Chapter 2 Name of Commodity and Quality Clause

Learning Objectives

（1）To understand the description and significance about the name of commodity and quality of commodity；

（2）To master the different methods of quality stipulation；

（3）To distinguish the name of commodity clauses and quality clauses properly.

Case Study

A company in Guangdong signed a contract of“Guangzhou Longan”with an importer in Japan. In terms of quality clause, it quoted that“Guangzhou Longan”. After receiving the goods, they raise an objection about the delivery goods that they did not originate from Guangzhou area.

Guangzhou Longan is famous for its high quality. Not only does the longan has superior quality, but also enjoys a good reputation in Southeast Asia. The Guangdong exporter made an explanation that the contract only stipulated“Guangzhou Longan”, so as long as the quality of longan is equivalent to that of longan of Guangzhou, it is also in conformity with the one in the contract. However, the buyer claimed“Guangzhou Longan”should be from Guangzhou area originally and that was accorded with contract requirements. Both sides insisted on their own position. Finally, in order to maintain the business relationship between the two parties, the Chinese company made compensation to the Japanese company.

What lessons should we learn from it？

2.1 Name of Commodity

2.1.1 Description and Significance

Name of commodity is what a commodity is called. When conducting business negotiations, both the sellers and buyers should reach an agreement about description of goods in the contract exactly. In sales contract, name of commodity reflects the natural attributes, purpose and the main features of the commodity itself.

In international transaction, it is significant to stipulate the name of commodity in the contract. Owing to the distance between trading parties, both sides seldom have a chance to make a deal face-to-face. To stipulate the name of commodity is the first and important step for trading parties, which is also the precondition for other terms in the contract. In addition, as a basis for the delivery of goods, name of commodity has bearing on the rights and obligations of both trading parties. If the seller fails to deliver the same goods as named in the contract, the buyer is entitled to claim against the seller for compensation, refuse to take delivery, or even cancel the contact. Therefore, the name of commodity should be clearly and properly specified in the contract and the name of the goods delivered should exactly conform to the contract.

2.1.2 The Name of Commodity Clause

The name of commodity clause, as a main component of the description of goods in contract, is relatively simple. Usually, both parties in the contract just specify the name of the products under the article of name of commodity. Sometimes, both parties only write several sentences at the beginning of a contract without headline to express the agreement on the business of some commodity.

2.1.3 Points for Attention in Stipulating Name of Commodity Clause

Owing to the significance of name of commodity clause, there are four principles which should be considered when setting the name of commodity clause to avoid subsequent disputes：

（1）Be Clear and Specific

There are different ways to express the commodities, such as named by main raw materials or main ingredients. Therefore, the expression of the commodity name should be clear and specific to indicate specific characteristics and so as to avoid vagueness and ambiguity（See Example 2－1）. Especially, the difference between name of commodity and description of goods should be understood（See Example 2－2）.

（2）Be Practice and Realistic

The name of commodity stipulated in the contract must be in conformity with the goods that meet the requirements of both trading parties. Exaggerated or unnecessary descriptions should not be used so as to avoid fulfilling the contract difficultly（See Example 2－3）.

（3）Adopt International Common Terms as Practical as Possible

Sometimes, a product has different name in different courtiers and regions. Hence, different names may refer to the same commodity or the same name may mean different goods. Possible disputes could be further avoided by adopting internationally standardized and widely accepted names（See Example 2－4）.

（4）Select Appropriate Name of Commodity

In international trade, choosing appropriate commodity names is a way to facilitate importing and reduce the cost of transaction in terms of customs tariff and freight charges. It happens that when the same product is imported or exported under different names or categories of commodities, differential tariff rates or freight rates and trade policies may apply（See Example 2－5）Therefore, choosing an appropriate name as the name of commodity in the contract is beneficial to both the exporter and the importer.

2.2 Quality of Commodity

2.2.1 Description and Significance

The quality of commodity is integration of the internal attributes and the external appearance of goods. The internal attributes include the physical, mechanical, biological and natural properties and chemical compositions of goods. The external appearance includes shape, taste, color transparency and style of the goods.

It is significant to improve the quality of the commodity. As the core component in international transaction, quality of goods not only concerns the value of use and the value of the commodity, but also directly affects the market price and marketability of the commodity, and even the reputation of a country. Hence, to improve quality of goods can not only enhance export competitiveness, increase price and expand market, but also improve reputation of export goods in international market.

2.2.2 Requirements of Quality

Owing to the significance of quality, there are several international standards of commodity quality in a sales contract.

（1）ISO9000

ISO9000 standard is the quality standard of manufacturing enterprise established by International Organization for Standardization in 1987. With the certificate of ISO9000, export products will obtain permits to enter into international market. Since ISO9000 series of standards were issued, they have been adopted by 60 countries include China.

（2）ISO14000

IS14000 environmental standards were enacted by ISO Technical Committee 207 on Environmental Management, which was established in June,1993. Some developed countries have taken them as one kind of“green barrier”. The developed countries will refuse the import of such goods without the certificate, with the aim of establishing implementing and effective environmental management system within the organization to regulate the environmental behavior of the organization, control and reduce damage to the environment caused by the production and management activities, encourage and promote enterprises to produce green environmental protection product so as to meet the ISO14000 series of standard belong to green enterprises, and products are recognized as environmental friendly.

（3）CE Mark

According to EU regulations, from January 1,1996, if to enter the European market, electrical products must comply with the common safety standards（with CE Mark）identified by the EU.

（4）UL Mark

It is a mark of security certificate stipulated by the inspection agency subordinated to the Underwriters' Laboratories. Electrical products exported to Canada and America should not be sold without UL mark.

2.2.3 Methods of Stipulating Quality

In international transaction, commodities have various types and characteristics so as to have several methods to stipulate quality of goods. Generally, there are three categories to indicate quality of goods:sale by actual commodity, sale by sample, and sale by description（See Table 2－1）.

（1）Sale by Actual Commodity

Sale by actual quality or sale by actual commodity, means that goods are already available at the time of contracting and then quality of actual goods will form the condition of transaction. Under terms of sale by actual commodity, the buyer inspects the quality of the actual goods at the seller's premises. If the seller is satisfied with the quality of the actual goods, both sides make a deal. It usually takes place in some special forms, such as consignment sales, auction, trade fairs and exhibition sale, etc.

（2）Sale by Sample

Sale by sample, means that both trading parties agree to take the sample as the representative of quality and condition of the goods to be delivered. A sample is a small quantity of product, which is taken out from a whole lot to represent the average quality of goods. This method is applied when it is difficult to indicate quality of commodity by scope of any scientific or technical description. For example, light industrial products, agricultural native products，handicraft articles, and textile products.

According to the supplier of the sample, there are three cases under sale by sample:sale by seller's sample, sale by buyer's sample and sale by counter sample.

1）Sale by seller's sample

Seller's sample is the sample provided by the seller. In this case, when the buyer accepts the sample, the seller is responsible for the delivery of the goods of the same quality as shown in the sample.

2）Sale by buyer's sample

Buyer's sample refers to the sample prepared by the buyer. In this case, when the seller accepts the sample, wording like“quality as per buyer's sample”should be clearly stipulated in the contact, the seller is responsible for the delivery of the goods of the same quality as shown in the sample.

In case of sale by buyer's sample, the seller should study the samples thoroughly which not only include external features but also the intrinsic characteristic of the sample. In addition, the seller should pay attention to raw materials supply, processing techniques and so on. Considering limitation of local conditions, sellers encourage to adopt sale by seller's sample rather than sell by buyer's sample so as to avoid risk.

3）Sale by counter sample

Counter sample, is also called a return sample, which is a replica made by the seller based on the sample provided by the buyer. After the confirmation of the buyer, the confirmed sample will serve as the basis of the transaction and delivery.

4）Points for attention in sale by sample

In this case, there are four principles should be considered.

It had better pick the representative sample, which should represent the average quality level of the whole lot, rather than pick best quality of goods as a sample.

It had better keep the duplicated sample.

Reference sample should carry the mark clearing showing“For Reference Only”.

If necessary, it had better have one additional sealed sample before sending samples or delivering the goods.

Except four principles, to understand four confusing concepts in the transaction is very important. These four concepts are as follows:Representative sample＆Duplicated sample＆Reference sample ＆ Sealed sample.

Representative sample is taken out from stock and typically represent the average quality of whole products.

Duplicated sample is the copy of a sample kept by the party who sends the sample. It served as the proof of quality in case there is a dispute about the quality of the goods to be delivered in the future.

Reference sample is the sample provided by either the seller or the buyer to each other for reference only when sale is made by description. This kind of sample serves as a tool of description and promotion rather than the quality basis of the delivery.

Sealed sample is the sample draw from a whole lot by a third party such as local commercial inspection institution and sealed by sealing wax in the presence of both the seller and the buyer. It is considered as the final quality basis of delivery and serves as the proof of quality in case there is a dispute.

（3）Sale by Description

Generally speaking, sale by description is applicable to commodities of which quality can be expressed by some scientific indicator. There are six forms based on the different attributes, nature and characteristics of a commodity.

1）Sale by specification

The specifications of the goods refer to main indicators to reflect commodity quality, such as composition, content, purity, length and size, etc.（See Example 2－6）. In international trade, when buyers and sellers use the specification to determine the quality of goods, it is called sale by specification. In this case, technical detection is usually used to determine quality of goods.

2）Sale by grade

The grade of goods refers to the classifications of commodities of the same kind, which is indicated by word, numbers or symbols. The commodities are graded as low or high quality by difference in specification. The same kind of goods might also be classified into different grades, such as Grade A, Grade B, Grade C; or Grade 1, Grade 2, Grade 3（See Example 2－7）In case of sale by grade, it is recommend to lay down some specific specification of each grade to avoid misunderstanding and possible disputes. In international transaction, when buyers and sellers use grade to determine the quality of goods, it is called sale by grade.

3）Sale by standard

Standards refer to the specifications or grades, which are stipulated and officially recognized by the government or commercial organizations, such as ISO 9000 and ISO 14000. Different countries have different standards. Therefore, it is important for the exporters to understand and meet the standards required by their target markets. Besides, exporters should pay attention to quoted publication of the standard in the contract. In international transaction, when buyers and sellers use standard to determine the quality of goods, it is called sale by standard.

4）Sale by brand name and trademark

Brand name is the particular name of business enterprise to produce and sell, which distinguish own products from other same kind of commodity. Brand is so important in terms of advertising.

Trademark is a mark used by the producers or merchants to identify the commodity, which is composed of words, letters, numbers, graphic or pictures.

Brand and trademark are a symbol of quality for itself. This method is usually applied in highly reputed products with well-known brands and trademarks（See Example 2－8）. In international transaction, when buyers and sellers use brand name and trademark to determine the quality of goods, it is called sale by brand name and trademark.

5）Sale by origin

Sale by origin refers to the sale of goods by using the name of the place of the origin as the indication of quality. This method is suitable for indicating the quality of agricultural products and native product, which are renowned for their unique specialty in quality own to some special factors such as natural conditions and traditional production techniques in certain area（See Example 2－9）. In international transaction, when buyers and sellers use origin of the goods as characteristic to determine the quality of goods, it is called sale by origin.

6）Sale by descriptions and illustrations

Sale by descriptions and illustrations is especially applicable for full sets of equipment or instruments, which the delivery must be in conformity with all the indicators stipulated in the illustrations. These commodities are described by the specifications accompanied by pictures, design drawings, analytic tables and various data, so as to indicate their specific properties and structural features（See Example 2－10）. This method is usually applied in machinery, precision instruments and equipment.

2.3 Quality Clause

2.3.1 Basic Contents

The quality clause is one of the main conditions in the contract, which refers to both buy ers and sellers agree upon the goods covering the quality, grade, standard, specification and so on. Generally, the name of the commodity and specific quality basis should be indicated explicitly in the quality clause.

When the contract is under sale by sample, it should indicate the number of the sample and the date of delivery. Sometimes it also includes clear quality to be about the sample or to be similar to the sample. When the contract is under sale by description, it should indicate clearly the name of the goods, specification, grade, standard, brand, trademark, origin and illustration. In the case of“sale by standard”, it should indicate clearly the name of standard and the date of standard.

2.3.2 Quality Tolerance

Quality tolerance refers to the quality deviation recognize internationally or agreed by both trading parties. It is usually applied in some manufactured goods, such as watch, which is allowed a quality tolerance within 60 seconds per day.

Points for attention：

（1）The buyer should not refuse goods delivery and claim compensation if the quality deviation within the range of quality tolerance.

（2）The buyer should not adjust price of goods if the quality deviation within the range of quality tolerance.

（3）The quality tolerance is used usually in terms of industrial manufactured goods.

2.3.3 Quality Latitude

Quality latitude means it allows some flexibility on delivery of goods in quality indicator within a certain range.

In international transaction, the buyer should not refuse goods delivery within range of quality latitude, and usually price keep the same as required in the contract. In addition, sometimes commodity price can be adjusted within the range of quality latitude according to the term of“price adjustment clause relating to quality”in the contract.

There are three ways to stating the quality latitude.

（1）Flexible Quality Range or Scope（See Example 2－11）

（2）Maximum ＆ Minimum Requirements（See Example 2－12）

（3）Allowed Deviation（See Example 2－13）

2.3.4 Points for Attention in Stipulating Quality Clause

Owing to the significance of quality of commodity clause, there are three principles should be considered when setting the quality of commodity clause to avoid subsequent disputes.

（1）Adopt the Correct Method to Express Quality of Commodity

In international transaction, there are various methods of specifying quality and each applicable to commodities with certain characteristics. After understanding definition, character, rights and obligations of stipulating quality method, we should adopt a proper way to express quality of commodity based on the character of goods. For example, sale by brand is usually applied in highly reputed products with well-known brands and trademarks. In addition, sometimes method comprehensive applied to express quality of goods. For example, it uses both sample and specification to express quality of goods. In this case, seller should pay attention to what is the final quality basis. Because in some countries, if trading parties use sample and specification to determine the quality of goods at the same time, the seller is responsible for the delivery of the goods of the same quality as both the sample and specification.

（2）Pay Attention to the Latest Laws and Regulations Concerning the Quality of Imports Among Different Countries

There are different laws and regulations in different countries and areas. In order to deliver the goods successfully, seller should ensure that the product complies with laws and regulations in exporter countries. In addition, importer should be familiar with latest laws and regulations in importer countries, which make importer access to international market successfully.

（3）Be Flexible About Quality of Goods

Flexible refer to quality tolerance and quality latitude. In some agricultural products, light industrial products and mineral products, it usually stipulate quality tolerance clause and quality latitude clause in the contract.

2.3.5 CISG

CISG, the United Nations Convention on Contracts for the International Sale of Goods. It was enacted by United Nations Commission on International Trade Law, which was established in January 1988.Accoding to CISG, the seller must deliver the goods, which conform to quality and description requirement in the contract. Otherwise, the buyer may claim damages, require delivery of substitute goods, or require the seller to remedy or even reject the goods and cancel the contract.

In conclusion, in terms of commodity, the quality clause is the essential part in international sales contracts. The sellers have responsibility to deliver the goods of the same quality as required in the contract.

Exercises

1. Answer the following questions.

（1）What principles should be followed when stipulating name of commodity clause？

（2）How many methods of stipulation quality are there? What are the characteristics of each method？

（3）What are the concept and function of reference sample, duplicated sample and sealed sample？

（4）What principles should be followed when stipulating quality clause？

2. Case analysis.

In 2006, foreign trade company A in China exported a certain amount of tobaccos to America. In the contact, both sides reach an agreement on quality of commodity, which allowed maximum moisture 13% and maximum impurities 3%. Before the deal, company A had sent some samples to the buyer and cabled to inform the buyer“the delivered goods would be similar to the samples”. After receiving the goods, the buyer presented a certificated proving the delivered goods were 5% lower than samples in quality and claimed for compensation amounting to 500 dollars.

Question:Can company A refuse the compensation because transaction is sale by specification not by sample？

3. Multiple choice.

（1）________is integration of the internal attributes and the external appearance of good.

A. name of commodity

B. quality of commodity

C. specification of commodity

（2）“Panasonic Television, TH-42PV65C, quality and technical date to be strictly in conformity with the instruction attached”is an example of .

A. sale by origin

B. sale by trademark

C. sale by descriptions and illustrations

（3）________is the copy of a sample kept by the party who sends the sample.

A. representative sample

B. duplicated sample

C. sealed sample

4. True or false.

（1）（　）Name of commodity, as a basis for the delivery of goods, has a bearing on the rights and obligation of both importers and exporters.

（2）（　）Peking Roast Duck is the example of sale by origin.

（3）（　）Reference sample could serve as the proof of quality in case there is a dispute about the quality of the goods to be delivered in the future.

（4）（　）Quality latitude is the quality deviation recognize internationally or by both trading parties agreement.

（5）（　）The buyer should not refuse goods delivery and claim compensation if the quality deviation within the range of quality tolerance.