DDU (Delivered Duty Unpaid) ? Seller must deliver goods to buyer in a location within the destination country but buyer must clear them for import through the port and customs authorities. Buyers must pay all taxes and expenses related to the clearance.
DDP (Delivered Duty Paid) ? Seller must deliver goods directly to buyer?s location (or to any other address) after having fully cleared them for import and fully paid all taxes and expenditures related to such clearance. Best to add: ?DDP-VAT unpaid? in case seller does not agree to pay the VAT.
IMPORTANT!!!
The buyer and the seller must include all special conditions, not covered by the Incoterms ? in their sale contract or order or commercial invoice.
Even if you include an Incoterm in a contract it is advised, to remove doubt, to also include a detailed list of rights obligations of the parties (=an agreed interpretation of the Incoterm). Always mention the version of Incoterms used (for instance: ?FOB ? Incoterms 1990?).
The transfer of responsibility to the goods from seller to buyer does NOT constitute a transfer of title (ownership) to the goods.
There are Exit Contracts (seller delivers to buyer?s carrier in country of origin of the goods and such a delivery ends the seller?s responsibility) ? All the Incoterms which start with the letters E, F and C. For example: CIF does NOT mean that the seller is responsible to deliver the goods in a port in the destination country ? only that it has to pay for the voyage and for the insurance.
There are Delivery Contracts (seller delivers to buyer in country of destination and is responsible to them until they are delivered there) ? All the Incoterms, which start with the letter D.
Insurance
This is why insurance is critical (policy types A, B, or C).
It must include:
Location in which the policy becomes valid
Location at which the policy expires
Extensions to the basic policy
Political risks
Value of coverage and types of coverage (replacement value, damages, etc.)
Insurance of loss of profits
The policy?s currency
Currency hedging
Important ?
The buyer must provide full specifications of packing of goods
If the parties use a C Incoterm, the buyer is usually responsible for costs associated with an inspection of the goods by the authorities of the country of origin (PSI ? Pre Shipment Inspection). If the buyer demands an inspection (quality and quantity controls) ? it must be stated clearly who will bear the cost. If not specified ? the buyer shall bear it.
It is recommended to use FCA when goods are not delivered to the carrier on quay or on board. Buyer must arrange the transport and provide the seller with exact instructions.
?FOB Airport? should not be used. FOB is ONLY for marine transportation. For air transport use FCA.
Incoterms in conjunction with Bill of Lading (BL)
When CIF or CFR is used, use ?on board BL? (goods have been loaded on board ship).
If goods shipped in containers, carrier may issue ?Received for Shipment? (when he receives the goods and prior to their loading on board) ? instead of BL.
It is preferable to use CPT or CIP if BL not required to conclude the transaction.
If goods arrive prior to original BL ? they are delivered to buyer against a bank guarantee. Avoid it as it negates the function of the BL.
Non Negotiable Waybills and Receipts
If a waybill is non-negotiable, there is no need to present its original to obtain delivery of the goods.
The following are non-negotiable:
Liner Waybill
Ocean Waybill
Data Freight Receipt
Cargo Key Receipt
Sea Waybill
All air waybills are non-negotiable. Only the seller can instruct the carrier (not the buyer or his bank). Importers dislike non-negotiable waybills (unless explicitly stated that they are irrevocable). The names of the parties in the waybill must be irrevocable ? otherwise, the seller can change them.
BLs, Receipts and Waybills
Let us call all waybills and receipts ? as well as bills of lading ? transport documents (TD).
TDs are delivered to the buyer or to the seller according to instructions given to the carrier (never mind who paid for the carriage). The seller might get them to prove delivery. The buyer needs them to release the goods (to instruct the carrier).
TDs can be divisible (article A8 of Incoterms) in case one TD covers goods deliverable to many buyers.
Buyers responsible to release the goods and accept delivery ? or to compensate seller for any damages.
Buyer is liable for damages to the goods after the transfer of responsibility from seller to buyer (?Price Risk?).
It is recommended to use ?Force Majeure? articles in sales contracts.
Some countries oblige exporters and importers to insure the goods in their own countries (to minimize foreign exchange outlays).
Rules of Use of Incoterms
Use DEQ, DES, CIF, FOB and FAS only in marine carriage and for marine freight.
Use CPT, CIP, FCA universally except if goods are in bulk of carried in chartered vessels.
Be clear: how are the goods to be transported, who has the obligation to have them loaded, who pays for what, who is responsible to clear the goods, to release them and to unload them and so on.
Be clear: how much insurance you require and what type (A, B, C)
What restrictions and special demands would you like to impose on the carriage and the carrier.
Include ?Force Majeure? and validity, expiry and termination clauses
Indicate which Incoterms version is used (example: FOB-Incoterms 1990).
The Incoterms CPT, CIP, CFR and CIF deal only with the transport aspect of the transaction ? not with the transfer of responsibility or ownership.
IV. PaymentPayment
Payments schedule (when?)
Payment mode or method of payment (how?)
Place of payment (where?)
Currency of payment (which?)
Payments Forms
Advance payments (cash in advance)
Open account credit
Cash Against Documents (CAD)
Documents for collection, Cash on Delivery (COD)
Letter of Credit or Documentary Credit (L/C)
General Principles of Payment
If cash was paid in advance by buyer, seller will give buyer the documents, courier them to the buyer or airmail them (Captain Mail them).
COD ? the carrier delivers the good against cash (collect).
But in all other forms of payment:
The carrier of the goods is hired by either the seller or the buyer to carry the goods, in accordance with instructions, to a destination.
The seller sends the goods to a bank in geographical proximity to the final destination of the goods.
The transport documents (bill of lading, waybill, receipt) are sent to that CONSIGNEE bank.
The consignee bank ? having received the transport documents, the commercial invoice, the certificate of origin, the insurance policy and other documents, invites the buyer to buy (to redeem) these documents (with which he can get the goods).
The buyer pays the bank and the bank endorses the bill of lading and instructs the carrier (if the BL is non-negotiable) to give the goods to the buyer.
The buyer pays the carrier, presents the endorsed bill of lading and gets a delivery order with which the buyers releases the goods, having paid customs, duties, taxes and port expenses. He receives a gate pass which allows him to load the goods to his lorries and transport them to his yards.
Open Account
Either with big, reliable clients, or with agents, distributors, subsidiaries which maintain a consignment warehouse or a forward warehouse.
Use Exchange Note ? A financial instrument in which the seller instructs the buyer to pay his bank for the goods. The buyer signs the note. Buyer?s signature confirms receipt of the goods in good order and the buyer?s debt. Exchange notes are transferable, negotiable, endoreseable and assignable.
It is a stand-alone document which does not refer to the underlying transaction.
It is recommended to date the exchange note (on its back) and thus transform it into a Time Note.
Cash On Delivery (COD)
Payment with delivery of goods.
Exporters which maintain warehouses in destination countries ? use COD.
Payment can be in cash, deposit receipt, bank guarantee, bankers? acceptance.
Be careful to receive payment only by your authorized representative.
Cash Against Documents
Contract
Carriage of goods to port of discharge
Documents (commercial invoice, bill of lading, insurance policy, certificate of origin) transferred by to seller?s bank for collection
Seller?s bank (usually through carrier) transfers documents to buyer?s bank
Buyer?s bank (the consignee) invites buyer to receive endorsed (ownership transferred to buyer) documents
Buyer deposits payment (or arranges credit line) for the goods in his bank
Goods delivered to buyer (using the endorsed documents)
Buyer?s bank transfers the payment to seller?s bank
Seller?s bank credits seller?s account with the payment minus fees and charges and commissionsIf bank endorses documents to buyer prior to receipt of payment ? the bank assumes the buyer?s obligation to pay.
CAD not to be used with branded or customized goods (buyer might refuse the goods and if they are branded or customized ? they cannot be sold to another buyer).
Banker?s or Bank?s Acceptance (Accept)
Exporter can ask buyer to provide a bank draft. An acceptance stamp and signature on the draft (?Accept?) transforms it into an obligation of the bank itself to pay, on a given date to bearer.
Both Exchange Notes and Bankers? Acceptances are traded in special exchanges in the world.
Letter of Credit and Documentary Credit
A letter in which a bank undertakes to pay the exporter if and when the exporter meets certain terms and conditions enumerated within the L/C.
The bank?s commitment is usually irrevocable (the L/C should contain this word: ?irrevocable? ? although it is irrevocable even by default).
If the exporter fulfils all the conditions of the L/C – the bank will pay, regardless of the situation of the buyer. If the seller did not comply with the conditions in the L/C, the bank will pay only if buyer expressly agrees to it.
IMPORTANT
The letter of credit is only as good as the issuing bank
Check: are the conditions of the L/C identical to the conditions specified in the sale contract, the commercial invoice or the order?
UCP-500
These are the uniform rules of international payments determined by the ICC in Paris, France:
Importer signs sales contract which includes prices, schedules of delivery and payment, types of packing, modes of carriage, volume, documents to be exchanged and more. Importer gets pro-forma invoice from exporter
Based on the pro-forma invoice, Importer asks his bank to open letter of credit in favor of Exporter. Importer instructs the opening bank which details to add to the L/C which are not included in the Sales Contract or in the pro-forma invoice. Such details may include: permission or prohibition of transit, transshipment, division of the L/C, part shipment, the number of copies of the documents, certificates of origin, the coverage amount of the insurance policy, should the policy be endorsed and so on.
The bank uses its letter of credit form and incorporate all the terms and conditions of the sales contract in the letter of credit
The Importer?s bank send the details of the L/C to the Exporter?s bank (the Correspondent Bank)
The Correspondent Bank informs the Exporter that an L/C was opened in the Exporter?s favor and conveys to the Exporter the details of the L/C
Exporter compares the conditions of the L/C to the conditions of the sales contract and especially whether the Importer?s Bank has irrevocably agreed to accept the Correspondent Bank?s signature regarding the receipt of the documents
Exporter consults his bank and others whether the Importer?s bank is a prime, world bank of good standing
Exporter makes sure the L/C is valid and corresponds to the timetables agreed with the Importer regarding both the delivery of the goods and payments. Another question: can the documents be negotiated or transferred within the term of the L/C? Can the Exporter accept all the restrictions and limitations of the L/C? Are there any impossible conditions (for instance, in contravention of the foreign exchange regime) or wrong details (name of a port which does not exist, etc.)
If the L/C is accepted by the Exporter, he starts production and manufacturing operations. When the goods are ready, Exporter contacts a carrier. After the goods are loaded, Exporter gets a bill of lading, a certificate of origin EUR1 or FORM A signed by the Customs, an export list and other documents
Exporter presents documents to his bank which checks whether all required documents have been presented and whether they comply with the conditions of the L/C. The correspondent bank then issues an ACCEPTANCE. The L/C then becomes a bank guarantee
If the correspondent bank is also the confirming bank, it also pays the Exporter
The correspondent bank transfers the documents and the acceptance to the opening bank
The opening bank checks the documents. But if the correspondent bank is also the confirming bank ? even if the documents are wrong or faulty ? the opening bank must pay
The opening bank transfers the payment to the correspondent and confirming bank
The opening bank informs the Importer that the documents arrived. Importer deposits payment with the opening bank (or opens a credit line with it)
Importer gets from the opening bank the documents endorsed
Importer clears the goods and takes delivery of them through the carrier (he gets a delivery order from the carrier, having settled all outstanding accounts with carrier)Settlement by Acceptance
Seller transfers documents to correspondent bank with a note made out to the bank (the bank is the note?s beneficiary)
Correspondent bank confirms acceptance of dated note to the seller
Opening bank gets the document
Opening bank credits correspondent bankSettlement by Negotiation
Seller transfers documents to correspondent bank with a note made out to the buyer (the buyer is the beneficiary of the note)
The correspondent bank pays seller against documents and note
Correspondent bank transfers documents and note to opening bank
Opening bank credits correspondent bankLetters of Credit – Form, Structure and Details
Number and ID (this number must be placed on all subsequent documentation pertaining to the same transaction
Names and details of buyer, seller, opening bank (buyer?s bank), correspondent bank
Description of goods ? usually the proforma invoice is attached and this sentence is then added: ?In accordance with proforma invoice number ? dated ? herewith attached to this letter of credit and which constitutes an integral and inseparable part thereof?.
Total cost or price
A list of documents (with the presentation of which by the seller payment to the seller will be effected):
Commercial invoice, including a list of the goods, details of buyer and seller and signatures
Packing list signed by seller
Insurance policy including its type, the coverage it affords, amount covered. The policy?s beneficiary must be the opening (importer?s) bank and it must be fully endorseable
Detailed billways, receipts or bill of lading: who is entitled to receive delivery of the goods, who pays for the carriage, is carriage prepaid and where, etc.
Other documentsDates ? when was the L/C opened, how long is it valid, date of loading and date of presentation of documents at the bank (maximum 21 days after loading of goods, if not otherwise specified)
Special instructions: is transit or transshipment allowed (best to write ?transshipment allowed?), is part shipment allowed (best to write ?part shipment or partial shipment allowed?)If carriage or delivery not according to L/C ? L/C will NOT BE PAID!!!
Types and Specifications of Documentary Credits
Confirmed versus Unconfirmed
Opening bank uses a bank in the Exporter?s country (usually the correspondent bank) to interface with the exporter.
The corresponding bank informs exporter about opening of L/C and checks and verifies the exporter?s documentation after goods have been loaded (such verification subject to opening bank?s consent).
Sometimes the correspondent bank verifies the documents AND pays for them ? this is known as CONFIRMATION. With a confirmed L/C, the correspondent bank must pay the exporter upon verification of the documents. The exporter pays a confirmation fee.
Transferable and Divisible
An L/C that can be transferred to or be paid in parts to sub-contractors and suppliers of the Exporter. Only one transfer is allowed:
The name and details (address, etc.) of first beneficiary can be changed to name and details of second beneficiary
The amount of transferred credit must be smaller than original amount of credit
The period of validity of the L/C or its parts can be altered