Procedures and contract initiation

PROCEDURES AND CONTRACT INITIATION

1. Preamble  
2. Buyer’s enquiry, so-called "Letter of Intent" (LOI)  
3. Bank Comfort/Confirmation/Edorsement Letter (BCL or BEL)  
4. Proforma Offer/Invoice (Full Corporate Offer - FCO)  
5. Summary and Comments

1. Preamble

You will find on these pages procedures proposed to follow and to make both parties comfortable that the transaction is progressing towards contract.

These practices have been self invented between two parties to make both parties feel that they are participating in a transaction, whether it becomes real or not. The usual procedures proposed are as follows (documents mentioned are commented upon below):

1. Buyer places an enquiry (commonly called a "Letter of Intent" - LOI).  
2. Seller, in response to the enquiry, issues Proforma Offer or Invoice, commonly called "Full Corporate Offer" (FCO).  
3. Buyer signs Porforma Invoice and returns it back to the Seller.  
4. Seller issues contract terms for mutual consideration.

Please note that the above procedures are not described by any authoritative and renowned international trading organisation (like UNCITRAL or ICC). It is fraudulent to quote, for example, "United Nations Convention on Contracts for the International Sale of Goods" as guidelines for such processes (sometimes procedures are even described as a "summary" of the above Convention!).

Please go to page ....  related to contracts for more information.

2. Letter of Intent (LOI)

This document substitutes Buyer's willingness, readiness and ability to purchase the product and can be regarded as a firm enquiry. As such an LOI has no financial strength and cannot be regarded as an ultimate credential. It can be considered as a helpful guide for the seller what the buyer actually needs, what his requirements are. Letter of Intent is especially helpful if an intermediary would like to show to a supplier that the buying side is serious and seller’s efforts to issue an offer could profit.

To prepare good enquiry which would help to obtain the best quotation please refer to "Enquiry Checklist" (page...) to ensure that all details are provided  - sellers need this information.

Letter of Intent exists in brokerage community. Buyers usually fill an on-line enquiry form (available on any seller’s website) or fax it directly to the supplier.  
 

3. Bank Comfort/Confirmation Letter (BCL)

Also referred to as "Bank Endorsement Letter" (BEL).

In fact it is basically IMPOSSIBLE to obtain such document. The bank will not confirm funds without issuing some type of financial instrument - letter of credit IS the confirmation. Bank can issue a document stating that their client (the buyer) has good credit record and good name with the bank.

There are other ways to gain trust between buyers and sellers than asking for banking statements. BCL (or BEL) is another document required by brokers to enhance status as an intermediary.

4. Proforma Offer (Invoice)

Also referred to as "Full Corporate Offer" (FCO) or "Irrevocable Full Corporate Offer" (IFCO).  
Proforma Offer is where the transaction can start. Seller is an "offerer" and the buyer an "offeree". The offer can be accepted or rejected within specified period of time (this time limit is indicated in the offer).

5. Summary and Comments

The information below can be very useful for any beginner in international trade and import/export business. Please read it carefully and take to your advantage.

1. The procedures mentioned above and all documents requested are designed ONLY to make both parties comfortable with themselves. They ARE NOT, by all means, financial documents or binding agreements between buyers and sellers.

2. Traders and brokers, who run most of their business via Internet, put too much of emphasis and hopes on those documents:

a) "Letter of Intent" can be issued by anybody just on the basis of information that another party is willing to purchase the product (even if the company issuing LOI is not the final buyer - letter of credit can be transferred by intermediate company and, in this light, this company can express willingness to buy, thinking in advance about "back-to-back" practice letter of credit). Buyers place an enquiry and do not issue LOI’s.

b) "Bank Comfort/Confirmation Letter" is not a financial instrument. "Confirmation" is letter of credit and "Bank Confirmation Letter" as such DOES NOT exist. "Bank Comfort Letter" would be a statement from buyer's bank about creditworthiness of the buyer and his good name with the bank only. You can imagine that any company can arrange for such "comforting" letter, which does not substitute confirmation of funds on buyer's account!

c) "Proforma Offer" (also called "Full Corporate Offer" is an OFFER. Offer can be accepted or rejected by the buyer. Offering product under any heading, even as "Irrevocable Full Corporate Offer" does not mean that the seller must sell the commodity to one particular buyer and negotiate as long as both parties agree to conclude transaction! There is a time limit on each offer for the buyer to accept it.

3. Procedures described above ARE NOT governed by any international treaty or convention. They are not a subject to any arbitration of International Chamber of Commerce (ICC) or United Nations Commission on International Trade Law (UNCITRAL) or the like. Do not look for recourse in these organisations if the offer was signed but the contract not provided, for example.  
4. If the buyer is going to buy, there is no need for anything else but a Proforma Offer from the seller. buyer's confirmation of intent to purchase IS the Letter of Credit. The seller has so many days in which to re-negotiate the terms of the agreement (contract), or to cancel altogether.

5. All that is needed in any transaction is:

a) The product  
b) Serious buyer  
c) Buyer's bank letter of credit

Documents like NCND's, LOI's, BCL's, sometimes sanitized SGS certificates and the like have been developed to gain trust between brokers and trading companies rather than between buyers and sellers. If the Buyer is a real one, he will find out about the seller and his product, either by paying him a visit, or requesting the seller to come and see him, but most then often banks validate identities and genuiness of both parties concerned. This is what is referred to as "bank-to-bank" transaction; buyer's bank validates the existence of the product, seller's bank existence of funds.

6. Guidelines for initiation or formation of the contract can be found in:

a) United Nations Convention on Contracts for the International Sale of Goods by UNCITRAL (United nations Commission on International Trade Law - in New York) (1980)  
http://www.uncitral.org/english/texts/sales/salescon.htm#TOP

b) Principles of International Commercial Contracts by UNIDROIT (Institute for the Unification of Private Law - in Rome) (1994)  
http://www.jus.uio.no/lm/unidroit.contract.principles.1994/doc.html

c) The Principles of European Contract Law (by Commission of European Contract Law - in Copenhagen) (1998)  
http://www.jus.uio.no/lm/eu.contract.principles.1998/doc.html

Each contract will start with acceptance of an offer. The solid acceptance will be a letter of credit from the Buyer and nothing else! None of the documents above refer to procedures involving LOI, BCL and FCO - those were designed in brokerage community and are a subject of frequent abuse. If you have firm credentials from a buyer or a seller to represent either of them, you do not need LOI’s, BCL’s, NCND’s etc.

To learn how to run professional import/export agency firm please read the book "How To Become a Successful Import/Export Agent":

http://www.internetclinic.org/books/b002.html  
or enrol in our training program (page...)