make contract with provisions in their sole discretion; Ofcourse, such provisions must be agreed by both Parties to become the bindingones Despite this fact, it is possible to divide them into three separate categories

In addition to the aforementioned provisions, depending on real situations and

requirements of both Seller and Buyer, a contract may cover some other termssuch as:

- Packing and Marking

- Warranty

- Inspection and Claim

Generally, owing to freedom of sales contracts, based on the real context andmutual agreement, involved Parties can draft provisions in the support themselves.

By carefully drafting “reasonable” terms, Parties shall be relieved from potentialrisks and disputes that can act as a basis for a long-term business relationship

2.2 How to draft precise contract provisions

It can be said that you will not able to cover every gap and fill all loopholes

in your contract provisions Also, you can not make a perfect contract However, it

is reasonable to draft it as clearly as you possibly can The illustrative clauseshereby are intended to give you some practice in finding ambiguities andtightening up phrases

2.2.1 Effective date:

The contract or agreement should have a date stated as the contract date oreffective date This date is not necessarily the date when the contract was signedbut rather the date from which all the contractual rights and obligations begin andfrom which point any term of time, usually commences To determine a soundeffective date, it is strongly advised to consider when goods should be deliveredand what warranty or maintenance period should apply to work or goods

Poor provision : “This contract becomes binding on both parties when it is

signed”

It can be seen that this provision is aimed to provide a designated time andmeans of contract formation In other words, it intends to stipulate when thecontract will come into effect However, in the event, the contract is somehowsigned by only one party, does it become binding on both, or must both partiessign to determine a common effective date? If the parties sign on different dates,which shall be effective one? If the last party to sign the contract is deemed tochange a provision in it before signing, has a contract formed? These hereby canlead to any potential dispute during contract performance

Better provision : “This contract will be binding on both parties as of the date

on which it is signed by the Seller/Buyer, provided that the Seller/Buyer does not alter, delete, or add to the terms of the contract.”

2.2.2 Effective date:

Poor provision : “This contract will become binding on the parties at the time

the Seller accepts the order that is detailed in the attached specification.”

This clause fails to define a particular date of acceptance – it is entirelyopened-ended To some extent, it can cause discrepancies in parties’ interpretation

of this clause that may lead to the situation that the Buyer may make another sameorder with other supplier, whereas the Seller continues to fulfill order withoutnotification/acceptance Consequenly, both parties get no benefits only because of

no contact, no information The general rule is that acceptance must be within a

“reasonable time” to ensure a smooth transaction

Better provision : “This contract will become binding on the parties as of the

date the Seller signs it, provided that the Seller does not alter, delete, or add to the terms of the contract and provided that the Seller signs the contract by [date],

transmit a copy of the signed contract by facsimile to the buyer by [date], and sends the original signed contract by post.”

2.2.3 Insurance

Poor provision : “The [Seller/Buyer] must insure the goods while in transit for

[currency and amount] A copy of the policy or other statement provided by the insurer must be provided to the [Seller/Buyer] before the goods are shipped Failure to insure the goods is grounds for contract termination Each party is responsible for obtaining on its own account any other insurance coverage for the goods that it may desire.”

This clause may be reasonable in a domestic transaction where parties arefamiliar with available insurance policies, but it is too strict and necessary for aninternational transaction Unless parties are assured that the coverage is available

in the amount designated, the failure of a party to obtain insurance coverageshould not be grounds for termination of the contract

Better provision : “The [Seller/Buyer] shall responsible for obtaining and

maintaining insurance on the goods while in transit The insurance coverage must

be for the invoiced value of the goods, and the [Seller/Buyer] must be named as a loss payee A copy of the policy or other statement provided by the insurer must

be provided to the [Seller/Buyer] before the goods are shipped If the [Seller/Buyer] fails to obtain such insurance, the [Seller/Buyer] has rights to purchase insurance coverage and to charge the cost of premiums to the [Seller/Buyer] Each party shall responsible for obtaining on its own account any other insurance coverage for the goods that it may desire.”

2.2.4 Transfer of title time

In every complete sales transaction, there is a certain moment of time whereinthe ownership of the goods by the seller ceases and passes to the others and that ofthe buyer begins; that is called the transfer of title In a certain aspect, it is

synonymous with transfer of risk to goods during goods delivery It thereforedraws most attention of both the seller and the buyer during their transaction fromthe place of the Seller to the place of the Buyer.

Poor provision : “Title to goods will pass to the Buyer when the Goods are

Better provision : “Title to goods will pass to the Buyer at the time the Seller

delivers the goods to the Buyer The goods will be deemed delivered at the time they are stowed on board the vessel.”

2.2.5 Inspection rights

If you have agreed to take the goods without warranties, you should insist on

adequate inspection rights, meaning you have the time, labor, and facilitiesavailable to conduct a meaningful inspection Even if warranties are provided,inspection rights are important Exercising a warranty is likely less convenientthan simply returning goods that are not in satisfactory conditions on arrival.Therefore, it is strongly advised to pay due attention to terms of inspection rights

Poor provision : “Before accepting the goods, the Buyer has right to inspect

them at the time and place where they are delivered.”

In the event the designated time and place are convenient to the Buyer, thisclause may be deemed appropriate However, the buyer’s inspection rights will

make non-sense if the buyer is unable to carry out such inspection Thus, in casethe delivery is made Ex Works - Incoterms (meaning at the seller’s warehouse), aforeign buyer is unlikely to be able to inspect the goods before having to acceptthem At a minimum, inspection rights should be granted to the buyer or anauthorized representative and the buyer should have a reasonable time withinwhich to complete the inspection and make any claim against the Seller in case ofany discrepancies.

Better provision : “Before accepting the goods, the Buyer has right to inspect

them after they reach the Buyer’s [designated time and place] Acceptance or rejection must be made within [a certain number] of working days from the date the goods reach that destination The Buyer’s failure to inspect the goods will be deemed a waiver of the right of inspection.”