UNIT 3
NEGOTIATING INSPECTION AND
DEFECTS LIABILITY
Lecturer: Phan Kim Thoa
Foreign Trade University
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OBJECTIVES
• The ways the exporter have to take to minimize the risk of the goods
being rejected: ensure the exported goods meet or exceed the quality
specified, marking and parking are corrected, delivery is on time.
• The buyer knows the right to inspect the goods and to reject them.
• A warranty protects both buyer and seller.
• The exporter always tries to keep control over how he will correct
defects.
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OVERVIEW
3.1 Warming up 3.5 The defects liability period
3.2 Exporting and the problem of quality 3.6 Corrective actions
Inspection and Acceptance Rejection:
3.3 3.7 Key words and phrases
Total or partial
3.4 Warranty and Guarantee 3.8 Practice and homework
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3.1. WARMING UP
1. What are the problems may happen when the buyer received the
goods?
2. What are the rights of buyer and seller in case the buyer is not
satisfied with the goods he/she received?
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3.1. WARMING UP (cont.)
SUGGESTED ANSWER
1. What are the problems may happen when the buyer received the goods?
• Wrong goods received;
• Unsatisfactory quality of goods;
• Damaged goods;
• Inferior goods/defective goods;
• Shortage of goods.
2. What are the right of buyer and seller in case the buyer is not satisfied
with the goods he/she received?
• Buyer’s right: reject the goods, ask the seller repair the goods.
• Seller’s right: cure the defective goods.
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3.2. EXPORTING AND THE PROBLEM OF
QUALITY
When things go wrong with the exported products, repair and replacement can be
ruinously expensive. There are some special steps that the exporters can take to
minimize the risk of the goods being rejected or of heavy defects liability claims.
• The exporter should ensure that all exported goods meet or exceed the quality
specified, that marking and packaging are correct and that delivery is on time.
• The agreement between the parties should contain specific quality specifications.
• A well-designed set of specifications offers vital protection the both sides: The
importer is protected against inferior products. Moreover, the seller is protected
also-through more subtly. If the products are fully specified and the consignment
meets the specifications, the buyer will be unable to find any excused for
rejection or for exaggerated defects liability.
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3.2. EXPORTING AND THE PROBLEM OF
QUALITY (cont.)
• Delivery of poor quality products to export markets is particular
dangerous because the cost of curing defects is high.
• To guard against high costs, the exporter should be particularly
careful about quality assurance.
• In negotiating quality clauses, the exporter should pay special attention to
detailed, realistic specification of the goods.
• Inspection provisions both before and after delivery must be negotiated with
care.
• The final quality hurdle is the defects liability period during which the
exporter is liable to cure defects that come to light in the goods
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3.3. INSPECTION, ACCEPTANCE AND
REJECTION
3.3.1 Inspection and acceptance
3.3.2 Rejection: total or partial
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3.3.1. INSPECTION AND ACCEPTANCE
• Inspection: right or duty?
• Who inspect the goods?
• Which kind of goods needs pre-delivery inspection?
• What are the functions of independent inspection?
• What is the real inspection for goods?
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3.3.1. INSPECTION AND ACCEPTANCE (cont.)
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3.3.1. INSPECTION AND ACCEPTANCE (cont.)
• The buyer can inspect goods and they can cancel the contract if the
goods do not conform the contract.
• At this point, exact specification is of great value to exporter if the
goods conform to specifications, the buyer is obligated to accept
them.
• A specimen clause:
The Buyer may, at the Buyer’s option, inspect the Goods prior to
shipment. At least fourteen days before the actual delivery date, the seller
shall give notice to the Buyer, or to any agent nominated by the Buyer,
that the Goods are available for inspection. The Seller shall permit access
to the Goods for purposes of inspection at a reasonable time agreed by
the parties.
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3.3.1. INSPECTION AND ACCEPTANCE (cont.)
bảo đảm ngầm định
• Implied warranty of conformity with contract
Goods must conform with their description in the contract. but what is “ conformity with
contract? There are law to deal with problem. Most laws have a way of “grading” non-
conformity.
• Implied warranty of merchantable quality
• Goods might well conform with the contract but be of seriously inferior quality.
• An implied warranty of merchantability is an unwritten and unspoken guarantee to the buyer
that goods purchased conform to ordinary standards of care and that they are of the same
average grade, quality, and value as similar goods sold under similar circumstances. In other
words, merchantable goods are goods fit for the ordinary purposes for which they are to be
used.
• Implied warranty of fitness for intended purpose
Goods might conform with the contract and be merchantable but still be useless to the
buyer. If exporter knew the buyer’s intended purpose, and if the buyer trusted the
exporter to supply correct goods, then most laws allow the buyer to reject unusable items.
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3.3.2. REJECTION: TOTAL OR PARTIAL
• Rejection: Total or partial
• English law requires rejection of all the contract goods unless contract
expressly allows part rejection.
• German law and the Vienna Sales Convention both allow rejection of
only defective or non-conforming goods.
• The buyer must notify the exporter that the goods - have been
rejected “within a reasonable period”.
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3.4. WARRANTY AND GUARANTEE
• A guarantee is a promise about somebody else’s performance.
• A warranty is a promise about your own.
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3.4. WARRANTY AND GUARANTEE (cont.)
• Confusion between warranty and guarantee can be dangerous,
especially for the incorrect use of “guarantee”.
• To avoid these troubles, many contracts may mention “defects liability
provision”, which is the right concept, instead of warranty provision.
Sometimes, in software contracts, “Disclaimer of Warranty” is used
rather than warranty provision.
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3.4. WARRANTY AND GUARANTEE (cont.)
• Most contracts contain an assurance that the exporter will make good
any defects in his products: the assurance is variously known as a
warranty, a defects liability provision, or – incorrectly – a guarantee.
• The term guarantee, in strict legal usage, means a promise about
somebody else’s performance, it is, therefore, not correct in the
context of defects liability. The word guarantee might produce a
dangerous result for the exporter under certain applicable laws.
• The term warranty is used in many other contexts than the product
warranty.
• Probably the best term is defects liability since this is the only term
with an exclusive and unmistakable meaning.
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3.5. THE DEFECTS LIABILITY PERIOD
• Obvious or patent defect: Defects that can be easily seen during open package
inspection and usually already rejected.
Example: Deficit in quantity of products, wrong types of goods, torn or broken items.
• Hidden or latent defect: Defects that cannot be easily seen through inspection
and usually found out until the product is used. It comes to light after use.
• Three types of latent defect
• Defective Workmanship: A product is incorrectly built.
For example, a smartphone lacks the volume button.
• Defective Materials: Materials used to make products are inferior or somehow incorrect.
For instance, a shirt that should be made of 100% cotton is made from 65% cotton and 35% PE.
• Defective Design: A product does not meet specifications.
For example, a metal fan is covered by a guard, but the openings in the guard are three-quarters of an inch
wide, which is larger than specified.
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3.5. THE DEFECTS LIABILITY PERIOD (cont.)
What is not a defect?
• Fair Wear and Tear: the result of common use.
For example, a refrigerator works less efficiently and uses more electricity after 2
years use.
• Misuse: mistake in handling by the buyer.
• For example, the buyer uses acids to clean parts or the whole sophisticated
machines like computers, phones...
• In some contracts, misuse can also be determined as merely opening these
aforementioned complicated machines.
Faults not present on delivery: : Both buyers and sellers should understand that
only faults provably present in the goods on delivery can be considered defects.
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3.5. THE DEFECTS LIABILITY PERIOD (cont.)
Timing of defect liability period
• The Defect Liability Period: It states the length of the defects liability
period and its starting point.
• The Notification Period: The time allowed to the Buyer to notify the
Exporter of defects in the products delivered by the Exporter.
• The Rectification Period: It regulates the period during which the
buyer must notify the seller about the defects.
• The Legal Action Period: It seldom regulates the legal action period.
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3.5. THE DEFECTS LIABILITY PERIOD (cont.)
Timing of defect liability period
a. The Defect Liability Period
• First is starting point of defects liability period. While the seller wants early date
and starts timing of the Defects Liability, the buyer wants a much later date,
perhaps a successful acceptance test.
• To be fair we have the following typical terms:
• The Defects Liability Period shall be extended by a period equal to the period during which
the Goods cannot be used by reason of any defect, but not so as to extend the Defects
Liability Period for more than twenty-four months from the date of first delivery of the Goods
repaired or replaced under this provision.
• Less wide accepted is clause that buyer’s often try to slip into a contract – replacement parts
trigger a new warranty period: Any Supplies finished by way of replacement under warranty
shall be subject to provisions of this Clause to the same extent as Supplies initially accepted
by the Contractor for full further period of warranty.
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3.5. THE DEFECTS LIABILITY PERIOD (cont.)
Timing of defect liability period
b. The Notification Period
• The buyer must notify the exporter if a defect occurs. In practice, most of
contracts do not put precise time limit on the Notification Period.
• A typical wording: Notice of Defects.
• The buyer shall notify the Seller of defects without undue delay. In case, a
problem arises, the judge sets a fair period for undue delay.
• Example:
The UCC says: “What is a reasonable time for taking any action depends on the nature,
purpose and circumstances of such action.” Any action is taken “reasonably” when it is
taken at or within the time agreed or, if no time is agreed, at or within a reasonable
time.
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3.5. THE DEFECTS LIABILITY PERIOD (cont.)
Timing of defect liability period
c. The Rectification Period
• The Rectification period is like to a guarantee period and the Seller usually
has the obligation, and indeed the right, to remedy defects appearing
within this time.
• Making Good of Defects:
• The Seller shall making good of the defect or damage as soon as practicable and at his
own cost.
• The making good of defects without undue delay or within a reasonable time is a fair
and normal contract requirement.
• The options for curing Defects: Repair, Allow the buyer to repair at exporter’s cost,
Replace(part or whole item), Reduce the price, Return the goods and refund the price.
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3.5. THE DEFECTS LIABILITY PERIOD (cont.)
Timing of defect liability period
d. The Legal Action Period
• If the exporter has failed to repair under warranty and the buyer must start a legal
action, how much time does the buyer have to begin proceedings?
• This "legal action period" differs under applicable laws:
• In Germany, for example, the BGB defines a legal action period equal to and concurrent with
the defects liability period.
• In another common Continental law pattern, the legal action. In the United States: the UCC
sets up a four-year legal action period; the parties to a contract may shorten this period
(minimally to 1 year), but they may not lengthen it.
• In England the normal period is six years from the date of the cause of action. The variations
are many: within one country, the legal action period varies from one type of contract to
another or even from one type of duty to another.
• In practice, contracts rarely regulate the legal action period, leaving the matter to the
applicable law. If you foresee a problem, take legal advice.
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3.5. THE DEFECTS LIABILITY PERIOD (cont.)
Timing of defect liability period
• The defects liability provision states the length of the defects liability
period and its starting point.
• It regulates the period during which the buyer must notify the
exporter about defects.
• It regulates the amount of time the exporter has to cure defects.
• It seldom regulates the legal action period, the applicable law
normally fixed the legal action period.
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3.5. THE DEFECTS LIABILITY PERIOD (cont.)
• Eternal warranty
• An endlessly renewed liability for defects. The exporter cannot break the
chain of warranty and is involved in endless responsibility for the goods.
• The problems can be avoided with a cut-off clause such as: the total warranty
period shall in no case exceed three years.
• Disclaimer of warranty
• Sell the goods “as is”. Example: Software, second-hand goods.
• A specimen clause:
The software provided under this Agreement is furnished “as is” and without support of any
kind whatsoever. The Supplier disclaims all warranties with regard to any software licensed to
the Purchaser under this Agreement, including all implied warranties of merchantability and
fitness for a particular purpose.
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3.6. CORRECTIVE ACTION
a. Repair
• The cheapest cost for defective item in case that a manufacturer sells in his
own country.
• Costly choice for the exporter who must travel to the buyer's country with
tools and spare parts and clearly take such costs into his account.
b. Allow the Buyer to repair at the exporter’s cost
• Obvious danger for the exporter: An expensive repair bill and no way to be
sure the repair is properly carried out.
• Cause new problems that the exporter must fix under the warranty. Most
exporters try to resist pressure from the buyer to include a “repair by the
buyer” provision.
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3.6. CORRECTIVE ACTION (cont.)
c. Replace
• Advantage: It helps to keep the goodwill of the customer.
• Expensive for the exporter: Replace the whole product or the defective part for
heavy equipment. In case of replacing a part for foreign buyer, similar problems to
repair are caused such as a competent technician must be at hand to install
replacement parts for complicated equipment. Thus, the costs are much higher
for the exporter than for the local trader.
d. Reduce the price
• Is considered the best option for exporter. This action means that both parties
must negotiate and eventually reach an agreement of price reductions for the
defective goods. Commonly, the exporter offers a price reduction.
• If goods are paid for on delivery by letter of credit, such a reduction must take the
form of a direct payment by the exporter to the buyer.
• If payment is on open account and the invoice has not yet been settled, the
payment due is simply reduced.
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3.6. CORRECTIVE ACTION (cont.)
e. Return the goods and refund the price
• The least desirable option from the exporter’s point of view. The
exporter must take back the goods and give back the money; Besides,
he has to cover cost of return shipment to his country. That means
the deal is a total loss for the exporter.
• The exporter must protect himself by allowing a “return and refund”
clause only in exceptional cases and with his express agreement.
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3.6. CORRECTIVE ACTION (cont.)
• The purpose of the defects liability provision is to allow the exporter to
cure defects in delivered goods: The provision must therefore explain the
corrective action he must take.
• The normal options are to repair, to replace, to allow the buyer to repair
the defect at the exporter’s expense.
• The exporter likes to have full discretion over what corrective action he
takes; buyer, however, resist this.
• The exporter usually, though not always, pays for curing defects.
• The consequences of a defect can be costly; the parties often negotiate at
length to decide who pays for consequential loss or damage.
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3.7. KEY WORDS AND PHRASES
No ENGLISH VIETNAMESE
1 Implied warranty of conformity with contract Đảm bảo phù hợp với hợp đồng
2 Implied warranty of merchantable quality Đảm bảo về chất lượng hàng hóa có thể tiêu thụ được
3 Implied warranty of fitness for intended purpose Đảm bảo phù hợp với muc đích sử dụng
4 Patent defect Khuyết tật / lỗi dễ thấy
5 Latent defect Khuyết tật / lỗi ẩn/ bên trong
6 Defect liability period Thời gian chịu trách nhiệm với hàng khuyết tật/ lỗi
7 Eternal warranty Bảo hành vô kỳ hạn
8 Disclaimer of warranty Từ chối bảo hành
9 Come to light with use Phát hiện khi sử dụng
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3.7. KEY WORDS AND PHRASES
No ENGLISH VIETNAMESE
1 Warranty Bảo hành
2 Guarantee Bảo đảm
Các mốc trong thời gian chịu trách nhiệm về hàng lỗi/
3 Timing of defect liability period
khuyết tật
4 The Rectification Period (slide 23) Thời gian khắc phục hàng lỗi/ khuyết tật
5 The Legal Action Period (slide 24) Thời gian khiếu kiện
6 Notice of Defects Thông báo hàng lỗi
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