Dear Executive,

Price is always an important element in any contract, but there are many other elements in complex international contracts that can impact profitability. It doesn't take many of these seeming small elements to make the difference between profit and loss when margins are already thin.

The table below shows examples of some of the Terms and Conditions (T&C's) I have participated in when negotiating the sale of semiconductors to Fortune 500 global customers. You may not have the same T&C's in your industry. The primary point I want to make is that every T&C other than your Standard Contract Default incurs an associated cost. Whether you capture that cost, or provide that item at No Charge, impacts your profitability. Here is one example.

FOB vs Ex Works
INCOTERMS (International Commerce Terms - http://www.iccwbo.org/incoterms/)
Many people who only transact business in North America commonly and mistakenly use FOB as an INCOTERM. Free On Board (FOB) is a hold-over from a time when much commerce moved by ship, and in fact, that INCOTERM is only valid for transportation by ship. However, I have seen many examples where FOB is stipulated, and the method of shipment has been air, rail, or truck.

FOB requires the Seller to pay for: (1) delivering the goods on board, (2) providing a clean on board receipt, (3) pay loading costs not included in the freight, and (4) arrange export clearance. But there is one more significant item-transfer of risks. Title doesn't not transfer from the seller to the Buyer, "...until such time as all goods have passed the rail at the named port of shipment". Since it may take ten days or more to travel by ship, you can not claim any Revenue until the ship has arrived and unloaded.

Ex Works only requires the Seller to: (1) place the goods at the disposal of the Buyer at the named place. In plain English, come pick it up off my dock, and when you do, the transfer of risks has been satisfied; I can claim Revenue at that moment.

I hope this may shed some light on the complexity of negotiating Terms and Condition in International Contracts. There are Legal pitfalls to be aware of too: – Most Favored Nation, Indemnification, Incidental, Consequential, Liquidated Damages, and Force Majeure; are just a few. That will have to be the topic of another TechTIP eNewsletter.

If you need help understanding, or negotiating Terms and Conditions or Legal clauses in Domestic or International contracts, please feel free to contact me.