A Comprehensive Guide to Reducing Risk in International Procurement of Equipment and Goods
In today’s world where global supply chains are intricately intertwined, companies are forced to interact and trade with foreign suppliers. Purchasing equipment, machinery, raw materials or even technical services from other countries is not only a technical and economic necessity, but also one of the riskiest and most sensitive parts of project management.
A foreign purchase agreement is a legal and technical document that specifies the legal framework for these interactions. This agreement should be drafted in a way that protects the buyer’s interests against delays in delivery, technical non-conformity of the goods, problems in installation and commissioning, lack of after-sales service, and even exchange rate changes and sanctions.
Experience has shown that many legal problems or financial losses in industrial projects arise from weak and general-purpose agreements. Therefore, it is essential for project engineers, procurement managers, legal experts, and even financial managers to have a thorough understanding of the critical components of this type of contract.
The following is a review of the most important elements of a foreign purchase contract; the absence of any of which can lead to heavy direct and indirect costs.
1. Obligations of the parties
The obligations of the seller and the buyer should be clearly and transparently stated in separate clauses. The items to be seen in this section are:
- The seller’s obligation to deliver the goods in accordance with the attached technical specifications (Technical Specification)
- Delivery schedule: Determining the exact time of production, packaging, transportation, and unloading
- Responsibility for obtaining export licenses, clearance, and shipment: In many cases, the seller is required to obtain an export license and deliver the goods to the customs of destination
- The buyer’s obligation to provide financial documents, timely payment, customs cooperation, etc.
Important point: In the event of a breach by either party, the damages that can be claimed must be defined as a percentage or a specific amount.
2. Spare Parts & Consumables
In contracts for the purchase of machinery or special equipment, forecasting spare parts and consumables is of great importance. This is more critical in construction and industrial projects that have delays in operation, costs of stopping or sleeping the machine.
The contract should include the following:
- A list of spare parts proposed by the manufacturer for the first 1 to 2 years of operation
- The possibility of purchasing at the same time as the main equipment and including their prices in the contract
- Spare parts warranty (if used)
- A program for resupplying high-consumption and critical parts
3. Warranty & Guarantee
One of the key tools to protect the buyer against manufacturing defects or malfunctions is warranties.
Difference between warranty and guarantee:
Warranty: The seller’s commitment to repair or replace the product in the event of a failure within a specified period (for example, 12 months after delivery or installation)
Guarantee: A more general commitment that can include reimbursement, total replacement, or even a guarantee of the product’s performance
Things to include in the contract:
- Length of warranty and guarantee
- Scope of obligations (does it include transportation costs, technician travel, parts, labor?)
- Warranty voiding cases (incorrect installation, improper use, technical manipulation, etc.)
- Guaranteeing the technical performance of the device or specific output (for example, production capacity or energy consumption)
4. Inspection & Quality Control
Inspection of the product before shipment is one of the most critical steps in ensuring the quality of the received product.
Some key points that should be foreseen in the contract:
- Inspection by a reputable third party company (e.g. SGS, BV, TÜV)
- Determination of the inspection location: manufacturing plant or port of origin
- Type of inspection: visual, dimensional, functional, FAT (Factory Acceptance Test)
- Provide the buyer with an official inspection report before shipment
- Inspection cost and who is responsible for paying it
- In some contracts, the buyer can send a technical representative to attend the inspection.
5. Packing & Shipment
Damage caused by non-standard packaging not only costs a lot, but can also invalidate the shipping insurance.
The contract must include:
- Type of packaging (moisture-proof, impact-resistant, wooden/metal with ISPM-15 standard, etc.)
- Detailed marking of each package including the buyer’s name, order number, weight, dimensions and serial number
- How the goods are arranged in the container or pallet
- The seller’s commitment to send shipping documents to the buyer within a specified period
6. Payment Terms
The payment method in foreign purchases must be carefully selected based on the level of trust, the type of seller and the value of the contract.
Common methods:
- Letter of Credit (L/C): The least risky method for the buyer and common in large projects
- TT (Telegraphic Transfer): Suitable for small amounts or well-established sellers
- Advance payment: Only with bank guarantee or in exclusive contracts
Key points:
- Payment phasing: (e.g. 30% advance payment, 60% upon delivery to the port, 10% upon installation and commissioning)
- Currency used (Euro, Dollar, Yuan… and its compliance with sanctions)
- Commitments in the event of severe exchange rate fluctuations or changes in sanctions laws
A foreign purchase contract, although it may appear to be a simple agreement, is in fact a multi-dimensional document with financial, legal, technical and time implications. Companies that carefully and professionally draft these contracts can significantly reduce their business risks and ensure the effective and timely operation of imported equipment.
Using a specialized team consisting of a legal advisor, technical expert, and international procurement officer is the best solution for drafting a successful contract.
