Counterpurchase

From Supply Chain Management Encyclopedia

Russian: Встречная закупка

The simplest definition of the counterpurchase (parallel barter ^[1]) , or International Counterpurchase Contract, says ^[2]: “An agreement between two persons or companies to buy goods or services from each other, usually at different times. For example, Company A may buy goods from Company B in March 2014, and then sell different goods to Company B in July 2014. Logically thinking, they state that counterpurchases are to be made only for the mutual benefit of both companies.” In other words, Company A is obliged to buy from the Company B goods and/or services that are usually unrelated to the goods and/or services sold by the Company A. The counterpurchase involves two separate contracts and, as counterpurchase practices show, the deliveries can take place within a period of some month to five years.

In counterpurchase (See. the scheme below) the seller (Company A) and buyer (Company B) of a primary transaction agree (See "Agreement on counterpurchase") that the seller will subsequently buy (or will cause third parties to buy - this situation is not displayed on the scheme below) products from the buyer (or from third parties in the buyer's country - See "An option to transfer executing the counter purchase contract) to a third party"). In this international operation, there are two flows of products - that is, the products sold under the primary transaction (See "Exporting according to the Agreement on counterpurchase"), on the one hand, and those sold in counterpurchase (See "Importing according to the International counterpurchase contract"), on the other are paid for in money. The value of products bought under the counterpurchase contract may be lower than, equal to, or higher than the value of the products sold under the primary transaction. A typical feature of a counterpurchase transaction is that, contrary to buyback, there need not be any special relationship between the products sold under the primary transaction and those supplied in accordance with the counterpurchase contract. A possible difference in value between the said two contracts could be settled in money.

Аccording to number of the parties involved into a counterputchase arrangement, there are three option s^{[3] [4]}:

• Only two parties – Counterpurchase in its simplest form involves only two parties. One of the parties (Original Seller) assumes the rights and obligations of a seller with regard to the primary export transaction and those of a buyer (Counterpurchaser) in the counterbalancing transactions, while the other party (Original Buyer) takes the roles of seller and buyer in reversed order.

• Third parties as implementing sellers (the parties to the Implementing Contract ^[5] who supply the products agreed on therein) – Sometimes more than two parties could be involved in a counterpurchase transaction (See the scheme below). This will often be the case in larger transactions where counterbalancing supplies are to be realized during an extended period of time. In this kind of situation the parties to counterpurchase (Company A and Company B) might indeed agree that the counterbalancing products may be purchased either entirely, or for some part, from a third party (Company C), or several third parties, in the country of the original buyer (Country B).

• Third parties as implementing buyers (Implementing Buyer ^[6] means the party to the Implementing Contract who purchases the products agreed on therein.) – In cases where the products sold in counterpurchase are not suitable for in house use by the original seller (Company A), it is often agreed that he will have the right to assign his counterpurchase obligation to third parties (not shown on the scheme below), who will then discharge the counterpurchase commitment on behalf of the original seller.

EXAMPLE^[7]: Fred Krupp Huttenwerke AG of Germany won a$ 9 million order for big capacity hydraulic cranes from Machinoimport in the USSR by agreeing to buy back 15 percent of the contract value in Soviet machine tools and equipment. Krupp was prepared for the counter trade demand and ether used the machines and equipment in its Germany plants or resold them. Krupp’s competitors in the deal, which included Grove Manufacturing Co. and Harnisachfeger Corpn of the United States and Coles Crane of England were not prepared to accept the counter trade requirements. These competing companies would have had to sell the counter purchased goods in the open market at a discount of up to 40 per cent which made the entire deal unattractive.

References

1. ↑ Aggarwal, R. International Business Through Barter and Countertrade - Long Range Planning, Vol. 22, No. 3, pp. 75-81, 1989 - http://stage.community-currency.info/wp-content/uploads/2014/02/International-Business-Through-Barter-and-Countertrade-Raj-Aggarwal-1989.pdf
2. ↑ Counterpurchase - http://financial-dictionary.thefreedictionary.com/Counterpurchase
3. ↑ International Counterpurchase Contracts – United Nations Publications, Sales No. E.90.11.E.3 – United Nations, New York, 1990 – pp.1-2.
4. ↑ In accordance with the Section E “Terminology”, Chapter 1, of the “UNCITRAL Legal Guide on International Countertrade Transactions” (UNCITRAL Legal Guide on International Countertrade Transactions, UNITED NATIONS, New York, 1993 – p.8. – URL: http://www.uncitral.org/pdf/english/texts/sales/countertrade/countertrade-e.pdf) they state “Terminology used in practice and in writing to describe countertrade transactions and the parties involved in them varies greatly. A prevailing terminology has not developed.” This is the reason why theу sometimes use the simplest contract names, such as: Company A and Company В (Counterpurchase Contract of Machinery - http://www.miripravo.ru/)
5. ↑ Implementing Contract, or International Counterpurchase Contract (See the scheme below), means the contract that regulates the rights and obligations of the parties to that contract with regard to the sale and purchase of the specific counterpurchase products.
6. ↑ Implementing Buyer may, in fact, be the party who is the Original Seller (Company A) and the Counterpurchaser (Company A), but he may also be a third party called as Assignee. Assignee means the third party to whom the Counterpurchaser has assigned his rights and obligations under the Counterpurchase Contract.
7. ↑ Counter Purchase Agreement and others in Export Marketing - http://www.citeman.com/3923-counter-purchase-agreement-and-others-in-export-marketing.html#ixzz362fxnhfG