Binding and binding sales contract for secure trading and financing

A written sales contract is the founding document for initiating international business transactions in Bangladesh, which is also the case with most developed and developing countries.

Unfortunately, the enforceability of sales contracts does not appear to be clearly understood, and the importance of enforceability is hardly recognized.

Indeed, these agreements between exporters and importers have been reduced to a role of information source during the processing of the issuance of a documentary credit.

We use different types of contracts to maintain our business in Bangladesh.

To begin with, the “firm contract” is a requirement for commercial services of banks in Bangladesh. The term is specifically mentioned in the Bangladesh Bank Foreign Exchange Guidelines (GFET) and Export Policy of Bangladesh.

Although the term “firm contract” can be interpreted differently, a standard interpretation is associated with the binding nature of the contract. This means that it should not be changed, amended or canceled unilaterally by one party.

The Directive on the prevention of money laundering for commercial purposes also puts forward a caveat regarding the potential vulnerability of contract documents.

Then we have sales contracts that have implications for the commercial payment methods used in any country. Documentary credit has been the most dominant form of commercial payment in Bangladesh, especially for imports.

Although the “firm contract” is legally binding on local businesses, such explicit, binding and legally enforceable contracts are not available for sales contracts, especially in the case of international trade. But why do we need it?

First, a binding sales contract is a crucial risk management tool in documentary credit transactions, although it is not viewed by many as essential in the case of LC.

Second, the terms / conditions of the contract are essential information in the process of issuing a letter of credit. In addition to this, a binding contractual agreement and enforceability are particularly useful in the event of failure to perform under the LC arrangement.

The extensive use of back-to-back letters of credit in Bangladesh also has important implications for the legal enforceability of “buy-sell” contracts.

In addition, the popularity of documentary collections continues to grow, especially for export. Between 2019 and 2020, a binding sales contract became very important to ensure the safety and security of banks, traders, and also contributed to the management of “country risk”.

Unfortunately, the buy-sell contract does not appear to cause extraordinary concern on the part of traders or bankers in Bangladesh.

The use of cash in advance has been limited in Bangladesh, however, the volume and number of “cash in advance” has increased in recent times, particularly during the Covid-19 pandemic when a large volume of health and essential equipment / goods was imported for cash. in advance.

The sale-purchase contract can serve as a guidance document in the event of a cash advance and account opening even if their use has been limited in Bangladesh (excluding EPZ) to date.

Use of the proceeds may increase soon as the Bangladesh Bank allows the conditional open account to support exporters since June 2020. A contract is especially critical in the case of open accounts for the safety and security of exporters.

The increasing use of open accounts would require binding and legally enforceable sales contracts in the coming period in Bangladesh.

And adopting these contracts can also be beneficial for the economy. For example, contractual partners like the United Nations Convention on Contracts for the International Sale of Goods (CISG) and the UNIDROIT Principles on International Commercial Contracts (UNIDROIT Principles) were better placed to protect themselves during interruptions. Exchanges.

The CISG and UNIDROIT Principles have yielded better results in providing protection to traders during the pandemic.

The applicability of CISG has become even more relevant in the environment created by the Covid-19 pandemic, where the fulfillment of contractual obligations and commitments may well be viewed as impossible, impractical or unreasonably burdensome. due to the occurrence of unforeseen circumstances or events beyond the control of the parties.

Bangladesh is not a signatory or ratifying country of CISG or the UNIDROIT Principles. However, Bangladesh’s main trading partners such as the United States, EU members, China are among the signatory countries of the “United Nations Vienna Convention”. They are also among the signatories of the ‘UNIDROIT Principles’.

However, Bangladesh has yet to sign the treaty and principles, nor has the country recognized any national regulations to cover cross-border purchases or sales contracts.

Bangladesh has a national law to manage these purchases, called the Contract Act, 1872. The Contract Act, 1872, was enacted in the 19th century and enacted by the Parliament of Bangladesh after the country’s independence.

Over time and with the growth in the volume of trade, certain changes have been made to the law. For example, the 1940 Arbitration Law was replaced by the current Arbitration Law of 2001. The Arbitration Law of 2001 is largely based on the UNCITRAL Model Law which does not specifically mention awards. foreign arbitration.

The standardization of sale-purchase contracts is an immediate necessity to facilitate the country’s international commercial transactions. The status quo poses many problems.

For example, the absence of the arbitration clause and the indemnity clause in the contract document is common in Bangladesh, leaving local exporters vulnerable to exploitation.

So what can we do?

For starters, alternative dispute resolution (ADR) clauses can assure parties that their disputes will be resolved through cost-effective and expeditious arbitration or mediation processes rather than litigation.

Traders may also be suggested to use the service of the “International Arbitration Center” as a dispute resolution body.

Bangladesh Bank may issue “Model Contract Guideline” to help traders and bankers standardize and evaluate the buy-sell contract and thereby help minimize business risks, country risks and money laundering risks. money in international trade.

The issuance of consecutive letters of credit against non-binding sales contracts is common in Bangladesh and is increasing in proportion and number.

The termination of these contracts and the transition from documents against payment (DP) to documents against acceptance (DA) without consulting the exporters exposed the weakness of the country’s purchase-sale contracts and the vulnerabilities of some of the traders.

Open accounts may gain popularity in the near future and should be guided by a legally enforceable contract document.

In such circumstances, ratifications of CISG and the UNIDROIT Principles of International Commercial Contracts are an immediate necessity.

In the context of the Covid-19 pandemic, more than ever, companies that engage in international trade must understand their applications and potential benefits.

Until ratification, exporters and importers must incorporate them into their contract documents in consultation with their counterparts. The Ministry of Commerce, the Bangladesh Bank and business associations have a role to play in this context.

The Contract Law of 1872 is primarily an instrument for managing contracts associated with internal commerce and commercial transactions.

The principles of CISG and UNIRDOIT have been widely used in unifying national regulations across the world over the years.

Such uniformity is a matter of great convenience for traders and other stakeholders in the country when there is a direct link and association between domestic trade and cross-border business transactions.

In view of the growing global interconnection, there is a logical basis for upgrading and amending the Contract Law of 1872 in accordance with the provisions of CISG and UNIRDOIT.

Unification would significantly help reduce the lack of information on regulatory and dispute settlement procedures among traders and bankers.

Currently, traders and bankers lack awareness and information on the importance of a binding buy-sell contract in the context of international business transactions.

Questions relating to “the applicability of a binding contract”, “implications of different contractual terms / conditions”, “dispute settlement procedures”, “regulations applicable in the sale-purchase contract” and the “Need for legal enforceability of contracts” should be disseminated through training, awareness and capacity building events in order to manage relevant risks. Trade finance banks and trade associations have a role to play in this regard.


Dr Shah Md. Ahsan Habib is Professor at the Bangladesh Institute of Bank Management.


Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.


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