Business conventions

BUSINESS CONVENTIONS

Objectives:

familiarize with specific terminology and concepts of different business agreements

acquisition of specific vocabulary

train ability of drafting different contract clauses

Contracts are agreements between two parties as a result of an 'offer' and 'acceptance'. Other requirements must also be met for an agreement to become legally binding. The two parties must have full and legal capacity to enter into a legal agreement, i.e. they must be competent, so that the agreement should not be considered void either by law, statutory rule or an inherent defect. The setting of a valid contract does not require any particular formality, as it can be concluded in an oral or in a written form or even implied from conduct. However, certain contracts are valid only if made by deed: transfers of shares, certain types of lease, hire-purchase agreements, bills of exchange, promissory note. There are some different types of contracts :

Hire-purchase contract (HP) by which goods are passed in the possession of the purchaser as soon as he has paid an initial installment of the price. A hire purchase agreement often involves a finance company as a third party. The owner of the goods sells them outright to a finance company entering a hire-purchase agreement with the hirer.

Franchising agreement by which a licence is granted by the franchisor to the franchisee to enable him to manufacture, or sell a product or service in a particular area or stated period. He pays a royalty on sales to his franchisor.

Contract of employment (service) by which an employer and a employee set an agreement. It stipulates the job title, salary, payday, holiday entitlement, sick pay, pension, notice requirements, and disciplinary procedures. Larger organizations provide a company handbook giving a detailed account of company policies, disciplinary rules and any other relevant matters.

Loan Agreement is the type of a contract by which the creditor undertakes to provide financing to a debtor who obliges himself to pay back the amount within a stated period of time together with an interest.

Contract of licence: the licensor grants the licensee the right to sell, to produce or render a service under the name of the former. The licensor provides the latter with all the necessary technical

documentation and information needed to exercise the right under the contract while he is bound to keep the confidentiality of this information against a third party.

Mandate agreement: the mandatory undertakes to arrange business matters in the name of a mandator at his request against the payment of a certain amount of money for the service rendered called a commission.

Silent partnership agreement: the silent partner provides an investment to an entrepreneur that will pay him back an amount deriving from the profits obtained in the entrepreneur's business results.

Leasing contract: the lessor undertakes to allow the lessee the temporary use of equipment, means of transportation, buildings for a stipulated period of time and the lessee undertakes to pay the lessor a hire-pay as remuneration.

Security Brokerage Contract: a Brokerage company undertakes execute buy/sell orders on the behalf of a natural/legal person as a Client.

Insurance Policy: an Insurance company undertakes to cover the different types of risks: transportation, damages, fire, floods, accidents, life, etc.

Charter Party: a ship-owner agrees to place his ship, or part of it, at the disposal of a charterer against a certain freight on the cargo to be carried.

A. Sales Contract

The Hire/Purchase contract has the object of transfer of the ownership from the seller to the buyer for an amount of money or for any other consideration. The seller undertakes to deliver the assets sold or hired and the buyer/purchaser undertakes to pay the purchase price according to the clauses negotiated and stipulated din the contract.

The main parts of the contractare:

Preamble of the contract that will include information about the number of the contract, date and place of conclusion, the seller and the buyer, their legal address, logoes, telephone number, bank account number. If the seller and buyer are legal persons they will always be represented by natural persons that will be identified by the data in their identity card

Terms or Clauses of the contract:

- Object of the contract: goods or assets sold or hired named)

- Quantity of the goods/assets that make the object of the contract

- Quality accoording to the nature of the goods/assets

- Packing

- Marking

- Unit/Total Price and Terms of Payment

- Sales/Hire Terms of delivery

-Transportation

-Insurance

- Jurtisdiction and Arbitration

- Contingencies. Claims and Penalties

- Other clauses: guarantee, technical documentation, taxes, customs duties, amendments, cancellation, stamps

- signatures of the two parties

B. Franchising Agreement

The two main parties of the franchising contract are the franchisor that licenses the franchesee (a manufacturer, a distributor, trader, etc) to manufacture or sell a product or render a service on his behalf for a stated period of time. The franchesee, i.e the holder of the licence pays the grantor of the licence (franchisor) a royalty on sales, often as a lump amount as an advance against royalties. The franchisor undertakes to supply the franchesee with finance and technical expertise.

C. Employement Contract

This type of contract is concluded between the employer and the emploee for a determined or undetermined period of time. The clauses are negotiated and stipulated in the contract and guaranteed by the two parties who undertake their rights and responsibilities that become binding under their signatures.

D. Credit Facility Convention

In order to execute a loan, banks need paid-in capital that is earned from financial activities, borrowed funds, and from customers' deposits. The source for lending is always the money deposited with the bank by the bank's customers, whether in a demand or time account. This will always limit considerations in the degree of risk that the commercial bank will take. It cannot jeopardize the safety of the depositors. The domestic and the international bank will always obtain certain basic information that usually is forthcoming in a meeting with the potential borrower. It will learn how much money is being sought, the purpose of the loan, how long it is needed for, and how it will be repaid.

Banks make loans for worthwhile purposes: financing trade, expanding businesses, house building, and so on. They need evaluate the three C's of credit: character, capacity, and capital. That is the integrity of the borrower, his capacity to repay the loan, and the soundness of his financial position.

Sometime the loan applicant's ability to repay the loan is pendant on the purpose of the loan itself. Loans can be self-liquidation, when the source of repayment is from the sale of imported merchandise, or capital-expansion, when the source of repayment is from increased sales.

The financial statement of the borrower represents the financial position of the borrower and it usually consists of a detailed balance sheet and a profit and loss account statement. An audited financial statement requested by the credit officer will cover a certain period of the customer's activity.

In international banking activity, the credit officer will consider the economic and political outlook of the foreign country before loaning money to a foreign borrower, its balance of payments being an important source of information. The bank's prior experience with the borrower and the nature of his

business represents a subjective factor in the decision-taking process. When the loan is granted, the bank will also decide upon the interest rate to charge. That will depend on the cost of money to the bank. This includes the average interest rate the bank is paying to its depositors, the bank's operating costs, the return that the bank expects. The bank must also take into account possible losses and provide dividends to the bank's shareholders.

There are also other considerations to take into account when a bank decides to allow a loan. If it is about a term loan, that is a second rate borrowing, the risk is greater and it must be compensated through a higher interest rate against the prime-rate borrowings that are short-term loans.

The appropriate credit instrument is to be decided upon for the repayment of the loan too. The promissory note is the most customary that can be payable 'on demand' of the bank. The banker's acceptance can be used for loans involving international trade. It is saleable to investors so that the bank merely commits itself to pay on maturity. The bank does not have to commit its own funds. Credit extension may involve advances, discounting of accounts receivable, overdrafts, or advances against collections. A loan can be secured by collateral assigned to the bank, such as securities or precious metals, or guaranteed. When an agreement is reached, the borrower signs the necessary documents and the amounts are disbursed to him.

For large loans, banks often form a syndicate each of them disbursing a portion of the loan. One bank puts the deal together and carries the administrative burden during the life of the loan, being the 'lead bank'. A syndicate is sometimes desirable because of the legal lending limits on banks, the general relationship of the total demand for credit compared to the supply of loanable funds, or the prudent banker's desire to spread the risk.

E. Contract of Licence

The agreement is concluded between the licensor who grants a licence to the licencee to sell a certain product, manufacture a preoduct, render a service, run a business. The licensor is entitled to continue performance of his rights but may also grant the same object of the contract to other persons. The licencee is not entitlerd to transfer the rights and obligations undertaken by the licence contract to another person without the consent of the licensor. The contract will also provide the providing of the technical documentation and the information needed to the licencee to perform his undertaken obligations. The latter is bound to keep confidential both the documentation and the information provided under the contract, against a third person.

F. Mandate Agreement

The two parties of the Mandate contract are the mandatory who undertakes to set certain business matters by taking legal steps in the name and for the account of the mandator, while the mandator undertakes to pay him a certain amount of money a commission. The mandatory will perform his obligations undertaken by the contract in accordance to the mandator's instructions and interests and keep him informed on the matter.

G. Silent Partnership

The silent/sleeping partner will participate into a business managed by an entrepreneur by providing him investment. The entrepreneur undertakes to pay a certain amount or percentage of the profits arising form the silent partnership. The object of the business will be passed to the entrepreneur to be used for a

certain period of time in business activities. The silent partner is entitled to check the books of the business regarding its activity. The silent partner is not bound to give back his profit share in case of loss. The contract ends when the stipulated time elapses.

H. Leasing contract

Almost any asset can be purchased through leasing, from aircraft to zithers. Even renting a car for a few days is being considered a convenient short-term lease. Corporations lease both short-term and long-term as a method of financing property, plant, and equipment. Every leasing contract has two parties: the lessee the user and the lessor the owner. When the lessee decides on the asset needed, he negotiates a lease contract with a lessor. From the lessee's standpoint of view, long term leasing is compared to a form of financing with a secured loan. The principal benefit of long-term leasing is the tax reduction. If the corporate income tax were repealed, long term, leasing would virtually disappear. The contract is called lease by which the lessee has the right to use an asset and in return must make periodic payments to the lessor, the owner of the asset. The lessor is either the asset's manufacturer or an independent leasing company that has to buy the asset from the manufacturer, and then the lessor delivers the asset to the lessee: the lease goes into effect. If the lessor is an independent leasing company who purchase s the assets from a manufacturer, leases contracts that it concludes are called direct leases. It issues both debt and equity to finance the purchase. But of course, a manufacturer could lease its own merchandise. This type of lease contract is called sales-type leases. The most interesting feature of an operating lease is the cancellation option. This gives the lessee the right to cancel the lease contract before the expiration date. If the cancellation option is exercised, the lessee must return the equipment to the lessor. The value of a cancellation clause depends on whether future technological and /or economic conditions are likely to make the value of the asset to the lessee less than the value of the future lease payments under the lease.

There are different types of lease agreements as it follows:

financial lease does not provide for maintenance or service by the lessor and it is fully amortized; the lessee, in this case, has the right to renew the contract on expiration, but never to cancel it. In other words, the lessee must make all payments or face the risk of bankruptcy. Two special types of financial lease are the sale and lease-back arrangement and the leveraged lease.

- sale and lease-back occurs when a company sells an asset it owns to another firm and immediately leases it back. In this case the lessee receives cash from the sale of the asset, and the lessee makes periodic lease payments, thereby retaining use of the asset.

- leveraged lease is a three-sided arrangement among the lessee, the lessor and the lender by which the lessor purchases the assets, delivers them to the lessee, and collects the lease payments from the lessee. The lessor puts up no more than 40-50 per cent of the purchase price, while the lender supply the remaining financing and receives the interest payment from the lessor. The arrangement would be a leveraged lease if the bulk of the financing was supplied by creditors.

I. Security Brokerage Contract

A member of the public wishing to buy or sell shares can only do so through a broker. Finding a broker is most commonly done by personal recommendation, but otherwise the Stock Exchange provides, on request, a list of brokers willing to deal, and all a prospective client has to do is approach one of the firms and ask them to act for him. The person becoming the client of a broker has to complete a Security Brokerage agreement, which sets out the terms and conditions under which business shall be done. The broker usually wants to know details of his new clients financial position and his investment objectives.

J. Insurance Policy

Insurance is based on the principle of paying a relatively small amount of money, called a premium that is to cover against the risk of accidents, damage, theft, which could determine financial loss. When deciding to take out insurance, a broker or an underwriter can give advise on the specific type of insurance that cover certain requirements. The third party insurance type is compulsory when driving a motor vehicle, as the owner of a write-off car may lose a lot of money in case of an accident. The most advantageous insurance type is the all-in which enables the insured party to claim for any damage that might occur to his car. The insured party fills in a notice of claims when the damage, loss or theft occur and lodges it with the insurer and an independent surveyor assesses the compensation claimed. Properties can also be insured against fire, floods or burglary. But because of depreciation, little compensation is usually paid. Life insurance called assurance is more and more convenient for the people retiring

as the state pension funds are lower and lower as they provide an additional source for them. Their premiums are calculated according to actuaries. Trade is also covered by insurance policies.

K. Charter Party

Foreign shipping is backed by Charter Party contract that is an undertaking of a ship owner to place his ship or a part of it, at the disposal of a charterer, the latter agreeing to pay the corresponding freight on the cargo to be carried. The

contracting parties are the ship-owner and charterer.

EXERCISES:

I. Translate into English:

Desi nu poate fi definit exact, leasing-ul operational este caracterizat de unele trasaturi importante:

echipamentele achizitionate in leasing operational nu sunt de regula amortizate integral pe perioada contractului. De aceea, platile prevazute in contractul de leasing nu sunt suficiente pentru ca locatorul sa recupereze intregul cost al bunului care face obiectul contractului. Aceasta se intampla deoarece durata contractului de leasing operational e de regula mai mica decat durata de viata a bunului. Astfel, locatorul se asteapta sa recupereze costurile activului prin reanoirea contractului de leasing sau prin vanzarea bunului la valoarea lui reziduala. (residual value)

caracterisitica cea mai interesanta a leasing-ului operational este optiunea de anulare. Utilizatorul are dreptul de anulare a contractului inainte de data expirarii acestuia. In acest caz utilizatorul trebuie sa inapoieze echipamentul locatorului. Valoarea clauzei de anulare depinde de valoarea activului care trebuie sa fie sub valoarea platilor prevazute in contractul de leasing.

Contractul este un acord, o intelegere intre doua sau mai multe parti contractante, sub forma scrisa sau verbala. De obicei, pentru aceste contracte societatile, institutiile, organizatiile au pregatite contracte tip pe care le completeaza atunci cand este nevoie. Unele clauze, cu variatii nesemnificative de continut, se gasesc in toate tipurile de contracte, cum ar fi: obiectul contractului, notificari, forta majora, cesiunea, incetarea contractului. Conventiile scrise permit determinarea clara a obligatiile si drepturile partilor. Daca acestea nu pot ajunge la consens deplin in ceea ce priveste fiecare termen in contract, aceasta nu trebuie sa impiedice semnarea contractului totusi atunci cand majoritatea conditiilor au fost indeplinite si tranzactia este destul de importanta.

Orice notificare/comunicare ulterioara semnarii contractului devine valabila pentru intelegerea intre parti numai daca va fi transmisa prin scrisoare, fax sau telex confirmat. Aceleasi comunicari nu pot deveni parte integranta din contract daca ele nu capata o forma scrisa si confirmata de catre cealalta parte contractanta.

II. Fill in the blanks using the following words:

1. installments; 2. security; 3. amount; 4. money; 5. paid; 6. statement; 7. agreement; 8. default.

When a person borrows a) ____________ or sells goods on credit, the lender wants a guarantee to cover the loan. If the borrower does not pay back the borrowed b) ___________, the lender may sell the goods which were given

to him as a guarantee and may also use the guarantee amount in order to cover the loan. Such a contract is called a 'loan c) __________'. On the basis of this contract, the borrower obliges himself to pay back the loan at a certain date, or in several equal d) _____________ at periods established throughout a month or a year. If the borrower does not pay back at required date, makes any false e) _____________ to lender, dies, becomes insolvent or terminates his business by all reason, the payment of the loan is 'accelerated' and the borrower or his successors must pay immediately the whole amount which remained unpaid. When a f) ____________ and loan agreement is drawn up, the identity of the parts, the total amount of the loan, the interest rate and the date the loan must be paid back must be taken into consideration. The contract will stipulate the description of the goods which secures the loan, and the date on which the installment is to be g) __________ back. It will also mention the lender's obligation not to sell or destroy the good and the right of the lender in case of the borrower's h) ___________ on his obligations.