7 Types of Contract with Examples: A Guide for Export Managers
If you are an export manager, you need to know the different types of contract that you may encounter in your international trade activities. A contract is a legally binding agreement between two or more parties that defines the rights and obligations of each party. Contracts can vary in complexity and scope, depending on the nature and value of the transaction, the level of trust and cooperation between the parties, and the legal system of the countries involved.
In this article, we will explain the main types of contract that are commonly used in international trade, with examples of each type. We will also provide some tips on how to choose the best type of contract for your export business, and how to avoid common pitfalls and risks.
The main types of contract that we will cover are:
- Sales contract
- Distribution contract
- Agency contract
- Franchise contract
- Licensing contract
- Joint venture contract
- Turnkey contract
1. Sales Contract
A sales contract is the most basic and common type of contract in international trade. It is an agreement between a seller and a buyer for the sale and purchase of goods or services. The sales contract specifies the essential terms of the transaction, such as:
- The description, quantity, quality, and price of the goods or services
- The delivery terms, including the place, time, and method of delivery
- The payment terms, including the currency, mode, and timing of payment
- The warranty terms, including the duration, scope, and remedies for defects or non-conformance
- The risk transfer terms, including the allocation of responsibility for loss or damage during transit
- The dispute resolution terms, including the applicable law and jurisdiction
An example of a sales contract is an invoice or a purchase order that contains all the relevant information about the transaction.
2. Distribution Contract
A distribution contract is an agreement between a supplier and a distributor for the distribution of goods or services in a specific territory or market. The distribution contract defines the rights and obligations of each party, such as:
- The scope and exclusivity of the distribution rights granted by the supplier to the distributor
- The obligations of the supplier to provide the goods or services, technical support, marketing materials, and training to the distributor
- The obligations of the distributor to promote, sell, and service the goods or services in the territory or market
- The pricing terms, including the discounts, commissions, and incentives offered by the supplier to the distributor
- The performance terms, including the sales targets, reporting requirements, and quality standards expected by the supplier from the distributor
- The termination terms, including the grounds, notice period, and consequences of terminating the contract
An example of a distribution contract is an agreement between a manufacturer of medical equipment and a local distributor in a foreign country.
3. Agency Contract
An agency contract is an agreement between a principal and an agent for the representation of the principal’s interests in a specific territory or market. The agency contract establishes the relationship between the principal and the agent, such as:
- The scope and exclusivity of the agency rights granted by the principal to the agent
- The authority and limitations of the agent to act on behalf of the principal in negotiating and concluding contracts with third parties
- The obligations of the principal to provide the agent with information, instructions, and support
- The obligations of the agent to act in good faith, loyalty, and diligence in representing the principal’s interests
- The remuneration terms, including the fees, commissions, and expenses payable by the principal to the agent
- The duration terms, including the commencement date, renewal options, and termination clauses
An example of an agency contract is an agreement between a manufacturer of clothing and an agent who acts as an intermediary between the manufacturer and retailers in a foreign country.
4. Franchise Contract
A franchise contract is an agreement between a franchisor and a franchisee for the operation of a business under a specific brand name and system. The franchise contract regulates
the franchising relationship between them. such as:
- The grant and scope of the franchise rights given by the franchisor to the franchisee
- The obligations of the franchisor to provide training, support, quality control,
and marketing assistance to franchisee - The obligations of franchisee to follow franchisor’s standards,
policies , procedures ,and pay fees , royalties ,and contributions to franchisor - The protection terms ,including confidentiality ,non-compete ,and intellectual property rights clauses
- The renewal terms ,including conditions ,fees ,and duration for extending franchise agreement
- The termination terms ,including causes ,notice ,and effects for ending franchise agreement
An example of a franchise contract is an agreement between a fast-food chain and a local entrepreneur who wants to open an outlet under its brand name.
5. Licensing Contract
A licensing contract is an agreement between a licensor and a licensee for granting permission to use licensor’s intellectual property rights ,such as patents ,trademarks ,or copyrights ,in exchange for a fee or royalty. The licensing contract specifies the terms and conditions of the license ,such as:
- The description and scope of the intellectual property rights licensed by the licensor to the licensee
- The purpose and limitations of the license ,including the permitted and prohibited uses of the intellectual property rights
- The duration and territory of the license ,including the start and end dates and the geographic areas covered by the license
- The payment terms ,including the amount ,frequency ,and method of payment of the fee or royalty
- The maintenance terms ,including the obligations of the licensor to protect and enforce the intellectual property rights
- The termination terms ,including the grounds ,notice ,and consequences of terminating the license
An example of a licensing contract is an agreement between a software developer and a software user who wants to install and use its software on its computer.
6. Joint Venture Contract
A joint venture contract is an agreement between two or more parties who agree to cooperate and share resources ,risks ,and profits in a common business project. The joint venture contract establishes the legal structure and governance of the joint venture entity ,such as:
- The name and purpose of the joint venture entity
- The capital contribution and ownership share of each party in the joint venture entity
- The management and decision-making authority of each party in the joint venture entity
- The distribution and allocation of profits and losses among the parties in the joint venture entity
- The dispute resolution and arbitration clauses for resolving conflicts among the parties in the joint venture entity
- The dissolution terms for winding up or exiting from the joint venture entity
An example of a joint venture contract is an agreement between a local company and a foreign company who want to jointly develop and operate a power plant in a developing country.
7. Turnkey Contract
A turnkey contract is an agreement between a contractor and a client for delivering a complete project or facility that is ready for operation. The turnkey contract defines the scope and specifications of the project or facility ,such as:
- The design ,engineering ,construction ,and installation of the project or facility by the contractor
- The testing ,commissioning ,and handing over of the project or facility by the contractor to the client
- The price and payment schedule of the project or facility agreed by the contractor and the client
- The warranty and liability clauses for defects or delays in the project or facility
- The risk allocation and force majeure clauses for unforeseen events or circumstances that may affect the project or facility
- The change order and variation clauses for modifying or adjusting the project or facility
An example of a turnkey contract is an agreement between a construction company and a hotel owner who wants to build a new hotel on its land.
In this article, we have explained the main types of contract that are commonly used in international trade, with examples of each type. We have also provided some tips on how to choose the best type of contract for your export business, and how to avoid common pitfalls and risks.
We hope that this article has been helpful and informative for you. If you have any questions or comments, please feel free to contact us.
Types of Contract with Examples
One of the most important aspects of any business transaction is the type of contract that governs the exchange of value between the parties. A contract is a legally binding agreement that defines the rights and obligations of each party and sets the terms and conditions for the delivery of goods or services. There are many different types of contract, each with its own advantages and disadvantages depending on the situation. In this article, we will discuss some of the most common types of contract and provide examples of how they are used in various industries.
Fixed-Price Contract
A fixed-price contract, also known as a lump-sum contract, is a type of contract where the seller agrees to provide a specified product or service for a fixed amount of money, regardless of the actual cost or time involved. This type of contract is suitable for projects that have a clear and well-defined scope, quality, and schedule. The buyer benefits from knowing the exact cost of the project upfront and avoiding any cost overruns. The seller benefits from having an incentive to complete the project efficiently and profitably. However, the seller also bears the risk of any unforeseen difficulties or changes that may increase the cost or time required to complete the project.
For example, a construction company may enter into a fixed-price contract with a client to build a house for $500,000. The construction company will estimate the cost of labor, materials, equipment, and other expenses and add a profit margin to determine the fixed price. The client will pay the construction company according to a payment schedule based on milestones or deliverables. If the construction company finishes the project on time and within budget, it will earn the agreed profit. If the construction company encounters any delays or additional costs due to weather, material shortages, design changes, or other factors, it will have to absorb the loss.
Cost-Reimbursement Contract
A cost-reimbursement contract, also known as a cost-plus contract, is a type of contract where the seller agrees to provide a product or service for a reimbursement of its actual costs plus an additional fee or profit. This type of contract is suitable for projects that have a high degree of uncertainty or complexity and where it is difficult to estimate the exact scope, quality, or duration of the work. The buyer benefits from having more flexibility and control over the project and being able to adjust the requirements as needed. The seller benefits from having less risk and being able to recover its costs regardless of any changes or challenges that may arise during the project.
For example, a software development company may enter into a cost-reimbursement contract with a client to develop a custom software application for an hourly rate plus a percentage fee. The software development company will track its actual hours spent on the project and invoice the client monthly for its costs plus the fee. The client will pay the software development company based on its invoices and monitor the progress and quality of the work. If the software development company delivers the project faster or cheaper than expected, it will earn less profit. If the software development company takes longer or spends more than expected due to technical issues, scope changes, or user feedback, it will earn more profit.
References:
https://www.unidroit.org/wp-content/uploads/2021/06/Unidroit-Principles-2016-English-i.pdf
https://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/FinCEN-Hawala-rpt.pdf
https://learn.g2.com/types-of-contracts
https://www.contractscounsel.com/b/types-of-contracts
https://www.contractscounsel.com/b/contract-law
https://www.export.gov/article?id=Types-of-International-Business-Agreements
https://www.trade.gov/knowledge-product/types-international-business-agreements
https://www.investopedia.com/terms/j/jointventure.asp
https://www.thebalancesmb.com/what-is-a-turnkey-contract-845301
