International Trade Finance Law

International Trade Finance Law

Introduction

The aim of this paper is to outline and explain the legal principles that are involved in the counter trade transactions financing in the oil and gas business internationally. In outlining the legal principles in the business, the paper has defined counter trade and the reasons why it is used as a part of introduction.

Counter trade transaction is the exchange of services or goods which are fully paid for or are paid in part with other services or goods. The goods or services are not exchanged with money but they are given monetary valuation for the purpose of accounting. It is also termed as bilateral trade. The services or the goods that are exchanged are supposed to be equal in value and the valuation is supposed to be calculated properly. Ten to fifteen percent of the international trade involves countertrade transactions. The payment of the goods that are bought through the countertrade transactions can be paid through various means as illustrated by D’Arcy et al, (1999, p. 20-110).[1] The goods can be paid through the combination of currency, services and other goods. Payment through this methods gives rise to various documents that are involved in the transaction as suggested by Johnson, (2002, p. 387).[2] Counter trade encourages the exporting country to have more outlets and it also involves more than one country depending on the goods or the services that are involved.

The reasons why a country may be involved in the countertrading transaction may be due to the restrictions of the government as Onkvisit and Shaw, (2007, p. 510- 520),[3] states. The other reason may be that the country wants to preserve the foreign exchange for other uses like the payment of the international debts of the government.

Principles involved in financing of countertrade transactions in the international oil and gas business.

Mostly, oil and gas business in the Middle East countries is traded through the countertrading transactions and there are principles that are involved in the business. An example as illustrated by Voyevodins’ Library International business, (2011),[4] of such counter trade transactions is when the Saudi Arabia agreed to pay for 10747 Boeing jets with crude oil which had a discount of ten percent below the other prices in the world and the market prices.

Discrimination principle

One of the principles that are involved in the countertrade transactions of the international oil and gas business is that trade should be done without discrimination to any country. The parties that are involved are supposed to do business and treat each other in the best way possible without favouring some countries. The charges and the duties that are involved in the exports and the imports of the oil and gas and the other goods or services in the countertrade transactions should not discriminate any country.

As Maurice, (2009, p. 534),[5] suggested, counter trade in the oil and gas industry is mostly used when there is a large amount of currency that is to be involved. In most cases it takes place when one of the parties is unable to pay convertible currency and they pay with other goods and that is why there should be no discrimination. The trade in the oil and gas business is mostly involved when the prices of the products are low or are high. If the price of the crude oil is above the market price at a certain given time, the country selling the oil can arrange with the country wanting to buy the oil to countertrade and value the price of the oil at the market price. The values involved in the counter trade are always the genuine market prices. Counter trade is a good way of dealing with the prices that are not the market values. The counter trade transactions in the oil and gas industry promote exports and the amount that is exported increases while it is used rather than when the currencies are involved.

Protection of domestic industries

Another principle that is involved is that the protection of the domestic industries should only be through the tariffs and not other financial measures. This principle is important because it makes it possible for the countries that are involved to compete with each other. The countries that produce oil and gas and are involved in the countertrading protect their industries through the tariffs only. The principle of domestic protection helps in price discrimination which helps the exporter to export more than they could have done if they dealt with convertible currency which may be bulk. It also helps the exporter to avoid prices that are extreme. As suggested by Caves and Marin, (1992, p1171-1183),[6] countertrading assist the exporters to conceal the quality of the goods that are involved in the business of both parties.

Consultation principle

Consultation is a legal principle that is involved in the countertrading transaction of the gas and oil international business. The countries involved are supposed to consult each other in case there is a problem. They are also supposed to consult in all the matters that are concerned with the countertrade transactions. According to Horn, (2001, p. 1- 740),[7] the parties who are involved in the international oil business are supposed to negotiate if any problems arise in the course of their business. If there are problems with the contracts or other documents, they are supposed to renegotiate the contracts. The parties may not reach to an agreement but the principle is that they are supposed to negotiate and consult. The negotiations should be conducted in good faith and parties should corporate in the process of trade.

Stable basis of trade

Another principle that is involved is the principle of a stable basis of trade. This provides the tariff levels that are used in the contracting countries. This helps the countries that are involved not to increase the tariffs without consultations. The contracting countries can renegotiate only the tariffs that are binding. Any other increase of the tariffs is compensated for, and so the increase of the tariffs is discouraged.

Contracts and documentation

As a legal principle, contracts are supposed to be made between the countries that are involved in the oil business through countertrading. The parties are not supposed to breach the contract as in the case of Central W. Virginia Energy Co., Inc. v. Mountain State Carbon, LLC, 10-1486.[8] The parties should not assume that the other party will perform the duties but they should prepare documentation concerning the transactions that each one of them is expecting from the other party. The contracts and the documents that are prepared should show how the transactions are supposed to be carried out, the responsibilities of the parties should also be stated in the documentation or in the contract, the purpose of the trade should also be stated in the documentation and finally the documentation is supposed to connect the parties that are involved. According to Mugasha, (2003, p. 128-132),[9] the documentation that is presented must be consistent with the other documents. The documents prepared are supposed to link to one another and not contradict each other. They are supposed to refer to the same goods. By being consistent with one another it means that they comply with the credit conditions and the terms. The set of the documents presented must contain all the documents that are involved which include the licences obtained for the business. Lack of licences may lead to breach of law as illustrated by US v. Guo, 09-50394, 2011.[10]

Agreements form part of contract in the international oil and gas business. In counter trade business, agreements between the two parties must be involved for the business to continue. The parties that are involved enter into an agreement with the aim of fulfilling the expectations of both parties. The agreement includes the details of transportation of the goods and the shipment of goods which may be contained in a single contract or in two contracts that are separate from each other. The parties who are involved in the counter trade agreements are supposed to choose the law that is applicable to their agreement. There are some contracts that have restrictions on which laws to choose.

Evaluation of imports and exports

According to William, (2009, p. 63-66),[11] as a legal principle involved in the oil and gas business, a proper comparative evaluation of the products that are involved in the transaction have to be made. This is important for both parties because they might get into losses if the valuation is not done in a proper manner. The process of evaluation is bulk because it might involve two different products with the purpose of exchanging the products fairly. With the example of the countertrade that took place in Saudi Arabia of the Boeing jet and the oil, they are supposed to know exactly the value of the Boeing jet and the value of the barrels of oils that they are supposed to give as payment.

The other principle is that both of the transactions in the counter trade are supposed to be done at the same time if it is possible or done simultaneously. To make sure that the principle works in the proper way, they can include in the contract a clause containing the penalty that is supposed to be paid by the party who delays in the shipment of the goods. The goods being shipped at the same time is referred to as a primary consideration in counter trade transactions. An important factor that is supposed to be considered is the counter trading transactions of oil and gas business is the factor of quality control. The valuation that is done for both products that are to be countertraded is assumed to be of a certain standard and if the party that is receiving the goods finds out that the quality is not as expected he is supposed to sue the other party for breach of contract.

As stated by Lorrie, (2010),[12] for the taxation purposes, there is no difference in the transactions that involves cash and the transactions that involve the counter transactions. The sales done through the countertrade transactions are taxed at the end of the year as with the other incomes that are made. The oil and the gas that is sold through countertrading transactions are taxed as if there was exchange of currency. This happens to the businesses that are profitable. The businesses that do not receive profits by the countertrade transactions are not taxed in the year because they are no profits. It is a requirement that all the services that are provided are supposed to be at the market value and the records of the business must be well kept. The records are supposed to show how the invoices are recorded and how they are covered.

Liability for the goods

An important principle in the financing of the counter trade transaction as stated by Counter Trade Final, (2011),[13] is the Liability for the products that are to be resold. In managing the risk that might be involved in the goods that are to be resold, it is good not to take the title to the product for the importer before they are received. An intermediary or another trader who is conversant with the goods is the one who is supposed to take the responsibility of the goods. He will be able to ensure if the products are able to meet the requirements and the standards in the current market. He is also able to ascertain if there is a need of an alternative trade or if the deal is a better one.

Guarantees

Another legal principle that is involved in the financing of countertrade transactions in the oil and gas business as illustrated by Roeland, (2004, p. 15-30),[14] is the use of guarantees. A guarantee is referred to as a contract that is signed between two parties which are the banks and the other person who wants to benefit who is the beneficiary. The international businesses are guaranteed by the international banks. A contract of guarantee takes place where there is another contract between the debtor and the creditor. The guarantee may be the general guarantee which according to Pierce, (1993, p. 1-292),[15] involves two types of guarantees. The general guarantee covers the risk and provides security of the goods that are involved with the financial obligations and the risk that are involved with the non financial obligations. There are many types of guarantees that are used by the international banks to cover loses that might be involved in the countertrade transactions. The bank guarantee is involved in the shipment of the goods and the whole process of transaction. The banks that are always involved in the guarantee are instructed by the principle debtors to give a guarantee to the creditor and they are given terms and conditions that are to be involved. If the banks at any time pay the payment for the debtor, then the creditor is supposed to reimburse the amount that is paid by the guarantor bank. The international banks involved benefits from the transactions by charging a commission for the services that are provided. In the counter trade transactions the carriers of the goods that are to be transported are very important and the mode of transport that is to be used. The two parties can be involved in the operations that will allow the goods to be loaded one time and be offloaded once.  The airlines in most cases have been used and the shipping companies have also been used. The shipping lines include the oil tankers, the refrigerated vessels and the container vessels that may be used.

Insurance

The movements of goods is involved in the counter trade transactions as Eric, (2004, p .3-6),[16] puts it, and the parties who are involved are supposed to be prepared for the hazards that might be involved. The goods may be damaged in transits because of the risks involved as suggested by Watson, (1994, p. 1-363),[17] or in some cases the goods might hijacked or be involved in piracy. The parties who are involved in the counter trade transactions are supposed as a legal principle to insure the goods that are involved which help to reduce the risks and big losses that might be involved. International insurance companies give the insurance policies to the parties. The policies that are involved in the countertrading of oil and gas are not similar to the other policies which are involved in other goods. The most popular cover that is used in the transportation of gas and oil is the marine cover.

Pricing

As illustrated by the Price of Fuel/What affects Fuel Pricing, (2011),[18] another legal principle involved in the financing of the oil and gas business is the pricing that is determined by the demand and the supply overview of the market places. If the supply of the oil is disrupted and the demand goes high, the price of the oil in turn rises. If there is much supply of the products and the demand is low, the prices go down.  The principles apply in the international business and also in the service stations in all the countries that are involved.

The countries that are not credit worthy can use the countertrading methods to buy other products. It helps in the restoration of the credit worthiness of the growing countries. It is important to countertrade oil because it is a necessity in all countries and its supply needs to be secured. The volume that is involved in the trading of oil is bigger than any other. Oil and gas makes the largest volume in any country of either exports or the imports. As Countertrading of energy – Walter Solutions, (2011),[19] suggested, oil is the most important commodity in any nation because some countries depend on it raging from 30% to 100% in all the activities of the country. It is a political commodity because it is strategic. The major producers of the oil like Saudi Arabia, Russia and Brazil together with the other countries which import the oil and gas in large quantities like India and China has made the oil to be their medium of exchange because of the countertrading and the large volumes that are involved. Oil has also been like a barter currency.

As stated by, Adioc 2011 to address major counter trade themes in Middle East, (2011),[20] the Middle East countries are making some changes in the business of oil industry in offsetting programs because they want to take care of the requirements of the national defence. The approaches that are being used in the countertrading in the Middle East countries are sophisticated and that is why the changes are being made.

The adequacy of the law to the business

The principles and the laws that are concerned with the countertrade transaction of the international oil and gas business are good because they support the oil business. The pricing principle is used to control the prices of the oil that is to be exported. The principle of the tariff is important because it facilitates the competition between the countries that are involved. The business in the oil industry is adequately supported. The principle that requires the countries that are involved not to discriminate other countries help the oil and gas business and support it because oil is essential in all countries. The principle gives directions on how the oil business is to be carried out.

Conclusion

Countertrade transactions as a means of financing has been used internationally by countries that deal with bulk goods and they do not want to deal with currency. The financing of the international oil and gas business has been effective through countertrading. The method has mostly been used by the Middle East countries when dealing with oil and gas. In the regulation of the business, there are principles that have been set for the financing of the oil and gas business through countertrading and they have supported the oil and gas business. Countertrading is one of the easiest ways of financing imports.

References

Adioc 2011 to address major counter trade themes in Middle East. 2011. Viewed on 12th April, 2011. <http://www.ameinfo.com/256343.html>

Caves. R. E., and Marin. D. 1992. Countertrade transactions: theory and

evidence. Academic Journal. Vol. 102 Issue 414, p1171-1183, 13p,

Central W. Virginia Energy Co., Inc. v. Mountain State Carbon, LLC, 10-1486 (2010)

Counter trade final. 2011. Viewed on 11th April 2011. <http://www.scribd.com/doc/13142134/Counter-Trade-Final >

Countertrading of Energy – Walter Solutions. 2011. Viewed on 12th April 2011. <http://www.walterenergy.info/mainframe.php?page=collateral&level=29>

Eric. B. 2004. Finance of international trade. Book. P.3-6.

Horn. N. 2001. The Law of International Trade Finance. Book. P. 1-740

Johnson. T. E. 2002. Chapter 9. D: Barter and Countertrade Transactions. Book.  P 387-387, 1/3p

Lorrie in Finance, 2010. Taxation Issues Surrounding Barter. Viewed on 11th April 2011 <http://blog.ormita.com/?p=262>

D’Archy, Cleave. B. Murray. C, Clive. M. S., 1999. Export Trade: the Law and Practice of International Trade. Book. P. 20-62.

Maurice. D. L. 2009. International finance. 5th Edition. P. 534

Mugasha. A. 2003. The Law of Letters of Credit and Bank Guarantees. P. 128-132

Onkivist. S., and Shaw .J.J. 2007. International marketing: analysis and strategy. Book. P. 510-520

Pierce. A. 1993. Demand Guarantees in International trade. Book. P. 1-292.

Roeland. I. V. F. B, 2004, Bank Guarantees on International Trade. Book. P. 15-30

The Price of Fuel/ What affects Fuel Pricing. 2011. Viewed on 12th April. 2011 <http://www.thepriceoffuel.com/whataffectsfuelpricing/>

US v. Guo, 09-50394, 2011.

Voyevodins’ Library, 2011. Viewed on 11th April 2011. <http://enbv.narod.ru/text/Econom/ib/str/191.html>

Watson . A. 1994. Finance of International Trade. Book.  P. 1-363.

William. F. 2009. International commercial agreements: a primer on drafting, negotiating, and …Book. P. 63-66

 



[1] D’Archy, Cleave. B. Murray. C, Clive.M.S., 1999. Export Trade: the Law and Practice of International Trade. Book. P. 20-62.

[2] Johnson. T. E. 2002. Chapter 9. D: Barter and Countertrade Transactions. Book.  P 387-387, 1/3p

 

[3] Onkivist. S., and Shaw .J.J. 2007. International marketing: analysis and strategy. Book. P. 510-520

[4] Voyevodins’ Library, 2011. Viewed on 11th April 2011. <http://enbv.narod.ru/text/Econom/ib/str/191.html

[5] Maurice. D. L. 2009. International finance. 5th Edition. P. 534

[6] Caves. R. E., and Marin. D. 1992. Countertrade transactions: theory and

evidence. Academic Journal. Vol. 102 Issue 414, p1171-1183, 13p,

 

[7] Horn. N. 2001. The Law of International Trade Finance. Book. P. 1-740

[8] Central W. Virginia Energy Co., Inc. v. Mountain State Carbon, LLC, 10-1486 (2010)

[9] Mugasha. A. 2003. The Law of Letters of Credit and Bank Guarantees. P. 128-132

[10] US v. Guo, 09-50394, 2011.[10]

[11] William. F. 2009. International commercial agreements: a primer on drafting, negotiating, and …Book. P. 63-66

[12] Lorrie in Finance, 2010. Taxation Issues Surrounding Barter. Viewed on 11th April 2011

[13] Counter trade final. 2011. Viewed on 11th April 2011.

[14] Roeland. I. V. F. B, 2004, Bank Guarantees on International Trade. Book. P. 15-30

[15] Pierce. A. 1993. Demand Guarantees in International trade. Book. P. 1-292.

 

[16] Eric. B. 2004. Finance of international trade. Book. P.3-6.

[17] Watson . A. 1994. Finance of International Trade. Book.  P. 1-363.

[18] The Price of Fuel/ What affects Fuel Pricing. 2011. Viewed on 12th April. 2011 <http://www.thepriceoffuel.com/whataffectsfuelpricing/

[19] Countertrading of Energy – Walter Solutions. 2011. Viewed on 12th April 2011. <http://www.walterenergy.info/mainframe.php?page=collateral&level=29>

[20] Adioc 2011 to address major counter trade themes in Middle East. 2011. Viewed on 12th April, 2011. <http://www.ameinfo.com/256343.html>

 

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