Contents INTERNATIONAL TRADE DOCUMENTATION AND PAYMENT METHODS .......................................... 2 ABSTRACT AND LEARNING OUTCOMES .............................................................................................. 2 1. TYPES OF INTERNATIONAL TRADE DOCUMENTATION.................................................................... 2 1.1 International Commercial Contracts ....................................................................................... 2 1.2 International Transport Documentation................................................................................. 4 1.2.1 Bill of Lading ..................................................................................................................... 4 1.2.2 Road Waybill (CMR) ......................................................................................................... 5 1.2.3 Air Waybill (AWB) ............................................................................................................. 5 1.2.4 Rail Waybill (CIM) ............................................................................................................. 6 1.2.5 Dangerous Goods Note .................................................................................................... 6 1.3 Customs Documentation......................................................................................................... 6 1.3.1 License .............................................................................................................................. 6 1.3.2 TIR Carnet ......................................................................................................................... 6 1.3.3 ATA Carnet ....................................................................................................................... 7 1.3.4 Export Invoice................................................................................................................... 7 1.3.5 Certificate of Origin .......................................................................................................... 8 1.3.6 EUR1 (Movement Certificate) .......................................................................................... 8 1.3.7 Single Administrative Documents (SAD) .......................................................................... 8 1.3.8 Packing List ....................................................................................................................... 9 2. PAYMENT METHODS ............................................................................................................... 10 2.1 Determining the Payment Method - Key Factors ............................................................. 11 2.2 Open Account.................................................................................................................... 12 2.3 Bills for Collection.............................................................................................................. 12 2.4 Letters of Credit (L/Cs) ...................................................................................................... 13 2.5 Advance Payment.............................................................................................................. 14 SUPPORTING MATERIALS AND LINKS ................................................................................................ 15 APPENDICES....................................................................................................................................... 16 A. THE INCOTERMS ..................................................................................................................... 16 B. DOCUMENT TEMPLATES ......................................................................................................... 20 Sample Letter of Credit (General) ............................................................................................ 20 Sample Letter of Credit (Irrevocable) ....................................................................................... 21
INTERNATIONAL TRADE DOCUMENTATION AND PAYMENT METHODS ABSTRACT AND LEARNING OUTCOMES The purpose of this training module on International Trade Documentation and Payment Methods is to inform companies, which do not have enough experience in international trade activities, on how they should prepare their necessary documents for international trade. By providing information regarding individual types of trade documents used in international trade and deciding the right payment method this module might help the trainees to be equipped with knowledge of paper work while they are taking first steps in exports and expand their business. By the end of this module the trainees are expected to learn about: o Use of Incoterms incorporated in commercial contracts o Which types of documentation is needed for transportation and customs clearance o Key factors in determining the payment methods in international trade. The training module proceeds as follows. In the first part, main types of international trade documents of contacts, transport and customs are elaborated. In the second part, payment methods and key factors in determining the right method are described.
1. TYPES OF INTERNATIONAL TRADE DOCUMENTATION International trade documentation is used to keep shipment and delivery on schedule, to describe cargo, for customs clearance, to indicate the ownership of goods for collection purposes or in the event of dispute, and to obtain payment. The following documents are commonly used in exporting, but which of them are necessary in a particular transaction depends on the product being shipped as well as on the requirements of the national government and the government of the importing country. Exporters should always check with their national Export Portal or other reliable sources to determine which documents they need. Making sure that sellers and buyers have the right documentation is a vital part for the international trade. Thorough and accurate paperwork minimises the risk of problems and delays.
1.1 International Commercial Contracts Internationally trading companies should have a written contract whenever they pay for goods, especially when they do not take possession of them at the time of payment. Traders should make sure they have documentation for the sale, even if it is just a simple description of goods, quantity, and price. For further information about the properties and provisions of
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the contracts, please refer to the training module on “International Negotiations and Contracts�. 1.1.1 Contract Documentation and Incoterms The contract should set out where the goods are being delivered. It should cover who is responsible for every stage of the journey, including customs clearance, and what insurance is required. It should also make it clear who pays for each different cost. To avoid confusion, internationally agreed Incoterms should be used to spell out exactly what delivery terms are being agreed, such as: x x x x
where the goods will be delivered who arranges transport who is responsible for insuring the goods, and who pays for insurance who handles customs procedures, and who pays any duties and taxes
For example, a seller might agree to deliver goods, at his expense, to a port in the buyer's country. The buyer might then take over responsibility, arranging and paying for customs clearance and delivery to his premises. The seller might also be responsible for arranging insurance for the goods until they reach the port, but pass this cost on to the customer. 1.1.2 What is Incoterms? International Commercial Terms (Incoterms) rules are an internationally recognised standard and are used worldwide in international and domestic contracts for the sale of goods. They were first published by the International Chamber of Commerce (ICC) in 1936 and since then have been updated in 1953, 1967, 1976, 1980, 1990, 2000 and the current revision had been in 2010 which came into effect on 1 January 2011. The basic purpose of each Incoterm is to clarify how functions, costs and risks are split between the buyer and seller in connection with the delivery of the goods as required by the sales contract. Delivery, risks and costs are known as the critical points. Each term clearly specifies the responsibilities of the seller and the buyer. The terms range from a situation in which everything is exclusively the responsibility of the buyer to the other extreme where everything is exclusively the responsibility of the seller. 1.1.3 Incorporating Incoterms 1 It is important to ensure that where the protection of Incoterms is intended to be incorporated into a contract of sale that an express reference to the current edition of Incoterms is always made. Alternatively, suitable wording can be included in the contract stating that the contract is subject to Incoterms 2010. However, if this is the case, the contracting parties should be careful to ensure that standard contracts, and any other standard paperwork mentioning Incoterms, are updated to quote "Incoterms 2010" ((ICC Publication No. 715) rather than Incoterms 2000. 1
Explanations of Incoterms 2010 can be found in Appendix A.
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Failure to incorporate the correct version of Incoterms could result in dispute as to which version is intended or, indeed, if Incoterms were intended to be incorporated at all. The complete definition of each term is available from ICC, and can be obtained by purchasing the Incoterms Reference Book through their online bookstore at www.iccbooks.com.
1.2 International Transport Documentation Transport documentation is needed to provide instructions to the carrier on what should be done with the goods. These documents can be used to pass responsibility for, and sometimes ownership of, the goods during their journey. Depending on the means of transport used and the specified requirements of the national customs authorities, the following key documents are generally required to be presented to the customs authorities: 1.2.1 Bill of Lading The Bill of Lading (B/L) is a document issued by the shipping company to the operating shipper and acknowledges that the goods have been received on board. The B/L serves as a proof of receipt of the goods by the carrier obliging them to deliver the goods to the consignee. B/L contains the details of the goods, vessel and port of destination. It evidences the contract of carriage and conveys title to the goods, meaning that the bearer of the Bill of Lading is the owner of the goods. Types of Bills of Lading: x Received Bill - confirms the goods are in the hands of the carrier, but not that they have been loaded. x Shipped Bill - once the goods are loaded the Bill can be stamped (notated) with a “Shipped on Board” date; x FIATA Bill - designed to be used as a multimodal or combined transport document with negotiable status which has been developed by the International Federation of Forwarding Agents' Associations (FIATA). x Transhipment Bill - in the case where the goods are not shipped direct to a port of discharge but via a third port, using two vessels, it is possible to obtain a Bill covering both vessels (Feeder and Ocean vessel) and showing the transhipment port. x Groupage Bill - in the case where a forwarding agent groups various export consignments together into one load, such a load will be covered by one set of Groupage Bills (often with a container manifest). x Claused Bill (Dirty or Foul) - in the case where a carrier does not think the goods are “in apparent good order and condition" the Bill will be claused to reduce the carrier's liability. Such Bills can be either - Clean Bills of Lading - stating that the 4
goods have been received in an apparent good order and condition or - Unclean or Dirty Bills of Lading - indicate that the goods are damaged or in bad order. In such case, the financing bank may refuse to accept the consignor's documents. x Stale Bill - a Bill which is not available on arrival of the goods is known as Stale. The consequence is that the goods cannot be cleared until at least one original is available. Causes delay and potentially increased costs in the form of Warehousing and Demurrage. x Sea or Liner Waybill – due to problems with the Stale Bills, particularly on short sea transits, a Waybill may be issued as an alternative. It is a Receipt and Evidence of the Contact of Carriage but NOT a Document of Title. The goods will be released to the named consignee. The advantage is the convenience in that the Waybill is not needed to obtain possession of the goods, BUT it does not provide the security of the full Bill of Lading. Sea Waybills are used on deep-sea routes, particularly in the North Atlantic, where security of title is less of a problem. These are often referred to as Express Bills as they allow express release of the goods. x Lost or Destroyed Bill – in this case delays are inevitable but can be reduced by the use of a Letter of Indemnity. This will allow release of the goods at destination without presentation of a valid Bill. The original (or the replacement) set will be produced at a later date. The Indemnity is invariably required to be counter-signed by a bank, and should not be accepted at destination without the approval of the shipper. 1.2.2 Road Waybill (CMR) The Road Waybill is a document containing the details of the international transportation of goods by road, set out by the Convention for the Contract of the International Carriage of Goods by Road 1956 (the CMR Convention). It enables the consignor to have the goods at his disposal during the transportation. CMR must be issued in quadruplicate and signed by the consignor and the carrier. The first copy is intended for the consignor, the second remains in the possession of the carrier, the third accompanies the goods and is delivered to the consignee, and the last copy is used for statistical and other purposes and it is intended for the customs authorities if required. Usually, a CMR is issued for each vehicle. The CMR note is not a document of title and is non-negotiable. 1.2.3 Air Waybill (AWB) The Air Waybill is a document proving the transport contract between the consignor and the carrier's company. It is issued by the carrier's agent and falls under the provisions of the Warsaw Convention. A single AWB may be used for multiple shipments of goods. It contains three originals and several extra copies. One original is kept by each of the parties involved in the transport process (the consignor, the consignee and the carrier). The copies may be required at the airport of departure/destination and for further freight carriers. The AWB is a freight bill which evidences a contract of carriage and proves receipt of goods.
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The IATA Standard Air Waybill is used by all carriers belonging to the International Air Transport Association (IATA) and it embodies standard conditions associated to those set out in the Warsaw Convention. 1.2.4 Rail Waybill (CIM) The Rail Waybill (CIM) is required for the transportation of goods by rail. It is regulated by the Convention concerning International Carriage by Rail 1980 (COTIF-CIM). The CIM is issued by the carrier in five copies, where the original accompanies the goods and the duplicate of the original is kept by the consignor. The three remaining copies are used for internal purposes by the carrier. The CIM is considered the Rail Transport Contract. 1.2.5 Dangerous Goods Note The Dangerous Goods Note (DGN) is a transport document that gives details about the contents of a consignment to carriers, receiving authorities and forwarders. The document is used to accompany hazardous goods in transit. A DGN is used when transporting goods using all forms of transport except air freight, when the IATA Dangerous Goods Declaration is normally used. (For further information about moving dangerous goods, please visit: https://www.gov.uk/moving-dangerous-goods)
1.3 Customs Documentation 1.3.1 License Any company willing to export or import goods has to check if it needs a license. There are controls on exports of military or related goods, technology, artworks, plants and animals, medicines and chemicals. Licence requirements may depend on the potential use of the item, e.g. if it has a military application (usually referred to as dual-use goods) and where it is exported to. There are also controls on imports including firearms, plants and animals, foods, medicines, textiles and chemicals. Whether a licence needed can also depend on where the goods are coming from. Exporters and importers should never ignore the fact that exporting or importing controlled goods without the right licence is a criminal offence, so it is important that they check first. A licence may be needed even on single or temporary exports or imports, i.e. taking samples to fairs or exhibitions. 1.3.2 TIR Carnet TIR Carnets are customs transit documents used for the transportation of goods where a part of it is made by road. TIR Carnets allow the movement of goods under the so called TIR Procedure laid down in the 1975 TIR Convention, signed under the auspices of the United Nations Economic Commission for Europe (UNECE). The TIR system places the following requirements:
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x transportation of the goods is done in secure vehicles or containers; x all duties and taxes at risk throughout the journey are covered by an internationally liable guarantee; x the transported goods are accompanied by a TIR Carnet; x customs control measures in the country of departure are accepted by the countries of transit pass and the country of destination. 1.3.3 ATA Carnet ATA carnets are international customs documents issued by chambers of commerce in most countries throughout the world for the purpose of allowing temporary import of goods that are free of customs duties and taxes. ATA carnets can be issued for the following categories of goods: x commercial samples and advertising videos; x goods for international exhibitions and fairs; x professional equipment. 1.3.4 Export Invoice Export invoices are; x x
Commercial Invoice - Standard company invoice, as for domestic sales and no specific layout requirements. Commercial Invoice with a Declaration - a written declaration must be added to the invoice, the wording being dependent on the country of destination. Usually refers to the country of origin and the fact that the prices are true and correct or in accordance with current price lists. Such document is often drafted in the language of the destination country. The exact wording being available from a variety of reference sources, e.g. Croner's Reference Book for Exporters, etc.
Commercial Invoices Requiring 3rd Party Verification: x x x
Certified Invoice - Chambers of Commerce certify that the signatory of the invoice is authorised to make declarations on behalf of the company. Legalised Invoice - Following Certification it may also be necessary to obtain the Legalisation of the commercial section of the buyer's embassy in the seller’s country. Consular Invoice - Blank Consular invoices must be obtained from the nearest regional Consulate of the country of destination, completed and returned with Commercial Invoices, Bills of Lading, Certificates of Origin, etc. to be Consularised. Exporters should take into consideration that the fees may be high (some charging a % of the invoice value).
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x
Specific Invoices - Variations from the obsolete Commonwealth Preference System. The import country's invoice must be used instead of the exporter's standard invoice. Often Certificates of Value and Origin (C V/O). No other special requirements.
1.3.5 Certificate of Origin A Certificate of Origin is a signed statement indicating the country of origin of the exported goods for a particular shipment. The country of origin is not necessarily the country from where the product is shipped. The country of origin is the country where the product has been manufactured or last underwent a substantial change or transformation. The Certificate of Origin is a document issued and/or endorsed by designated local authorities, usually the Chambers of Commerce in the EU Member States. The Certificate is required for the purposes of: x x x
meeting customs requirements in the importing state; meeting “quota� requirements imposed by the importing country; complying with banking requirements.
Even though the commercial invoice usually includes a statement of origin, many countries require a separate certificate issued from authorities of the exporting country. Customs' offices use this document to determine whether a preferential duty rate applies on the products being imported and whether a shipment may be legally imported during a specific quota period. 1.3.6 EUR1 (Movement Certificate) EUR1 Form, also known as a Movement Certificate, is a type of certificate of origin which entitles goods which "originate" in the EU to receive preferential import duty treatment when shipped to, currently, twenty four foreign markets. These markets are; Albania, Algeria, Bosnia Herzegovina, Chile, Croatia, Egypt, Faroe Islands, Iceland, Israel, Jordan, Lebanon, Liechtenstein, Macedonia, Mexico, Montenegro, Morocco, Norway, Serbia, South Africa, Switzerland, Syria, Tanzania and Tunisia. In completing the EUR1 form exporters or their authorised agents must make a statement that the goods "originate" in accordance with certain rules of origin. 1.3.7 Single Administrative Documents (SAD) The S.A.D is aimed at ensuring openness in national administrative requirements, rationalize and reduce administrative documentation, reduce the amount of requested information and standardize and harmonize data. Designed originally as a first step towards the abolition of the formalities in intra-EU trade, the S.A.D has, within the framework of the completion of the internal market, been virtually eliminated from intra-EU trade. On the other hand, it is still used for the movement of non-EU goods inside the EU.
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The information should be contained therein the document; identification of data of the parties involved, customs-approved treatment, data of the goods, means of transport, country of origin, commercial and financial information, declaration and method of payment of import taxes, and list of documents associated with the SAD (Import licences, inspection certificates, document of origin, transport document, commercial invoice etc.). For further information about SAD and its provisions, please visit: exporthelp.europa.eu/DocumentsForCustomsClearance) 1.3.8 Packing List The Packing List is an itemised list of articles usually included in each shipping package. It gives the quantity, description, and weight of the load contents. The Packing List is prepared by the shipper and sent to the consignee for accurate information of the delivered goods. The Packing List is also called as “Bill of Parcels”, “Packing Slip”, or “Unpacking Note”. Even though a Packing List is not required by the Customs laws of every country, its use can be crucial to the successful completion of the exporting process. Packing lists come in various formats, all with the same basic functions: x To confirm the contents of a shipment as it left the exporter’s premises. x To indicate weights, measures and the piece count (i.e. the number of cartons or cases) in that shipment. The packing lists applied in international trade are considerably more detailed and informative than a standard domestic packing list, as they itemize the material in each individual package and indicate the type of package, such as a box, crate, drum, or carton.
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2. PAYMENT METHODS There are several broad issues that affect what payment method will ultimately be used in an international transaction. Every participant in the transaction must consider these issues, though they will affect each differently and to a different degree. Payment methods in international trade are largely similar to those in domestic business. However, due to the added risks and complexities involved in cross-border transactions, certain terms are more often seen in international trade. In international trade, the means of payment are frequently known as the "terms of payment." There are four commonly used terms of payment, each of which offers different levels of risk and stability for buyers and sellers. Getting paid for providing goods or services is critical for any business. However, getting paid for an international transaction (also commonly known as "export receivables") can be a very different experience from securing payment on business with other national entities, due to the number of extra factors that can influence the process. Buyer and Seller The buyer and the seller are at the heart of every business transaction. Both parties have one thing in common: to profit from the transaction and to expose themselves to the least risk possible. All transactions, no matter how innocent, expose buyers and sellers to risk. Fundamentally, the concerns of the buyer and the seller are the same in both domestic and international transactions, where the buyer wishes to get the goods ordered and paid for, and the seller wishes to get paid for the goods shipped. International transactions, however, add a layer of uncertainty and risk for the buyer and seller that does not exist in purely domestic transactions. In the international transactions the buyer and seller are separated by long distances, differences in culture and business tradition, different government and economic systems, different currencies, and different banking and legal systems to name but a few. The following table gives an overview of the key issues for the buyer and the seller in terms of international payments: x x x x x x
BUYER Certainty in secure delivery of goods purchased Quality of goods
x x x x x x
Condition of goods Timely receipt of goods Transaction financing Costs of transportation and insurance 10
SELLER Certainty of getting paid Assurance in equal quantity of goods shipped and goods received Condition of goods Timely shipment of goods Assurance in getting paid Costs of transportation and insurance
2.1 Determining the Payment Method - Key Factors The terms of payment used in an international transaction will depend on the relationship between the seller and the buyer, the nature of the goods, industry norms, the distance between the buyer and seller, the potential for currency fluctuation, and political and economic stability in either or both countries. All of these factors must be considered before deciding on a method of payment that is acceptable to both parties. The single most important factor, however, is the nature and length of the business relationship between the buyer and seller. Trust and confidence in the other party go a long way in both parties' willingness to accept payment terms bearing a higher degree of risk. Security of Payment Terms It is, of course, the desire of all parties for a transaction to have absolute security. The seller wants to make absolutely certain he gets paid, while the buyer wants to make absolutely certain he gets the goods as ordered. In fact, there cannot be absolutes of certainty for both parties to a transaction. If one has absolute security (seller gets prepayment or the buyer gets the goods before making payment) the other party correspondingly loses a degree of security. International transactions, therefore, often require a compromise on the part of the seller and the buyer that leads to relative security for both. Payment Risk Ladder It is often a good idea during or even before contract negotiations that exporters and importers consider where, on the diagram below, they will be comfortable in placing themselves.
EXPORTER Least Secure
IMPORTER
OPEN ACCOUNT
Most Secure
BILLS FOR COLLECTION LETTER OF CREDIT Most Secure
ADVANCE PAYMENT
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Least Secure
2.2 Open Account
Documents and Goods
SELLER
BUYER Payment
This is the least secure method of payment for the exporter, but the most attractive to buyers. Goods are shipped and documents are remitted directly to the buyer, with a request for payment at the appropriate time (immediately, or at an agreed future date). An exporter has little or no control over the process, except for imposing future trading terms and conditions on the buyer. Clearly, this payment method is the most advantageous for the buyer, in cash flow and cost terms. As a consequence, Open Account trading should only be considered when an exporter is sufficiently confident that payment will be received. It should be noted that in certain markets, such as Europe, buyers will expect Open Account terms. The financial risk can often be mitigated by obtaining a credit insurance policy to cover the potential insolvency of a customer, which provides reimbursement up to an agreed financial limit. There are a number of commercial insurers who specialise in this market. 2.3 Bills for Collection More secure for an exporter than Open Account trading, as the exporter's documentation is sent from exporter’s bank to the buyer's bank. This invariably occurs after shipment and contains specific instructions that must be obeyed. Should the buyer fail to comply, the exporter does, in certain circumstances, retain title to the goods, which may be recoverable. The buyer's bank will act on instructions provided by the exporter, via their own bank, and often provides a useful communication route through which disputes are resolved. The Bills for Collection process is governed by a set of rules, published by the International Chamber of Commerce (ICC) called "Uniform Rules for Collections" document number 522 (URC522). Over 90% of the world's banks adhere to this document. Any interested foreign trade company can pick up a copy from the ICC (www.iccbooks.com) or from their bank and familiarise themselves with the contents. There are two types of Bills for Collection, which are usually determined by the payment terms agreed within a commercial contract. Each of them provides exporters with different benefits, as explained below in more details:
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Documents against Payment (D/P) The Documents against Payment are used where payment is expected from the buyer immediately, otherwise known as "at sight". This process is often referred to as "Cash against Documents". The buyer's bank is instructed to release the exporter's goods only when payment has been made. Where goods have been shipped by sea freight, covered by a full set of Bills of Lading, title is retained by the exporter until these documents are properly released to the buyer. Unfortunately, for airfreight items, unless the goods are consigned to the buyer's bank, no such control is available under the Air Waybill, as this document is merely a "movement certificate" rather than a "document of title" (Under URC522 goods should not be consigned to a bank without prior approval.). Similarly, there is no such control available for road or rail transport. Documents against Acceptance (D/A) The Documents against Acceptance are used where a credit period (e.g. 30/60/90 days – “sight of document” or from “date of shipment”) has been agreed between the exporter and the buyer. The buyer is able to collect the documents against their undertaking to pay on an agreed date in the future, rather than immediate payment. The exporter's documents are usually accompanied by a "Draft" or "Bill of Exchange" which looks something like a cheque, but is payable by (drawn on) the buyer. When a buyer (drawee) agrees to pay on a certain date, they sign (accept) the draft. It is against this acceptance that documents are released to the buyer. Up until the point of acceptance, the exporter may retain control of the goods, as in the D/P scenario above. However, after acceptance, the exporter is financially exposed until the buyer actually initiates payment through their bank. Bills for Collection are used in certain markets (particularly Asian) to fulfil Exchange Control Regulations. They are a cost-effective method of evidencing a transaction for buyers, where documents are handled (and reported) via the banking system. 2.4 Letters of Credit (L/Cs) A Letter of Credit (also known as a Documentary Credit ) is a bank-to-bank commitment of payment in favour of an exporter (the Beneficiary), guaranteeing that payment will be made against certain documents that, on presentation, are found to be in compliance with the terms set by the buyer (the Applicant).
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Like the Bills for Collections, Letters of Credit are governed by a set of rules from the ICC. In this case, the document is called Uniform Customs and Practice which latest version is document No 600. In a nutshell, it is known as UCP600 and, again, over 90% of the world's banks adhere to this document. The L/Cs can be of the following types: x
x x
Irrevocable: The terms and conditions within a L/C cannot be changed without the express agreement of the Beneficiary. Under UCP600, revocable L/Cs are no longer acceptable under any circumstances. Unconfirmed: The payment commitment within the L/C is provided by the Applicant's issuing bank. Confirmed: If an exporter has any concerns about the circumstances which may prevent payment being made from either the Issuing Bank or buyer's Country, the adding of "Confirmation" moves the bank/country risk issues to the bank which adds its confirmation (the confirming or advising bank) and notifies the Documentary Credit (DC) to the exporter. The price of such a confirmation will obviously depend upon the level of perceived risks to be covered. Banks can often provide indicative pricing for confirmations prior to the arrival of the DC, so that costs can be estimated.
The above means that the exporter and buyer can agree detailed terms, as part of the commercial contract. This can include exactly what documents need to be produced and precisely what detail such documents should quote. Letters of Credit also offer benefits in terms of finance. Trading companies should speak to their banks to see how they can help. Additionally, commercial insurers now offer an insurance-backed product that covers the same basic risks as confirmations. Details should be discussed the relevant insurer. x
Standby Letters of Credit (SBLCs) or Bank Guarantees: SBLCs are similar to Bank Guarantees in that they sit behind a transaction and are only called upon if the buyer fails to pay in the normal course of business (which is often Open Account). They can be particularly useful to cover an underlying financial risk where multiple payments are to be made, possibly as part of an agreed schedule. However, they do not offer the documentary control of Letters of Credit to buyers and, as such they are an unconditional guarantee.
2.5 Advance Payment The most secure method of trading for exporters and, consequently the least attractive for buyers. Payment is expected by the exporter, in full, prior to goods being shipped. As one might imagine, having covered the two extremes on the Payment Risk Ladder, commercial decisions have to be made and this usually results in selecting one of the middle
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rungs of the ladder. This is where banking products such as Bills for Collection and Letters of Credit come in to play.
SUPPORTING MATERIALS AND LINKS About International Trade Documentation: Trade documentation: http://www.youtube.com/watch?v=Ch4C79NgN9o http://www.youtube.com/channel/UCQvw9CYtMWXcWdt7THFZ5QA
Incoterms Tutorial:
http://www.youtube.com/watch?v=gXD5ajEfUR4
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APPENDICES A. THE INCOTERMS The eleven Incoterms are split into four distinct groups: x x x x
Group E - where the goods are made available to the buyer at the seller's premises; Group F - where the seller must deliver the goods to a carrier appointed by the buyer; Group C - where the seller must contract for the carriage of the goods without assuming risk of loss of, or damage to the goods or additional costs due to events occurring after shipment; Group D - where the seller has to bear all costs and risks required to bring the goods to the place of destination.
The following is a list of all Incoterms 2, the group to which they belong and a brief outline of responsibilities of the seller and the buyer under that Incoterm. However, it should be remembered that this is just a brief outline and is not a substitute for reading and understanding Incoterms 2010 itself. Additionally, it has been noted whether the term is suitable for any mode of transport or just conventional maritime and inland waterway transport.
Group E Incoterm Definition
Obligations of the seller
Obligations of the buyer
Method of Transport
Ex-Works (EXW) The Incoterm Ex-Works (EXW) means the seller minimises his risk by making the goods available at his own premises. The buyer loads the goods then arranges and pays for transport, customs clearance and insurance. Responsible for making the goods available to the buyer from seller’s premises or an appointed place (such as a factory or depot). Once the sellers have made the goods available they are no longer responsible for them. Must arrange and pay for the transport having taken delivery of the goods. The buyer is responsible for the goods, and anything that happens to them having taken delivery of them. EXW means that the buyer carries all the risk and bears the entire cost for the movement of the goods once they are made available at the seller's premises. Because the responsibility for moving goods is entirely up to the buyer, EXW can be used for all types of transport.
Group F Incoterm
Free Carrier (FCA)
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Four previously defined terms of “Delivered at Frontier (DAF)”, “Delivered Ex Ship (DES)”, “Delivered Ex Quay (DEQ)”, “Delivered Duty Unpaid (DDU)” in Incoterms 2000, have been eliminated from Incoterms 2010 and the new terms of “Delivered at Place (DAP)” and “Delivered at Terminal (DAT)” took their place.
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Definition
Obligations of the seller
Obligations of the buyer
Method of transport Incoterm Definition
Obligations of the seller
Obligations of the buyer
Method of transport Incoterm Definition
Obligations of the seller Obligations of the buyer Method of transport
All three Incoterms beginning with "F" - Free Carrier (FCA), Free Alongside Ship (FAS) and Free On Board (FOB) - mean the seller is responsible for arranging and paying for delivering the goods to a carrier. The buyer pays for the main carriage onward from that point. Must deliver the goods to a named place, by any means of transport, and for them to be cleared for export to a main carrier. The seller is responsible for the goods until they reach a named place and enter the carrier's possession. Selects the main carrier. The arrangements with the carrier can then be organised by the buyer or seller on the buyer's behalf. The buyer becomes responsible for the goods once they enter the carrier's possession at a named place. They also have responsibility for costs of onward transport. Either the buyer or seller can arrange the main carriage, but the buyer pays. All modes of transport. Free Alongside Ship (FAS) All three Incoterms beginning with "F" - Free Carrier (FCA), Free Alongside Ship (FAS) and Free On Board (FOB) - mean the seller is responsible for arranging and paying for delivering the goods to a carrier. The buyer pays for the main carriage onward from that point. Must complete all export documentation, arrange and be responsible for the carriage of goods to bring them alongside a ship at a named port of shipment. The seller is also responsible for clearing goods for export. Either the buyer of seller can arrange the main carriage, but the buyer pays. Once the goods have been delivered alongside ship, the buyer becomes responsible for all risks and costs associated with the goods. Only for sea or inland waterway transport. Free On Board (FOB) All three Incoterms beginning with "F" - Free Carrier (FCA), Free Alongside Ship (FAS) and Free On Board (FOB) - mean the seller is responsible for arranging and paying for delivering the goods to a carrier. The buyer pays for the main carriage onward from that point. The seller arranges all export documentation and has to bring the goods right up to the point of passing over a ship's rail at a named port of shipment. Responsible for delivering the goods to a carrier chosen by the buyer. This means that the seller is responsible for the goods The costs and risks associated with the goods only become buyer’s responsibility when the goods pass across a ship's rail. Only for sea or inland waterway transport.
Group C Incoterm Definition
Cost and Freight (CFR) The seller is responsible for arranging and paying for the main 17
Obligations of the seller
Obligations of the buyer
Method of transport Incoterm Definition
Obligations of the seller
Obligations of the buyer Method of transport Incoterm Definition
Obligations of the seller
Obligations of the buyer
Method of transport Incoterm Definition
Obligations of the seller
Obligations of the buyer
Method of transport
carriage, but the risk of damage or extra costs stays with the buyer. Arranges the carriage. The seller is then responsible for the goods only until they pass a ship's rail in the port of shipment but must pay the costs for bringing the goods to the port of destination, i.e. the full journey by water. Responsible for the goods and all associated extra costs and risks once they have been delivered over a ship's rail at the outgoing port. Can only be used for goods shipped by sea or inland waterway. Cost Insurance and Freight (CIF) The seller is responsible for arranging and paying for the main carriage, but the risk of damage or extra costs stays with the buyer. Has the same obligations as a seller using the CFR Incoterm. However, under CIF the seller is also responsible for arranging and paying for insurance covering the buyer's risks during movement of the goods. Responsible for the goods and all associated risks once they have been delivered over a ship's rail at the port of shipment. Can only be used for goods shipped by sea or inland waterway. Carriage Paid To (CPT) The seller is responsible for arranging and paying for the main carriage, but the risk of damage or extra costs stays with the buyer. Responsible for choosing a carrier and delivering the goods to them. The seller is also responsible for paying the cost of transport to deliver the goods to a named destination. The seller must also clear goods for export. Responsible for all risks associated with the goods once they have been delivered to the nominated carrier. The buyer pays costs once the goods have reached their named place of destination. The CPT and CIP Incoterms can be used for any form of transport and for more than one type. Carriage and Insurance Paid To (CIP) The seller is responsible for arranging and paying for the main carriage, but the risk of damage or extra costs stays with the buyer. Responsible for the same obligations under CPT. But in addition, the seller is also obliged to arrange and buy insurance covering the buyer's risks of damage or loss during transport. Liable for the risks associated with the goods once they are delivered to the carrier. The buyer is responsible for costs once they reach their destination. The CPT and CIP Incoterms can be used for any form of transport and for more than one type.
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Group D Incoterm Definition
Obligations of the seller
Obligations of the buyer Method of transport Incoterm Definition
Obligations of the seller
Obligations of the buyer Method of transport Incoterm Definition
Obligations of the seller
Obligations of the buyer
Method of transport
Delivered at Place (DAP) The seller is responsible for arranging carriage and for delivering the goods, ready for unloading from the arriving conveyence, at the named place. This rule can often be used to replace the Incoterms 2000 rules DAF, DES and DDU Pays for carriage to the named place, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer. Responsible for import clearance and any applicable local taxes or import duties. Can be used for any transport mode, or where there is more than one transport mode. Delivered at Terminal (DAT) The seller is responsible for carriage and for delivering the goods, unloaded from the arriving conveyence, at the named place. Pays for carriage to the terminal, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer. Responsible for import clearance and any applicable local taxes or import duties. Can be used for any transport mode, or where there is more than one transport mode. Delivered Duty Paid (DDP) The seller has to pay all costs and cover all risks involved in bringing goods to the named place of destination. While EXW represents the least responsibility for the seller, DDP represents the highest responsibility for the seller. Must deliver the goods to a named destination, unload and clear them for import. The seller has responsibility for all costs and risks linked to bringing the goods to the named destination. The seller must pay all duties, taxes and charges in the country of import. NB: It can also be agreed that the seller is responsible for import duties, costs and risks. If both parties agree to this arrangement, it should be written into the contract as it is a variation of the Incoterm. Some taxes, such as VAT, can be excluded from the seller's obligations and transferred to the buyer. This variation to the Incoterm should be written into the sales contract. NB: This Incoterm is not used if the seller is unable to arrange an import licence. Cover all modes of transport.
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B. DOCUMENT TEMPLATES Sample Letter of Credit (General)
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Sample Letter of Credit (Irrevocable)
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