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ROMANIAN-AMERICAN UNIVERSITY

School of Domestic and International Business Banking and Finance

Bachelor Project

Scientific Coordinator(s)
PHD Professor
Potecea Valeriu
Graduate:
PHD Associate Professor Shyroka.V.Natalya
Surdu-Nitu Georgiana

Bucharest
2014
ROMANIAN-AMERICAN UNIVERSITY
School of Domestic and International Business Banking and Finance

The Importance of INCOTERMS in International Business

Scientific Coordinator
PHD Professor
Potecea Valeriu
Graduate:
PHD Associate Professor Shyroka.V.Natalya
Surdu-Nitu Georgiana

Bucharest
2014

2

TABLE OF CONTENTS:

INTRODUCTION 3
Motivation, significance and research methodology 4
Abbreviations 7
List of tables, graphs and cases 9

CHAPTER I. International Trade: the nature and structure.


1.1. The main stages in the development of international trade 10
1.2. The process of export/import operations 16
1.3. International trade contract. 23

CHAPTER II. International Trade and Transport


2.1. Basic models of international transportation 28
2.2. Air Transport 32
2.3. Land Transport (Rail/Road) 38
2.4. Marine Transport 45

CHAPTER III. INCOTERMS


3.1. Purpose and scope of using INCOTERMS 52
3.2. Terminology 55
3.3. Main factors in choice of delivery terms 61
3.4. Transfer of responsibility and costs 63
3.5. Problems of application of INCOTERMS 66

CHAPTER IV. Case study 73

CONCLUSIONS 84

References 88

3

INTRODUCTION

Over the centuries, commercial goals have spurred advances in a wide range of human
pursuits, including transportation, communication, information technology, manufacturing,
research, medical care, insurance, and entertainment, among others. The same commercial goals
have created a need to travel to distant lands, learn other languages, and deal with other cultures.
While the business ambitions of individual nations or regions led to conflicts at times, the overall
effect of global trade has been to promote business growth and prosperity. In fact, we strongly
believe that the continuous expansion of world trade to include the impoverished regions of the
world is the surest path to world peace. This is because constructive trade leads to economic
development, understanding, and trust, which are essential ingredients for peace.
But one thing has not changedand it will never change. Success in world trade will go to those
individuals who are best prepared for it, including having an understanding of products, services,
markets, suppliers, distribution, transportation, documentation, regulations, financial tools, and
other aspects of world trade too numerous to mention.

The global economy has given businesses broader access than ever before to markets all
over the world. Goods are sold in more countries in larger quantities, and in greater variety. But
as the volume and complexity of international sales increase, so do possibilities for
misunderstandings and costly disputes when sales contracts are not adequately drafted.
Incoterms, the official ICC rules for the interpretation of trade terms facilitate the conduct
of international trade. Reference to Incoterms 2010 in a sales contract defines clearly the parties'
respective obligations and reduces the risk of legal complications.
Since the creation of Incoterms by ICC in 1936, this undisputed worldwide contractual
standard has been regularly updated to keep pace with he development of international trade.
Incoterms 2010 take account of the recent spread of customs-free zones, the increased use of
electronic communications in business transactions, and changes transport practices. Incoterms
2010 offer a simpler and clearer presentation of the 11 definitions, all of which have been
revised.
Since international sales contracts are generally realized between the non-present parties
from different nationalities, it is very important how the parties interpret the terms and the
abbreviations commonly used in foreign trade. By the regulation of Incoterms, at least the
confusions and the differences of interpretation will be overcome and the conflicts arising out of
international trade will be reduced.

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Motivation, significance and research methodology
The present international trade relations are multilateral, due to the developing global
trade and the increasing number of actors participating in the import-export relationships. As
with all complex processes, connected to business issues, international trade is regulated by a
number of legal instruments. The function of these legal mechanisms is to facilitate and ensure
the rights and responsibilities of the parties are clear. The main legal instruments for
international trade are contracts of carriage, insurance, financing and sale. The most important of
them is the sales contract.
Nowadays relationship-building processes are greatly discussed by many researchers.
The present marketing developments show a shift from the traditional transaction-based
exchanges to more contemporary relationship-building processes. This is due to the strong,
complex and dynamic interdependences between sellers and buyers. This tendency is clearly
seen not only in the local markets but also the international market is undergoing similar
changes.
Exporter-importer markets are quite different from the ordinary business-to-business or
business-to-customer markets, due to the fact that the export-import environment usually carries
more risk and uncertainty for the participants. In an exporting situation, relationship quality
refers to relationships developed beyond national boundaries. Unlike relationships in the
domestic market, relationships developed with partners in foreign markets are influenced to a
higher degree by dissimilar cultural, economic and other environmental factors.1 Increased
emphasis on globalization, cooperative strategies, and strategic alliances, coupled with the
intensification of competition on a global scale, has led to a growing number of firms to rethink
their distribution strategies and to emphasize and seek to create greater mutual interdependence2,
and thus to concentrate on relationship quality. In the exporter-importer relationships the
exporting activities do not only involve economic transactions, whereby goods are exchanged for
money and/or other goods, but also, complex behavioral interactions, involving exchanges of
social, information, and other intangibles.3 This is due to the fact that both exporters and
importers interact, because they recognize that they are mutually interdependent and, in order to
increase efficiency in business transactions, they need to use each others experience, knowledge


1
Lages, C., C. R. Lages, et al. (2005). "The RELQUAL scale: a measure of relationship quality in export market
ventures." Journal of Business Research 58(8): 1040-1048.
2
Samiee, S. and P. G. P. Walters (2003). "Relationship marketing in an international context: a literature review."
International Business Review 12(2): 193-214.
3
Hallen, L. and M. Sandstrom (1991). Relationship Atmosphere in International Business. Paliwoda, Stanley J., ed.
New perspectives on international marketing. London and New York: Routledge 1991; 108 25.
5

and resources.4.For this purpose they must build a sound long-term relationship that will help in
developing business transactions.
The present study is aimed to investigate the relevant factors in the choice of terms of
delivery (Incoterms 2010). Special attention is paid to the exportimport relationship quality
between exporters and importers of goods and its influence on the choice of Incoterms 2010. The
present study exploring the evolution of trade relations, the nature of international trade contract,
and the process of export/import operations, basic models of international transportation, purpose
and scope of using INCOTERMS, etc.
A comparative analysis of the cases in different countries is carried out in order to find
out similarities and differences in the use of the terms of delivery and the factors that influence
their choice.
Significance of this research is pointed out from the need to identify the physical point in
the supply chain where risk of loss or damage passes from the seller to buyer. It is also
determined by specific functional responsibilities between the seller and buyer related to the
delivery of goods. The main purpose of the thesis is to show out the moments concerning the use
of INCOTERMS, such as:

- The division of costs


- Point at which risk passes from seller to buyer
- Delivering and taking delivery of goods
- Proof of delivery, transport documents or equivalent electronic message

In this order the present paper is organized in 4 chapters.


Chapter one is devoted to the central concepts and theoretical propositions as a basis for
the study. The chapter presents the main stages in the development of international trade, legal
mechanisms facilitating the process of export/import operations, international trade contract.
Chapter two is dedicated to basic models of international transportation: air, rail/road and
marine transport.
Chapter three is focused on purpose and scope of using INCOTERMS 2010, the
definition of the term is given and all Incoterms 2010 are briefly described. Furthermore,
possible factors influencing the choice of Incoterms 2010 are discussed. The choice of Incoterms
2000 is related to the assumption that it may be influenced by several factors including the
relationship quality. In this chapter, the relationship marketing and the concept of the


4
Cunningham, M. T. (1980). "International marketing and purchasing of industrial goods - Features of European
research projects." European Journal of Marketing (14): 322-339.
6

relationships quality and its constructs are contemplated, as well as problems of application of
INCOTERMS are identified.
Chapter four represents a case study on mistaken choice of delivery terms, based on an
example of international seafood trade.

The present study is based on the mixed-method approach. The approach is named so
because it combines qualitative and quantitative methods, which are very beneficial, as it is
aimed at both exploring and explaining the phenomenon of international trade, import/export
relationship, etc. The quantitative research method is applied for analyzing the relationship
quality constructs and for defining the perceived relationship quality. The qualitative research
method is applied for studying the Incoterms 2010 used by the importers, the factors influencing
the choice of transportation mode and terms of delivery, for analyzing possible influence of the
relationship quality on the choice of the Incoterms 2010, and for collecting additional
information about the respondents perception of the relationship quality. The combination of
both methods contributed to a more accurate study. Also, there were used such methods as:
comparative, logical, analytical, historical, synergetic and sociological.
The main references used are the researches of Robert Bradgate (Oxford University),
Belay Seyoum (McGill University, Concordia University, Nova Southeastern University), Jim
Sherlock and Jonathan Reuvid (The Institute of Export), Ken Button (School of George Mason
University), Michael Furmston (The University of Bristol), etc., the international conventions
concerning international carriage by air, road, rail, maritime transportation, INCOTERMS and
other related information.

This work deals with an interdisciplinary present subject for international economic
relations which is the function of communication in international trade relations, in particularly
the delivery terms INCOTERMS to unify and facilitate the development of international
economic contracts representing a useful research for foreign trade companies but also for
specialists in international enterprises.
Key words: international trade, import/export operation, international trade contract, air
freight, road freight, rail freight, international transport contract, INCOTERMS, delivery terms,
costs, liability, etc.

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ABBREVIATIONS AND ACRONYMS

CIF - Cost, Insurance and Freight


CIP - Carriage and Insurance Paid To
CFR - Cost and Freight
CPT - Carriage Paid To
DAT - Delivered At Terminal
DAP - Delivered At Place
DAF - Delivered At Frontier
DDP - Delivered Duty Paid
DDU - Delivered Duty Unpaid
DEQ - Delivered Ex Quay
DES - Delivered Ex Ship
EXW - Ex Works
FAO - Food and Agriculture Organization of the United Nations
FAS - Free Alongside Ship
FCA - Free Carrier
FOB - Free On Board
GDP - Gross domestic product
ICC - International Chamber of Commerce
INCOTERMS - International commercial terms

BC - Before Christ

AD - Anno Domini

IMF - International Monetary Fund


IBRD - International Bank for Reconstruction and Development
GATT - General Agreement on Tariffs and Trade
U.S. United States of America
FDI - Foreign Direct Investment
UN United Nations
ICC - International Chamber of Commerce
FCL - Full Container Loads
LCL - Less than Container Loads
RO/RO - Roll On/Roll Off
LO/ LO - Lift On/Lift Off
LASH - Lighter Aboard Ship
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BACAT - Barge Aboard Catamaran
ASAs - Air Service Agreements
UK United Kingdom
EU European Union
ICAO - International Civil Aviation Organization
IATA - International Air Transport Association
COTIF - Convention concerning International Carriage by Rail
CIV - Uniform Rules concerning the Contract for International Carriage of Passengers and
Luggage by Rail
CIM - Uniform Rules concerning the Contract for International Carriage of Goods by Rail
RID - Regulation concerning the International Carriage of Dangerous Goods by Rail
CMR - Convention on the Contract for the International Carriage of Goods by Road
IRU - International Road Union
TIR - Convention on International Transport of Goods Under Cover of TIR Carnets
UNECE - United Nations Economic Commission for Europe
WCO - World Customs Organization
ATA - Customs Convention on the ATA Carnet for the Temporary Admission of Goods
ISO - International Organization for Standardization
FCL - Full Container Loads
LASH - Lighter Aboard Ship
BACAT - Barge Aboard Catamaran

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List of tables, graphs and cases

Table1. Major trade flows 16


Table 2. Incoterms 2000 and 2010 (source www. free-logistics.com) 57
Table 3. Incoterms 2010, Group 1 58
Table 4. Incoterms 2010, Group 2 58
Table 5. Incoterms 2010 61
Table 6. Fact sheet: International fish trade and world fisheries 75
Table 7. Terms of delivery used in seafood trade 76
Figure I. The order action file (example A) 21
Figure 2. Below-trend growth of world merchandise trade 2002-2013 23
Figure 3. The aspects and particularities of transport 29
Figure 4. The freight forwarder as intermediary 31
Figure 5. Sample of Air Waybill 38
Figure 6. Alternative forms of ocean cargo carriers 48
Figure 7. Types of marine cargo 50
Figure 8. Types of containers 51
Figure 9. Main factor influencing the choice of Incoterms in seafood trade 77

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CHAPTER I. International Trade: the nature and structure.

By one of its definitions, International trade - is the process of buying and selling of
goods and services carried out between different countries, which act as buyers, sellers and
intermediaries.5 By the other words, International trade links national economies of countries
into a single global market system. Exports are the merchandise individuals or nations sell;
imports are the goods individuals or nations purchase. By these methods, products valued at
more than several trillion Euros worldwide are exchanged every year. When we as consumers
enjoy fresh flowers from Latin America or Holland, tropical fruits in the middle of winter, or a
foreign car, we are participants in, and beneficiaries of, international trade. International trade is
not a zero-sum game of winners and losers; it is a game in which everyone wins.

1.1. THE MAIN STAGES IN THE DEVELOPMENT OF INTERNATIONAL TRADE

The world trading system is not static and going through periods of declines and
upgrades over time. We can observe three main stages in development of the international trade.

Stage I - Ancient Period


International trade based on the free exchange of goods started as early as 2500 BC.
Archaeological discoveries indicate that the Sumerians of Northern Mesopotamia enjoyed great
prosperity based on trade by sea in textiles and metals. The Greeks profited by the exchange of
olive oil and wine for grain and metal somewhere before 2000 BC.
By around 340 BC, many devices of modern commerce had made their appearance in
Greece and its distant settlements: banking and credit, insurance, trade treaties, and special
diplomatic and other privileges.
With the decline of Greece, Rome became powerful and began to expand to the East. In
the first century AD, the Romans traded with the Chinese along the Silk Road and developed
many trade routes and complex trading patterns by sea. However, the absence of peace made
traveling unsafe and discouraged the movement of goods, resulting in the loss of distant markets.
By the time of the breakup of the Roman Empire in the fifth century, the papacy (papal
supremacy) had emerged as a strong institution in a new and unstable world. The churchs
support (sponsorship) for the crusades in the eleventh century revived international trade in the
West through the latters discovery and introduction of new ideas, customs, and products from


5
Robert Bradgate, Commercial Law, 3rd Edition, Butterworths, London, 2000, p. 717
11

the East. New products such as carpets, furniture, sugar, and spices brought from Egypt, Syria,
India, and China stimulated the markets and the growing commercial life of the West. This
helped Italian cities such as Venice and Genoa to prosper and to replace Constantinople as the
leading center of international commerce. Letters of credit, bills of exchange, and insurance of
goods in transit were extensively used to accommodate the growing commercial and financial
needs of merchants and travelers.6
By the end of the fifteenth century, the center of international commerce had moved from
the Mediterranean to Western Europe. Spain, Portugal, and later Holland became the focal points
of international commercial activity.
History shows that sometimes, commercial rivalry between nations even led to armed
clashes.
To ensure the trade monopoly and growing population livelihood states conducted
colonial policy using some measures of protectionism to keep confidential its technical and trade
secrets.

Stage II - Colonial Period


With the discovery of America in 1492, and sea routes to India in 1498, trade flourished
and luxury goods and food products such as sugar, tobacco, and coffee became readily available
in the markets of Europe.
The principal motivations behind global expansion (colonization) in the fifteenth century
had been to enhance national economic power (mercantilist policy) by exploiting the colonies for
the exclusive benefit of the mother country. Colonies were regarded as outposts of the home
economy that would reduce trade dependence on rival nations and augment national treasure
through exports as well as discoveries of precious metals. This first phase of colonization, which
lasted until the advent of the Industrial Revolution in England in 1750, was characterized by the
following general elements with respect to commerce:
1. All commerce between the colonies and the mother country was a national monopoly,
meaning all merchandise exports/imports had to be carried by ships of the mother country and
pass through specified ports.
2. Little encouragement was provided toward the development or diversification of indigenous
exports. For example, in 1600, precious metals constituted 90 percent of colonial exports to
Spain. In the mid-1650s, British imports from its colonies were mainly concentrated in three
primary products: sugar, tobacco, and furs. To protect domestic producers, competing colonial

6
Belay Seyoum, PhD, Export Import Theory, Practices and Procedures, Second Edition, Routledge, NY, 2009, p.
19.
12

exports were restricted or subject to special duties. The patterns of economic relations were
fashioned on the basis of dissimilarity, that is, non-competitiveness of colonial and metropolitan
production.
3. Certain enumerated products could be exported only to the mother country or another colony.
The policy ensured a supply of strategic foodstuffs and raw materials.
4. Private companies in the metropolis received a charter from the government that granted them
(i.e., the companies) a monopoly of trade in the colonies. In most cases, the charter also granted
complete local administrative authority, ranging from the making of laws and administration of
justice to imposition of taxes. Examples of this include the British East India Company (1600),
the Dutch West India Company (1621), and Hudsons Bay Company (1670)7.
The second historical phase of overseas expansion (1765-1900) was dictated more by
commercial considerations than by mere territorial gains. Britain emerged as the dominant
colonial power, and by 1815 it had transformed its empire into a worldwide business concern. By
the 1860s, the Industrial Revolution had transformed the social and economic structure of
England, and mass production dictated an expansion of the market for goods on an international
scale. That of free trade gradually replaced the political economy of mercantilism that had
proliferated over the preceding century. By 1860, Britain had unilaterally repealed the Corn
Laws, abolished the Navigation Act restrictions (foreign ships were permitted to take colonial
goods anywhere) and the commercial monopolies given to particular companies. Preferential
duties on empire goods were gradually abolished. In trade, as in foreign policy, Britain led the
free trade ideology based on nondiscrimination. At the time, Britain was most likely to benefit
from free trade because of its industrial and commercial lead over other nations.

Stage III - 1900 till Present time


The end of the XIX Century is characterized by the formation of the world market. In the
first half of the XX century (since the first world war begun), the structure of the international
economic relations has weakened and resulted in a deep crisis and disruption of world trade
(until the end of WWII) In this period trade costs were the main obstacle to international
economic integration, but formation of the world economy, allowing to move across national
borders not only goods, but also capital, became a means of smoothing the economic and market
crises. Various methods to enter the domestic markets of foreign countries have been developed
and put into practice:
provision of preferential loans and credits for the purchase of imported goods;

7
Belay Seyoum, PhD, Export Import Theory, Practices and Procedures, Second Edition, Routledge, NY, 2009, p.
20.
13

improving the quality of products;
creation of importing countries after-sales service, etc.
The late XIX century was a period of high tariffs, but on the other hand, it was a period of
economic grows for many countries (Argentina, Canada)8
The major characteristics of economic relations from 1900 until the outbreak of World
War I were the further development of trade and the emergence of a world economy. These were
also the result of the international migration of people and capital from Europe, particularly
Britain, since the 1850s, to other countries such as the United States, Australia, Argentina,
Brazil, and Canada. This pattern of world economy provided the industrial economies with new
sources of food and raw materials and new markets for exports of manufactures. For example, by
1913, Brazil was the source of two thirds of German coffee imports, whereas North Africa
supplied over half of French imports of wine. However, much of the import trade in Europe was
subject to trade restrictions, such as tariffs, to secure home markets for local producers. Even
within Britain there were mounting pressures for the abolition of free trade.
The postWorld War I recovery was further delayed by the disruption of trading links, as
new nations were created and borders were redrawn. State intervention and restrictive economic
policies had been consolidated in Europe and other countries by the end of the war. The U.S.
government introduced the Fordney - McCumber Tariff in 1922, which imposed high tariffs on
agricultural imports, and later the Smoot-Hawley Tariff in 1930, which provoked widespread
retaliation. Britain imposed high duties on various industrial products, such as precision
instruments and synthetic organic chemicals, to encourage domestic production under the
Safeguarding of Industries Act, 1921. The volume of world trade in manufactures fell by 35
percent between 1929 and 1932, and prices also fell by a similar amount. The volume of trade in
primary products fell by 15 percent, but prices fell by about 50 percent. To alleviate the worst
effects of the Depression, countries resorted to more protectionism. This wave of protectionism
produced a massive contraction of international trade and further aggravated the Depression.
Many of the barriers placed on trade included tariffs and quotas, a variety of price
maintenance schemes, as well as arbitrary currency manipulation and foreign exchange controls
and management. To avoid a repetition of the economic situation of the previous two decades,
Allied countries met even before the war to discuss the international financial arrangements that
should govern trade and capital movements in the postwar world. In 1944, they established the


8
The two most rapidly expanding, high tariff countries of the period -Argentina and Canada -grew because capital
imports helped stimulate export-led growth in agricultural staples products, not because of protectionist trade
policies. , Interpreting the Tariff-Growth Correlation of the Late Nineteenth Century Douglas A. Irwin, NBER
Working Paper No. 8739, January 2002

14

International Monetary Fund (IMF) and the International Bank for Reconstruction and
Development (IBRD). The IMF was to be concerned with facilitating the growth and expansion
of global trade through the system of fixed exchange rates, while IBRD was established to
promote long-term investment. This was followed by an agreement (the General Agreement on
Tariffs and Trade, or the GATT) in 1948 to permit the free flow of goods among nations.9
Examining the structure of world trade in the first half of the XX century (before the 2nd
World War), and in subsequent years, we see significant changes. If in the first half of the
century two thirds of world trade accounted for food, raw materials and fuel, the end of the
century, they account for one-quarter turnover. The share of trade in manufactured goods
increased from 1/3 to 3/4. Finally, more than one third of total world trade in the mid-90s - is of
machinery and equipment.
One of the fastest growing areas of international trade is the trade of chemical products. It
should be noted a tendency to increase the consumption of raw materials and energy. However,
growth in trade of raw materials significantly lags behind the overall growth rate of world trade.
This lag is due to generation of substitute raw materials, more economical using it, deepening its
processing.
In the world food trademarked relative decrease in demand. To some extent this is due to
the expansion of food production in the industrialized countries. Important trend - the expansion
of trade this group of goods between industrialized countries. Due to the growth of this trade, the
exchange of services has risen sharply: scientific and technical, industrial, commercial, financial
and credit related. Active trade in machinery and equipment has spawned a number of new
services, such as engineering, leasing, consulting, information and computing services, which in
turn stimulates the inter-country exchange of services, particularly scientific, technical,
industrial, and financial and credit communicative nature. At the same time, trade in services
(especially such as information and computing, consulting, leasing, engineering) stimulates
world trade in goods production purposes.
Describing the main trends in the geographical focus of international trade, it should be
emphasized that the development and deepening of the international division of labor between
the industrialized countries leads to increase in their mutual trade and reduces the share of
developing countries. Major trade flows occur within the "big triad": U.S. - Western Europe
Japan (Table 1). 10


9
Belay Seyoum, PhD, Export Import Theory, Practices and Procedures, Second Edition, Routledge, NY, 2009,
p. 20.
10
http://www.wto.org/english/res_e/statis_e/its2013_e/its13_toc_e.htm
15

Table 1. Major trade flows

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1.2. THE PROCESS OF EXPORT/IMPORT OPERATIONS

International trade is the exchange of goods and services across national boundaries. It is
the most traditional form of international business activity and has played a major role in shaping
world history. It is also the first type of foreign business operation undertaken by most
companies because importing or exporting requires the least commitment of, and risk to, the
companys resources. For example, a company could produce for export by using its excess
production capacity. This is an inexpensive way of testing a products acceptance in the market
before investing in local production facilities.11
A company could also use intermediaries, who will take on import-export functions for a
fee, thus eliminating the need to commit additional resources to hire personnel or maintain a
department to carry out foreign sales or purchases International trade involves two interrelated
processes: exports and imports.
By export we understand transfer of goods, technology and services produced/developed
in one country for their implementation in the foreign market.
Import is coming-in goods and services which to be used by country at the internal
market. Any export or import operation is registered in the customs and foreign trade statistics in
the moment of passing borders. Export operation of selling country corresponds to the import
operation of buyers country. Thus, foreign trade turnover of a separate state is the sum of
exports and imports.
For international trade to be mutually beneficial to all its members, should be emerged
the most effective system of exports and imports for each country. In practice, the efficiency is
determined by an adequate system of world prices and international payments.
Structural changes in the economies of the countries, resulting from the influence of scientific
and technological development; specialization and cooperation in industrial production increase
interaction of national economies. This contributes are to increased international trade.
International trade, which determines the movement of all the cross-country trade flows,
growing faster than production. According to research by foreign trade, for every 10 % increase
in global production, accounting for 16 % increase in the volume of world trade. Thereby
creating more favorable conditions for its development. When failures occur in trade,
development and production slows.
So, what encourages countries to trade? Among incentives to export we can name:
- use of excess capacity;


11
Daniels, J., and Radebaugh, L., International Business. Upper Saddle River, NJ: Prentice Hall, 2004
17

- decrease unit production costs;
- increase profitability through increased margins (possibility in certain circumstances to sell
their products more profitably abroad than at home).
Most subjects begin their initial involvement in international trade by exporting or
importing. Both of these approaches require minimal investment and are, for the most part, free
of any major risks. They provide individuals and companies with a way of getting into
international trade without the commitment of significant financial resources (like the kind that
would be required to actually set up shop overseas).
Exporting comes in two major forms:
a) Direct exporting is a commercial activity occurring between an exporter and an
importer without the intervention of a third party. This option is a good one for existing
businesses that are looking for ways to expand their operations.
Selling directly to customers prevents other businesses taking a share of experts margin.
However this approach requires a large commitment of financial and human resources. It takes
time to make contacts and build relationships, negotiate deals, understand the market and carry
out marketing.
Advantages of direct exporting: exporters control of pricing and brand, exporter gets a
direct understanding of buyers' or end users' needs and an ability to customize accordingly,
exporter maintains the customer relationship, exporter is able to identify possible new
opportunities, customers may prefer dealing directly with the producer.

Disadvantages of direct exporting: it requires a lot of time, energy, staff resources and
money, competitors with a local presence will be perceived as lower risk to buy from, after-sales
commissioning and service may require local language capability, daily follow up of genuine
leads in-market can come second to business based in exporters country, remote troubleshooting
may not be possible, requiring additional visits, growth will be slower - a commitment to an in-
market presence will have to be made for the business continue to grow12.

b) Indirect exporting is simpler than direct exporting. It involves exporting goods


through various intermediaries in the producers country. Indirect exporting doesnt require any
expertise or major cash expenditures, and its the type of exporting used most often by many
companies that are new to exporting.


12
Nelson C.A. Import/Export. How to take your business across borders, McGraw Hill, NY, 2009, p. 146
18

Selling to or through an intermediary is a relatively cheap and straightforward way to
enter a new market. Intermediaries are typically agents or distributors based in producers target
export market who sell his products or services to end-users.
A good intermediary will have in-market experience, reputation and contacts. Using them
can be a quick way to get products and services to the end user. They will generally require a
level of support in the overseas marketing and selling of the product.

The disadvantages of using an intermediary are: the intermediary takes a margin, requires
sales support, no direct contact with the end customer of the producer, less control over the
actual final transaction, fewer opportunities to learn about the overseas market, which could slow
down longer term expansion plans.

By decision to import country may benefit from cheaper delivery of goods or raw
materials, extension range and reducing the risk of interruption of supplies of goods.
Main benefits for consumers from countrys external and internal trade process are wider
choice of products/services, lower prices and better quality.
International trade has different organizational forms of export and import such as:
Trade in finished products. Finished goods - products that are designed for final
consumption. Trade it is done by signing contracts directly between producers and
consumers of goods or through intermediaries. This does not prevent the execution
mediate pre-sales service and pre-completion, and for mechanical and electrical products
- Maintenance.
Trade in unassembled products. Exports unassembled used to improve its
competitiveness and market penetration for countries prohibit the importation of certain
products in the finished form.
Trade in complete equipment. Complete considered equipment of industrial
enterprises, representing a single finished processing facility.
Commodity trade. In generalizing the concept of "commodities" includes minerals,
food processing and enrichment, agricultural raw materials of plant and animal origin
and products of its processing, chemical and food products. Trade in these products is
carried out through international commodity agreements. They relate, for example,
cereal grains, beans, coffee, cotton, etc.
Exchange trading. Exchanges - are permanent markets, trading with the major parties
of similar goods. Exchange transactions are carried out on standard consignment. This

19

makes it possible to perform operations on the stock exchange, not only without
examining the goods, but also on non-existent until the goods.
Auctioning. Auctions - it trades, specializing in the marketing of certain products at
certain times of the year. The main stage of the auction is the auction, the auctioneer who
leads with customers.
Countertrade. It includes foreign trade, in which the commissions in a single document
(contracts or agreements) are fixed firmly committed exporters and importers of a full or
partial exchange of goods. In case of partial exchange the difference in cost is covered
by cash payments.
International tenders - a conclusion of sales contracts in which the buyer announces a
competition for sellers, and after comparing the offers received, signed with those of
sellers, who offered goods on favorable terms.
Whatever the size of the operation there is a logical sequence of tasks that are necessary
to develop an initial enquiry into a profitable payment and include: - enquiry; - quotation; -
order, - order acknowledgement; - order process and progress; - packing and marking; - space
booking; - documents prepared; - transport; - customs; - insurance; - payment; - goods
dispatched; - payment received.
Companies develop internal procedures to deal with this process, which vary enormously
from one to another depending on the nature and size of their business, number of shipments,
number and expertise of staff etc.
There are a number of systems available to manage the process and the sequencing of
functions, the simplest of which are based on tracking files or folders that can be completed
manually (figure I), and the more complex of which are software packages that can produce all
export documentation and be linked with internal production and inventory systems. 13


13
Sherlock J., Reuvid J., The handbook of international trade. A guide to the principles and practice of export,
GMB Publishing Ltd, London, 2004, p. 171-173
20

Figure I. The order action file (example A)

Why do some countries export or import more than others? Several studies have been
conducted to establish major factors that influence exports. The trade and exchange rate regime
(import tariffs, quotas, and exchange rates), presence of an entrepreneurial class, efficiency
21

enhancing government policy, and secure access to transport (and transport costs) and marketing
services are considered to be important influential factors of export behavior.14 A study on the
nature, composition, and determinants of Singapores technology exports suggests that the
countrys open trade and investment regime and development-oriented economic policy have
been the key factors in enhancing the countrys exports.
Singapores economy has shown continued and remarkable growth in exports for over
thirty years with only two brief and mild recessions in the mid-1970s and mid-1980s. Its total
trade as a proportion of GDP remains one of the highest in the world, over 300 percent of GDP
in 2003.15 A recent study on the determinants of export performance underlines the importance
of foreign direct investment (FDI) and the general quality of the institutional framework. Foreign
direct investment contributes to capital formation and helps promote the development and export
of knowledge-based industries.16
Much of the research literature on imports underlines the importance of high per capita
incomes, price of imports, and the exchange rate in determining import levels.17 For developing
countries, however, determinants of import demand also include factors such as government
restrictions on imports and availability of foreign exchange. A study examining the factors
influencing import demand in Pakistan from 1959 to 1986 found that the policy of devaluation or
the policy of raising tariffs was not significant in reducing imports except in the case of imports
of machinery and equipment.18
The growth in the volume of world merchandise trade has always exceeded the growth of
output (1870-2014) except for the period 1913-1950, which was marked by global political and
economic instability. Since 1950, while world economic output has shown steady growth, world
exports increased at an average annual rate of more than ten times the estimated rate for 1913-
1950.19 The volume of world trade in 2004 was about three times what it was in 1990 and
approached eleven trillion U.S. dollars.20 The dollar value of total world trade in 2004 was
greater than the gross national product of every nation in the world except the United States.
During the 2008-2009 crisis, import volume of developing countries fell to about 13 per
cent below trend, but recovered strongly, to catch up almost fully with the rapidly rising trend

14
Kaynak, E., and Kothavi, V. Export behavior of small and medium-sized manufacturers: Some policy guidelines
for international marketers. Management International Review, 24, 1984, p. 61-69.
15
Fong, P., and Hill, H. (1991). Technology exports from a small, very open NIC: The case of Singapore. World
Development, 19, p. 553-568.
16
Fugazza, M., Export Performance and Its Determinants: Supply and Demand Constraints. Study No. 26. Geneva:
UNCTAD, 2004.
17
Lutz, J. (1994). To import or to protect? Industrialized countries and manufactured products. Journal of World
Trade, 28(4), 1994, p. 123-145.
18
Sarmand, K. The Determinants of import demand in Pakistan. World Development, 17, 1989, p. 1619-1625.
19
Rostow, W. Theories of Economic Growth. New York: Oxford University Press, 1992.
20
http://www.wto.org/english/res_e/statis_e/its2004_e/its04_toc_e.htm
22

experienced in the early 2000s (figure 2). In 2010, developing country import growth contributed
to half of world trade growth (compared with 43 per cent in the pre-crisis period of 2004-2007).
Among developing regions, East and South Asia led the recovery in external demand, accounting
for about three quarters of the growth of imports of developing economies in 2010, followed by
Latin America and the Caribbean, accounting for 17 per cent; Western Asia and Africa
contributed about 7.0 and 2.0 per cent, respectively. China continues to be the key driver of
import growth among developing countries, accounting for 37 per cent of the growth of imports
of all developing countries in 2010.
Figure 2 Below-trend growth of world merchandise trade 2002-2013

The below-trend recovery of global trade is almost fully explained by the weaker import demand
in developed economies. Import demand had declined to 21 per cent below trend by 2009 and
did not catch up thereafter. The gap is expected to widen further, to 30 per cent by 2013, in the
baseline scenario.
Another measure of the significance of world trade is that one-fourth of everything grown
or made in the world is now exported.
The rapid increase in the growth of world trade after World War II can be traced to
increased consumption of goods and services as more people joined the middle class in many
countries of the world. Trade liberalization, both at the regional and international level, has
created a global environment that is conducive to the growth and expansion of world trade. New
technologies such as computers, telecommunications, and other media also assisted in the
physical integration of world markets.
Small countries tend to be more dependent on international trade than larger ones because
they are less able to produce all that they need. Larger countries (in terms of population) import

23

less manufactured goods on a per capita basis because such countries tend to have a diversified
economy that enables them to produce most of their own needs. The previous statement can be
exemplified by the case of the United States, Japan, India, and China, which have low import
propensities compared to countries such as Belgium or the Netherlands.
Merchandise trade currently accounts for about four-fifths of world trade. The top seven
exporters accounted for just over one-half of world merchandise exports (United States,
Germany, Japan, France, United Kingdom, Italy, and Canada). Merchandise trade includes three
major sectors: agriculture, mining, and manufactures. Trade in manufactured goods has been the
most dynamic component of world merchandise trade. Growth in service exports has lagged
behind that of merchandise trade for the past few years21.
Industrial market economies account for the largest part of world trade.
Trade among these countries is estimated to be greater than 67 percent of global trade. In
view of their role in world trade, Western countries also account for major shares of trade with
developing countries and an increasing share of trade with transition economies.

1.3. INTERNATIONAL TRADE CONTRACT

The international character of a contract may be defined in a great variety of ways. The
solutions adopted in both national and international legislation range from a reference to the
place of business or habitual residence of the parties in different countries to the adoption of
more general criteria such as the contract having significant connections with more than one
State, involving a choice between the laws of different States, or affecting the interests of
international trade.
As we know, almost no trade operation is occurring without a contract. In cases involving
small amounts of goods and respectively small amounts of money, or simple cash transaction,
not necessarily requires a formal contract. What we cant say about cases with the greater
commitments, amounts and greater risks, where drawing of contract is highly recommended.


21
The value of Asias exports of manufactured goods expanded by 3 per cent in 2012 whereas Europes exports
declined by 2 per cent. As a result, Asias share in world exports of manufactured goods rose to 38 per cent,
compared with 41 per cent for Europe - down from 43 per cent in 2011.With the exception of the Commonwealth of
Independent States (+15 per cent) and North America (+3 per cent), all regions registered declines in exports of
agricultural products in 2012. Africa and the Middle East increased their exports of fuels and mining products in
2012, by 9 per cent and 6 per cent respectively (http://www.wto.org).
24

By definition contract is: pact or agreement, oral or written, whereby two or more parties bind
themselves to certain obligations, and whose fulfillment is legally enforceable.22
From a more practical perspective, a contract may be summarized in the following four
basic points:
- It is an agreement, generally in writing, between two or more parties. For the purposes of
our analysis, unilateral actions (by one party), are not considered to be contracts,
although these may exist as such in the general legal context.
- It contains rights and obligations. The contract document establishes the rules that are to
be followed by the parties.
- It serves to regulate business relations (for example, a sales agreement or a
distributorship agreement).
- It is generally for a specific period of time (the duration of the contract is often specified).
Its impossible to mention all types of contracts used in international trade.
Signing a contract is recommended in the following cases: a) in an agreement for the
distribution of products for a six-month period, in which an exporter commits a certain amount
of working capital and invests in new machinery or inputs and needs guarantees that orders will
be placed; b) when the monetary value of the exports is very high in relation to the companys
capital. In these cases it is advisable to seek legal advice in order to select the most appropriate
contract model and to examine all possible scenarios of the commercial relationship, particularly
those of noncompliance, and establish the means of resolving these issues.
It is also important to consider where the contract is to be applied and identify the
possible advantages for exporters. Some jurisdictions may be attractive because of their
proximity and the low cost of using these (in this case, the jurisdiction of the exporting
company); others may be chosen for their reliability and certainty in applying the law (the
jurisdiction of the country of destination, e.g. the United States). In the event of disputes arising
in a business relationship, the parties may also have recourse to alternative dispute resolution
methods (commercial arbitration).
Finally, for the purposes of validity, it is essential to find out whether the contract
documents must be registered, especially in the country of destination.23
In 1980, the United Nations (UN) convened a conference in the city of Vienna to regulate
the issue of contracts for the sale of goods. The resulting document, entitled The United Nations

22
Ventura, L.C., International Trade Contracts. A Practical Guide for Exporters, Inter-American Institute for
Cooperation on Agriculture (IICA), San Salvador, 2007, p. 9

23
By way of example, as a general rule, in countries whose legal system is based on Anglo- Saxon law (common
law), e.g. the United States, contracts of a private nature, such as sales or distribution contracts, are not registered in
the commercial records, except in the case of particular states and are beyond the scope of this document.
25

Convention on Contracts for the International Sale of Goods (Vienna Convention of 1980),
contains a series of basic commercial rules that apply to contracts for the sale of goods,
particularly in cases where the parties have not defined most of the issues that affect their
business relations. The United States, a common destination for exports, has been a party to
the Convention since 1980. This set of rulesthe Convention is limited to sales and,
following the principles of contractual freedom and autonomy, the parties may, through a
written document, determine the rules that will govern their commercial relationship, without
making use of these international legal instruments.
Other international regulations that may be applied are known as INCOTERMS
(International Commercial Terms), a set of commercial terms used by buyers and sellers to
conduct all types of international commercial transactions, regardless of the product, the
destination, the means of transportation or the type of insurance chosen. These terms are issued
by International Chamber of Commerce (ICC), and were last revised in the year 2010. The
terminology is internationally accepted by governments, customs authorities and by all types of
companies and business people around the world. Terms such as FOB or CIF are immediately
understood and accepted without question in trade negotiations. The Vienna Convention of 1980
and the INCOTERMS both have a direct bearing on sales and distribution contracts, but not on
other agreements, such as licensing contracts. This topic is discussed further on in this research.
Some of the most used for exports are:
Sales Agreement
Distributorship Agreement
Brokerage Agreement
Trademark Agreement
A contract contains a series of clauses setting out the details of the business relationship and the
commercial operation, such as the names of the parties, the price of the products, quantities,
penalties, etc. The most usual contents of a contract type are briefly described below:
Headings: This is the title of the contract; for example: Sales Agreement, Distributorship
Agreement, Brokerage Agreement, etc.
Naming of the Parties: This clause identifies and describes the parties, i.e. the persons and/or
companies signing the contract.
Representation: This clause follows immediately after the naming of the parties and states the
attributes of the person who appears to sign the contract, together with his/her attributions to
execute said act. Special attention must be paid to this, since it determines the persons capacity
to represent the counterpart2. For example: Juan Rulfo, of legal age, a company executive,
acting in his capacity as director and representative of the company LIMES GIANT S.A.. It is
26

of particular interest to the seller (export firm) to ascertain that the buyer has the necessary
authority to act, as the person in question may not have the decision-making capacity or the
degree of responsibility to assume contractual obligations.
Definitions: A brief glossary of terms that appears in the contract, establishing what is to be
understood, for example, as products, gross income or territory.
The inclusion of definitions is a very common practice in contracts signed with counterparts
from Anglo-Saxon countries (common law countries, for example, the United States or Canada),
so close attention must be paid to these when negotiating.
Term: The duration or period of the agreement, the commencement and termination dates; for
example, a contract of sale may state that the products will be delivered within one month; or
that products will be distributed for a period of six months; or that a license may be used for one
year.
Terms of payment: This clause determines the method of payment, the amount, the frequency
and the place where payment will be received for the transactions carried out. No problems arise
in the case of cash payments, but it is also possible to agree on a system of staggered payments
(progress payments), upon delivery of the goods.
It is worth noting that this is often one of the most contentious clauses even when no contract is
involved - due the naturally opposing interests. The seller (the export company) will be
interested in immediate payment, prior to dispatching the goods. The buyer (import company),
on the contrary, will likely prefer payment upon delivery of the products.
Penalties and indemnity: the parties determine the type of penalties that will be applied in the
event of breach or default of the contract and how to compensate the other party for the damages
incurred by said default. It is important to pay attention to this clause - sometimes only the
importer imposes conditions. It is important that our party (the exporting firm) is also able to
invoke this clause.
Applicable jurisdiction: As noted previously, this clause establishes the laws and procedures to
which the parties may submit a problem or major claim arising from any breach of contract.
Returning to the issue of contractual freedom, the parties may agree, for example, that the law of
the country of destination will be applied (for example, the United States), but under the rules of
the aforementioned 1980 Vienna Convention. Or, they may opt for the laws of a specific US
state.
Arbitration: In addition to the previous clause, the parties may submit their disputes to
arbitration procedures. This clause establishes the type of arbitration, the number of arbitrators
and the jurisdiction (location) where the arbitration will take place. For example, the parties may
decide on the jurisdiction of the State of Florida, based on arbitration rules of the International
27

Chamber of Commerce. The use of arbitration has gained much support, since arbitrators are
most knowledgeable about the rules that govern international commerce, which are often
unknown even to the judges of the different countries. A further advantage of using the
arbitration clause is its international character.
Another UN document that discusses the recognition of foreign arbitration rulings is the
New York Convention of 1958.24 In very special circumstances, and when the case merits it
(particularly if large sums are involved), a party may invoke the jurisdiction of the International
Chamber of Commerce, one of the most respected arbitration bodies.
Confidentiality: The parties determine the terms and issues that are not to be disclosed, under
any circumstances, to persons or entities outside the agreement, including the counterparts
commercial or financial information, manufacturing secrets or product details.
Amendments to the contract: In this clause, the parties determine the way in which any
amendments or addenda will be made to the contract, if necessary; for example, extending the
contract term, extending the payment period, a change in the address of delivery, etc.
Force Majeure: the parties may determine that certain situations, such as natural disasters, wars
or accidents, constitute reasons of force majeure that impede the normal fulfillment of the
contract and excuse them from liability.
In addition to the points mentioned, there are other clauses that, by their very nature,
depend on the type of contract to be signed. For example, the exclusivity clause may feature
prominently in a distribution contract, while clauses restricting competition may be included, not
only in distribution contracts, but also in licensing or franchise contracts. Clauses establishing
the percentages of royalties or commissions generally appear in intermediary or agency
contracts.25


24
The New York Convention, signed in 1958, recognizes arbitration rulings or awards issued abroad. For example,
companies from Colombia and Mexico have a commercial dispute that they submit to arbitration in Mexico, but the
resolution must be effective in Colombia. If both countries are signatories to the New York Convention, the
procedure for recognizing the arbitral award is based on said Convention and not on the local law of both countries.
This serves to avoid a longer procedure caused by the difference in the laws of each country (the New York
Convention provides common rules).
25
Ventura, L.C., International Trade Contracts. A Practical Guide for Exporters, Inter-American Institute for
Cooperation on Agriculture (IICA), San Salvador, 2007, p. 11-14.
28

CHAPTER II. INTERNATIONAL TRADE AND TRANSPORT
2.1. BASIC MODELS OF INTERNATIONAL TRANSPORTATION
The definition of transport can be pointed in two ways; these are showed out in the Figure
below:

its main func7on is the


movement of goods and
travelers in space

economic branch it materializes the


connec7ons among all the
(largo sensu) other economic branches

it connects all the


administra7ve areas, ci7es,
towns of a state territory as
TRANSPORT well as those among dierent
countries

realizes the physical


economic process movement of the goods from
(stricto sensu) the produc7on place to the
consump7on area

Figure 3. The aspects and particularities of transport


In modern times transport must be regarded as a dynamic, coherent system, made out of
specific technical means (mean of transport), communication channels (infrastructure), skilled
personnel, and related services technologies system that ensures the transfer of goods from
production, via the flow of goods, to consumption.
This way we can point out the economical aspects of transport:
Production place is not the same (geographically) with the consumption place;

Resources are never equally distributed over territories;

It diminishes economical isolation;

It helps the goods and services exchange (nationally and internationally);

It helps to balance (territorially) the demand and offer, nationally and internationally,
with its result, the price stabilization;

It optimizes the location of production entities in connection with the territories where
resources (raw materials) come from.

29

Particularities of international transport:
This is the service that materializes the international trade of a country with its other
partners;

It continues the internal production process into the world economic circuit;

The transport costs and expenses are directly participating in establishing the
international prices of goods;

International transport, marketing and logistics all together form the aggregate of
processes, activities necessary to technically, commercially and legally convey the goods
(resource phase / manufactured product phase) on the whole chain from the producer to
the end user;

The demand of international transport services is directly influenced by the weight /


measurement of the export and import goods;

The demand of international transport services is not flexible in relation with the
transport services price evolution, worldwide, the price of transport services goes up
faster than the price of the goods, the increases in the transport price will be supported by
those countries whose imports and exports are not flexible;

The demand of international transport services is distinct by mode of transport, based on


goods nature;

The demand of international transport services is always changing, covering the


dynamics and trends of the commercial flows;

The price of transport services (long term) is increasing continuously.

In the dim and distant past the exporter had an easy job in choosing the mode of transport
for an international consignment. It went by sea, or by rail. The modern exporter is now faced
not only with a range of modes of transport (sea, air, road or rail) but also with a wide variety of
specialized services within each mode.
It is no longer enough to simply decide to send the goods by sea, or air, but decisions
need to be made regarding the use of unitized systems, FCL (Full Container Loads) or LCL
(Less than Container Loads) services, RO/RO (Roll On/Roll Off) or LO/ LO (Lift On/Lift Off),

30

LASH (Lighter Aboard Ship) or BACAT (Barge Aboard Catamaran), and so on. An
understanding of the wide range of modern freight services is essential to the exporter attempting
to compete competitively in world markets.
Most exporters, and nearly all importers, use freight forwarders. Some use only one,
others use dozens, but clearly the freight forwarder plays an essential part in the international
trading activities. Their basic function is to act as intermediaries between shippers, with goods to
send, and carriers with space to be filled (as defined in Figure below).

SHIPPERS CARRIERS

EXPORT SEA
MANUFACTURERS

AIR
EXPORT MERCHANT FREIGHT
FORWARDER

ROAD

BUYING
CONFIRMING
RAIL
AND INDENT HOUSES

Figure 4. The freight forwarder as intermediary


The traditional situation represents a clear-cut distinction between the range of
organizations providing cargoes, either as pure manufacturers, merchants or as representatives of
overseas buyers, and the freight forwarder acting as an agent between them and the various
shipping and air lines, and road and rail carriers. However, over the last few decades the
distinction has become somewhat blurred. The exporter is now more likely to become involved
in own account operations; that is, they will carry their own goods. This is perfectly feasible for
road freight movements, although much more difficult for other modes of transport.

The movement of goods from producer to buyer and buyers in another country is ensured
by international transport contract.

31

Transportation contract refers to those contracts dealing with freight transportation
services including local drayage by rail, motor, domestic freight forwarder, and domestic water
carriers (including inland, coastwise, and intercostal). However, a contracting officer does not
use a transportation contract for the acquisition of transportation services by domestic or
international air carriers or by international ocean carriers, or to freight services provided under
bills of lading or to those negotiated for reduced rates.

Transportation Contract is a contract where one party desires to provide contract carriage
services to another party who desires to use that contract motor transportation services. In other
words transport contract agreement will be concluded between the carrier (carrier) and the
consignor by the carrier undertakes to move a good or individualized goods as cargo in a given
period, taking them over by the place of departure and handing them to place for a price
(shipping fee or tariff).

By its nature, the contract of carriage is characterized by the existence of economic


relations governed according to the principle of equivalence of benefits.

The contract of carriage is autonomous in the sense that it establishes relationships that
are independent of those of the sender as the recipient, which are based on another contract
usually supply that is taxable carrier.

The contract of carriage is a unitary26 and independent contract, which contents combine
elements that resemble specific elements of other contracts (for works, location, warehouse), but
at the same time its nature is different. Some authors have noted that not any movement of things
from one place to another is the object of a contract of carriage, but only when the transport is
based on the obligation assumed by the carrier in this regard and has taken over at loading, and
will deliver them to destination. The transport contract is an onerous contract by which the
transport provider undertakes to convey the goods to the place of destination and to deliver them
to the recipient.27

Contract for International Carriage of Goods has the following legal character: it is a
mutually binding contract (bilateral), onerous, consensual, has real character and economic
content.


26
R. Rodiere, Droit des transports terretres et aeriens, Paris, 1975, p. 190.
27
CIM Standard Rules (Appendix B of The "Convention for international rail transport" (COTIF 1999), applicable
from 1st July 2006, art. 6.
32

Transport of goods and trade between countries is carried out in accordance with a
number of international conventions, some agreements at the governmental level, others -
between organizers and transport companies from different countries. With versatility, these
conventions govern different areas of transport (road, sea, air, etc.).

2.2. AIR TRANSPORT

Air transport has always been seen to have an inherently strategic role. It has obvious
direct military applications, but it is also highly visible and, for a period, and in some countries
still, was seen as a flag carrier, a symbol of international commercial presence. From its
earliest days, airlines were seen as having potential for providing high-speed mail services, and
subsequently medium and long-term passenger transport. Technology now allows the carriage of
much larger cargo payloads in a more reliable way. These strategic functions were used to
pursue internal national policies of
social, political, and economic
integration within large countries
such as Canada, the US, and
Australia, but also took on
international significance from the
1930s within the Imperial
geopolitical systems centered
mainly on the UK, France,
Germany, and other European countries when technology allowed for intercontinental services to
be developed. Air transport was highly regulated and protected in this environment with the
intention of it being used as a lever for larger political and economic objectives. But even in
these roles, its importance, largely because of the technology until after World War II, was small.
British Imperial Airways, for example, only carried about 50,000 passengers to the colonies in
the 1930s, a figure hidden in the public media coverage given to the importance of colonial air
networks.28 Technology shifts as an offshoot of military developments in World War II changed
this with the introduction of planes with far longer ranges, faster speeds, enhanced lift, and the
increasingly ability to cope with adverse weather conditions. Air traffic control, navigation,
communications, and airport facilities have also improved considerably, and more recently the


28
Ken Button, School of George Mason University, USA, Global Forum on Transport and Environment in a
Globalizing World, 10-12 November 2008, Guadalajara, Mexico

33

underlying management structure of the supplying industries has enhanced efficiency. The
Chicago Convention of 1944 confronted the new international potentials of civil aviation and
initiated an institutional structure that laid common ground rules for bilateral air service
agreements (ASAs) between nationals. The result, however, while providing a formal basis for
negotiation was essentially one of protectionism with pairs of countries agreeing on which
airlines could offer services between them, the fares to be changed and, often, how the revenues
could be shared. Added to this, with the major exception of the US, most international airlines
were state owned flag-carriers that operated to fulfill, often vague, national objectives of
prestige, as well as linking colonies. Internal markets within countries were regulated in similar
fashions, and it was not uncommon for wealthier countries to have an airline to provide primarily
domestic and short haul services, and one for long haul, international markets. The breakdown of
the domestic regulatory structure within the US from the late 1970s29 provided both a
demonstration for other countries to follow in deregulating their own domestic regimes, but also
the USs, initially unsuccessful, initiatives from 1979 to liberalize international services on a
bilateral basis based on a common Open Skies recipe began to bring about pressures to wider
reforms. This was coupled with more generic moves towards a withdrawal of government in
market-oriented countries such as New Zealand and the UK that saw airports and air traffic
control being privatized, or at least operated on a more commercial footing. The move to a
Single European Market within the EU from 1992 represented a broader trend, both in terms of
the sectors and the geography involved, towards market liberalization of air transport
infrastructure, as did the collapse of the Soviet economic system. Not all countries moved
completely in this direction, the US for example, rather perversely, continued with its traditional,
strongly socialist policy of air traffic control being a state owned, tax financed monopoly and
airports, with few exceptions, being owned by local governments30.
Where there have been almost universal tightening of regulations that run counter to the
market liberalizations, have been in what the US calls social regulation and Europe calls,
quality regulation. This concerns such matters as the environment, safety, security, and
consumer and labor protection. These are areas that have been traditionally dealt with at the
international level by the International Civil Aviation Organization (ICAO) set up under the
Chicago Convention, and in accord with some peculiar international accords such as the Warsaw


29
Morrison, S. and Winston, C. (1995), The Evolution of the Airline Industry, Brookings Institution, Washington
DC
30
Button, K.J. and McDougal, G. (2006) Institutional and structural changes in air navigation service providing
organizations, Journal of Air Traffic Management, 12(5). 236-252.
34

Convention that dates back to 1929 and deals with liabilities in the case of accidents31. More
recently, regional or national actions have also taken international significance; e.g. the extension
of carbon trading within the EU to embrace all air transport, and the USs introduction of stricter
security measures, such as the provision on passenger information, for all flights into the
country.
The modern air transport industry is thus one that increasingly operates within a liberal
market context. While government controls over fares, market entry, and capacity continue in
many smaller countries, they are gradually and almost universally being removed or relaxed.
International controls under the bilateral ASA structure are increasingly moving towards broad
Open Skies formulations, allowing free provision of services between the countries involved,
although progress on open market, whereby nationality of ownership of airlines is unrestricted, is
coming more slowly. The EU area32 has effectively been the largest international free market in
air transport services in the world since 1997, and this has grown as the Union has expanded
geographically. The supply and operation of air transport infrastructure is also becoming more
market driven with on-going privatizations of airports and air traffic control systems, or the use
of franchising mechanisms to involve private capital and expertise33. It is also becoming more
coordinated.34
The air transport industry is now large it accounts for about 1% of the GDP of both the
EU and the US and is vital in many industries such as tourism, exotics, and hi-technology. It is
an important transporter of high-value, low-bulk cargoes. International aviation moves about
40% of world trade by value, although far less in physical terms. The market is served by a
diversity of carriers, some specializing in long-haul international routes and others in short-haul
markets. To handle the interface between land and air transport the worlds major airports have
grown to handle millions of international passengers and tones of cargo each year, and many
have been significant catalyst facilitating, in particular, the growth of modern hi-technology
industries and tourism about them.
International air cargo contract is a contract under which one party, called the carrier,
undertakes to the other party, called the sender, for a fee of transport, to air transport certain
goods to the agreed destination and deliver them to that destination.

31
The air transport industry itself has established international bodies to both interact with national governments and
institutions such as the ICAO; e.g. the International Air Transport Association (IATA) was established to assist
airline companies to achieve lawful competition and uniformity in prices.
32
Norway and Switzerland are also included in most of these agreements.
33
Button, K.J. (2008), Air transportation infrastructure in developing countries: privatization and deregulation, in
C. Winston and G. de Rus (eds.) Aviation Infrastructure Performance: A Study in Comparative Political Economy,
Brookings Institution, Washington DC.
34
E.g. in October 2001, the European Commission also adopted proposals for a Single European Sky, to create a
Community regulator for air traffic management within the EU, Norway and Switzerland.
35

It is a mutually binding contract, onerous and under uniform regulations on the matter, is
international if the point of departure and point of destination of the goods are situated in two
different states or if although the two points are located in the same territory, the aircraft fly over
the territory of a third country where makes a stop.
Forms of cooperation in the international air transport. Cooperation shall take the form
of contracts in one area or another, allowing each company to provide prompt and realize
revenues from mutual transfers of services or share them advantageously. These forms of
cooperation are based on the recommendations of IATA.
INTERLINE contract is a form of cooperation in which two carriers agree to recognize
each other shipping documents under which companies can take on board, for this purpose IATA
has developed a framework contract, which is a model in this regard.
INTERLINE framework contract contains three parts:
a) the first part, the partners and their commitments to enroll and recognize each other
shipping documents, and how to handle complaints, arbitration and jurisdiction;
b) the second part, are summarized carrier commissions that grant benefits company that
performs sales and issuing transport (tickets, letters of transport). The level of fees is higher for
sales to Europe, Asia and North America.
c) the third part, includes deadlines for the submission of invoices for shipments made on
the basis of the transport documents issued by the two parties, mutual settlement balances,
currency of payment and procedure for correction of exchange differences.
General sales representative agreement is concluded between the two airlines, which
engage each market to represent the other party as general sales representative, liaison with state
authorities, to carry advertising in compliance with the instructions and rules governing charges
for services rendered. Differs from INTERLINE contract because the general agent may transfer
all or a part of its obligations, including the right to sell the benefits to other companies or
individuals who are kind of sub agents. 35
The operating in pool contract. In order to avoid competition, partners operating on the
same route contracts operating pool (joint operation, in cartel), which establishes: equitable
sharing of traffic and a unique work frame, similar prices or discounts from published rates, and
the ability of the vessels to be used. So that existing traffic between the two countries is led by
partners pool resources.
The Handling contract is a type of contract when the airlines provide ground services
required the liability between the carrier rates used and the handling agent. Handling contract is


35
Stoian I., Dragne E., Stoian M., International Commerce, Techniques and procedures. Bucharest, 1997, p. 459.
36

reciprocal, meaning that each listed company is a handling agent. In a situation where there
would be no contract, payment for the necessary services would be made in cash, immediately
after services or in advance.
The Air Waybill - International air transport contract usually takes the form of
international air waybill, known as the Air Waybill or Air Consignment Note. The Air Waybill
has only probative value, which confirms the conclusion of the contract and receipt of goods by
the carrier, unless they contract, may be proved by evidence of the common law.
The air consignment note shall be made out by the consignor in three original parts and
be handed over with the goods. The first part shall be marked "for the carrier," and shall be
signed by the consignor. The second part shall be marked "for the consignee"; it shall be signed
by the consignor and by the carrier and shall accompany the goods. The third part shall be signed
by the carrier and handed by him to the consignor after the goods have been accepted. The
carrier shall sign on acceptance of the goods. The signature of the carrier may be stamped; that
of the consignor may be printed or stamped. If, at the request of the consignor, the carrier makes
out the air consignment note, he shall be deemed, subject to proof to the contrary, to have done
so on behalf of the consignor. The carrier of goods has the right to require the consignor to make
out separate consignment notes when there is more than one package.
The air consignment note shall contain the following particulars36: the place and date of
its execution; the place of departure and of destination; the agreed stopping places, provided that
the carrier may reserve the right to alter the stopping places in case of necessity, and that if he
exercises that right the alteration shall not have the effect of depriving the carriage of its
international character; the name and address of the consignor; the name and address of the first
carrier; the name and address of the consignee, if the case so requires; the nature of the goods;
the number of the packages, the method of packing and the particular marks or numbers upon
them; the weight, the quantity and the volume or dimensions of the goods; the apparent condition
of the goods and of the packing; the freight, if it has been agreed upon, the date and place of
payment, and the person who is to pay it; if the goods are sent for payment on delivery, the price
of the goods, and, if the case so requires, the amount of the expenses incurred; the amount of the
value declared; the number of parts of the air consignment note; the documents handed to the
carrier to accompany the air consignment note; the time fixed for the completion of the carriage
and a brief note of the route to be followed, if these matters have been agreed upon; a statement
that the carriage is subject to the rules relating to liability.


36
Convention for the unification of certain rules relating to international carriage by air, signed at Warsaw on 12
October 1929, art. 5-8.

37

The air consignment note is prima facie evidence of the conclusion of the contract, of the
receipt of the goods and of the conditions of carriage.

Figure 5. Sample of Air Waybill


38

2.3. LAND TRANSPORT (RAIL/ROAD)

Rail freight transport is the use of railroads to transport cargo as opposed to human
passengers. A freight train or goods train is a group of freight cars (US) or goods wagons (UIC)
hauled by one or more locomotives on a railway, transporting cargo all or some of the way
between the shipper and the intended destination as part of the logistics chain. Trains may haul
bulk material, intermodal containers, general freight or specialized freight in purpose-designed
cars. Rail freight practices and economics vary by country and region.

When considered in terms of ton-miles or tone-kilometers hauled per unit of energy


consumed, rail transport can be more efficient than other means of transportation. Maximum
economies are typically realized with bulk commodities (e.g., coal), especially when hauled over
long distances. However, shipment by rail is not as flexible as by highway, which has resulted in
much freight being hauled by
truck, even over long distances.
Moving goods by rail often
involves transshipment costs,
particularly when the shipper or
receiver lack direct rail access.
These costs may exceed that of
operating the train itself, a
factor that practices such as
containerization aim to minimize.

A freight train hauls cargo using freight cars specialized for the type of goods. Freight
trains are very efficient, with economy of scale and high-energy efficiency. However, their use
can be reduced by lack of flexibility, if there is need of transshipment at both ends of the trip due
to lack of tracks to the points of pick-up and delivery. Authorities often encourage the use of
cargo rail transport due to its environmental profile.

Container trains have become the dominant type in the world for non-bulk haulage.
Containers can easily be transshipped to other modes, such as ships and trucks, using cranes.
This has succeeded the boxcar (wagon-load), where the cargo had to be loaded and unloaded into
the train manually. The intermodal containerization of cargo has revolutionized the supply chain
logistics industry, reducing ship costs significantly. In Europe, the sliding wall wagon has largely
superseded the ordinary covered wagons. Other types of cars include refrigerator cars, stock cars
39

for livestock and autoracks for road vehicles. When rail is combined with road transport, a
roadrailer will allow trailers to be driven onto the train, allowing for easy transition between road
and rail.

Bulk handling represents a key advantage for rail transport. Low or even zero
transshipment costs combined with energy efficiency and low inventory costs allow trains to
handle bulk much cheaper than by road. Typical bulk cargo includes coal, ore, grains and liquids.
Bulk is transported in open-topped cars, hopper cars and tank cars.

There have been developed international conventions, which include uniform rules for
participating railways transport. Also between neighboring countries there are bilateral
agreements on cooperation between border railway stations, which limits how customs, way of
receiving / presentation of wagons, transshipment, etc.

International Contract rail freight is ruled mainly by uniform rules. In this category pane,
first, the Convention concerning International Carriage by Rail, COTIF, concluded at Berne in
1896 and revised in 1961. The Convention contains two parts37:

A. the Uniform Rules concerning the Contract for International Carriage of Passengers
and Luggage by Rail (CIV);

B. the Uniform Rules concerning the Contract for International Carriage of Goods by
Rail (CIM).

CIM in its current form was agreed in 1980 and entered into force on l May 1985. It
includes several annexes, namely:
- Special conditions on the transport of dangerous goods in international rail transport;
- Regulation on the transport of goods in containers;
- Regulation on loading and securing cargo on the opened wagons;
- Regulation for the transport of perishable goods;
- Regulation for the transport of goods on pallets;
- Regulation of transport of private cars;
- Regulation on rail Messaging.
The Uniform Rules shall apply to every contract of carriage of goods by rail for reward
when:


37
Convention concerning International Carriage by Rail (1980), article 3, 1.
40

- the place of taking over of the goods and the place designated for delivery are situated in two
different Member States, irrespective of the place of business and the nationality of the parties to
the contract of carriage;
- when the place of taking over of the goods and the place designated for delivery are situated in
two different States, of which at least one is a Member State and the parties to the contract agree
that the contract is subject to the Uniform Rules;
- when international carriage being the subject of a single contract of carriage includes carriage
by sea or trans frontier carriage by inland waterway as a supplement to carriage by rail;
By the contract of carriage of goods by rail, the carrier shall undertake to carry the goods
for reward to the place of destination and to deliver them there to the consignee.38
The contract of carriage must be confirmed by a Consignment Note, which accords with a
uniform model. However, the absence, irregularity or loss of the consignment note shall not
affect the existence or validity of the contract. The consignment note shall be signed by the
consignor and the carrier. The signature can be replaced by a stamp, by an accounting machine
entry or in any other appropriate manner. The carrier must certify the taking over of the goods on
the duplicate of the consignment note in an appropriate manner and return the duplicate to the
consignor. A consignment note must be made out for each consignment. In the absence of a
contrary agreement between the consignor and the carrier, a consignment note may not relate to
more than one wagonload. This document confirms that the rail carrier has received the goods
and that a contract of carriage exists between trader and carrier. Unlike a bill of lading, a CIM
note isn't a document of title. It doesn't give its holder rights of ownership or possession of the
goods.
In the case of carriage which takes place on the customs territory of the European
Community or the territory on which the common transit procedure is applied, each consignment
must be accompanied by a consignment note satisfying the requirements and must contain the
following particulars: the place at which and the day on which it is made out; the name and
address of the consignor; the name and address of the carrier who has concluded the contract of
carriage; the name and address of the person to whom the goods have effectively been handed
over; the place and the day of taking over of the goods; the place of delivery; the name and
address of the consignee; the description of the nature of the goods and the method of packing,
and, in case of dangerous goods, the description provided for in the Regulation concerning the
International Carriage of Dangerous Goods by Rail (RID); the number of packages and the
special marks and numbers necessary for the identification of consignments in less than full

38
Uniform Rules Concerning the Contract of International Carriage of Goods by Rail (CIM), applicable with effect
from 1 July 2006, CIT Edition, article 6, 1.
41

wagon loads; the number of the wagon in the case of carriage of full wagon loads; the number of
the railway vehicle running on its own wheels, if it is handed over for carriage as goods; in
addition, in the case of intermodal transport units, the category, the number or other
characteristics necessary for their identification; the gross mass or the quantity of the goods
expressed in other ways; a detailed list of the documents which are required by customs or other
administrative authorities and are attached to the consignment note or held at the disposal of the
carrier at the offices of a duly designated authority or a body designated in the contract; the costs
relating to carriage (the carriage charge, incidental costs, customs duties and other costs incurred
from the conclusion of the contract until delivery) in so far as they must be paid by the consignee
or any other statement that the costs are payable by the consignee; a statement that the carriage is
subject, notwithstanding any clause to the contrary, to the Uniform Rules.
Where applicable the consignment note must also contain the following particulars: a) in
the case of carriage by successive carriers, the carrier who must deliver the goods when he has
consented to this entry in the consignment note; b) the costs which the consignor undertakes to
pay; c) the amount of the cash on delivery charge; d) the declaration of the value of the goods
and the amount representing the special interest in delivery; e) the agreed transit period; f) the
agreed route; h) the entries made by the consignor concerning the number and description of
seals he has affixed to the wagon.39
Road transport or road transportation is the transport of passengers or goods on roads.
The nature of road transportation of goods depends, apart from the degree of development of the
local infrastructure, on the distance the goods are transported by road, the weight and volume of
the individual shipment, and the type of goods transported. For short distances and light, small
shipments a van or pickup truck may be used.
For large shipments even if less
than a full truckload a truck is more
appropriate. In some countries
cargo is transported by road in
horse-drawn carriages, donkey
carts or other non-motorized mode.
Delivery services are sometimes
considered a separate category
from cargo transport.


39
Uniform Rules Concerning the Contract of International Carriage of Goods by Rail (CIM), applicable with effect
from 1 July 2006, CIT Edition.
42

In many places fast food is transported on roads by various types of vehicles. For inner city
delivery of small packages and documents bike couriers are quite common.
Road transport is made directly and quickly, door to door. Direct transport allows a better
preservation of goods and reduces packaging costs and handling intermediate. Usually furniture,
fruits and vegetables, consumer goods, electronic items, cosmetics and pharmacy items are
dispatched by road transport.
In the matrix of International road transport were adopted several international
conventions, the most important of them were perfected under the United Nations Economic
Commission for Europe and the International Road Transport Union.

Parties mainly apply:

- The Convention on the Contract for the International Carriage of Goods by Road (CMR) - is a
United Nations convention that was signed in Geneva on 19 May 1956 and amended by the
CMR Protocol of Geneva, 5 July 1978. It relates to various legal issues concerning transportation
of cargo by road. It has been ratified by the majority of European states. As of 2013, it has been
ratified by 55 states. All the European countries are members of this Convention, and several
other countries, such as Lebanon and Iran are members. Based on the CMR, the International
Road Union (IRU) developed a standard CMR waybill;

- The Convention on International Transport of Goods Under Cover of TIR Carnets (TIR
Convention), is a multilateral treaty that was concluded at Geneva on 14 November 1975 to
simplify and harmonize the administrative formalities of international road transport. (TIR stands
for "Transports Internationaux Routiers" or "International Road Transports".) The 1975
convention replaced the TIR Convention of 1959, which itself replaced the 1949 TIR Agreement
between a number of European countries. The conventions were adopted under the auspices of
the United Nations Economic Commission for Europe (UNECE). As of May 2013, there are 68
parties to the Convention, including 67 states and the European Union. The TIR Carnet is a
customs transit document used to prove the existence of the international guarantee for duties
and taxes for the goods transported under the TIR system, within the limit of the amounts
specified by the contracting parties and under conditions stipulated in the TIR Convention. Each
TIR Carnet has a unique reference number. A TIR Carnet may have 4, 6, 14, or 20 vouchers, as
one pair of vouchers is used per country; the number of vouchers indicates the number of
countries that can be transited, including the countries of departure and destination, under cover
of this type of Carnet, e.g. a 20-voucher Carnet may be used for a TIR transport through up to 10
countries. Each individual TIR Carnet can be used for only one TIR transport. Once the TIR
43

transport has been terminated at the Customs office of destination of the goods, the driver is
handed back the TIR Carnet duly endorsed by the Customs authorities of destination. Customs
authorities must immediately confirm the termination of the TIR transport electronically via Safe
TIR. The TIR Carnet is returned to the Association and shipped to the IRU for final control and
archiving.

- The Customs Convention on the ATA Carnet for the Temporary Admission of Goods (ATA
Convention), concluded in 1961, at Brussels, jointly administered by the World Customs
40
Organization (WCO) and the International Chamber of Commerce41 through its World
Chambers Federation. The Convention On Temporary Admission (Istanbul, 26 June 1990). The
ATA Carnet System is currently in force in 73 countries and regions. Carnets apply to three
broad categories of merchandise: commercial samples, professional equipment and goods for use
at exhibitions and fairs. With the exception of perishable or consumable items, the product range
is nearly limitless. Carnets are regularly used to facilitate movement of everything from display
booths to racing yachts. Individuals or firms wishing to use a carnet to move goods in and out of
foreign countries must submit an application and the necessary collateral to their home national
guaranteeing organization. The application, among other things, lists all countries of intended
transit and all applicable goods with their assigned values. If the application is properly
completed and submitted with the applicable fees the national guaranteeing organization will
issue a carnet specifically tailored to that itinerary. The carnet document has two green cover
pages denoting country of origin with instructions. Within the covers are counterfoils and
vouchers for each country to be visited or transited. The vouchers act as receipts for entry and re-
export in foreign countries and are kept by foreign customs officials. The counterfoils are
stamped by the foreign customs services and act as the carnet holders receipt. Upon completion
of travel or expiration of the carnet's 12-month active period, the holder must return all
documents to their home national guaranteeing organization. A review is conducted. If all
documents are in order and no claims are found to be forthcoming from one of the applicable
foreign countries, the collateral can be returned. If a bond was used the national guaranteeing
organization issues notice that the bond may be canceled. If the counterfoils, including the final
one showing re-entry of all applicable goods back into the country of origin, are not in order, or
if a foreign customs service notifies the national guaranteeing organization of a violation, the
carnet holder is given notice to provide proper documentation or pay the applicable duties. If
they do not, the collateral or bond is used to pay the claim. Claims that cannot be amicably


40
www.wcoomd.org, May 2014
41
www. iccwbo.org, May 2014
44

settled between the applicable NGAs may be referred to the ICC for Dispute Resolution
Services.

Road transport contract is a contract for the carriage of goods by road in vehicles for
reward, when the place of taking over of the goods and the place designated for delivery, as
specified in the contract, are situated in two different countries, of which at least one is a
contracting country, irrespective of the place of residence and the nationality of the parties.
Where, "vehicles" means motor vehicles, articulated vehicles, trailers and semi-trailers as
defined in article 4 of the Convention on Road Traffic.42

The contract of carriage shall be confirmed by the making out of a consignment note. The
absence, irregularity or loss of the consignment note shall not affect the existence or the validity
of the contract of carriage. Road transport contract is concluded when the goods have been
loaded on the truck and the driver signed the consignment note.

The consignment note shall be made out in three original copies signed by the sender and
by the carrier. These signatures may be printed or replaced by the stamps of the sender and the
carrier if the law of the country in which the consignment note has been made out so permits.
The first copy shall be handed to the sender, the second shall accompany the goods and the third
shall be retained by the carrier.

When the goods which are to be carried have to be loaded in different vehicles, or are of
different kinds or are divided into different lots, the sender or the carrier shall have the right to
require a separate consignment note to be made out for each vehicle used, or for each kind or lot
of goods.

The consignment note shall contain the following particulars: The date of the
consignment note and the place at which it is made out; The name and address of the sender; The
name and address of the carrier; The place and the date of taking over of the goods and the place
designated for delivery; The name and address of the consignee; The description in common use
of the nature of the goods and the method of packing, and, in the case of dangerous goods, their
generally recognized description; The number of packages and their special marks and numbers;
The gross weight of the goods or their quantity otherwise expressed; Charges relating to the
carriage (carriage charges, supplementary charges, customs duties and other charges incurred
from the making of the contract to the time of delivery); The requisite instructions for Customs


42
Convention on road traffic (Geneva, 19 September 1949)
45

and other formalities; A statement that the carriage is subject, notwithstanding any clause to the
contrary, to the provisions of the CMR. 43

2.4. MARINE TRANSPORT

International conventions have been developed to regulate shipping. The 1924 International
Convention concluded in Brussels on Unification of Certain Rules of Law relating to the bill,
which is known as the "Hague
Rules".44 In 1968 The Hague Rules
were amended by the Protocol of
Brussels, becoming the Hague-
Visby Rules. In 1978, under the
auspices of UNCITRAL, was
adopted Convention on the carriage
of goods by sea, known as the
Hamburg Rules.

According to the Hamburg Rules (article 2, item 3) these are applied only to contracts of
carriage of goods by sea, based on the bill of lading, or similar document (booking notes),
excluding charter party contract.

International Conventions include provisions on the content of the bill of lading, the
carrier obligations, covering in particular its responsibility for damage or loss of the goods,
where the limitation or exclusion of liability.

A bill of lading (sometimes abbreviated as B/L or BoL) is a document issued by a carrier


which details a shipment of merchandise and gives title of that shipment to a specified party45.
Bills of lading are one of three important documents used in international trade to help guarantee
that exporters receive payment and importers receive merchandise. A straight bill of lading is
used when payment has been made in advance of shipment and requires a carrier to deliver the
merchandise to the appropriate party. An order bill of lading is used when shipping merchandise
prior to payment, requiring a carrier to deliver the merchandise to the importer, and at the


43
Convention on the Contract for the International Carriage of Goods by Road (CMR) (Geneva, 1978), articles 4-6.
44
The Hague Rules were developed, in fact, the Hague in 1921, then revised Conference in London in 1922 and
completed at the Conference in Brussels.
45
Levi, Maurice D., International Finance, 4th Edition. New York, NY: Routledge, 2005.
46

endorsement of the exporter the carrier may transfer title to the importer. Endorsed order bills of
lading can be traded as a security or serve as collateral against debt obligations.46

Bills of lading have a number of additional attributes, such as on-board, received-for-


shipment, clean, and foul. An on-board bill of lading denotes that merchandise has been
physically loaded onto a shipping vessel, such as a freighter or cargo plane. A received-for-
shipment bill of lading denotes that merchandise has been received, but is not guaranteed to have
already been loaded onto a shipping vessel. Such bills can be converted upon being loaded. A
clean bill of lading denotes that merchandise is in good condition upon being received by the
shipping carrier, while a foul bill of lading denotes that merchandise has incurred damage prior
to being received by the shipping carrier. Letters of credit usually will not allow for foul bills of
lading.47 The principal use of the bill of lading is as a receipt issued by the carrier once the goods
have been loaded onto the vessel. This receipt can be used as proof of shipment for customs and
insurance purposes, and also as commercial proof of completing a contractual obligation,
especially under Incoterms such as CFR (Cost and freight) and FOB (free on board).

The bill of lading will rarely be the contract itself, since the cargo space will have been
booked previously, perhaps by telephone, email or letter. The preliminary contract will be
acknowledged by both, the shipper and carrier, to incorporate the carrier's standard terms of
business. If the Hague-Visby Rules apply, then all of the Rules will be automatically annexed to
the bill of lading, thus forming a statutory contract.

Other international conventions developed in this area are: Brussels Convention of 1924
and 1957 on the limitation of liability of ship-owners; Brussels Convention on jurisdiction in
matters of collision investigation and other events of 1952; Athens Convention on the carriage of
persons and luggage by sea, 1974; Convention on the ability of the vessels to London, 1969;
Convention for the Safety of Life at Sea, London, 1974; UN Convention on International
Multimodal Transport of Goods 1980 Geneva etc.

The Hamburg Rules stipulates that the contract of carriage by sea means any contract
whereby the carrier undertakes against payment of freight to carry goods by sea from one port to
another; however, a contract which involves carriage by sea and also carriage by some other


46
Buckley, A., Multinational Finance, Harlow, UK: Pearson Education Limited, 2004.
47
Ibidem
47

means is deemed to be a contract of carriage by sea for the purposes of this Convention only in
so far as it relates to the carriage by sea.48

The legal doctrine, define the charter as a contract by which the owner called charter
undertakes in exchange for a rent called freight, make available to the other party, the charterer,
the ship fit for transport or some of its capacity in order to move goods by sea to the
destination.49

Some national laws50 govern distinctly charter party, which only assigns meaning lease of
ships and shipping contract. Other legislations define shipping contract only.

The two basic forms of ocean cargo carriers are identified in Figure below.

General cargo and passenger

Regular sailing schedules


LINERS
Regular routes
Firm freight rates
Bill of landing
OCEAN CARGO
CARRIERS
Mostly bulk cargo

No schedule (react to demand)


TRAMPS No xed routes

Rates subject to nego7a7on

Charter party

Figure 6. Alternative forms of ocean cargo carriers

The distinction between liners and tramps is based on the nature of the service and not the
type of vessel. Tramp vessels are not so called because they are rather scruffy, but because they


48
United Nations Convention on the Carriage of Goods by Sea (The Hamburg Rules) Hamburg, 30 March 1978, art.
1, item. 6.
49
Furmston M., Principles of Commercial Law, Second Edition, Cavendish Publishing Limited, London, 2001, p.
187
50
Italian navigation code (1942), French law on charter contracts and shipping (1966)
48

have no fixed abode. Perhaps the most appropriate analogy is that the liners are the buses of the
shipping world, whilst the tramps are the taxis.
Liners offer regular schedules, between the same ports, based on an advertised sailing
schedule, and carry the majority of international sea transits (certainly in terms of the number of
consignments). Tramps will carry, generally bulk, cargoes from almost anywhere in the world to
anywhere else, and negotiate a rate for the job.
Many liner services, operating on the same routes, voluntarily form together into freight
conferences. They cooperate on both rates and schedules and are, of course, illegal, particularly
in terms of European Union competition law. However, whilst the lines do not compete on rates,
they do benefit the shipper in terms of their cooperation on schedules and the exporter is
virtually guaranteed a regularity of service. Just like buses, when operating efficiently, there will
be one vessel for a particular destination, receiving cargo every seven days, rather than three
receiving all at once and then nothing for a month.
There may also be non-conference lines operating on some routes, in competition with the
conferences, and this means that the exporter has, basically, three choices:
_ conference line;
_ non-conference line;
_ tramp.
The cheapest freight rate per ton of these three will invariably be the tramp, but very few
exporters can produce cargoes of sufficient size to interest even small tramp steamers. The
choice between conference and non-conference lines is influenced by the fact that the
conferences offer immediate discounts, usually 9.5 per cent, off the freight invoice to shippers
who contract to use conference vessels only.
Alternatively, deferred rebates, usually 10 per cent, are given following periods of loyalty
to the conference. It may also be the case that non-conference services are either not available on
certain routes, or are seen as being less reliable than the conference services. The simple
consequence is that the majority of exporters use conference lines for all of their sea freight
consignments.
The equivalent distinction in terms of airfreight would be between schedule and charter;
tramping is also an expression used to describe road haulage operations across national frontiers.
Charter party.51 There are basically three types of charters that can be arranged:
-Voyage charter. The vessel is chartered for one specific voyage between specified ports. This
may involve more than one port of call but is nevertheless just one voyage.

51
Sherlock J., Reuvid J., The handbook of international trade. A guide to the principles and practice of export,
GMB Publishing Ltd, London, 2004, p. 212-213.
49

-Time charter. The vessel is chartered for a period of time. During that period the charterers
might have a degree of freedom regarding the use of the vessel, or it may only allow a number of
repetitive voyages.
-Bareboat (demise) charter. Both of the previous charters depend on the vessel owner operating
and crewing the ship, and the vessel owners own master will be in control. A bareboat charter is
almost self-explanatory in that the charterers take over the vessel, often for periods of time as
long as 15 years, and operate the vessel as if it were their own. This is not uncommon, for
example, in the oil industry, where the tankers carrying oil companys cargoes are crewed by oil
company staff, but will revert back to the vessel owners at the end of the charter period.
In all these cases, the contract will be based on the charter party, and a charter party bill of lading
will be issued. It should be noted that such bills are not acceptable to banks against letters of
credit requiring shipping companys bills, as the banks have no knowledge of the contract of
carriage conditions. On the assumption that the average exporter will be using liner services for
most, if not all, sea freight there are still alternatives from which to choose.

Figure 7. Types of marine cargo


Types of sea freight services:
A. Conventional - this is the traditional, but now less common, service carrying break-bulk,
that is, non-unitized cargoes. The development of containerization over the last 30 years has
severely reduced the number of conventional vessels in operation.

50

B. Containerized - by far the most common sea freight service used by the average exporter.
The principle was first developed in the mid-1950s and is based on the concept of moving goods
in standard sized units, i.e., unitized loads. The service is sometimes referred to as Lift On/Lift
Off (LO/LO) in that the container is lifted from one mode of transport on to another. The
majority of containers are built to the International Organization for Standardization (ISO)
specification, basically 6 or 12 meters, and a wide range of different designs are now in common
use (some of them are shown in the
figure below52). These include:
_ insulated and/or refrigerated
(reefers);
_ open-topped;
_ curtain-sided;
_ liquid and powder tanks;
_ half height (donkey);
_ hazardous cargo tank containers
(tanktainers).
F
Figure 8. Types of containers
There are few cargoes that cannot be containerized, except for the very large indivisibles.
It is also important to note that the standard container is suitable for all surface freight, and not
just sea, which yields major advantages.
C. Multimodal - the risk of loss or damage to the goods is much reduced because the goods
are not handled as they transfer from one mode of transport to another, for example, road trailer
to vessel. This allows an exporter who can fill a container, that is supply Full Container Loads
(FCL), to actually arrange door-to-door deliveries during which the goods will not be handled at
all.53
D. Through documentation - because containers move goods door to door, or depot to depot,
the documentation covers more than just the sea freight part of the journey. This also means that
through freight rates are used, which cover the greater part of the journey.
E. Vessel efficiency - there are a number of advantages to the vessel owner, notably the ease
of segregation of cargoes, which require separation from others and the turn-round time of the


52
Source www.unctad.org
53
Furmston M., Principles of Commercial Law, Second Edition, Cavendish Publishing Limited, London, 2001, p.
185.
51

vessel, that is, the time spent in discharging and receiving cargo is minimized because of the
speed with which the container units can be handled.
F. Specialist barge services - there is a growing use in mainland Europe, if not in the United
Kingdom, of vessels that are designed to carry floating lighters or barges. These units are like
floating containers but carry up to 600 tons of cargo, and their main advantage is that they make
use of inland waterway systems, the cheapest means of inland transport. The barges are floated
into ports such as Antwerp, Rotterdam and Zeebrugge and the ocean-going vessels load them for
the deep-sea movement. The most common versions are Lighter Aboard Ship (LASH) and Barge
Aboard Catamaran (BACAT), but sea-going barges known as SEABEES, which move as large
pontoons of barges, are also available.

52

CHAPTER III. INCOTERMS
3.1. PURPOSE AND SCOPE OF USING INCOTERMS

The purpose of INCOTERMS is to provide a set of international rules for the


interpretation of the most commonly used trade terms in foreign trade.54 Thus, the uncertainties
of different interpretations of such terms in different countries can be avoided or at least reduced
to a considerable degree.
Frequently, parties to a contract are unaware of the different trading practices in their
respective countries. This can give rise to misunderstandings, disputes and litigation with all the
waste of time and money that this entails. In order to remedy these problems the International
Chamber of Commerce first published in 1936 a set of international rules for the interpretation of
trade terms. These rules were known as Incoterms 1936. Amendments and additions were later
made in 1953, 1967, 1976, 1980, 1990, 2000 and presently 2010 (the latest edition of these
became effective on January 2011) in order to bring the rules in line with current international
trade practices.55
It should be stressed that the scope of Incoterms is limited to matters relating to the rights
and obligations of the parties to the contract of sale with respect to the delivery of goods sold (in
the sense of tangibles, not including intangibles such as computer software).
It appears that two particular misconceptions about Incoterms are very common. First,
Incoterms are frequently misunderstood as applying to the contract of carriage rather than to the
contract of sale. Second, they are sometimes wrongly assumed to provide for all the duties,
which parties may wish to include in a contract of sale.
As has always been underlined by ICC, Incoterms deal only with the relation between
sellers and buyers under the contract of sale, and, moreover, only do so in some very distinct
respects. While it is essential for exporters and importers to consider the very practical
relationship between the various contracts needed to perform an international sales transaction -
where not only the contract of sale is required, but also contracts of carriage, insurance and
financing - Incoterms relate to only one of these contracts, namely the contract of sale.
Nevertheless, the parties' agreement to use a particular Incoterm would necessarily have
implications for the other contracts. To mention a few examples, a seller having agreed to a CFR
- or CIF -contract cannot perform such a contract by any other mode of transport than carriage by
sea, since under these terms he must present a bill of lading or other maritime document to the
buyer, which is simply not possible if other modes of transport are used. Furthermore, the


54
Guide to the Incoterms 2010 Rules, Institute for Supply Management, p.1
55
Belay Seyoum, PhD, Export Import Theory, Practices and Procedures, Second Edition, Routledge, NY, 2009,
p. 158.
53

document required under a documentary credit would necessarily depend upon the means of
transport intended to be used.
Second, Incoterms deal with a number of identified obligations imposed on the parties -
such as the seller's obligation to place the goods at the disposal of the buyer or hand them over
for carriage or deliver them at destination - and with the distribution of risk between the parties
in these cases.
Further, they deal with the obligations to clear the goods for export and import, the
packing of the goods, the buyer's obligation to take delivery as well as the obligation to provide
proof that the respective obligations have been duly fulfilled. Although Incoterms are extremely
important for the implementation of the contract of sale, a great number of problems which may
occur in such a contract are not dealt with at all, like transfer of ownership and other property
rights, breaches of contract and the consequences following from such breaches as well as
exemptions from liability in certain situations. It should be stressed that Incoterms are not
intended to replace such contract terms that are needed for a complete contract of sale either by
the incorporation of standard terms or by individually negotiated terms.
Generally, Incoterms do not deal with the consequences of breach of contract and any
exemptions from liability owing to various impediments. These questions must be resolved by
other stipulations in the contract of sale and the applicable law.
Incoterms have always been primarily intended for use where goods are sold for delivery across
national boundaries: hence, international commercial terms. However, Incoterms are in practice
at times also incorporated into contracts for the sale of goods within purely domestic markets.
Where Incoterms are so used, the A2 and B2 clauses and any other stipulation of other articles
dealing with export and import do, of course, become redundant.
As reflected above, the Incoterms identify standard trade usages (which in turn reflect
standardized trade practices or customs) and provide a detailed statement of what each term
requires the parties to do. The purpose of Incoterms is to provide a set of international rules for
the interpretation of the most common trade terms in foreign trade. Thus, the uncertainties of
different interpretations of such terms in different countries can be avoided or at least reduced to
a considerable degree.56
As mentioned, the Incoterms, like other standard trade terms, facilitate contracting by
giving the parties the option of incorporating detailed regimes of rights and obligations, by the
simple use of a shorthand expression.


56
International Chamber of Commerce, Incoterms 1990, 1990, p 6, Paris: ICC Publishing SA, (known hereafteras
ICCIncoterms 1990). Fundamentally, the Incoterms regime provides rules of interpretation for selected trade
usages.
54

The Incoterms are limited in their scope, dealing as they do with nominated aspects of the
delivery of goods pursuant to the international sales contract, and collateral matters a compass
expressed as being concerned with the carriage of goods from seller to buyer, export and
import clearance and the division of costs and risks between the parties.57 Many matters are
not dealt with by the Incoterms; they do not provide a general regime for the regulation of the
contract. They do not, for example, regulate the passing of property in the goods, nor do they
specify the consequences of a breach of contract.
The rules dealing with these broader matters must be sought for in the other terms of the
contract, and the law of the contract (i.e. the applicable municipal law, which will in the normal
case be the law agreed upon by the parties).58 Further, the Incoterms have no bearing upon the
interpretation of any contract of carriage, which may be entered into by a party to the sales
contract.59
When the parties adopt as the law of their contract (directly or indirectly) the Vienna
Convention on Contracts for the International Sale of Goods, and use an appropriate Incoterm,
they achieve a relatively greater degree of certainty as to the regime of rules, contractual and ex-
contractual, which govern the performance of their transaction. Both the Convention and the
Incoterms represent standardized, internationally well-recognized codes.
The Incoterms do not possess the status of law. Unlike the Vienna Convention on
Contracts for the International Sale of Goods, they have not been assimilated into the municipal
law of any State. Such a process of adoption would be potentially counterproductive. The intent
of the International Chamber of Commerce is to revise the Incoterms periodically (such as every
decade) with a view to their amendment to reflect changing practices in the international trade of
goods. Rather, they are a standardized, published and widely known code, which is available for
incorporation in foreign goods contracts at the option of the parties.


57
Ramberg, J, Guide to Incoterms 1990, 1991, p 8, Paris: ICC Publishing SA. This document is the leading
commentary on the Incoterms 1990.
58
The parties may also agree directly that the Vienna Sales Convention (see Ch 1) should, within its compass,
govern their contract; or this may come to be applied indirectly where they agree that the law of a State, which has
adopted the convention, should be the applicable law.
59
ICCIncoterms 1990, p 18, noting that the Incoterms (self-evidently, in referring to the buyer and seller) relate
only to terms used in contracts of sale, and thus do not deal with terms used in contracts of carriage, including.

55

3.2. TERMINOLOGY

As we mentioned,the scope of the Incoterms is limited to the rights and obligations of the
parties arising from the delivery of the sale of goods. Incoterms do not define the goods, but the
goods should be understood as commodities.

Incoterms do not regulate any contract other than sale contract. However, even in a sale
contract, Incoterms do not cover all the contractual aspects. The topics that Incoterms govern can
be gathered under four groups: (1) the delivery of goods, (2) transfer of risks, (3) division of
costs, and (4) obligations concerning the documents. Incoterms do not provide rules for the:
payment and payment methods transfer of ownership, variants, dispute resolution and other
issues relating to fulfilment of the contract.

It is stated under the Foreword of Incoterms 2010, since the creation of the Incoterms
rules by ICC in 1936, this globally accepted contractual standard has been regularly updated to
keep pace with the development of international trade.

It is also stated that the continued spread of customs-free zones, the increased use of
electronic communications in business transactions, the heightened concern about security in the
movement of goods and changes in transport practices required the ICC to revise the Incoterms
2000. 60

Moreover, the urge of the traders to commonly use Incoterms rules for purely domestic
sale contracts within the boundaries of countries or trade blocks like EU and the greater
willingness in the United States to use Incoterms rules in domestic trade rather than the former
Uniform Commercial Code shipment and delivery terms also motivated ICC to revise Incoterms
in a way that would enable the trade terms to be used also on domestic basis in addition to its
previous use on international basis.


60
Carr I., Stone P., International Trade Law, Routledge-Cavendish, NY, 2010, p. 33-38.
56

Incoterms 2010 Rules, first of all, the number of Incoterm rules has been reduced to 11
from 13. Two new rules that may be used irrespective of the agreed mode of transport being
namely (1) DAT (Delivered at Terminal) and (2) DAP (Delivered at Place) replace the Incoterms
2000 rules DAF, DES, DEQ and DDU. Both of the new rules provide for delivery to occur at a
named destination (Table 2). In DAT, the delivery occurs at the buyers disposal unloaded from
the arriving vehicle. In DAP, it occurs at the buyers disposal, ready for unloading. These new
rules, like their predecessors, are delivered, with the seller bearing all the costs, other than
those related to import clearance, where applicable, and risks involved in bringing the goods to
the named place of destination.61

Table 2. Incoterms 2000 and 2010 (source www. free-logistics.com)

Under the previous version of 1990 and 2000 of Incoterms, the rules were classified
under four groups as;

E Group consisting of Ex Works: EXW,

F Group consisting of FCA, FAS and FOB,

C Group consisting of CFR, CIF, CPT and CIP, and


61
Incoterms 2010, Domestic and International Trade Terms, English Version, Zurich Insurance Company Ltd,
Global Corporate Switzerland
57

D Group consisting of DAF, DES, DEQ, DDU and DDP.

Incoterms 2010 prefers a completely different distinction and a classification system


based on modes of transport each Incoterms could be used for. Under the new classification,
there are two groups as;

Group 1: Rules for any mode or modes of transport consisting of EXW, FCA, CPT, CIP,
DAT, DAP and DDP (Table 3); and

Table 3. Incoterms 2010, Group 1(source www.juridischevoorwaarden.nl)

Group 2: Rules for sea and inland waterway transport consisting of FAS, FOB, CFR and CIF
(Table 4).

Table 4. Incoterms 2010, Group 2 (source www.juridischevoorwaarden.nl)


58

The first group includes the seven Incoterms 2010 rules that can be used irrespective of
the mode of transport selected and irrespective of whether one or more than one mode of
transport is employed:
EXW - EX WORKS (... named place of delivery) - the Seller's only responsibility is to
make the goods available at the Seller's premises. The Buyer bears full costs and risks of
moving the goods from there to destination.
FCA - FREE CARRIER (... named place of delivery) - the Seller delivers the goods,
cleared for export, to the carrier selected by the Buyer. The Seller loads the goods if the
carrier pickup is at the Seller's premises. From that point, the Buyer bears the costs and
risks of moving the goods to destination.
CPT - CARRIAGE PAID TO (... named place of destination) - the Seller pays for
moving the goods to destination. From the time the goods are transferred to the first
carrier, the Buyer bears the risks of loss or damage.
CIP - CARRIAGE AND INSURANCE PAID TO (... named place of destination) - the
Seller pays for moving the goods to destination. From the time the goods are transferred
to the first carrier, the Buyer bears the risks of loss or damage. The Seller, however,
purchases the cargo insurance.
DAT - DELIVERED AT TERMINAL (... named terminal at port or place of destination)
- the Seller delivers when the goods, once unloaded from the arriving means of transport,
are placed at the Buyer's disposal at a named terminal at the named port or place of
destination. "Terminal" includes any place, whether covered or not, such as a quay,
warehouse, container yard or road, rail or air cargo terminal. The Seller bears all risks
involved in bringing the goods to and unloading them at the terminal at the named port or
place of destination.
DAP - DELIVERED AT PLACE (... named place of destination) - the Seller delivers
when the goods are placed at the Buyer's disposal on the arriving means of transport
ready for unloading at the names place of destination. The Seller bears all risks involved
in bringing the goods to the named place.
DDP - DELIVERED DUTY PAID (... named place) - the Seller delivers the goods -
cleared for import - to the Buyer at destination. The Seller bears all costs and risks of
moving the goods to destination, including the payment of Customs duties and taxes.

In the second group, the point of delivery and the place to which the goods are carried to
the buyer are both ports:

59

FAS - FREE ALONGSIDE SHIP (... named port of shipment) - the Seller delivers the
goods to the origin port. From that point, the Buyer bears all costs and risks of loss or
damage.
FOB - FREE ON BOARD (... named port of shipment) - the Seller delivers the goods on
board the ship and clears the goods for export. From that point, the Buyer bears all costs
and risks of loss or damage.
CFR - COST AND FREIGHT (... named port of destination) - the Seller clears the goods
for export and pays the costs of moving the goods to destination. The Buyer bears all
risks of loss or damage.
CIF - COST INSURANCE AND FREIGHT (... named port of destination) - the Seller
clears the goods for export and pays the costs of moving the goods to the port of
destination. The Buyer bears all risks of loss or damage. The Seller, however, purchases
the cargo insurance.

Under FOB, CFR and CIF all mention of the ships rail as the point of delivery in the
previous versions of Incoterms has been omitted in preference for the goods being delivered
when they are on board of the vessel. ICC states that this approach more closely reflects
modern commercial reality and avoids the rather out-dated image of the risk swinging to and
across an imaginary perpendicular line.62

Incoterms 2010 also grant electronic means of communication the same effect as paper
communication, as long as the parties so agree or where customary under Articles A1/B1 of each
Incoterm. It is emphasized by ICC that this formulation facilitates the evolution of new
electronic procedures throughout the lifetime of the Incoterms 2010 rules.

There are only two terms, which provide an insurance obligation for the parties. CIP and
CIF refer to Institute Cargo Clauses as to the coverage of the insurance. Institute Cargo Clauses
were subject to a revision, which started on 2006 and finalized on 2009. The Incoterms 2010
rules take account of the Institute Cargo Clauses 2009. The Incoterms 2010 rules provide for
information duties relating to insurance in articles A3/B3, which deal with contracts of carriage
and insurance.

ICC paid attention to the heightened concern about security in the movement of goods,
requiring verification that the goods do not pose a threat to life or property for reasons other than
their inherent nature in the new version of Incoterms.2010. Therefore, ICC have allocated


62
Sherlock J., Reuvid J., The handbook of international trade. A guide to the principles and practice of export,
GMB Publishing Ltd, London, 2004, p. 192-195.

60

obligations between the buyer and seller to obtain or to render assistance in obtaining security-
related clearances, such as chain-of-custody information, in articles A2/B2 and A10/B10 of
various Incoterms rules.

The Incoterms 2010 rules seek to avoid multiple payments of terminal handling charges
by the buyer. Under Incoterms 2000 CPT, CIP, CFR, CIF, DAT, DAP, and DDP, the seller must
make arrangements for the carriage of the goods to the agreed destination. While the freight is
paid by the seller, it is actually paid for by the buyer as freight costs are normally included by the
seller in the total selling price (Table 5).63

Table 5. Incoterms 2010 (source www.icecargo.com.au)

The carriage costs will sometimes include the costs of handling and moving the goods
within port or container terminal facilities and the carrier or terminal operator may well charge
these costs to the buyer who receives the goods.

In these circumstances, the buyer would want to avoid paying for the same service twice:
once to the seller as part of the total selling price and once independently to the carrier or the


63
Incoterms 2010, ICC Publishing, p. 8-9.
61

terminal operator. The Incoterms 2010 clearly allocate terminal handling costs in articles
A6/B6 of the relevant Incoterms rules.

During the sale of commodities, goods in subject are frequently sold several times during
transit down a string. ICC notes that a seller in the middle of the string does not ship the
goods because these have already been shipped by the first seller in the string. The seller in the
middle of the string therefore performs its obligations towards its buyer not by shipping the
goods, but by procuring goods that have been shipped.

Incoterms 2010 rules includes the obligation to procure goods shipped as an


alternative to the obligation to ship goods in the relevant Incoterms rules.

3.3.Main factors in choice of delivery terms

Terms of delivery are an important management tool in any importing or exporting


company. Since Incoterms 2010 are legal trade instruments, the partners participating in
international trade should be aware of their obligations and consequences of using particular
Incoterms 2010. The choice of terms of delivery can be influenced by factors different for
various business environments, industries, countries and companies. Identifying these factors is
very challenging, but the knowledge about this issue can lead to better understanding of supply
chains and facilitate negotiations between partners.64
In international trade it is possible to use different means of transport, such as trains,
trucks, marine vessels, and airplanes. All these means of transport are of different capacities and
need a special design for transporting goods. The modern technical development makes it
possible to use any of these means of transport with relatively the same safety for the quality of
different goods. The factors influencing the choice of transport means are the volume, location,
destination and desirable speed of delivery. The choice of transport is essential for the use of
Incoterms 2010 and vice versa. Some of Incoterms 2010 are possible to use, as we mentioned
previously only for marine transport (e.g. FAS, FOB, CFR and CIF), the rest are suitable for all
means of transport (e.g. EXW, FCA, CPT, CIP, DAT, DAP and DDP).


64
Shangina, O., Main factors in choice of delivery terms. A multiple case study of Japanese and Russian importers
in seafood trade with Norway, University of Troms, 2007, p. 31.


62

The initial factor for the choice of delivery terms is the geographical location of countries
and access to them. For example, Norway and Japan do not have land borders and thus the
seafood transportation is possible only by sea or by air. If considering only the geographical
positions of the country, in importing goods to Japan the following Incoterms 2010 theoretically
can be used: EXW, FAS, FOB, FCA, CIF, CPT, CIP, DAT, DAP and DDP.
Terms of delivery are included in sales agreements that are constructed under
negotiations between importers and exporters. This means that both the importer and exporter
participate. Who proposes the term of delivery usually depends on the case and relationship
between the partners in the supply chain. The choice of Incoterms 2010 is expected to be
influenced by several factors. First of all, a desirable risk distribution between the importer and
exporter plays an important role. Thus EXW is more advantageous for the exporter, as the goods
are usually transferred to the importer together with the risks at the premises of the exporter.
Delivery terms of the group F relieve the exporter from the responsibilities and risks as soon
he delivers the goods to the carrier named by the importer. Though the exporter pays for the
export license and customs formalities for export, this group represents the next advantageous
terms of delivery for the exporter. In this case the exporter bears less responsibility for carriage
of goods, risks and costs than in the case of the group C and D. The delivery terms of the
group C also relieve the exporter from the responsibilities and risks as soon he delivers the
goods to the carrier, though here in some cases the exporter also is responsible for the insurance
(CIF and CIP). Group D is more advantageous for the importer as the exporter bears all
responsibilities and risks for the delivery.65
The choice of Incoterms 2010 may also be influenced by value/volume of seafood to be
transported. Big volumes usually mean bigger value of the consignments. For example, the
delivery term FOB may be more preferable for bigger volumes (meaning bigger values of the
seafood). At the same time the delivery term CFR may be more preferable for smaller volumes
(smaller values), as mentioned by the Japanese importers for example. This may be explained as
a desire of the Japanese importer to take more control over the deliveries of bigger values. Type
of fish can be also a important factor because the quality characteristics of fish often determine
the speed of delivery and thus the type of transport used (e.g. airplanes for quicker deliveries)
may influence the use of Incoterms 2010.
The choice of the terms of delivery is made in negotiations between partners where the
importer and exporter interact and behave accordingly to the existing relationship level. Hence
the choice of delivery terms may be influenced by relationship factor. For example, having a

65
Sherlock J., Reuvid J., The handbook of international trade. A guide to the principles and practice of export,
GMB Publishing Ltd, London, 2004, p. 199
63

very good relationship quality characterized by a high level of trust and satisfaction, the importer
may take more risks and responsibilities on them and use the Incoterms 2010 that state earlier
risk transfer to the importer, such as terms of delivery of the group E, C and F. On the
contrary, the distrust in the exporter may result in the intention to use Incoterms 2010 that
implies more risks to the exporter, for example the terms of delivery of the group D. In
general, both companies in importer-exporter dyads tend to find an optimal term of delivery that
will give reasonable advantages for both parties and will contribute to achieve the best
economical result. There can be more factors influencing the choice of Incoterms 2010 for
different countries, situations and practices. The location of the exporter and importer, type of
products, volumes, and local legislation may be of high significance. Furthermore, relationships
between partners, trust and distrust, as well as satisfaction, commitment and conflict level in the
dyads, may influence the desirable risk and costs distribution between the partners and thus the
choice of Incoterms 2010.66
In the present study the dependence of the choice of Incoterms 2010 on the perceived
relationship quality by the importer will be emphasized. In addition, other factors such as risk
and costs transfer, volumes and type of seafood, location of the country-importer and exporter,
etc. will be also included. So far the perceived relationship quality is emphasized in the present
study with relation to the terms of delivery, the theoretical basis for the relationship quality and
its constructs will be discussed further.

3.4. Transfer of responsibility and costs

The text of each Incoterm has been structured in a standardized format, with the sellers
obligations being stated under 10 headings; and with the buyers most closely corresponding
obligations being likewise grouped under 10 headings. The obligations on each side broadly
mirror those on the other side (the details of course differ).
Thereby, a checklist of obligations imposed upon each party is generated. In some cases,
a particular heading will be inapplicable, having regard to the particular term; in this case, the
text under the heading reads no obligation. Because this standard table of obligations has been
used not only as between the parties, but also from one term to the next, it is relatively easy to
determine the differences between each Incoterm, especially in those cases where two terms are
largely identical but differ on some pivotal point.


66
Shangina, O., Main factors in choice of delivery terms. A multiple case study of Japanese and Russian importers
in seafood trade with Norway, University of Troms, 2007, p. 33-34.
64

EXW The buyer bears all costs and risks involved in taking the goods from
(Ex Works) the seller's premises to the desired destination. The seller's obligation is
to make the goods available at his premises (works, factory, and
warehouse). This term represents minimum obligation for the seller.
This term can be used across all modes of transport.

FCA The seller's obligation is to hand over the goods, cleared for export, into
(Free Carrier) the charge of the carrier named by the buyer at the named place or
point. If no precise point is indicated by the buyer, the seller may
choose within the place or range stipulated where the carrier shall take
the goods into his charge. When the seller's assistance is required in
making the contract with the carrier the seller may act at the buyers risk
and expense. This term can be used across all modes of transport.

CPT The seller pays the freight for the carriage of goods to the named
(Carriage Paid To) destination. The risk of loss or damage to the goods occurring after the
delivery has been made to the carrier is transferred from the seller to the
buyer. This term requires the seller to clear the goods for export and can
be used across all modes of transport.

CIP The seller has the same obligations as under CPT but has the
(Carriage & responsibility of obtaining insurance against the buyer's risk of loss or
Insurance Paid to) damage of goods during the carriage. The seller is required to clear the
goods for export however is only required to obtain insurance on
minimum coverage. This term requires the seller to clear the goods for
export and can be used across all modes of transport.

DAT New Term May be used for all transport modes


(Delivered Seller delivers when the goods, once unloaded from the arriving means
At Terminal) of transport, are placed at the disposal of the buyer at a named terminal
at the named port or place of destination. "Terminal" includes quay,
warehouse, container yard or road, rail or air terminal. Both parties

65

should agree the terminal and if possible a point within the terminal at
which point the risks will transfer from the seller to the buyer of the
goods. If it is intended that the seller is to bear all the costs and
responsibilities from the terminal to another point, DAP or DDP may
apply.

Responsibilities

Seller is responsible for the costs and risks to bring the goods to the
point specified in the contract
Seller should ensure that their forwarding contract mirrors the
contract of sale
Seller is responsible for the export clearance procedures
Importer is responsible to clear the goods for import, arrange import
customs formalities, and pay import duty
If the parties intend the seller to bear the risks and costs of taking the
goods from the terminal to another place then the DAP term may
apply.

DAP New Term - May be used for all transport modes


(Delivered Seller delivers the goods when they are placed at the disposal of the
At Place) buyer on the arriving means of transport ready for unloading at the
named place of destination. Parties are advised to specify as clearly as
possible the point within the agreed place of destination, because risks
transfer at this point from seller to buyer. If the seller is responsible for
clearing the goods, paying duties etc., consideration should be given to
using the DDP term.

Responsibilities

Seller bears the responsibility and risks to deliver the goods to the
named place
Seller is advised to obtain contracts of carriage that match the
contract of sale

66

Seller is required to clear the goods for export
If the seller incurs unloading costs at place of destination, unless
previously agreed they are not entitled to recover any such costs
Importer is responsible for effecting customs clearance, and paying
any customs duties

DDP The seller is responsible for delivering the goods to the named place in
(Delivered the country of importation, including all costs and risks in bringing the
Duty Paid) goods to import destination. This includes duties, taxes and customs
formalities. This term may be used irrespective of the mode of
transport.

FAS The seller must place the goods alongside the ship at the named port.
(Free The seller must clear the goods for export. Suitable only for maritime
Alongside Ship transport but NOT for multimodal sea transport in containers
- named port (Incoterms 2010, ICC publication 715). This term is typically used for
of shipment) heavy-lift or bulk cargo.

FOB The seller must load by themselves the goods on board the vessel
(Free nominated by the buyer. Cost and risk are divided when the goods are
On Board actually on board of the vessel (this rule is new!). The seller must clear
named port the goods for export. The term is applicable for maritime and inland
of shipment) waterway transport only but NOT for multimodal sea transport in
containers (Incoterms 2010, ICC publication 715). The buyer must
instruct the seller the details of the vessel and the port where the goods
are to be loaded, and there is no reference to, or provision for, the use of
a carrier or forwarder. This term has been greatly misused over the last
three decades ever since Incoterms 1980 explained that FCA should be
used for container shipments.

CFR The seller must pay the costs and freight required in bringing the goods
(Cost and Freight) to the named port of destination. The risk of loss or damage is
transferred from seller to buyer when the goods pass over the ship's rail
in the port of shipment. The seller is required to clear the goods for

67

export. This term should only be used for sea or inland waterway
transport.

CIF The seller has the same obligations, as under CFR however he is also
(Cost, Insurance required to provide insurance against the buyer's risk of loss or damage
& Freight) to the goods during transit. The seller is required to clear the goods for
export. This term should only be used for sea or inland waterway
transport. 67

3.5. PROBLEMS OF APPLICATION OF INCOTERMS

When global companies enter into contracts to buy and sell goods, they are free to
negotiate specific terms. These terms include the price, quantity, and characteristics of the goods.
Every international contract also contains, what is referred to as an Incoterm, or international
commercial term.

Not only uniform interpretation of Incoterms is significant but also being well informed
about Incoterms in order to be able to choose the appropriate Incoterm rules convenient for the
particular transaction between them is rather important for the parties. Therefore, while
incorporating the Incoterms 2010 rules into their contract, parties must carefully read the rules
and the guidelines that are placed before each Incoterm. The mentioned guidelines explain the
fundamentals of each Incoterm rule and try to assist the users to accurately and efficiently choose
the appropriate Incoterm rule for that particular transaction.

It is also very important to specify the place or port as precisely as possible in order for
chosen Incoterm rule to be able to work and to avoid the parties to face unexpected duties to be
borne on them.

As stated above, Incoterm rules do not regulate every aspect of a commercial relationship
and do not give the parties a complete contract of sale. Therefore, parties should deal with
through express terms in the contract of sale or in the law governing that contract as to issues not
covered by Incoterms.

The parties should also be aware that mandatory local law might override any aspect of
the sale contract, including the chosen Incoterms rule.


67
Guide to the Incoterms 2010 Rules, Institute for Supply Management, p.3-4
68

Some companies think that the Incoterms 2010 rules show where title/ownership
passes. A common misunderstanding of the Incoterms is that an Incoterm represents a contract of
sale. This is not the case. An Incoterm does not establish a contract, but is simply a part of a sales
contract. Incoterms 2010 rules only relate to the physical movement of goods and indicate how
costs should be divided and where risk passes. The passing of risk has nothing to do with title.
Incoterms 2010 rules do not regulate ownership of the goods.

Ownership in goods passes normally when the goods are paid by the Buyer, however
there can be exceptions.

When the contract states that the seller must do something to the goods when they are
delivered, for example installation and testing, than the ownership only passes when that action
is completed. When the seller must send the goods to the buyer the delivery to the carrier is not
the delivery to the buyer. The moment of passing ownership can be very important during the
agreement when the buyer goes bankrupt or cannot pay anymore for the goods.

If the seller has no rights to sell the goods he cannot pass ownership to the buyer. Another
example is if the owner allowed the seller to give the impression that he was the true owner and
the buyer was fooled by this, then ownership will pass to the buyer. Also if the seller was acting
for the owner, then again ownership will pass to the buyer.

It is very important to have a "retention of title" clause in the trading terms. This might
help seller to get his goods back that was delivered on credit to the buyer. To keep it simple the
retention of title clause will say that the seller continue to own the goods until he is paid and he
is entitled to recover his goods once the payment is overdue. The seller must check that the
trading terms are written in the contracts, offers and invoices.68

Other problem of INCOTERMS application is the wrong use of them. Here are some
examples of wrong use:

exporters think it is easier to sell Ex Works. The goods are handed over to the buyer's
carrier at the seller's premises but then the seller is unable to get evidence of export
leading to problems with the tax authorities as, without this evidence, it is viewed as a
domestic delivery. For the buyer Ex Works delivery can be very complicated because he
is required to complete export procedures. In many countries it will be necessary for the
exporter to communicate with the authorities in a number of different ways. Also Ex


68
Nelson C.A. Import/Export. How to take your business across borders, McGraw Hill, NY, 2009, p. 120
69

works is not suitable for containers because there is a conflict with Incoterms and
standard trucking rules.

An example of how an ex works shipments turns into a nightmare is not that hard to find.
Here is the story of a simple airfreight shipment that went into a disaster. The seller
received a letter of credit that looks very simple, only an invoice and the airway bill are
the required documents. The goods were picked up by the forwarder, that was appointed
by the buyer. The seller received a receipt from the forwarder. The seller chased the
forwarder for days to give a copy of the airway bill without any success. Things got
worse the latest date of shipment was passed, the letter of credit expires and whereabouts
of the goods is unknown. Shippers end up with no goods and no money. This lesson
proofs that EXW isn't suitable for international shipments.

Trucking companies are not equipped to load the container and need the shipper to take
care for loading, lashing and securing the goods into the container. According to the
EXW Incoterms 2010 rule the buyer must take care for loading the goods. EXW can
better be used for non-containerized cargo and domestic sales. In fact when you think
about it EXW is not designed for international shipments regardless the transport
modality you choose. When the buyer only wants the goods ex works the proper advice is
to ask the buyer to accept a courier receipt or Forwarders Cargo Receipt (FCR) as proof
that the cargo is picked up from the warehouse.69

The buyer must take care for insurance when goods are delivered CFR Incoterms 2010.
These rules tell nothing about the type of coverage it tells the buyer just to take care of
adequate cargo insurance. What happens when the buyer takes insurance with an own
risks or a minimal coverage? When ends the liability for the seller? Is it when the goods
are on board or when the goods are in the port? What if the container drops during
handling or loading into the vessel? Claims will be complex and compensation for the
seller may be nothing or a little. Sellers are advised to consider contingency cargo
insurance; this insurance protects the sellers interest.

CPT, Carriage paid to (named place of destination) according to Incoterms 2010 rules.
The Seller takes out the insurance for the first leg of the journey up to the first Carrier.


69
Carr I., Stone P., International Trade Law, Routledge-Cavendish, NY, 2010, p. 33-38.

70

When the Buyer risks take charge and must take the insurance cover for the transport to
the agreed destination.

Cost and freight, these traditional sea and waterways Incoterms rule must be used for
bulk or conventional shipments only. When cargo passes the ships rail in containers it's
impossible to see the condition of the goods.70

Using DAP (Delivered at place) without naming an exact place or port can end into a
horror story. For example a seller uses the trade term DAP Memphis USA but forgot to
mention the state. If not limited to the place/port of arrival then the seller could find
themselves expected to arrange for the goods to be delivered all the way to the buyer's
premises - with the extra cost and risk implications. Parties must be specific and write the
complete delivery address in the sales contract.

This rule may be used for every selected mode of transport and multi modal transport.
Seller pays for carriage to the named place, except for costs related to import clearance;
all risks to bring the goods to the agreed place for unloading are for account of the seller.

Incoterms 2010 show that buyer must pay additional costs if the buyer fails to clear
customs in time. The circumstances where that clearance is delayed are not mentioned.
This delay in the customs clearance end in demurrage costs that has to be paid before the
carrier will deliver the cargo. When buyer is not willing to pay the demurrage costs the
seller has to pay the bill to fulfill his contract. The cost of discharging the goods,
including, all risks after the time of delivery are for the buyer's account. Buyers and
Sellers are advised to specify the agreed place of destination as clearly as possible.

The buyer expects the delivery of the goods in the same manner, as the goods would
come from a local supplier. The buyer can and may refuse customs clearance in his name
and any liability associated with it. Registration of the sellers company in the same
country as the buyer or the use of a customs representative in that same country is
necessary for the seller to fulfill the DDP delivery. The seller must handle and pay the
local taxes and VAT and it is recommended that before seller sends DDP shipments to
verify the local customs/VAT requirements.


70
Sherlock J., Reuvid J., The handbook of international trade. A guide to the principles and practice of export,
GMB Publishing Ltd, London, 2004, p. 199
71

Sellers quote DDP (Delivered Duty Paid) but forget that they also have to pay for the
taxes. If the parties wish to exclude such as value added tax (VAT)), this should be made
clear by adding words to this effect: "Delivered duty paid, VAT unpaid ... (named place
of destination)".

Lack of care when using DDP can lead to extra costs, risks, and delays when tax
registrations are not in place and disappointed customers. When buyers accept DDP
terms they are advised to check if their foreign supplier is registered as an importer or has
sorted out tax issues. If the seller isn't registered it's impossible to make a DDP delivery.

Some of the delivery terms in the USA have the same three-letter abbreviation as in the
Incoterms Standards. These delivery terms are defined within the United States federal
and are inconsistent with the Incoterms Standards. These terms are published as Uniform
Commercial Code (UCC). Due to potential confusion with domestic North American
usage of FOB, it is recommended that the use of Incoterms be explicitly specified, along
with the edition of the standard. For example, "FOB New York (Incoterms 2010)".

Virtually all goods were transported to the dock and individually loaded into the vessel,
usually by cranes. This is why Incoterms described seller's delivery responsibilities under
the FOB term as ending when the goods "passed over the ship's rail".71

FOB normal practice is that until the goods are loaded on board the seller is responsible
over loss or damage even when the containers on the carrier's terminal. The Incoterms
2010 has somewhat modified this description into "on board the vessel".72

Sellers quote FOB for their goods calculating that their goods will be shipped on board in
a conventional way. (1) When the buyers chose to ship the goods with a container line the
seller must pay for stuffing, lashing and securing in or on the container(s). After the cargo
is loaded he still has to pay for loading the container on board. The loading on board is
mostly the normal terminal handling charges. (2) When the cargo is too heavy to lift with
the container cranes the carrier must use a floating crane to get the cargo on board which
have to be paid by sellers. In both cases the seller gets a lot of extra costs from the carrier
before he gets his bill of lading. This easily could have been avoided by choosing the


71
Sherlock J., Reuvid J., The handbook of international trade. A guide to the principles and practice of export,
GMB Publishing Ltd, London, 2004, p. 198
72
Carr I., Stone P., International Trade Law, Routledge-Cavendish, NY, 2010, p. 46.

72

appropriate trade term for example FCA (free carrier) instead FOB (free on
board).Choosing the proper Incoterm parties can better manage their costs, risks and
responsibilities and will avoid disputes with the trading.73

Sellers and Buyer are free to use the trade terms of the old Incoterms rules. But they
must refer specifically to older versions of Incoterms by mentioning its full name. For
example C&F New York USA Incoterms 1980. When they are not referring to an old
version and their Incoterms rule is not retired than the new Incoterms 2010 rules
automatically presume that they are referring to the latest set of Incoterms. Retired
Incoterms are: FOR (Free on rail), FOT (Free on truck), C&F (Cost and freight), DES
(Ex ship), DEQ (Ex quay), DAF (Delivered at frontier), DDU (Delivered duty unpaid).

The only two Incoterms rules that indicate the goods must be insured are CIF and CIP.
Insurance is taken out by the seller in the buyer's name and the insurance must be for
minimum 110% of the shipment value. For all the other incoterms rules it's unclear if
the seller or buyer is arranging insurance. This can lead to inadequate or no insurance and
must be clearly written in the contract.74

The insurance that seller pay for, doesn't protect his own risks. Risks are transferred to
the buyer once the goods are loaded on the vessel. The insurance protects only the buyer's
risk, the sellers interest is not covered.

If seller is taking care for the insurance he is free to choose what the coverage of the
insurance will be. This is not what a buyer wants! The buyer must always mention the
required insurance conditions in his contact.

These conditions are the Institute Cargo Clauses:

Institute Cargo Clauses (A) the widest of covers available, covering All
Risks;
Institute Cargo Clauses (B) is not an All Risks policy;
Institute Cargo Clauses (C) covers the same risks as the (B), except
damages or loss caused by earthquake, volcanic eruption or lightning,


73
Carr I., Stone P., International Trade Law, Routledge-Cavendish, NY, 2010, p. 36-37.

74
Carr I., Stone P., International Trade Law, Routledge-Cavendish, NY, 2010, p. 51.
73

entry of Sea, and Total Loss of packages lost overboard during (un)loading
are not covered.
In the Incoterms 2010 rules the seller is obliged to pack the goods at his own expenses
even if the goods are delivered ex works. An exception on packing is when goods are
shipped normally unpacked such as bulk goods. When damage is occurred due to
insufficient packing then the seller is kept responsible for the damage and redelivery of
the goods. The parties should always confirm in the contract for which transport modality
the goods are packed.75


75
http://www.trade-terms.com
74

CHAPTER IV.
FOB VS. CIF DELIVERY TERM: CASE STUDY OF IMPORTERS IN SEAFOOD
TRADE.
Nowadays many markets
are subject to globalization. The
fishing industry is no exception to
this phenomenon. The fishing
industry has been developed stably
in terms of exports and imports
flow. The development of business
relationships between seafood
importers and exporters, and the
need to facilitate and regulate the
trade issues, prompted the seafood
industry to adopt the same legal
instruments as used by other international trade industries.
In the seafood trade with other countries, exporters use Incoterms 2010 as a part of the
sales contracts. But different business environments characterize the import-export relationships
with different countries, and thus different Incoterms 2010 are used.
When seafood is transported, then location of the countries, type of seafood, volumes,
relationship between the partners, and specific regulations within the country-importer can all be
important for the choice of Incoterms 2010. Trust and satisfaction between exporters and
importers may influence the decision-making process and distribution of risks and costs. Due to
this fact, it is possible to suppose that the relationship quality may be associated with the choice
of terms of delivery.
In this study, based on reports of international organizations connected to seafood trade
and a particular case of a Romanian importer, the following questions will be addressed, the
questions that have not been addressed specifically before in supply chain literature, namely:
1. Which delivery terms from Incoterms 2010 are primarily used with regard to seafood
deliveries?
2. What are the main factors that determine the choice of specific delivery terms?
3. Does the relationship quality in terms of trust, satisfaction, commitment and conflict level,
influence the choice of delivery terms?
4. Who is liable for the Insurance obligations, Costs and Risks according to scenario?

75

The study concerns only the investigation of possible factors in respect to the choice of
Incoterms 2010 (FOB and CIF) from the point of view of importers. The import-export
relationships within the seafood sector from Vietnam to Romania. The present study is limited to
the case study of 20 deliveries. The quality of the relationship is limited to measuring the
importers satisfaction with, trust in, commitment to the relationship, and the level of conflict in
the relationship. The influence of the relationship quality on the choice of the legal mechanisms
is restricted to the choice of Incoterms 2010.The table below shows the situation in international
fish trade and world fisheries:

Table 6. Fact sheet: International fish trade and world fisheries (source www. globefish.org)
76

The study of twenty cases showed that the most used term of delivery in the seafood trade
with Vietnam was FOB (9), followed by CIF (7). The term CFR (3) was rarely used, and the
term EXW were very rarely used (1). In all cases the company used these terms of delivery
without changes for many years. Company might also use different terms of delivery from
Incoterms 2010 in different situations and with different suppliers. A summary of Incoterms
2010 used by the Romanian importer participated in the study is presented in the figure below:

Terms of delivery used in seafood trade

CIF

FOB

CFR

EXW

0 2 4 6 8 10 12 14 16 18 20
Number of cases
Table 7. Terms of delivery used in seafood trade
Among the factors that influence the choice of Incoterms 2010, first of all, the respondent
named the type of fish. The collected information on this factor shows that company tend to use
FOB for mackerel and capelin, when CFR and CIF for salmon and other fish. The respondent
found it difficult to develop on why they use these Incoterms 2010 for the named specific fish
species.
Another factor named by respondent as important for the choice of terms of delivery, is
the volumes of deliveries. It is logical to suppose that bigger volumes increase the value of the
delivery. The respondent underlined, that FOB was used for bigger volumes (greater values)
and CFR for smaller volumes (lower values) of seafood. In these situations the importers prefer
to take more control over deliveries of greater value and thus they take the responsibility for
transportation. In the cases when smaller volumes of seafood are to be delivered, the value of
the consignment is lower and the importers have less control over transportation which is usually
arranged by the supplier.
The study of these cases shows that the intention to have more control over the delivery
makes the importers to use EXW when the responsibility and risks for the exporter are minimal,
though rarely, and more often FOB in the seafood trade. The supplier condition plays an
important role in the choice of terms of delivery, thus CIF is usually stipulated by the supplier.

77

The Romanian importer mentioned that the relationships with the insurance agencies
played an important role. This means if the Romanian importers have good relationship with the
insurance company they may get better insurance conditions than if the insurance would be
fulfilled by the Vietnam exporter. In this case the Romanian importers prefer to use the terms
CFR, FOB or EXW.
To summarize the Romanian importers named the following factors influencing the
choice of Incoterms 2010 in the seafood trade with Vietnam:

Calcula7on of customs Rela7ons with the


clearance fees insurer

Common prac7ce Legisla7on obstacles

Control over Choice of


terms Loca7on of seafood
delivery
of delivery
(Incoterms
2010) Rela7ons with the
Type of sh carrier

Condi7on of the Desirable speed of


deliveries
supplier

Demand for
Volume/value insurance

Figure 9. Main factor influencing the choice of Incoterms in seafood trade


Finding out the proper Incoterm 2010 for seafood delivery, we have to characterize the
two more used terms according to the research (FOB and CIF) and point out to what
consequences can lead a mistaken applying of Incoterms (on the example of a Romanian
importer case).
Scenario. A Romanian importer purchased product from their Vietnamese manufacturer
for shipment (Ho Shi Minh City) to a designated Romanian Port (Constanta) as indicated on their
Purchase Order. Merchandise was shipped on a refrigerated container, carrying temperature set
at minus eighteen degrees of Celsius. In preparation for their international transaction, they have
created several documents to guide their team including: Responsibilities under Incoterms 2010
(FOB Port Constanta); International Purchase Order; Sales Order; Sales Policy; Order Policy.
After a while, the shipper declared general average.

78

79

When it comes to the division of responsibilities connected to the notion of delivery, two
definite features can be identified in regard to FOB sales, irrespective of the type or variant being
used:
(a) The seller undertakes to place the goods on board a ship at the agreed port of shipment at his
own expense.
(b) Delivery takes place and the risk of loss of or damage to the goods is transferred to the buyer
once the goods pass the ships rail and are on board.
Although it is generally stated that costs and risks pass on shipment, the precise moment
of shipment is sometimes unclear. Moreover, its meaning has not been the subject of much
judicial clarification. Place and time of shipment refers to the place and moment of delivery. The
seller is deemed to have delivered the goods once the goods are delivered to a carrier. What is
relevant here, however, is that the FOB sellers duty to deliver the goods is generally described
as a duty to place the goods on board the vessel. That also tends to be the defining point for costs
and risks to transfer from the seller to the buyer. Once again it is not clear what placing the
goods on board precisely means. Traditionally it has been accepted that delivery is completed
once the goods pass the ship's rail at the named port of shipment. The reference to place on
board is therefore equated to pass the ships rail. That implies that, in the absence of
contractual provisions to the contrary, the seller does not have any further responsibilities
beyond the point that the goods cross the ships rail,76 but bears full liability for the costs and
safety of the goods up to that point. The buyer, therefore, has to pay for all subsequent charges,
such as the storage of the goods in or on board the ship, and has to carry all risks after the goods
have crossed the rail.
There are two views as to when exactly the risk passes. One holds that the risk literally
passes as the goods cross the ships rail. Therefore, if the goods were to suffer damage after they
have left the ground, but before they cross the ship's rail, the loss would normally be for account
of the seller. But if the goods have crossed the rail and the damage occurred before they are
safely on board, the damage would be for the buyer. The other view is that the risk passes only
when the goods are safely loaded on board the ship. When goods are placed on board a vessel, it
entails lifting the goods across the ships rail onto the deck. However, the obligation to place
goods on board can entail various additional obligations, such as securing the goods on deck or
in a hold. Because the point of delivery is also the dividing point for costs and risks, the question
arises as to who is responsible for the costs of these additional stages of the loading operation
and who bears the risk for accidents that may occur during these stages of the loading process?


76
Sassoon CIF and FOB Contracts para 463
80

The law does not clearly stipulate at which point of the loading process costs and risk pass from
the seller to the buyer. When it comes to the transfer of risk, the practicability of the ships rail as
the dividing point for costs and risks is questionable, especially in light of modern methods of
containerization77 and trade usages at different ports. Usages or courses of dealing between
parties can influence the division of loading and stevedoring costs. Moreover, the parties can
provide for these responsibilities either by agreement or by referring to a variant of the standard
term, such as FOB stowed or FOB stowed and trimmed.78
As regards the passing of property, the FOB term does not necessarily indicate when
property is to pass. Risk passes on shipment, but that does not necessarily coincide with the
passing of property. When property passes depends on the intention of the parties. The practice
that payment is to be made against delivery of the shipping documents has become so
established, that the seller must first be paid before property passes. In these situations, the seller
normally names himself as the consignee in the bill of lading, meaning that the goods will be
deliverable under the bill of lading to him or to his order.
The CIF (cost insurance freight) term also evolved in line with commercial
developments. This term is more widely and frequently in use than any other contract used for
the purposes of seaborne commerce. Under the CIF contract in its usual form, the seller is
obliged to ship at the port of shipment goods of the description contained in the contract; procure
a contract of affreightment; insure the contract goods; and invoice them to the purchaser. As
soon as reasonably possible after shipment, the seller must tender to the buyer or his agent, in
proper form, the so-called shipping documents. The buyers obligation to pay or to assume
liability to pay the invoice price arises upon such tender. The buyer is covered by the contract of
insurance against the risk that at the time of tender or subsequently the goods have become lost
or destroyed. It is also possible to purchase goods, which are already in transit, by purchasing the
shipping documents and tendering them together with the insurance and invoice to the buyer.79
The essential characteristic of a CIF contract of sale is that, while the seller undertakes to be
responsible for transportation and insurance cover to a named destination, the buyer agrees to
pay, not against delivery of the goods at that destination, but against tender of a set of documents

77
In the case of containerized goods, the seller is no longer in control of the goods when they cross the ships rail.
Containerized goods are stowed in shipping or container terminals for long periods of time prior to departure of the
ship. That renders it not only impracticable, but also unrealistic, to hold the seller responsible for the risk of the
goods in circumstances where he has already relinquished his control over them to a third party. In these cases, the
FCA term will be more appropriate.
78
It is not clear whether these additional obligations merely affect the sellers delivery obligation or whether it also
means that he is to pay the costs for the stowage and trim mage. The Institute of Export does not allow for any
variation in the interpretation of FOB terms. In terms of their rules, variations are regarded as mere concessions.
Sassoon CIF and FOB Contracts para 473.
79
Ademuni-Odeke The Law of International Trade (1999) 81-83. The documents represent the goods and enable the
buyer and seller to deal with the goods afloat. This is one of the main economic functions of the CIF contract.
81

comprising the invoice, bill of lading and insurance policy.80 Because of this the CIF sale is
sometimes considered to be not a sale of goods but one of documents relating to goods.
However, this does not mean that there is no duty to deliver goods. If the goods are not delivered
to the buyer, the seller will be held liable for breach of contract. Unless the contract so provides
it is also not sufficient merely to prepare the goods for shipment, for instance by delivering them
to the carrier ready for loading. The goods should in fact be loaded on board the ship. Although
the emphasis in CIF sales is on the tender of proper documentation, such transactions remain
sales of goods and the duty of the seller is either to ship contract goods, or if he is selling goods,
which he has himself bought afloat, the undertaking that such goods have actually been shipped
is fundamental. The presentation of an apparently satisfactory bill of lading is insufficient if there
is no actual shipment of goods behind it.
However, not every contract, which contains a CIF term, is a CIF contract. Sassoon81
remarks, there is considerable laxity in the use of forms of contract for the sale of goods
overseas, and the interpretation of any particular contract of sale expressed to be c.i.f. may
present real difficulty. Sometimes terms are introduced into such contracts that contradict the
understanding of CIF terms and prevent them from being CIF contracts.82 Printed contract forms
frequently contain terms that are inapplicable or unsuitable to a CIF contract. In some cases the
meaning of CIF is vitiated, for example by determining that risk should remain on the seller until
actual delivery to the buyer. This is contrary to the meaning of a CIF contract and is
unacceptable.
Where there is no intention to vitiate the standard meaning, the normal consequences of
the CIF term will determine the obligations of the seller and buyer. As is the case with the FOB
term, it is also the duty of the seller to ship the goods.
But what does that mean in the context of the CIF term? In European law shipment
means the loading of the goods onto a ship.83 Evidence of a custom in the American timber trade
that shipment could also mean loading into railway cars in the interior of the country or
loading on cars at the saw mills from which the timber came, was held to be inconsistent with the
nature of the CIF term under European law. Although this might suggest that the seller must in
every case load goods aboard a ship, this is not completely true as a seller can normally perform
a CIF contract in one of two ways; either by shipping the goods himself or by purchasing them


80
Tiplady Introduction to the Law of International Trade 39; Ademuni-Odeke International Trade 72-73.
81
CIF and FOB Contracts para 20.
82
Griffin Law of International Trade 68-69.
83
Sassoon CIF and FOB Contracts para 52
82

afloat. The seller can therefore also discharge this obligation by acquiring goods that have
already been shipped by someone else.84
Delivery of the goods on board the vessel, followed by the delivery of the correct
documents, is considered to be complete performance by the seller of his duties under a CIF
contract. The risk of loss will pass from the seller to the buyer on shipment of the goods or as
from shipment. The buyer, therefore, bears all risk of the goods from the time when they have
passed the ships rail at the port of shipment. If the goods are lost at sea, the buyer is still bound
to pay the price but he will have the benefit of the insurance policy. However, when it comes to
the transfer of risk, the practicability of the ships rail as the dividing point can once again be
questioned, especially in light of modern methods of containerization and trade usages at
different ports.
Although the ships rail is traditionally considered to be the point of delivery, commercial
practice is also not consistent in this regard.
As we seen above, in FOB contracts, the seller is normally under no duty to insure for the
benefit of the buyer unless the contract expressly requires him to do so). The seller is, however,
under a duty to give such notice to the buyer as may enable him to arrange insurance of goods
during transit. He should also provide all the necessary information to enable the buyer to obtain
the necessary cover. If the seller fails to give this notice (and the necessary information), the
goods remain at the sellers risk. As a general rule, the seller has an insurable interest in the
goods until the goods pass the ships rail upon loading, whereupon the buyer acquires an
insurable interest. In some cases, however, the seller retains an insurable interest in the goods,
even though they have been loaded on to a vessel for example, if the seller has a right to stop
the goods in transit.

As per the law of General Average all parties in a sea venture proportionally share any
losses resulting from a voluntary sacrifice of part of the ship or cargo to save the whole in an
emergency. This sharing is known as contribution.

A contribution by all parties in a sea voyage to make good loss sustained by one / several
of them on account of sacrifices voluntarily made of part of the ship and/or cargo to save the
venture from an impending peril, or for extraordinary expenses necessarily incurred by one or
more of the interests in the enterprise. Some degree of success must occur, as if nothing could be
saved, there would be nothing to contribute to General Average.


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Tiplady Introduction to the Law of International Trade (1989) 48
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Ship-owners have maritime lien on the cargo for its pro-rata share of the total amount to
be made good in General Average. A lien is the right of the creditor to retain the properties of his
debtor until the debt is paid.

When general Average has been declared, before cargo is released by the carrier/ ship-
owner to the cargo owner, a General Average Bond will have to be signed and a cash deposit
based on a percentage of the invoice value estimated to cover General Average expenditure will
have to be paid. However in most cases the Carrier / Ship-owner will accept General Average
Guarantee signed by the Insurance company who has insured the cargo in lieu of the cash
deposit.

Therefore, as soon as the cargo owners receive General Average notice, they should
contact the Insurance Company who have insured their goods and submit the following
documents.

Copy of the completed General Average Bond


Format for General Average Guarantee form provided by Ship owners or their General
Average Adjusters
Any other correspondence received from the Ship owners or their General Average
Adjusters
Copy of the Insurance Certificate / Policy, Commercial Invoice & Bill of lading

This way the buyer from the scenario will support all the costs including insurance.

Choosing the proper Incoterm, parties can better manage their costs, risks and responsibilities
and will avoid disputes with the trading.

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CONCLUSIONS

In the last decades, for many companies, a strategic necessity results within the scope of
globalization to use broader access to new markets and to take part in international business.
Most pursued goals are market protection, cost minimization, capacity utilization and
maximization of profit. Hence, world trade gains importance, and those goods are traded in
larger numbers and diversities on international markets.

In addition, International Trade language is one of the most important and complex
instruments. Even a small variation in wording can have a major impact on aspects of a business
agreement, as in any business that is complex and sophisticated. From industry to industry word
definitions often vary, especially concerning global trade. Such essential expressions as
"delivery" can have a far different meaning in business than in the rest of the world. For business
terms, to be efficient, expressions must mean the same thing. Often the contracting parties are
not aware of different commercial customs in their respective countries. Misunderstandings,
conflicts as well as litigations and the involved effort of time and costs are resulting from that.
Therefore the ICC published the Incoterms.

INCOTERMS are UNCITRAL recognized as global standards for interpretation of terms


in foreign trade that provides internationally accepted rules specifying standards and definitions
of performance for most common trading terms. INCOTERMS rules specify:

Establishment of seller and buyer


Point in journey where risk transfers from seller to buyer
Obligation of each party (buyer and seller)

In international trade, INCOTERMS identifies physical point in supply chain where


damage or risk of loss shifts from the exporter to importer. In addition, its through
INCOTERMS that location in supply chain is determined where responsibility of transport and
custom related cost shifts from the exporter to importer.

There is no organization better placed than international Chamber of Commerce (ICC)-


An organization, which establishes and maintains INCOTERMS rules to assist traders in correct
application of rules for their application in both global and domestic trade. So, by agreeing on
INCOTERMS rules and incorporating the same into the trade contracts, buyer and seller can
easily achieve a precise understanding of what each party should do and the responsibilities that
lies in event of damage, loss and related mishaps. The recent INCOTERMS rules are set
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standards on trading terms and conditions designed to help traders when goods are sold and
transported. The new terms were developed for INCOTERMS delimitation of rights and
obligations of involved parties in international trade.

The change brought in by INCOTERMS 2010 is the reduction of terms from 13 to 11 in


INCOTERMS 2010/2011, which clearly define obligations of the trading parties, and reduces the
risks of legal implications.

INCOTERMS safeguards the following issues in international trade contract and Foreign
Trade contract:

1. To determine critical point of transfer of risks of seller to buyer, in the process of


goods forwarding (risks of loss, robbery or deterioration of goods) allowing the
person supporting these risks to prepare enough, especially in terms of insurance
taking
2. To specify and subscribe the contract of carriage i.e. the seller or buyer
3. To define the party responsible for packaging, operations handling, on loading
and off loading of the goods or porting and discharge of containers, and
operations of inspection.
4. To distribute logistic and administration expenses between seller and buyer in
various stages of the trading process
5. To fix obligations for achievement of the formalities, payments of rights,
importation and supply of the documents.

Incoterms do not say anything about the transfer of ownership, the breach of contract and
its consequences and exclusions of liability under certain circumstances. In this case, it depends
on the governing law. Therefore they regulate who gets the documents of the goods and who
pays possible customs costs; who is responsible for transport documents and their costs; who
insures checks and packs the goods.

There are several issues one should be aware of when choosing an Incoterm:

a) The regulations of the buyers country

There are regulations in certain countries saying which terms must be used when goods are
brought into the country. The main reason for this is that they want to gain advantage from the
import rather than the export industry with the want for local shipping and insurance markets.
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b) Standard practice:

Some countries do not have regulations saying which terms must be used. When a party offers
less favorable terms (for example FOB rather than DDP) one could miss out on the business. For
example it is standard practice for goods to be sold on a delivered basis.

c) The used transport method:

Some Incoterms are just for maritime and inland waterway.

d) Availability of information:

The seller and the buyer should be able to meet their obligations under the chosen term because
there may be occasions when a party is not able to clear the goods for import or to get an import
license (then the DDP term cannot be used).

e) Customer service:

One should use a competitive term, which is suitable for buyer and seller and not only important
for one party to get maybe an advantage from that. When choosing an Incoterm clause, one has
to be especially aware of matching the content of the clause in detail with the content of contract
incidentally. Furthermore the choice of certain Incoterms (although without validity for third
party) has repercussions on the matching freight arrangements, letter of credit arrangements and
insurance arrangements.

Incoterms are only relevant for a sales contract, not for contracts of carriage, insurance
contracts and financing treaties, which are important for carrying out an international
commercial transaction for importers and exporters. Nevertheless the agreement between parties
to use a certain Incoterms clause has also an effect on other contracts, for example a seller who
has agreed on a CFR or CIF contract, is forced to choose no other transport than sea
transportation as he has to present a bill of lading or another maritime bill of freight to the seller
(as shown in the case study). Therefore other transportation methods are completely impossible.
Furthermore in accordance with the documentary letter of credit, the required document depends
on the planned mode of transportation.

The Lack of INCOTERMS rules in international trade contract can lead to:

1. Inadequate sales budget


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2. Undesired offsetting of lead times
3. Unfavorable inventory levels
4. Poor customer service

Ultimately, INCOTERMS should be used in creation of competitive advantage through


an improved flow of supply chain, and hence satisfying both parties involved in the trading
contract.

88

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Internet references:
The World Trade Organization (WTO) - www.wto.org
World Customs Organization (WCO) - www.wcoomd.org
International Chamber of Commerce (ICC) - www. iccwbo.org
INCOTERMS - www.trade-terms.com
Intergovernmental Organization for International Carriage by Rail (OTIF) - www.otif.org
The International Air Transport Association (IATA) www.iata.org
International Road Transport Union (IRU) www.iru.org

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