Professional Documents
Culture Documents
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
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.
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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.
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.
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)
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.
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 sellers 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).
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.
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.
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 exporters 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.
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
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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
EXPORTER
Least Secure
IMPORTER
OPEN ACCOUNT
Most Secure
ADVANCE PAYMENT
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Least Secure
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 exporters 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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13
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.
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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.
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
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
sellers 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
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
Method of transport
Incoterm
Definition
Method of transport
Incoterm
Definition
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
buyers responsibility when the goods pass across a ship's rail.
Only for sea or inland waterway transport.
Group C
Incoterm
Definition
Method of transport
Incoterm
Definition
Method of transport
Incoterm
Definition
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
Method of transport
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B. DOCUMENT TEMPLATES
Sample Letter of Credit (General)
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