Faculty of Foreign Languages

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ENGLISH FOR
FOREIGN TRADE

Ho Chi Minh City-2016

 Nguyễn Thành Lân
Lê Văn Tuyên

ENGLISH FOR
FOREIGN TRADE

Ho Chi Minh City-2016

Preface
Engaging in international trade is a never-ending challenge for a host of reasons: political
turmoil in one or another country, protectionist regulations, market uncertainties,
exchange rate fluctuations, trade organization edicts, compliance requirements, payment
problems, shipping delays, cultural differences, and an awful lot of changing procedures
and documentation to contend with in every country. In such challenging economic
environment, it is essential for Vietnamese enterprises to well identify and comprehend
all international regulations, rules, customs and practices if they want to conduct their
business transactions in international market smoothly and profitably.

With a view to helping learners who will use English in foreign trade to be familiar with
such provisions, regulations and rules, this book is written to serve as a valuable guide to
international trade operations, particularly in the fields of forwarding, international
payment and sale contract dealings.

As in most endeavors, the basic ingredients of enthusiasm, interest, and hard work are
important to achieving success in foreign trade transaction, but they alone are not
sufficient. The critical additional factors needed are technical knowledge and training,
which will lead to success for those who carefully apply what they learn. This all
encompassing book makes that learning process orderly and understandable.

We hope that after their study of this book, Vietnamese learners will have a thorough
grasp of the knowledge in foreign trade dealings and can achieve all the rewards it can
offer them and their business.
Contents
Unit 1 OVERVIEW OF FOREIGN TRADE .................................................. 1
1. The need for international trade ............................................................................. 1

2. The aim of international trade ................................................................................ 2

3. Characteristics of international trade ..................................................................... 2

4. Obstacles in international trade .............................................................................. 3

5. The nature of foreign trade ..................................................................................... 5

5.1 Participants in foreign trade ............................................................................ 5

5.2 Features of Vietnamese enterprises in foreign trade ........................................ 5

6. Stages of transactions in foreign trade ................................................................... 6

6.1. Enquiry ............................................................................................................ 6

6.2. Offer ................................................................................................................ 6

6.3. Order................................................................................................................ 6

6.4. Counter-offer ................................................................................................... 7

6.5. Acceptance ...................................................................................................... 7

6.6. Confirmation ................................................................................................... 8

Unit 2 PATTERNS OF BUSINESS TRANSACTION IN FOREIGN

TRADE ............................................................................................................... 10
1. Transactions through intermediary....................................................................... 10

1.1. Agency .......................................................................................................... 11

1.2. Brokerage ...................................................................................................... 11

2. Direct business ..................................................................................................... 12

3. Re-exportation ...................................................................................................... 13

4. Counter-trade ........................................................................................................ 13

5. International processing ....................................................................................... 14

Unit 3 INTRODUCTION OF INCOTERMS 2010...................................... 15

1. Purpose of Incoterms ............................................................................................ 15
 2. History of Incoterms ............................................................................................. 15

3. The scope of Incoterms ........................................................................................ 18

4. Some concepts related to Incoterms ..................................................................... 20

5. Important differences between shipment and arrival contracts ............................ 22

Unit 4 SELLER’S AND BUYER’S OBLIGATIONS IN INCOTERMS .... 25

1. Summary of seller‘s and buyer‘s responsibilities in Incoterms 2010 .................. 25

2. Classification of Incoterms 2010 .......................................................................... 26

3. The uses of each group ......................................................................................... 27

Unit 5 THE USAGE OF 11 RULES UNDER INCOTERMS 2010............ 37

1. Rules for any mode or modes of transport ........................................................... 37

1.1. EXW .............................................................................................................. 37

1.2. Free carrier (FCA) ......................................................................................... 37

1.3. Carriage Paid To (CPT) ................................................................................ 38

1.4. Carriage and Insurance Paid To (CIP) .......................................................... 39

1.5 Delivered at Terminal (DAT) ......................................................................... 39

1.6 Delivered at Place (DAP) ............................................................................... 40

1.7 Delivered Duty Paid (DDP) ........................................................................... 41

2. Rules for marine-restricted transport .................................................................... 41

2.1. Free Alongside Ship (FAS) ........................................................................... 41

2.2 Free On Board (FOB) ..................................................................................... 42

2.3. Cost and Freight (CFR) ................................................................................. 42

2.4. Cost Insurance and Freight (CIF) .................................................................. 43

3. Some notes when applying Incoterms 2010 ......................................................... 43

Unit 6 DOCUMENTS IN FOREIGN TRADE ............................................. 46

1. Documents related to goods ................................................................................. 46

1.1. Invoices ......................................................................................................... 46

1.2. Packing List ................................................................................................... 49

 1.3. Certificate of Origin ...................................................................................... 49

1.4. Certificates of Inspection .............................................................................. 51

2. Documents related to shipment ............................................................................ 53

2.1. Mate‘s Receipt............................................................................................... 53

2.2. Certificate of Measurement ........................................................................... 54

2.3. Bill of Lading ................................................................................................ 54

2.4. Airway Bill .................................................................................................... 57

3. Documents related to loading and unloading ....................................................... 57

3.1 Cargo manifest ............................................................................................... 57

3.2 Stowage plan/ cargo plan ............................................................................... 58

3.3 Statement of facts ........................................................................................... 58

3.4 Report on Receipt of Cargo (ROROC) .......................................................... 59

3.5 Cargo outturn report (COR) ........................................................................... 59

3.6 Certificate of short-landed cargo (CSC) ........................................................ 59

3.7. Dock sheet/ Tally sheet ................................................................................. 60

Unit 7 INSTRUMENTS OF INTERNATIONAL PAYMENT ................... 61

1. Payment currency ................................................................................................. 61

2. Time of payment .................................................................................................. 61

2.1 Advanced payment ......................................................................................... 61

2.2 Sight payment ................................................................................................. 62

2.3 Deferred payment ........................................................................................... 62

2.4 Combination of different time of payment..................................................... 62

3. Payment instruments ............................................................................................ 62

3.1 Bill of exchange.................................................................................................. 62

3.2 Cheque ................................................................................................................ 65

Unit 8 METHODS OF INTERNATIONAL PAYMENT .......................... 69

1. Cash in Advance (CIA) ........................................................................................ 69
 1.1 Application ..................................................................................................... 70

1.2. Advantages and disadvantages ...................................................................... 70

2. Open Account ....................................................................................................... 71

1.1 Application ..................................................................................................... 71

1.2 Advantages and disadvantages. ...................................................................... 71

3. Remittance ............................................................................................................ 72

3.1 Forms of remittance ....................................................................................... 72

3.2 Participating parties ........................................................................................ 72

3.3 Process of payment by deferred remittance ................................................... 73

3.4 Application of Remittance ............................................................................. 73

3.5 Advantages and disadvantages of Remittance: .............................................. 74

4. Collection ............................................................................................................. 74

4.1. Clean Collection ............................................................................................ 74

4.2. Documentary Collection ............................................................................... 76

Unit 9 DOCUMENTARY CREDIT .............................................................. 79

1. Introduction of Documentary Credit .................................................................... 79

2. Participating parties .............................................................................................. 79

3. Process of payment by L/C .................................................................................. 79

Unit 10 TYPES OF LETTER OF CREDIT AND ASSOCIATED

DOCUMENTS ................................................................................................... 82

1. Types of Letters of Credit .................................................................................... 82

1.1 According to the nature of the L/C ................................................................ 82

1.2 According to the time of payment .................................................................. 82

1.3 Other types of L/C ......................................................................................... 82

2. Letter of Credit and its associated documentation ............................................... 83

2.1 Commercial Invoice ....................................................................................... 84

2.2 Transport Documents ..................................................................................... 84

 2.3 Insurance Documents ..................................................................................... 85

2.4 Customs Documents ....................................................................................... 85

Unit 11 NEGOTIATING THE TERMS OF A LETTER OF CREDIT ...... 87

1. Negotiating the terms of a Letter of Credit .......................................................... 87

2. Segments in a Letter of Credit .............................................................................. 89

3. Common Discrepancies in documents ................................................................. 95

3.1 Problems with the letter of credit ................................................................... 95

3.2 Problems with the bill of lading ..................................................................... 96

3.3 Problems with insurance ................................................................................ 96

3.4 Inconsistencies among the Documents .......................................................... 96

Unit 12 OVERVIEW OF INTERNATIONAL SALE CONTRACTS ....... 98

1. Introduction .......................................................................................................... 98

2. Requisites to the effect of an international sale contract ...................................... 99

2.1. Legal status of contracting parties................................................................. 99

2.2. Object of an international sale contract ......................................................... 99

2.3. The form and essential clauses required in a sale contract ......................... 100

Unit 13 TERMS AND CONDITIONS IN INTERNATIONAL SALE

CONTRACTS.................................................................................................. 102

1. Introduction ........................................................................................................ 102

2. General structure of a contract ........................................................................... 102

2.1 Preamble ....................................................................................................... 102

2.2. Terms and conditions .................................................................................. 103

2.3. Execution ..................................................................................................... 103

3. Major terms and conditions ................................................................................ 104

3.1. Scope of supply ........................................................................................... 104

3.2 Financial terms ............................................................................................. 107

3.3. Terms of delivery ........................................................................................ 109

 3.4. Legal terms .................................................................................................. 111

Unit 14 PERFORMANCE OF INTERNATIONAL SALE CONTRACTS

........................................................................................................................... 115

1. Obtaining import-export licenses ....................................................................... 116

2. Arranging the goods for export .......................................................................... 116

3. Examining the quantity and quality of goods..................................................... 117

4. Contracting for carriage...................................................................................... 119

5. Contracting for insurance ................................................................................... 120

6. Conducting customs formalities ......................................................................... 120

7. Making and taking delivery of import-export goods ......................................... 121

7.1 Making delivery of exported goods ............................................................. 121

7.2 Taking delivery of imported goods .............................................................. 122

8. Making payment for imports and exports .......................................................... 122

8.1 Payment procedures for exported goods ...................................................... 122

8.2 Payment procedures for imported goods...................................................... 122

9. Making and settling complaints ......................................................................... 122

Unit 15 SPECIMEN CONTRACTS FOR REFERENCE ......................... 124

1. ITC model contract used for small firms ........................................................... 124

1.1 Introduction .................................................................................................. 124

1.2. Contents of ITC Model International Commercial Sale of Goods ............. 126

2. ICC model sale contract ..................................................................................... 133

3. ICC General CIF contract................................................................................... 143

4. ICC General FOB contract ................................................................................. 149

References ........................................................................................................ 156

Unit 1 OVERVIEW OF FOREIGN TRADE

Learning objectives
By the end of this unit, you will be able to:
- have an overview of the importance, aims, characteristics of international trade and
its obstacles for importers and exporters
- identify the features of Vietnamese enterprises in foreign trade
- comprehend the general transaction process of foreign trade

1. The need for international trade

In today‘s world, economic life has become more complex and diversified. No country
can live in isolation and claim to be self-sufficient. Even countries with different
ideologies, culture, and political, social and economic structure have trade relations with
each other. Thus, trade relations of Vietnam with ASEAN, EU countries, South Korea or
Japan are examples. The aim of international trade is to increase production and to raise
the standard of living of the people. International trade helps citizens of one nation to
consume and enjoy the possession of goods produced in some other nation.
There is a need of international trade due to the following reasons:
(i) Uneven distribution of natural resources
Natural resources of the world are not evenly divided among the nations of the world.
Different countries of the world have different amount of natural resources and they differ
with each other in regard to climate, minerals and other factors.
Some countries can produce more of sugar like Cuba, some can produce more of cotton
like Egypt, while there are some others which can produce more of wheat like Argentina.
But all these countries need sugar, cotton and wheat. So they have to depend upon one
another for the exchange of their surpluses with the goods that are in short supply in their
country and hence the need for international trade is natural.
(ii) Division of labour and specialisation
Due to uneven distribution of natural resources, some countries are more suitably placed
to produce some goods more economically than other countries. But they are
geographically at a disadvantageous position to produce other goods. They specialise in
the production of such goods in which they have some natural advantage in the form of
availability of raw material, labour, technical know-how, climatic conditions, etc. and get
other goods in exchange for these goods from other countries.
(iii) Differences in economic growth rate
There are many differences in the economic growth rate of different countries. Some
countries are developed some are developing, while there are some other countries which

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are under-developed: these under-developed and developing countries have to depend
upon developed ones for financial help, which ultimately encourages international trade.
(iv) Theory of comparative cost
According to the theory of comparative cost, each country should concentrate on the
production of those goods for which it is best suited, taking into account its natural
resources, climate, labour supply, technical know-how and the level of development.
Each country specialises in the production of those goods which it can produce at the
lowest cost as compared to other countries, which leads to international specialisation and
division of labour. This reduces the cost of production all over the world and improves
the standard of living of the people in various countries. Hence the theory of comparative
cost encourages international trade.

2. The aim of international trade

The aim of international trade is to increase production and to raise the standard of living
of the people. International trade helps citizens of one nation to consume and enjoy the
possession of goods produced in some other nation. Trade between two or more countries
is called foreign trade or international trade. This involves the exchange of goods and
services between the citizens of two countries. When citizens of one country exchange
goods and services with the citizens of another country, it is called foreign trade.
In Vietnam, foreign trade is recognized as the most significant determinants of economic
development of a country, all over the world. For providing, regulating and creating
necessary environment for its orderly growth, several Acts have been put in place. The
foreign trade of a country consists of inward and outward movement of goods and
services, which results into outflow and inflow of foreign exchange. The foreign trade of
Vietnam is governed by Vietnamese Commercial Law (2005) and the rules, orders and
by-law documents issued there under. Payments for import and export transactions are
governed by the Act of Instruments for payment 2005. Customs Act, 2014 governs the
physical movement of goods and services through various modes of transportation. To
make Vietnam a quality producer and exporter of goods and services, apart from
projecting such image, an important Act—Quality control & inspection Act, 1992 has
been in vogue. Developmental pace of foreign trade is dependent on the Export-Import
Policy adopted by the country too.

3. Characteristics of international trade

Today‘s international trade is not only highly competitive but also dynamic. Necessary
responsive framework to make exports compete globally, is essential. In order to harness
these gains from trade, the transaction costs, in turn dependent on the framework support,
involved need to be low for trading within the country and for international trade.
International trade is a vital part of development strategy and it can be an effective
instrument of economic growth, employment generation and poverty alleviation. Market
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conditions change, almost daily, requiring quick response and more importantly,
anticipation of the future requirements is the need of the hour. To gear with the changing
requirements, it is essential that the framework has to remain in pace and change in
anticipation, accordingly, and then only international trade can pick up the speed
envisaged.
Characteristics of international trade can be seen as follows:
(i) Separation of buyers and producers:
In inland trade producers and buyers are from the same country but in foreign trade they
belong to different countries.
(ii) Foreign currency:
Foreign trade involves payments in foreign currency. Different foreign currencies are
involved while trading with other countries.
(iii) Restrictions:
Imports and exports involve a number of restrictions but by different countries. Normally,
imports face many import duties and restrictions imposed by importing country.
Similarly, various rules and regulations are to be followed while sending goods outside
the country.
(iv) Need for middlemen:
The rules, regulations and procedures involved in foreign trade are so complicated that
there is a need to take the help of middle men. They render their services for smooth
conduct of trade.
(v) Risk element:
The risk involved in foreign trade is much higher since the goods are taken to long
distances and even cross the oceans.
(vi) Law of comparative cost:
A country will specialise in the production of those goods in which it has cost advantage.
Such goods are exported to other countries. On the other hand, it will import those goods
which have cost disadvantage or it has no specific advantage.
(vii) Governmental control:
In every country, government controls the foreign trade. It gives permission for imports
and exports may influence the decision about the countries with which trade is to take
place.

4. Obstacles in international trade

International trade is more complicated as compared to home trade of a country. There
are many difficulties which are faced by a trader engaged in international trade.
The following are the special obstacles of foreign trade:
(i) Distance:
Usually, international trade involves long distances. Distance between various countries is
a great difficulty in an International trade. Due to long distances, it becomes difficult to
3
establish close relationship between the buyers and the sellers.
(ii) Diversity of languages:
Different languages are spoken and written in different countries of the world. The
difference of language creates another problem in the international trade. It becomes
difficult to understand the language of traders in other countries. All correspondence has
to be done in foreign language.
(iii) Transport and communications:
Long distances in international trade create difficulties of proper and quick transport and
communication. Both of these involve considerable delay as well as cost. The high cost of
transport is a great hindrance in international-trade.
(iv) Risk and uncertainty:
International trade is subject to greater risk and uncertainties as compared to home trade.
As the goods have to be transported to long distances, they are exposed to many risks.
Goods in transit overseas are susceptible to the perils of the sea. These risks may be
covered through marine insurance, but this involves extra cost in foreign trade
transactions.
(v) Lack of information about international traders:
In international trade, since there is no direct and close relationship between the buyers
and the sellers, the seller has to take special steps to verify the creditworthiness of the
buyer. It is difficult to obtain information regarding creditworthiness, business standing
and financial position of persons living in foreign countries.
(vi) Import and export restrictions:
Every country has its own laws, customs and import and export regulations. Exporters
and importers have to fulfill all the custom formalities as well as follow rules controlling
exports and imports.
(vii) Difficulties in payments:
International trade involves the exchange of currencies because the currency of one
country is not the legal tender in the other country. Exchange rates are determined for
different currencies for this purpose. But exchange rates go on fluctuating.
Moreover there is a wide gap between the time when the goods are despatched and the
time when the goods are received and paid for. Thus, there is a greater risk of bad debts
also in foreign trade. Remittances of money for payments in foreign trade are time-
consuming and expensive. Hence, payments in foreign trade create complications.
(viii) Various documents to be used:
Foreign trade involves the preparation of a large number of documents both by the
importer as well as the exporter. These documents may be required either under law or
under customs of trade of the two countries.
(ix) Study of foreign markets:
Every foreign market has its own characteristics. It has own requirements, customs,
traditions, weights and measures, marketing methods, etc. An extensive study of foreign
4
markets is required to be successful in foreign trade, which may not be possessed by an
ordinary trader.

5. The nature of foreign trade

Foreign trade could concern exchange of goods for money under contracts of sale (on an
ad hoc-basic or repeatedly in a long-lasting contractual relationship), agreements for the
marketing and distribution of goods, licensing of patent rights or exploitation of technical
know-how, building contracts, erection of industrial plants as well as a number of
ancillary contracts for carriage of goods, financing, guarantees, security and insurance. It
is not possible in the present context to deal with all these various types of transactions.
However, it is particularly important in international trade to observe the interrelation
between four different types of transactions all of which frequently are needed for the
implementation of a contract for the international sale of goods, namely, in addition to the
contract of sale as such, the contracts of carriage, insurance and financing. In most
jurisdictions, the contract of sale stands in the focus of attention as one of the most
important contract types and, therefore, the main problems connected with such contracts
shall be considered. Quite frequently, the normative solutions applicable to contracts of
sale may also be appropriate for other types of transactions.
Foreign business is a process in which parties, in the international trade, have to negotiate
with and persuade each other to build up and adjust to trade relations to gain mutual
benefits.

5.1 Participants in foreign trade

- Enterprises: are the most common subjects in the international commercial transactions,
including sole trader, or the cooperation of entrepreneurs. They can be either giants or
small and medium sized enterprises, and have the same target of taking the advantages of
international business to maximize profits. This book only focuses on the transactions of
enterprises.
- Apart from enterprises, the subjects of international commercial transactions include
nations, non-profit organizations, and international organizations such as WTO, ASEAN,
and ITC.

5.2 Features of Vietnamese enterprises in foreign trade

- Most of Vietnamese enterprises are small and medium sized ones, causing the shortage
of both finance and techniques.
- There have been various limitations when entering global market due to their ineffective
strategies.
- Vietnamese enterprises are quite new and strange to the integration because of their
limited experiences in economic market.
- They are also lack of knowledge about global market.
5
6. Stages of transactions in foreign trade
In international commercial transaction, sellers/buyers can conduct one of the following
stages to establish relationship.
6.1. Enquiry
Enquiry is a proposal for stating a transaction, initiated by the buyer. The buyer not only
requests the seller to inform him of prices, but also other transaction terms and conditions.
An enquiry letter is written by a potential customer, on the lookout for a product or with a
desire to avail the service offered by a seller or an organization. An enquiry letter is
neither a contract nor does it entail any contractual obligation between the two. It is
actually a preliminary exercise that may lead to a contract.

6.2. Offer
Offer is a proposal for concluding a contract, initiated by the seller. Offers can be made
either in oral or written forms. In the international trade, enterprises can give free offers
or firm offers, and revocable offers and irrevocable offers. An offer becomes effective
when it reaches the offeree. An offer, even if it is irrevocable, may be withdraw if the
withdrawal reaches the offeree before or at the same time as the offer (CISG, Article 15).
A free offer is a proposal sent to many unspecific persons, but it does not bind the offeror.
A proposal other than one addressed to one or more specific persons is to be considered
merely as an invitation to make offers, unless the contrary is clearly indicated by the
person making the proposal (CISG, Article 14.2).
A firm offer includes material content of a contract, and indicates the intention of the
offeror to be bound by the proposal. A proposal for concluding a contract addressed to
one or more specific persons constitutes an offer if it is sufficiently definite and indicates
the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently
definite if it indicates the goods and expressly or implicitly fixes or makes provision for
determining the quantity and the price (CISG, Article 14.1). Until a contract is concluded
an offer may be revoked if the revocation reaches the offeree before he has dispatched an
acceptance. However, an offer cannot be revoked:
- If it indicates, whether by stating a fixed time for acceptance or otherwise, that it is
irrevocable; or
- If it was reasonable for the offeree to rely on the offer as being irrevocable and the
offeree has acted in reliance on the offer.
An offer, even if it is irrevocable, is terminated when a rejection reaches the offeror.

6.3. Order
Order is a request for concluding a contract, initiated by the buyer. It indicates the buyer‘s
intention to purchase under certain terms and conditions. An order is often used when the
seller and the buyer have conducted previous transactions such as enquiry and offer. A
6
confirmed request by one party to another to buy, sell, deliver, or receive goods or
services under specified terms and conditions is called an order. When accepted by the
receiving party, an order becomes a legally binding contract. An order can contain a
variety of information. For example, an order can contain line item information, an order
subtotal, shipping, discount, and tax information, and total order cost. An order can also
contain customer information, such as customer name and address, currency used, the
date the order was placed or last modified, and extended data about the order.

6.4. Counter-offer
Counter-offer is the bargaining of price and other transaction terms and conditions. The
counter-offer turns a firm offer into a free offer.
When the offeree accepts to enter into a contract but states the conditions therefore or
modifies the offer, he shall be considered having made a new offer (Vietnam Civil Code,
Article 395). A reply to an offer which purports to be an acceptance but contains
additions, limitations or other modifications is a rejection of the offer and constitutes a
counter-offer (CISG, Article 19.1)
If the offeree rejects the offer, the offer has been destroyed and cannot be accepted at a
future time. It should be noted that a mere enquiry is not a counter-offer and leaves the
offer intact.

6.5. Acceptance
Acceptance is a statement indicating the offeree‘s agreement to the content of the offer
and his intention to conclude a contract. The acceptance of an offer to enter into a
contract is the offeree‘s reply to the offeror on the acceptance of the whole contents of the
offer (Vietnam Civil Code, Article 396). A statement made by or other conduct of the
offeree indicating assent to an offer is an acceptance (CISG, Article 18.1). Silence or
inactivity does not in itself amount to acceptance. In other words, a reply to an offer
which purports to be an acceptance but contains additional or different terms which do
not materially alter the terms of the offer constitutes an acceptance, unless the offeror,
without undue delay, objects orally to the discrepancy or dispatches a notice to that effect.
If he does not so object, the terms of the contract are the terms of the offer with the
modifications contained in the acceptance. Additional or different terms relating, among
other things, to the price, payment, quality and quantity of the goods, place and time of
delivery, extent of one party‘s liability to the other or the settlement of disputes are
considered to alter the terms of the offer materially.
An acceptance of an offer becomes effective at the moment the indication of assent
reaches the offeror. An acceptance is not effective if the indication of assent does not
reach the offeror within the time he has fixed or, if no time is fixed, within a reasonable
time, due account being taken of the circumstances of the transaction, including the
rapidity of the means of communication employed by the offeror. An oral offer must be
7
accepted immediately unless the circumstances indicate otherwise. However, if, by virtue
of the offer or as a result of practices which the parties have established between
themselves or of usage, the offeree may indicate assent by performing an act, such as one
relating to the dispatch of the goods or payment of the price, without notice to the offeror,
the acceptance is effective at the moment the act is performed, provided that the act is
performed within the period of time laid down in the preceding paragraph.
Offer and acceptance analysis is a traditional approach used to determine whether an
agreement exists between two parties. Agreement consists of an offer by an indication of
one person (the offeror) to another (the offeree) of the offeror‘s willingness to enter into a
contract on certain terms without further negotiations. A contract is said to come into
existence when acceptance of an offer has been communicated to the offeror by the
offeree and there has been consideration bargained-for induced by promises or a promise
and performance.
There are certain rules relating to the communications of acceptance. The acceptance
must be communicated, and prior to acceptance, an offer may be withdrawn. An
exception exists in the case, of unilateral contracts, in which the offeror makes an offer to
the world which can be accepted by some act. An offer can only be accepted by the
offeree, that is, the person to whom the offer is made. An offeree is not usually bound if
another person accepts the offer on his behalf without his authorization, the exceptions to
which are found in the law of agency, where an agent may have apparent authority, or the
usual authority of an agent in the particular market, even if the principal did not realize
what the extent of his authority was, and someone on whose behalf an offer has been
purportedly accepted it may also ratify the contract within a reasonable time, binding both
parties. It may be implied from the construction of the contract that the offeror has
dispensed with the requirement of communication of acceptance. If the offer specifies a
method of acceptance, such as by post or fax, acceptance must be by the method that is no
less effective form the offeror‘s point of view than the method specified. The exact
method prescribed may have to be used in some cases but probably only where the
offeror has used very explicit words such as ‗by registered post, and by that method only1.
However, acceptance may be inferred from conduct.

6.6. Confirmation
After negotiating transaction terms and conditions, the seller/ buyer should write down a
confirmation note and send to each other, it is called sale confirmation or purchase
confirmation.
There are two ways of making confirmation: Confirmation is made into two copies, one
party signs, keeps one and sends to the other; Confirmation made into one copy with two
signatures. After the contract has been concluded, if there are changes, additions, the two
parties need to confirm in writing.

8
Review questions
1. Why is international trade needed for all countries?
2. What are the characteristics of international trade?
3. What are the obstacles of foreign trade?
4. What is the nature of foreign trade?
5. Identify the stages of transactions in foreign trade.
6. What is an Enquiry?
7. What is an Offer? What are the differences between a firm offer and a free offer?
8. What is an Order? What is a Counter-offer?
9. What is an Acceptance? When does an acceptance become effective?
10. What is a Confirmation? How is a Confirmation made?

9
Unit 2 PATTERNS OF BUSINESS TRANSACTION IN FOREIGN
TRADE

Learning objectives
By the end of this unit, you will be able to:
- distinguish the different types of agents and brokers and their roles in foreign trade.
- identify the process of business transaction through direct importing and exporting,
re-exportation, counter-trade and international processing.

Each enterprise when joining the global market can consider and choose the most suitable
patterns of business transaction, subject to its own features and conditions to maximize
their profits.
According to the nature of business, international trade can be divided into 04 major
types: Transactions through Intermediary, Direct business, Re-exportation, Counter-
trade and International processing.

1. Transactions through intermediary

It is a mode of transaction in which the relationship between the seller and the buyer is
established by a third party - commercial intermediary.
Commercial intermediary activities mean activities carried out by a trader to effect
commercial transactions for one or several identified traders (Vietnam Commercial Law
2005, Article 3.11). They have some significant features, as followed:
- Commercial intermediaries connect sellers and buyers, producers and consumers;
- Commercial intermediaries work under entrustment;
- Commercial intermediaries and traders who entrust them are interdependent;
- Profit is shared between commercial intermediary traders who entrust them.
There are some pros and cons of using commercial intermediaries. For the pros, they can
increase the sales and help to reduce risks in newly penetrated markets. Through the third
party, the seller/buyer can save direct investment and transport costs, and also take
advantages of intermediaries‘ services. However, the seller/buyer shall lose direct
contacts with the market. They also have to share profits with the intermediaries, and
even take risks if wrongly choose poor intermediaries. Sometimes, they are under
pressures of intermediaries‘ requirements.
In general, commercial intermediaries are only used when enterprises penetrate into
unfamiliar or new markets, or introduce and sell new products or goods which require
special care or market practice. This mode is also used when an establishment of trade
relationship is restricted by political and/or diplomatic relations.

10
There are two types of commercial intermediaries: brokerage and agency.

1.1. Agency
Under European law, agents are self-employed intermediaries who have continuing
authority to negotiate the sale and purchase of goods on behalf of the principals, or to
negotiate and conclude the contracts for sale and purchase of goods on behalf of and in
the name of the principals.
Under Vietnam Commercial Law 2005, commercial agency means a commercial activity
whereby the principal and the agent agree that the agent, in its own name, sells or
purchases goods for the principal or provides services of the principal to customers for
remuneration. Agents may sign and carry out contracts, and often operate under long-
term authorization. The principal is the owner of goods or money delivered to the agent.
Types of agents
In terms of scopes of authorization:
- Universal agent: is a commercial intermediary who can act for and on behalf of the
principal.
- General agent: is a commercial intermediary who just covers certain jobs for the
principal.
- Special agent: is a commercial intermediary who covers only one job for the principal.
In terms of degree of authorization:
- Mandatory agent: operate under the principal‘s name arid costs. His remuneration is a
specific amount or a percentage as agreed.
- Commission agent: operate under his own name, with the principal‘s costs, and then
receives the commission.
- Merchant agent: operate under his own name and costs. What he earns is the difference
between the prices given by the principal and the selling prices to customers.
In addition, there are some other agents on the market such as consignee or agent carrying
stock, del credere agent, sole agent and factor.
Agency contracts must be made in written or in other forms of equivalent legal validity. It
must contain detail information of the principal and the agent, product or service, price,
territory, the rights and obligations, costs and remuneration, validity and termination.

1.2. Brokerage
Brokerage is a commercial activity in which a trader acts as an intermediary (the broker)
between parties selling and purchasing goods or providing services (the principal) in the
course of negotiations and entering into contracts for sale and purchase of goods or
provision of services and shall be remunerated under a brokerage contract.
Features of brokers
- Brokers are not representatives of principals;
- Brokers do not sign contracts and take part in the performance of contracts between
11
principals, except when authorized by the principals;
- Brokers are responsible for the legal status, but not for the solvency, of the principals;
- Brokers often operate under short-term authorization for single transaction.

2. Direct business
This mode is quite common in the international trade, in which the enterprises directly
exchange goods with foreign partners to exploit the comparative advantages among
nations, in order to increase profits. Direct exporting means the sellers export directly to a
customer interested in buying his product. The seller is responsible for handling the
market research, foreign distribution and logistics of shipment and for collecting
payment.
The advantages of direct exporting:
- The seller‘s potential profits are greater because he is eliminating intermediaries.
- The seller has a greater degree of control over all aspects of the transaction.
- The seller knows who his customers are. His customers also know who he is. They feel
more secure in doing business directly with the exporter. The business trips are much
more efficient and effective because the export can meet directly with the customer
responsible for selling the product. The export knows whom to contact if something isn‘t
working. The customers provide faster and more direct feedback on the product and its
performance in the marketplace.
- The exporter gets slightly better protection for the trademarks, patents and copyrights.
- The exporter is fully committed and engaged in the export process, then develop a better
understanding of the marketplace, can actively adjust to the market changes.
- As the business develops in the foreign market, the exporter has greater flexibility to
improve or redirect his marketing efforts.
The disadvantages of direct exporting:
- It takes more time, energy and money than enterprises may be able to afford.
- It requires more ‗human power‘ to cultivate a customer base.
- Servicing the business shall demand more responsibility from every level of the
organization.
- Exporters must hold accountable for whatever happens. There is no buffer zone.
- Exporters may not be able to respond to customer communications as quickly as a local
agent can.
- Exporters have to handle all the logistics of the transaction.
- If an exporter has a technological product, he must be prepared to respond to technical
questions, and to provide on-site start-up training and ongoing support services.
Should an exporter decide to export directly, he must be ensure of his company-wide
commitment, which includes his export/import dream team to ensure the initiative is fully
supported.

12
3. Re-exportation
Re-exportation is the transaction in which profit is gained by exporting goods in the same
state as previously imported.
Re-exportation has following features:
- Gain more foreign currency than that spent;
- Goods does not undergo processing;
- Involve three parties (triangular transaction);
- Goods of great supply/demand and varying price;
- Enjoy customs and tax preferences.
Temporary import of goods for re-export means the bringing of goods into Vietnam from
foreign countries or special zones locating in the Vietnamese territory, which are regarded
as exclusive customs zones according to the provisions of law, with the completion of the
procedures for importing such goods into Vietnam, then procedures for exporting the
same goods out of Vietnam. There are some features of re-exportation in Vietnam:
- Re-export of goods must carry out both import and export customs procedures;
- Re-export of goods cannot be retained in Vietnam territory for more than 120 days.
Traders can request to prolong, but no more than 180 days;
- Pay import tax and refunded when re-exported;
- Tax must be paid within 15 days after the end of re-export period expires.

4. Counter-trade
Counter-trade is a special type of transaction that has a connection between exports and
imports of goods or services in addition to, or in place of, financial settlements. Counter-
trade means exchanging goods or services which are paid for, in whole or part, with other
goods or services, rather than with money. However, monetary valuation can be used for
accounting purposes.
A counter-trade transaction has following features:
- The exporter is also the importer;
- Counter-traders care more about use value worth than exchange value of goods;
- Money is used for calculation purposes;
- Require balance in usage value, exchange value, weight, delivery terms...
Counter-trade can be used as an effective international business tool in today international
trade. There are some reasons for its development:
- Lack of money, lack of faith in money, lack of acceptability of money as an exchange
tool;
- Maintain positive balance of trade, reduce trade imbalances;
- Gain competitive advantage over other nations/ companies, selling or trading the same
products;
- A mechanism to gain entry into new markets;
- Providing counter-trade services helps traders differentiate their- products from
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competitors.
5. International processing
Commercial processing means a commercial activity whereby a processor uses part or
whole of raw materials and materials supplied by the processee to perform one or several
stages of the production process at the latter‘s request in order to receive remuneration
(Vietnam Commercial Law, 2005, Article 178).
In the international processing, the processor and processee have to be based in different
countries or customs areas. There are also cross-border transactions of materials, semi-
products, and products.
There are several features of international processing:
- Remuneration is proportional to labour power;
- Ownership of materials, semi-products often belongs to the processee;
- Export is connected to production;
- Parties can enjoy tax and customs preference;
Processing contracts must be made in written form or in other forms of equivalent legal
validity (Vietnam Commercial Law, 2005, Article 179). The processing contract must
contain following contents:
- Name and addresses of parties;
- Processing product; materials and/or semi-products;
- Processing fee and pricing method;
- List and/or value of leased/borrowed machinery;
- Material supply method and target level of use;
- Payment terms and method (Payment for materials can be settled by deferred L/C or
collection D/A; payment for completed products can be at sight L/C, or collection D/P)
- Dealing with left-over materials, faulty products, leased/ borrowed machinery;
- Place and time of delivery;
- Brand and origin of products;
- Validity, termination and finalization of contract.
Review questions
1. What are the significant features of commercial intermediaries?
2. What are the advantages and disadvantages of using commercial intermediaries?
3. Under Vietnam Commercial Law 2005, what is an agent? Name some common types
of agent.
4. What is brokerage? What are the features of brokers?
5. What are the advantages of direct exporting?
6. What are the disadvantages of direct exporting?
7. What are the features of re-exportation?
8. What is counter-trade? What are the features of a counter-trade transaction?
9. Under Vietnam Commercial Law of 2005, what is a commercial processing? What are
the features of international processing?
14
Unit 3 INTRODUCTION OF INCOTERMS 2010

Learning objectives
By the end of this unit, you will be able to:
- have an overview about Incoterms 2010: its purpose, history and scope.
- discuss some concepts related to Incoterms and the important differences between
shipment and arrival contracts

1. Purpose of Incoterms
Incoterms stand for international commercial terms. It provide a set of international rules
for the interpretation of trade terms used in initially international and recently even in
domestic trade contracts by indicating the responsibilities of the seller and the buyer.
Incoterms are established to overcome the difficulties faced by buyers and sellers
concerning the problems as to the law of what country shall be applicable to their
contracts, as well as the difficulties arising from diversity in interpretation, unclear
division of responsibilities between the seller and buyer during the carriage. A point
worthy to note is that if there are special provisions in individual contract between trading
parties, they shall override the provisions in the rules. Traders may adopt ―Incoterms‖ as
the general basis of their contract and specify particular variations of them so as to meet
their particular requirement.

2. History of Incoterms
Since times past, merchants have used trade terms, such as FOB and CEF, to convey the
basics of their transactions. However, these acronyms are- far from sufficient as a tool for
the understanding and implementation of their contracts. Thus, there is room for
variations and misunderstandings. A Trade Terms Committee with the assistance of the
ICC National Committees developed the first sue rules in 1923 including FOB, FAS,
FOT, FOR, Free delivered CIF and C&F. The first interpretive Incoterms version of the
most common used terms was initially created in 1936 by ICC. They have been
periodically revised. Incoterms are generally good for approximately ten years which is
not a magic number, but historically about accurate. As commercial practice changes
from time to time, revisions are needed to reflect contemporary methods of carrying
goods, of implementing contracts of sale, of clearing goods for export and import and of
using documents as evidence and tools in order to secure the rights of the entitled persons
to receive the goods from carriers at agreed destinations. Incoterms reflect world-wide
trade practices, as practices change, Incoterms are revised. Incoterms have been
experienced some revisions in 1953, 1967, 1976, 1980, 1990, 2000 and 2010.

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During 1930s, trade terms involving carriage of goods focused on carriage by sea and
reflected the worldwide use of the terms FAS, FOB, C&F (later to be renamed CFR),
CIF, Ex Ship, Ex Quay (now DES, DEQ).
Further revision of Incoterms was suspended during the Second. World War and the work
was not resumed until the 1950s resulting in the 1953 version. A trade term for non-
maritime transport was added, namely FOR-FOT (‗Free On Rail-Free On Truck‘) as well
as DCP (‗Delivered Costs Paid‘) - now CPT - as an equivalent to CFR when land
transport was intended. The words ‗Free On Track‘ are misleading as, semantically, they
could refer to any truck regardless of whether it was used in connection with rail or road
transport. In fact, the addition FOT in the 1953 version only concerned railway transport.
No version of Incoterms ever referred to a trade term specifically to be used only in
connection with road transport. In 1967, further trade terms were added addressing
delivery at frontier (DAF) and delivery in the country of destination (DDP).
In 1976, a particular term for air transport, which received the somewhat peculiar name
‗FOB Airport‘, was added. In a sense, the term reflects the confusion relating to the
interpretation of ‗FOB‖. Where goods are to be carried by a ship, it is appropriate to
interpret the acronym FOB as signifying that the goods should be delivered ‗Free On
Board‘ the ship and defining the exact point for the transfer of the risk of loss of or
damage to the goods as the point where the goods pass the ship‘s rail. However, entry into
an aircraft is hardly a practical risk division point for goods to be carried by air. Instead,
handing over the goods to the air carrier would constitute the transfer of the risk of the
goods. In this sense, the acronym FOB would follow American practice where it simply
means delivery at a certain point unless the word ‗vessel‘ is added, in which case FOB
becomes equivalent to the term FOB as Incoterms used it in connection with maritime
transport. FOB -Airport remained in the 1980 version of Incoterms. The most important
addition in Incoterms 1980 undoubtedly concerned the ‗Free Carrier‘ term. The reason for
this addition had to do with the growth of the carriage of goods in containers signifying
that the goods were not actually received by the maritime carrier at the ship‘s side but
rather at some reception point ashore, usually at so-called container yards or container
freight stations. The goods could either move in a container loaded by the seller at his
premises for further carriage over land to the seaport to be subsequently lifted on board
the container vessel or, alternatively, be delivered for stowage by the carrier itself into
containers, usually at a terminal or other cargo handling facility in the seaport. Needless
to say, defining the point for the transfer of the risk of loss or damage to the goods as the
arrival onto the ship itself became wholly inappropriate. Instead, the relevant point, as
with FOB Airport, would be the point of handing over the goods to the carrier. In order to
further support that understanding, the name of the term, when first introduced in the
1980 version of Incoterms, became ‗Free Carrier [...] (named point)‘ with the acronym
‗FRC‘.
Carrying goods in containers also triggered new documentary practice. While,
16
traditionally, Bills of Lading were the only documents actually used when the goods were
to be carried by sea, other variants now appeared similar to transport documents used for'
non-maritime carriage. Particularly when no sale of the goods in transit was
contemplated, the Bill of Lading as a negotiable document with the particular function of
permitting transfer of the rights under the Bill of Lading to another party in transit
became unnecessary. This explains the developments towards so-called sea waybills
without such a transferability function. Thus, the seller could fulfill his obligation to
tender the documents not only by using of the Bill of Lading but also by using other
customarily used transport documents, such as a sea waybill. Consequently, the Free
Carrier clause had to reflect this change of practice by referring to ‗the usual document or
other evidence of the delivery of the goods‘.
The 1990 revision of Incoterms further strengthened the position of the Free Carrier term,
now with the acronym FCA instead of FRC. Since FCA could be used regardless of the
type of transport contemplated including carriage of goods by road, which so far had not
been blessed with any specific trade term, the particular trade terms for carriage of goods
by air and rail were removed from the 1990 version of Incoterms. Another important
addition was made in the 1990 revision in the A8-clauses dealing with the seller‘s duty to
provide proof of delivery and the transport document. Here, in the last sentence, the
following words were added: ‗Where the seller and the buyer have agreed to
communicate electronically, the document referred to in the preceding paragraphs may be
replaced by an equivalent electronic data interchange (EDI) message‘.
When Incoterms came up for revision again in the late 1990s, it was hard to point at any
particular change of commercial practice which required amendments or additions to
Incoterms 1990. The revision work came to focus around the possibility of updating the
FOB term and adapting the old term EXW representing the seller‘s minimum obligations
in order to properly reflect what actually happens in practice. While, certainly, FOB ought
not to reflect anything but delivery to the ship, as distinguished from FCA where delivery
occurs upon handing over the goods, to the carrier, it was investigated whether a more
practical notion could be found than the old passing of the ship‘s rail as a risk transfer
point. There were considerable drafting efforts but they all fell, either because they were
simply wrong or did not reflect all the possible variants actually used for delivery of the
goods to the ship. Wording comprising all such possible variants - e.g. ‗delivery to the
ship as appropriate depending upon the nature of the cargo and the loading facilities‘ -
might be correct but certainly unable to provide any specific guidance. As a result, the
efforts were abandoned and FOB stands in the same manner as it always had in
Incoterms. However, there was another consequence of the notion of ‗passing the ship‘s
rail‘ which was observed. The importance of the trade term FOB has, indeed, been so
strong that it signifies a border between the seller‘s and buyer‘s responsibility, so that,
traditionally, the point has also served as the point for the division of the obligations to
clear the goods for export and import. In this sense, the trade term Free Alongside Ship
17
(FAS) under Incoterms has meant that the seller escapes the obligation to clear the goods
for export. In essence, it then becomes a domestic sale equivalent to the sale to a trading
house which in turn would sell the goods to a second buyer for export. This understanding
of FAS was removed in Incoterms 2000 where in the preamble to the term there is a
capitalized reminder that the change is a reversal from previous versions of Incoterms. A
corresponding change was made in the clause Delivered Ex Quay (DEQ) where, due to
the fact that the goods had to enter into the country of destination when landed on the
quay, the seller according to the previous versions of Incoterms had to arrange for import
clearance. This obligation is now on the buyer. Consequently, with respect to clearing the
goods for export and import Incoterms 2000 reflect a considerable simplification, namely
that the seller clears the goods for export and the buyer for import with only two
exceptions. As EXW represents the seller‘s minimum obligation, the principle that he
simply has to make the goods available for the buyer at his own premises or some other
indicated place without any further obligations is retained. Therefore, it is up to the buyer
to clear the goods for export. And when the term Delivered Duty Paid (DDP) has been
used, the term explicitly says that the shipper has to deliver the goods with duty paid and,
as a consequence, he would also have to undertake the .import clearance obligation. In
connection with celebrating 70 years of Incoterms, voices were again raised that
Incoterms should be further revised.
However, the answers to the questionnaire sent to the national committees of the ICC
worldwide did not indicate any problem sufficiently important to require a further
revision at this time. So, there is certainly no principle that Incoterms ought to be revised
every ten years but rather that there is some merit in consolidating commercial practice
using Incoterms as is done in the version Incoterms 2010, which is the 8th revision. The
reason for the recent update is several changes in international practice over the last ten
years, the most obvious being a change from paper-based documentation to electronic
communication.
In short, Incoterms is a series of internationally recognised standardised trade terms
published by the International Chamber of Commerce (ICC) and widely used in
international contracts of sale. They are also increasingly used in domestic trade.

3. The scope of Incoterms

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
18
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 Incoterms 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 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.
In short, Incoterms cover main contents such as who does what, who pays for what, when
risk in the goods passes from seller to buyer, when delivery occurs, as well as issues such
as insurance, export and import: clearance and the allocation of other costs pertaining to
19
the delivery of goods. Incoterms do not cover the following contents. There is nothing on
ownership/title to the goods, nothing in detail on payment obligations (when, how, what
security, against what documents), nothing on detailed vessel requirements, force
majeure, termination, insolvency. Incoterms do not determine when ownership changes.
When delivery occurs or when payment happens can impact when ownership changes.
This must be addressed specifically in contract. For example, under US Law, it is when
the product is delivered. If jurisdiction is under another sovereign nation law, you need to
address per that country regulation. If contract is subject to the United Nations
Convention on Contracts for the International Sale of Goods (CSIG) the law does not
specify if it is not addressed specifically within the contract. The Incoterms does not
identify when revenue is recognized. Normally, ownership must pass prior to recognizing
revenue and delivery must occur. If not specifically addressed in contract, look to
applicable contract law. Incoterms does not identifying if a breach of contract occurs,
when it happened, it does not determine remedies for breach of contract. It also does not
provide relief from obligations/exemptions from liability in unexpected or unforeseeable
situations. Payment issues do not mention when or where the buyer must pay.
To sum up, Incoterms do not constitute a complete contract of sale, but rather provide
convenient, internationally recognised rules for the sale of goods. They work well as
general outline of the contract of sale which is to be specified and adjusted with further
terms and conditions of the contract.

4. Some concepts related to Incoterms

Delivery as defined in Incoterms 2010 is used to indicate where the risk of loss of or
damage to the goods passes from the seller to the buyer. It is not always when the goods
arrive in your customer‘s hands or when the goods leave your dock.
Before we go into details of every shipping term, let us examine each step during the
carriage of goods from one place to another. The following diagram shall help to illustrate
this:

Exporter Customs point of Customs point of Importer

exporting country importing country
Goods

Pre- carriage MAIN CARRIAGE On- carriage

Linh Trung Port of loading Port of discharge Destination
Industrial Zone, Thu (Cat Lai Container (Brisbane, (Daly City, USA)
Duc, Hochiminh Terminal, Vietnam) Sanfrancisco, USA)
city, Vietnam

In the example, a supplier in Vietnam is exporting goods from Hochiminh city, to Daly
20
City, USA. The pre-carriage means transporting the goods from Linh Trung Industrial
Zone, Hochiminh city, Vietnam to Cat Lai Container Terminal. The main carriage refers
to the voyage from Cat Lai Container Terminal to the port of destination, Brisbane,
Sanfrancisco, USA. The on-carriage transport starts from the Port of Brisbane to Daly
City, USA and here is an inland transport.

Pre-carriage: also called ―domestic pre-carriage‖ or ―local cartage‖, means inland

transportation on the seller‘s side. In terms of domestic pre-carriage, it is understood as
inland transportation from the place where the shipment starts to any subsequent
transportation carriage. In terms of international pre-carriage it means inland
transportation from the place where the shipment starts to the departure point on the
seller‘s side. In other words, pre-carriage consists of a point-to-point carriage from the
shipper‘s premises or warehouse to the first carrier‘s terminal or to the freight forwarder‘s
warehouse. Usually covered by inland carriers via road, or rail, or a combination of road-
rail (for full container loads moves – FCL), symbolized in the scheme by a truck.
Export formalities: include export licenses & authorizations (obtained through
Chambers of Commerce), export declaration (when the value of the shipment is over US
$2,000, also called Exdec for Export Declaration), certificate of origin, and more if
needed.
Export customs clearance: encompasses export taxes, duties and fees if required by the
customs of country of exportation.
Terminal: means cargo terminal, railway station, quay/wharf/port warehouse and/or
airport.
Terminal Handling Charges (THC) at origin: charges calculated by freight forwarders,
include such charges as handling fee, storage fee, transfer charges (for transferring from
the freight forwarder‘s warehouse to the main carrier‘s terminal at the airport or at the
port terminal), file fee, Air Way Bill or Bill of Lading fee (for issuing the transport
document), and exceptional charges enforced by international or federal organizations
(such as the FAA, Federal Aviation Association, fee).
Main carriage: deals with the carriage from a terminal in the country of origin to a
terminal in an overseas country. It can be air (from airport to airport), ocean (from seaport
to seaport, more usually called ―from quay to quay‖), road, rail, inland waterway, or a
combination of such modes.
Terminal Handling Charges (THC) at destination: also called ―arrival charges,‖
include such charges as transfer charges (for transferring from the main carrier‘s terminal
to the freight forwarder‘s warehouse), handling fee, storage fee, and dispatch fee.
Import formalities: encompass import licenses and authorization.
Import customs clearance: involves duties, import taxes, fees and other charges related
to customs.
On-carriage: also called ―local cartage‖ or ―domestic on-carriage,‖ or simply ―delivery‖
21
consists of a point-to-point carriage from the carrier‘s terminal to the consignee‘s
premises (most likely the buyer‘s premises). Usually covered by inland carriers via road,
or rail, or a combination of road-rail (for full container loads moves – FCL), symbolized
in the scheme by a truck.
Multimodal: several different modes of transport used successively on one single
shipment.
Carrier: a person or entity whom commences to perform or to procure the performance
of transport by rail, road, air, ocean, inland waterway or by a combination of such modes.
Door-to-Door means contract of carriage that includes pre-carriage, main Carriage and
on-carriage by the same carrier.
Door-to-(Air) Port means contract of carriage including pre-carriage and main-carriage
to airport or ocean port or truck terminal port or rail port.
(Air) Port-to-(Air) Port means contract of carriage for main carriage only.
(Air) Port-to-Door means contract of carriage including main carriage and on-carriage.
Multi-modal is used with terms that use all modes of transportation (truck, airplane,
vessel, train...)
Marine-restricted means terms that only apply to carriage by vessel.
Shipment Contract means sales/purchase contract where the seller‘s responsibility ends
when goods are handed over to the first carrier.
Arrival Contract refers sales/purchase contract where seller‘s responsibility ends when
goods have arrived at agreed place.
Packaging: The packaging of goods to comply with any requirements under the contract
of sale or the packaging of goods so that they are fit for transportation. However,
packaging as the stowage of the packaged goods within a container or other means of
transport are not addressed in Incoterms 2010 so that the meaning must be addressed
within the contract between the parties.
String sales means shipments where ownership changes in transit. In contracts for the
sale of "commodities", as opposed to manufactured goods, it is often the case that a cargo
is on-sold a number of times during transit (i.e. a ―string sale‖, also called ―sale of goods
afloat‖). In such situations, sellers in the middle of the string do not ship the goods, as the
goods have already been shipped by the seller as: the top of the string. As such, the
obligation on sellers in the middle of the string is to procure goods that have been already
shipped. The Incoterms 2010 clarify this by including an obligation to "procure goods
shipped" as an alternative to the obligation to ship goods. This is relevant in case of FAS,
FOB, CFR and OF as it is technically only possible when a bill of lading or another type
of document of title is used.

5. Important differences between shipment and arrival contracts

There is an important distinction between the delivered-terms (―D-terms‖) and the other
trade terms with respect to determining the critical point when the seller has performed
22
his delivery obligation. Only with the D-terms (DAT, DAP and DDP) is the seller‘s
delivery obligation extended to the country of destination. Under the other trade terms he
fulfills the delivery obligation usually in his own country, either by placing the goods at
the disposal of the buyer at his (the seller‘s) premises (EXW), or by handing over the
goods to the carrier for shipment (FCA, FAS, FOB, CFR, CIF, CPT and CIP).
To make the important distinction between this fundamentally different nature of the
―groups‖ of trade terms, contracts of sale are often classified accordingly, as, for example,
when the D-terms would turn the contract of sale into arrival contracts. Contracts using F-
terms or C-terms would fall into the category of shipment contracts.
It is important to note that the seller‘s obligation to arrange and pay for the carriage does
not in itself extend his delivery obligation up to the point of destination. On the contrary,
the risk of loss of or damage to the goods will pass at the point of delivery, and the
insurance which the seller has to take out under the trade terms CIF and CIP will be for
the benefit of the buyer, who has to assume the risk after the delivery point.
The C-terms, by extending the seller‘s obligation with respect to costs of carriage and
insurance respectively to the destination, make it necessary to consider not one but two
critical points: one for the division of risks and another for the division of costs. Because
this is not always easily understood, the C-terms are frequently misunderstood by
merchants, who believe them to be more or less equivalent to D-terms. This, of course, is
completely incorrect.
A seller having sold his goods on C-terms is considered to have fulfilled his delivery
obligation even if something happens to the goods after the point of shipment, while a
seller having sold the goods on D-terms has not fulfilled his obligation in similar
circumstances.
Consequently, if the goods are lost or accidentally become damaged after shipment but
before the goods have arrived at the agreed destination point, a seller having sold the
goods upon D-terms has not fulfilled his contract and can therefore be held liable for
breach of contract. He will normally have to provide substitute goods in place of those
lost or damaged, or make other agreed restitution.
In this respect, the interrelation between the trade term and the other terms of the contract
of sale is vital, since the risk falling upon the seller may be eliminated, or at least
modified, by various so-called relief clauses or force majeure clauses in the contract of
sale.
The basic distinction between C- and D-terms becomes crucial when goods are damaged
in transit. With C-terms, the seller has already fulfilled his delivery obligations, while
with D-terms the seller may be liable for breach of contract.

23
Review questions

1. What is the purpose of Incoterms?

2. How many versions of Incoterms are there? What are they?
3. What aspects do Incoterms cover?
4. Can Incoterms constitute a complete sale contract? Why or why not?
5. Define the costs for the terms: Pre-carriage, Terminal Handling Charge at origin, Main
carriage, Terminal Handling Charge at destination, On-carriage.
6. What are the differences between shipment and arrival contracts?

24
Unit 4 SELLER’S AND BUYER’S OBLIGATIONS IN INCOTERMS

Learning objectives
By the end of this unit, you will be able to:
- identify the general responsibilities of sellers and buyers defined by Incoterms 2010
- discuss the classification of Incoterms 2010
- analyse the application of each group

1. Summary of seller’s and buyer’s responsibilities in Incoterms 2010

The obligations of the seller and buyer respectively have been arranged in A- clauses for
the seller numbered 1-10 and more or less corresponding obligations of the buyer in B-
clauses in order to facilitate the reading of Incoterms 2010.

Summary the seller‘s and buyer‘s responsibilities in Incoterms 2010.

The seller must The buyer must

A1 General obligation of the seller B1 General obligations of the buyer

A2 Liciences, authorizations, B2 Liciences, authorizations, security

security clearance and other clearance and other formalities
formalities
A3 Contracts of carriage and B3 Contracts of carriage and insurance
insurance
A4 Delivery B4 Taking delivery

A5 Transfer of risks B5 Transfer of risks

A6 Allocation of costs B6 Allocation of costs
A7 Notices to the buyer B7 Notices to the seller
A8 Delivery document B8 Proof of delivery

A9 Checking- packing- marking B9 Inspection of goods

A10 Assistance with information and B10 Assistance with information and
related costs related costs

Incoterms merely spell out which obligations the parties owe to each other and is not
intended as a handy book to tell the parties what they ought to do in their own interest.

25
2. Classification of Incoterms 2010
In terms of transportation methods, Incoterms 2010 is divided into two groups: Sea and
inland transportation and Multi-modal transportation:

Marine-Restricted for sea & inland
waterway transport only
-FAS - Free Alongside Ship
- FOB - Free On Board
- CFR - Cost and Freight
- CIF - Cost, Insurance & Freight
Multi-modal for use with all modes of
transportation
- EXW - Ex Works
- FCA - Free Carrier
- CPT - Carriage Paid To
- CIP - Carriage & insurance Paid to
- DAT - Delivered At Terminal
- DAP - Delivered At Place
- DDP - Delivered Duty Paid

In terms of responsibility of the parties, Incoterms are arranged as stepladder of

increasing responsibility of from the seller‘s premises to buyer‘s premises and from
minimum responsibility of the seller to his maximum responsibility. The way classifying
the rules is by considering:
- Who is responsible for the main Carriage - the buyer or the seller?
- If the seller is responsible for the main carriage, where does the risk pass from the seller
to the buyer - before the main carriage, or after it?
This gives us these four groups:

Group Liabilities for carriage Rules

E Buyer responsible for all carriage EXW
F Buyer arranges main carriage FAS; FOB; FCA
C Seller arranges main carriage, but risk passes CFR; CIF; CPT; CIP
before main carriage
D Seller arranges main carriage, risk passes after DAT; DAP; DDP
main carriage

Take group C, for example. This group of rules often surprises newcomers, because
although the seller pays for transport to the named place, the risk transfers at an earlier
point in the journey. Consider, for example, goods that are taken in charge at Felixstowe,
UK, for transport to Long Beach, California, under the rule ―CIP Long Beach, California,
Incoterms 2010‖. The seller shall arrange and pay for freight to Long Beach, but risk shall
pass to the buyer upon delivery of the goods to the carrier at Felixstowe, before the main
carnage.
Each group reflects the level of risk undertaken by the seller. The level of risk is at its

26
minimum in an E term and its highest in a D term. An increase in the seller‘s level of risk
results in a corresponding decrease in the level of risk assumed by the buyer.
The letter F signifies that the seller must hand over the goods to a nominated carrier Free
of risk and expense to the buyer. The letter C signifies that the seller must bear certain
Costs even after the critical point for the division of the risk of loss of or damage to the
goods has been reached. The letter D signifies that the goods must arrive at a stated
Destination.

3. The uses of each group

(1) E term: All carriage paid by buyer
This group consists of one term - ex works (EXW). EXW represents the seller‘s
minimum obligation, since he only has to place the goods at the disposal of the buyer.
Although it may appear from the contract itself or from the surrounding circumstances
that the buyer intends to export the goods, it is entirely up to him whether he wishes to do
so. According to the trade term, there is no obligation for either party to do anything with
respect to export.
Nevertheless, it follows from B2 that the buyer must carry out all tasks of export, import
and security clearance, and, as stipulated in A2, the seller merely has to render his
assistance in connection with these tasks. The buyer has to reimburse the seller for all
costs and charges incurred in rendering this assistance (B6).
Neither of the parties has any obligation to the other with respect to contracts of carriage
and insurance. However, if the buyer wishes to have the goods carried from the seller‘s
place he should, for his own benefit, arrange for carriage and cargo insurance.

(2) F terms: main carriage paid by buyer

This group consists of three terms - free carrier (FCA), free alongside ship (FAS) and free
on board (FOB). FCA is recommended for use where rail, road, air or multimodal
transport is envisaged. FCA can also be used for sea or inland waterway transport where
the ship‘s rail is not the convenient point for passing of risk, as, for instance, in ro-ro (roll
on, roll off) traffic - that is, where trucks or trailers are driven straight on and straight off
a ship. FOB and FAS are to be used for inland waterway or sea transport. In an F term,
the seller agrees to deliver the goods to the carrier (FCA), alongside the ship (FAS), or on
board the vessel (FOB), and also undertakes to obtain the export licence or other official
authorisation.
F-terms and pre-carriage
While under the F-terms the seller has to arrange any necessary pre-carriage to reach the
agreed point for handing over the goods to the carrier, it is the buyer‘s function to arrange
and pay for the main carriage. Section A3 of the F-terms does not mention anything with
respect to pre-carriage, since there is no need to explain how the seller is able to reach the
point for the handing over of the goods to the carrier.
27
FCA and handing over goods for carriage
As noted, FCA is the main F-term which can be used irrespective of the mode of transport
and should be used whenever handing over to the carrier is not completed alongside a
ship or by placing the goods on board. In the two latter cases, the terms FAS and FOB
should be used instead of FCA.
The circumstances defining the handing over of the goods to the carrier differ according
to the mode of transport and the nature of the goods. Practices also vary from place to
place. Since the buyer has to arrange for the transport, it is vital that he instruct the seller
precisely regarding how the goods should be handed over for carriage. He should also
ensure that the precise point where this will occur is mentioned in the contract of sale.
This is not always possible to do when making the contract, since the exact point may be
decided subsequently. In this event, it is important that the seller, when quoting his price,
consider the various options available to the buyer for requiring the seller to hand over the
goods for carriage. The seller, of course, should know how the goods are to be packed,
whether they are to be containerized and whether they should be delivered to a terminal in
his vicinity or elsewhere.
Full loads and less-than-full loads
The quantity of the goods will determine whether they are suitable to constitute so-called
full loads (railway wagon loads or container loads), or whether they must be delivered to
the carrier as break bulk cargo to be stowed by him, usually at his terminal. In the
container trade, the important distinction is made between full loads and less-than-full
loads (FCL for full container load and LCL for less than full container load).
In practice, the seller often contracts for carriage
Although all of the F-terms clearly place the obligation to contract for carriage on the
buyer, in practice the seller frequently performs it when the choice is more or less
immaterial to the buyer. This is particularly common when there is only one option
available, taking into account the place and the nature of the goods, or when the freight
would be the same even though there are several options for carriage.
When there is a ―liner service‖ from the seller‘s country, the seller frequently contracts
for carriage under FOB. This practice is called ―FOB additional service‖. In many cases
the practice with respect to road transport is less firm; indeed, it may vary from forwarder
to forwarder and from carrier to carrier. Nevertheless, the seller frequently contracts for
the road carriage, though it is intended that the buyer should pay for it.
Current commercial practice makes it difficult to set down in a legal text what the parties
are obliged to do. But though from a strictly legal point of view the seller is not concerned
with the main contract of carriage, his duties according to commercial practice are
reflected under the heading A3. If there is such a practice, the seller may contract for
carriage on usual terms at the buyer‘s risk and expense.
When the seller declines or the buyer wants to contract for carriage
The seller may decline to contract for carriage and may notify the buyer accordingly. The
28
buyer may also specifically ask the seller to assist him or tell the seller that he intends to
contract for carriage himself.
It is important for the buyer to notify the seller of his intentions if, for instance, he has a
special relationship with a carrier making it important for him to exercise his right
according to B3 to arrange the contract of carriage.
Buyer’s risk if transport is unavailable
Even though the seller under an F-term is requested or intends to perform the contracting
for carriage according to commercial practice, the buyer always will bear the risk if,
because of unforeseen circumstances, transport facilities fail to be available as
contemplated.
Division of loading costs under FOB
When the cargo is delivered containerized or in less-than-full loads to the carrier‘s
terminal, the division of loading costs seldom presents any particular problems. However,
the situation is quite different when under FOB the cargo is to be delivered in the
traditional manner over the ship‘s rail.
The custom of the port will decide the extent to which loading costs under FOB should be
distributed between seller and buyer. If this is known to both parties, no difficulties
should arise. But frequently the buyer may not know the custom of the port in the seller‘s
country and indeed may find out later that the custom works to his disadvantage.
For this reason, it is important that the FOB buyer consider this problem when negotiating
the contract of sale and the price for the goods.

(3) C terms: main carriage paid by seller

This group contains four terms - cost and freight (CFR), cost, insurance, freight (CIF),
carnage paid to (CPT) and carriage and insurance paid to (CIP). CFR and CIF are to be
used for sea or inland waterway transport, whereas CPT and CEP are to be used where
rail, road, air or multimodal transport is envisaged. Once again, CPT and CIP can also be
used for sea and inland waterway transport where the ship‘s rail is not the point at which
risk is to pass from the seller to the buyer (see above, ‗F terms‘). Under C terms, the seller
is obliged not only to hand over the goods to the carrier and obtain export licences, but
has to obtain the contract of carriage (CFR and CPT) and insurance (CIF and CIP).
Two groups of C-terms
There are two groups of C-terms; one group (CPT and CIP) can be used for any mode of
transport, including sea and multimodal transport while the other group can be used only
when the goods are intended to be carried by sea (CFR and CIF).
Do not use CFR or CIF for anything other than sea transport
Sometimes the parties fail to observe the important distinction in the previous paragraph,
and use CFR and CIF for modes of transport other than carriage by sea. The seller then
puts himself in the unfortunate position of being unable to fulfill his fundamental
obligation to present a bill of lading, or to present a sea waybill or similar document as
29
required under CFR or CIF A8.
Note, however, that if the buyer intends to sell the goods in transit, he may lose this
option if he receives the incorrect transport document. In such a case, he would be able to
cancel the contract because of the seller‘s breach in not providing the correct document.
Also, when the market for the goods falls after the contract of sale has been entered into,
a buyer could, in certain circumstances, use the seller‘s breach as a means of avoiding the
market loss by cancelling the contract of sale.

C-terms are not equivalent to D-terms

The C-terms may present some difficulties, since only the point of destination is
mentioned after the respective term: for example, in a contract of sale concluded between
a buyer in New York and a seller in London, only New York is likely to be mentioned
after the C-term, with nothing usually being said about shipment from London.
Obviously, this can give rise to the false impression that the goods are to be delivered in
New York and that the seller has not fulfilled his obligation until they have in fact been
delivered there.
Consequently, it is not uncommon that the contract will indicate, for example, ―Delivery
New York not later than...‖ (with a particular date being given). But this notation would
demonstrate that the contracting parties failed to understand the fundamental nature of the
C-term, since under it the seller fulfils his obligation by shipping the goods from his
country.
This confusion arises because the seller undertakes to arrange and pay for the main
carriage up to destination. This payment obligation, however, is only in addition to the
fundamental obligation to ship the goods from the seller‘s place.

Two "critical points” under C-terms

Since the C-term must show the extent to which the seller undertakes to arrange and pay
for the main contract of carriage - with the addition of insurance under CIF and CIP -
indicating the point of destination under C-terms is inevitable. The C-term also
establishes that the seller fulfils his delivery obligation by handing over the goods for
shipment in his country, and that this has to be accepted as delivery by the buyer (A4 and
B4 respectively).
Thus, under the C-terms there will be not only one relevant point as under the F-terms -
the point of shipment - but two critical points, one coinciding with the point of shipment
under the F-terms, the other indicating the point up to which the seller would have to
procure and pay for contract of carriage and insurance. It would be easier for traders to
understand the fundamental nature of the C-term if both of these critical points were
indicated. However, this is usually not done, since the seller at the time of entering into
the contract of sale may prefer to retain a certain liberty with regard to the exact point or
port of shipment. A seller in Stockholm, for example, having sold the goods under CFR
30
or CIF to a buyer in New York, may wish to delay deciding whether he wishes to ship the
goods directly from Stockholm, or have them carried by road to Gothenburg or perhaps
even to Rotterdam for carriage by sea to New York.
Do not stipulate date of arrival under C-terms
If the contract of sale refers to a C-term, but also indicates arrival at destination on a
particular date, the contract becomes ambiguous. One would then not know if it was the
intention of the contracting parties that the seller will have breached the contract if the
goods do not actually arrive at destination on the agreed date, or whether the fundamental
nature of the C-term should supersede this interpretation.
In the latter case, the seller‘s obligation is limited to shipping the goods so that they could
arrive at the destination on the agreed date, unless something happens after shipment,
which, according to the C-term, would be at the risk of the buyer.

Seller’s insurance obligation under CIF and CIP

In the Incoterms rules the C-term exists in two forms: CFR and CPT when there is no
insurance obligation for the seller, and CIF and CIP when, according to A3b, the seller
must obtain and pay for the insurance. Otherwise, CFR and CPT are identical to CIF and
CIP respectively.

Cost of insurance depends on intended transport

Under CFR and CPT, where the seller has no insurance obligation, the buyer should be
aware of the relation between the cost of insurance and the intended carriage of the goods.
If the goods are deemed to be exposed to greater risks during the transport (for example,
during the shipment of goods on deck or in older ships), the insurance premium will
become more expensive - if insurance is available at all.

The “minimum cover” principle of CIF and CIP

The obligation of the seller to obtain and pay for cargo insurance under CIF and CIP
A3(b) is based on the principle of ―minimum cover‖ as set out in the Institute Cargo
Clauses drafted by Lloyd‘s Market Association (LMA) and International Underwriting
Association of London (IUA). But such minimum cover could also follow any other
similar set of clauses.
In practice, however, ―all risk-insurance‖ is preferred to less, since the minimum cover is
appropriate only when the risk of loss of or damage to the goods in transit is more or less
confined to casualties affecting both the means of conveyance and the cargo, such as
those resulting from collisions, strandings and fire. In such cases, even the minimum
cover would protect the buyer against the risk of having to pay compensation to a
shipowner for his expenses in salvaging the ship and cargo, according to the rules relating
to general average (the York/Antwerp Rules of 2004).

31
Unsuitability of minimum cover for manufactured goods
Minimum cover is not suitable for manufactured goods (particularly not for goods of high
value) because of the risk of theft, pilferage or improper handling or custody of the goods.
Therefore, extended insurance coverage is usually taken out as protection against such
risks. A buyer of manufactured goods should stipulate in the contract of sale that the
insurance according to CIF or CIP should be extended as indicated. If he does not, the
seller can fulfill his insurance obligation by providing only minimum cover (Institute
Clauses C).
The buyer may also wish to obtain additional coverage such as insurance against war,
riots, other civil commotions, or strikes or other labour disturbances. This would normally
be accomplished by specific instructions to the seller. Alternatively, the buyer may
himself arrange for appropriate additional insurance. This can be done either case by case
or through general arrangements with his insurer.
The question of whether it is correct to follow the principle of minimum insurance
coverage has been much debated. However, the traditional "minimum principle" has been
retained, primarily due to the difficulty of knowing the insurance requirements of
prospective buyers in multiple sales down a chain (―string sales").

Guarding against fraud under CFR and CPT

Statistical evidence indicates that fraud occurs more frequently under the CFR and CPT
terms than under other terms, largely because the buyer does not normally have sufficient
control over the particular method and the type of transport involved. Therefore, the CFR
or CPT buyer is advised to consider specific stipulations in the contract of sale restricting
the seller‘s option to arrange for carriage as he pleases (for example, the buyer can
mention a particular shipping line or identify the carrier).

How to prevent delivery until payment has been made

Sellers uncertain about the buyer‘s ability or willingness to pay the price can take
measures to prevent delivery of the goods before payment has been made. There are two
ways to do this: (1) instructions to prevent the buyer from obtaining documents required
to obtain the goods before payment can be given to a carrier, a freight forwarder or a bank
(CAD-Instructions); and (2) instructions to require cash from the buyer on delivery (COD
instructions) can be given to the carrier or a freight forwarder, and the bank can be
instructed not to release the original(s) of the bill of lading until payment has been made.
This would probably best be achieved by means of a documentary collection arranged
through the international banking system.

In conclusion, for C-terms, it should be noted that

- CFR and CIF should never be used when carriage other than carriage by sea is intended;
- the buyer should always consider the need to restrict the seller‘s options with respect to
32
arranging the carriage and, except in case of ―string sales‖, should require additional
insurance coverage from the seller or arrange such insurance himself;
- under no circumstances should a stipulation as to time for delivery be mentioned in
connection with arrival at destination: it should be mentioned only in connection with the
shipment of the goods; and
- if buyers wish to make sellers responsible for the arrival of the goods at destination at a
particular time, D-terms should be used instead of C-terms

(4) D terms
This group consists of DAT (Delivered at Terminal), DAP (Delivered at Place) and DDP
(Delivered Duty Paid). These rules are recommended for use with any form of transport.
The seller‘s obligations are at their maximum in D terms. He undertakes to make the
goods available for collection at a named terminal (DAT), or at named place (DAP) or at
the named place of destination in the country of importation, having paid the duties
(DDP). In the case of DDP, the seller has to obtain the import licences and other official
authorisation.

Factors determining the use of different D-terms

When choosing among the different D-terms, two factors have to be taken into
consideration:
- the distribution of costs and risks connected with discharging the goods at destination;
and
- the distribution of functions in connection with the clearance of the goods for import.

The trend toward choice of delivered terms

A seller of manufactured goods, whose products have to compete in the country of
destination and who has to extend his obligation to the buyer by contract guarantees,
often finds it inappropriate to limit his obligation under the contract of sale by fulfilling
the contract at some earlier point, for example before the goods are dispatched or before
they have reached destination. As one car manufacturer reportedly said: ―Although I may
be relieved of the risk of damage to my cars sold under an FOB contract, I am not pleased
to see how they are being damaged when hopeless efforts are made to squeeze them into a
cargo hold of a wholly inappropriate ship.‖

The seller’s need to plan and control cargo movements

Practical problems with respect to arranging the carriage often make terms under which
the seller fulfils his obligation by handing over the goods to a carrier inappropriate and
less economical. An exporter of goods with a constant flow of cargo in various directions
often finds that transport economy (so-called logistics planning) requires him to totally
control carriage as well as the delivery at destination. In addition, the seller is often in a
33
better position to obtain competitive freight rates than his buyers.

Buyer needs to know time of arrival

Under the terms DAP and DAT, it is vital that the buyer know the time of the ship‘s
arrival so that the ship is not detained in the port of discharge waiting for the cargo to be
removed. It is also important that the goods, when they have been discharged, be removed
from the quay as quickly as possible. It is common practice for the seller in the contract of
sale to give the buyer notice of the estimated time of the arrival of the ship (ETA), and
also for the contract to require the buyer to discharge the ship and remove the cargo from
the quay within an agreed time.

DAT, DAP and DDP - for all modes of transport

DAT, DAP and DDP can usually be used regardless of the mode of transport. When DAP
is used for through rail transport, it signifies that the seller‘s obligations extend up to the
border of the country mentioned after the term. This is usually the border of the buyer‘s
country, but it could also be some third country through which the goods are to be carried
in transit.

DAP and DDP do not include unloading

When cargo is to be collected or delivered at destination, difficulties arise in determining
exactly what should be done by the seller and the buyer.
Is it sufficient that the goods arrive on the vehicle provided by the seller? Or do they have
to be removed from that vehicle at the risk and expense of the seller? If the latter, can the
buyer debit the seller for the work performed by his own personnel in receiving the goods
at a ramp in his warehouse? And should the seller load the goods on to a vehicle sent by
the buyer to collect the goods from the seller‘s terminal? Answers to these questions
normally follow from commercial practice or from previous dealings between the same
contracting parties. Since, in most countries, the seller normally loads the goods on to the
buyer‘s collecting vehicle, while the buyer unloads the goods from the seller‘s vehicle
arriving at his premises or some other place named by the buyer, DAT and DAP, in
clause A4, at least reflect the latter practice.

Import clearance under D-terms

It is common practice that the party domiciled in the country arranges export and import
and security clearance. Thus the buyer must clear the goods for import and pay duty,
VAT and other taxes and charges levied upon import of the goods, unless the parties by
choosing DDP have explicitly placed that obligation on the seller.

Seller should avoid DDP if difficulties expected

If any difficulties seem likely to arise in relation to the import of the goods into the
34
buyer‘s country, the seller should try to avoid using the term DDP.
Even if no difficulties are expected, each party is usually better suited to assess the
possible risks in his own country. Therefore, it is normally better that the seller take upon
himself the task of clearing the goods for export, while the buyer procures the import
formalities and bears any extra costs and risks incurred in that connection.
Also, it may be that the applicable statutory provisions relating to duties, VAT and similar
charges require payment from a party domiciled in the country concerned. A party from
abroad, having undertaken to pay these charges, cannot then benefit from advantages
accorded to parties domiciled in the country of export or import. Moreover, if the costs
are paid by a non-resident, difficulties may arise in deducting the expenditure in the VAT
forms submitted to the authorities.

Choice of DDP with exclusion of duty and/or other charges

The seller or his freight forwarder may be prepared to clear the goods for import, without
paying duty, VAT and other official charges connected with the import clearance. If so,
DDP may still be used but with the addition of the phrase ―exclusive of duty, VAT and
other import charges‖.
DDP with such an exclusion is not equivalent to the other D-terms since the obligation to
clear the goods for import still falls on the DDP seller. It is also possible to use another D-
term and then to add that some costs connected with import should be borne by the seller.

DAT or DAP and difficulties of reaching the final destination

Serious difficulties could arise in using the term DAT, DAP when the goods have to pass
through customs at an earlier point than the agreed point of destination. If so, the goods
may be prevented from reaching the destination point as contemplated if they are held up
at the customs station, either because of the failure of the buyer to do whatever is required
by the authorities or for other reasons.
Since under DAT and DAP it is the buyer‘s task to clear the goods for import, all of the
above events are at his risk and expense. This may be cold comfort for a seller who has
his transport arrangements interrupted at the customs station but who has the remaining
obligation to deliver the goods at the agreed final point of destination. Consequently,
sellers are advised to be cautious and to avoid agreeing to arrive at a point which may be
difficult to reach.
By adding the term ―cleared for import‖, it is possible to use DAT or DAP and still place
the obligation to clear the goods for import on the seller. This means that the seller‘s
obligation is limited to the clearance as such and that the duty, as well as other charges
levied upon import, will be unpaid and have to be paid by the buyer.

Charges and the DDP seller

It should be underlined that the ―charges‖ to be paid by the DDP-seller concern only such
35
charges as are a necessary consequence of the import as such and thus have to be paid
according to the applicable import regulations. This does not include additional charges
resulting from warehousing or services obtained from private parties in connection with
the import.

Review questions
1. Name the ten obligations (A1-A10) of the seller under Incoterms 2010.
2. Name the ten obligations (B1-B10) of the buyer under Incoterms 2010.
3. Name the rules which are used in marine-restricted for sea & inland waterway
transport.
4. Name the rules which are used in any mode or multi-modal transportation.
5. Complete the table below by inserting the party (Seller or Buyer)

GROUP Pre- Terminal Export Main Terminal Import On-

carriage handling clearance Carriage handling clearance carriage
charge charge
(THC) at (THC) at
origin destination
E
F
C
D

36
Unit 5 THE USAGE OF 11 RULES UNDER INCOTERMS 2010

Learning objectives
By the end of this unit, you will be able to comprehend:
- the usage of each rule under Incoterms 2010
- some particular cases when using such rules

1. Rules for any mode or modes of transport

1.1. EXW
E- term: EXW Seller fulfils his delivery obligation by making the goods available for the
buyer at his own premises (factory, warehouse, place of sale) or at some particular place
where the goods are stored at the time of the conclusion of the contract. The EXW- term
also obliges the seller to notify the buyer when and where the goods shall be placed at his
disposal. The buyer must take delivery as soon as they have placed at his disposal and the
risk is transferred from seller to buyer at this very moment.
This rule places minimum responsibility on the seller, who merely has to make the goods
available, suitably packaged, at the specified place, usually the seller‘s factory or depot.
The buyer is responsible for loading the goods onto a vehicle (even though the seller may
be better placed to do this); for all export procedures; for onward transport and for all
costs arising after collection of the goods. In many cross-border transactions, this rule can
present practical difficulties. Specifically, the exporter may still need to be involved in
export reporting and clearance processes, and. cannot realistically leave these to the
buyer. Consider Free Carrier (seller's premises) instead. Although the seller is not obliged
to load the goods, if the seller does so, this is at the buyer‘s risk.
Summary:
- Mode of transport: any mode or multimodal.
- Transfer of risk: When goods are at disposal of buyer at a named placed
- Seller‘s responsibilities: Place the goods at Buyer‘s disposal at his premises or other
named place.
- Buyer‘s responsibilities: All transportation & export/import customs costs.
- Minimum risk to Seller.
- Maximum risk Buyer.

1.2. Free carrier (FCA)

FCA can be used for any transport mode, or where there is more than one transport mode.
A very flexible rule that is suitable for all situations where the buyer arranges the main
carriage a bear any risks in connection with the unavailability of transport. The seller

37
fulfils his delivery obligation by handling over the goods for carriage to the carrier
nominated by the buyer. Usually the parties know beforehand exactly how the goods
should be handed over, e.g. ―FCA Cat Lai terminal‖. Delivery under FCA could occur to
a vehicle provided by the carrier not only when the goods are to be carried to the buyer‘s
destination by road but also when air, rail or sea carriage is intended. So- called pick-up
service is quite common for such carriers who would then send a vehicle with or without
a container in order to pick up the goods at the seller‘s premises (FCA seller‘s premises).
It is then for the seller to load the goods on to the collecting vehicle.
For example:
- Seller arranges pre-carriage from seller‘s depot to the named place, which can be a
terminal or transport hub, forwarder‘s warehouse etc. Delivery and transfer of risk takes
place when the truck or other vehicle arrives at this place, ready for unloading - in other
words, the carrier is responsible for unloading the goods. (If there is more than one
carrier, then risk transfers on delivery to the first carrier.
Where the named place is the seller‘s premises, then the seller is responsible for loading
the goods onto the truck etc.
In all cases, the seller is responsible for export clearance; the buyer assumes all risks and
costs after the goods have been delivered at the named place.
FCA is the rule of choice for containerized goods where the buyer arranges for the main
carriage.
Summary:
- Mode of transportation: Any mode or multimodal.
- Point of delivery (Transfer of risk): when goods are delivered to first carrier.
- Buyer‘s responsibilities: Loading cost (if delivery not at seller‘s premises), other costs
beyond delivery point.
- Seller‘s responsibilities: Loading cost (if delivery at Seller‘s facility), export customs
clearance and all costs beyond the point of delivery.

1.3. Carriage Paid To (CPT)

CPT can be used for any transport mode, or where there is more than one transport mode.
The CPT term is based on the main obligation of the seller to hand the goods over for
carriage and procure and pay for the carriage to the agreed delivery point named after the
term. According to CPT, it is for the buyer to arrange his own insurance cover. The seller
is responsible for arranging carriage to the named place, but not for insuring the goods to
the named place. However delivery of the goods takes place, and risk transfers from seller
to buyer, before the main carriage, at the point where the goods are taken in charge by the
first earner. Things to watch for: Terminal Handling Charges (THC) are charges made by
the terminal operator at either the beginning or the end of the transport operation, or at
both ends. These charges may or may not be included by the carrier in their freight rates -
the buyer should enquire whether the CPT price includes THC, so as to avoid surprises.
38
The buyer shall need to arrange insurance cover for the main carriage, starting from the
point where the goods are taken in charge by the carrier.
Summary:
- Mode of transport: any transport mode or multi modal.
- Point of delivery (Transfer of Risk): when goods are delivered to the first carrier.
- Seller‘s responsibilities: Pre-Carriage, THC at origin, Main carriage, export customs
clearance.
- Buyer‘s reponsibilities: THC at destination (if such charge is excluded in a carriage
contract), Import customs clearance, On-Carriage.

1.4. Carriage and Insurance Paid To (CIP)

CIP can be used for any transport mode, or where there is more than one transport mode.
The seller is responsible for arranging carriage to the named place, and also for insuring
the goods. The CIP term is in every respect wholly identical with the CPT term except
with respect to the seller‘s added obligation to procure and pay for insurance. The
insurance obligation is the same irrespective of whether the parties have concluded the
contract on the basis of CIF or CIP. Thus, there is a firm point of departure, namely the
minimum cover (Institute Cargo Clause C) as it has been considered preferable to start
from the minimum so that the parties, if they should so desire, could extend the cover.
As with CPT, delivery of the goods takes place, and risk transfers from seller to buyer,
before the main carriage, at the point where the goods are taken in charge by the first
carrier. Things to watch for. Terminal Handling Charges (THC) are charges made by the
terminal operator at either the beginning or the end of the transport operation, or at both
ends. These charges may or may not be included by the carrier in their freight rates - the
buyer should enquire whether the CPT price includes THC, so as to avoid surprises.

Summary:
- Mode of transport: any transport mode or multi modal.
- Point of delivery (Transfer of Risk): when goods are delivered to the first carrier.
- Seller‘s responsibilities: Pre-Carriage, THC at origin, Main carriage, export customs
clearance, Insurance cover (clause C unless otherwise stated by Buyer).
- Buyer‘s responsibilities: THC at destination (if such charge is excluded in a carriage
contract), Import customs clearance, On-Carriage.

1.5 Delivered at Terminal (DAT)

The term DAT was introduced for the first time in Incoterms 2010 in order to reflect
commercial practice to deliver the goods at a named terminal. DAT can be used for any
transport mode, or where there is more than one transport mode. The seller is responsible
for arranging carriage and for delivering the goods, unloaded from the arriving
conveyance, at the named place. The term ―terminal‖ includes any place, whether covered
39
or not, such as quay, warehouse, container yard, container freight station, road, rail or air
cargo terminal. It should be observed that DAT differs from all other D-terms as the
seller‘s obligation under these terms is limited to deliver the goods on the arriving means
of transport ready for unloading by the buyer or by somebody acting on his behalf.
It is essential to indicate the terminal as precisely as possible as the seller undertakes to
make arrangements to ensure that the goods actually arrive at the terminal and to choose
the appropriate carrier at his own and risk. A useful rule, well suited to container
operations where the seller bears responsibility for the main carriage.
Summary:
- Mode of transport: any transport mode or multi modal.
- Point of delivery (Transfer of Risk): when goods are placed at Buyer‘s disposal at a
named terminal at destination.
- Seller‘s responsibilities: Pre-Carriage, THC at origin, Main carriage, export customs
clearance, THC at destination.
- Buyer‘s responsibilities: Import customs clearance, On-Carriage.

1.6 Delivered at Place (DAP)

DAP is an innovation and its introduction in Incoterms was deemed essential in order to
induce the use of Incoterms particularly in the United States where it is customary just to
indicate a place/point to delivery. As that place/point could be the same country where
both the seller and the buyer are domiciled, it is now explicitly mentioned in Incoterms
2010 that the rules are intended also for domestic use. DAT can be used for any transport
mode, or where there is more than one transport mode.
The seller is responsible for arranging carriage and for delivering the goods, ready for
unloading from the arriving conveyance, at the named place. (An important difference
from Delivered At Terminal DAT, where the seller is responsible for unloading.)
Risk transfers from seller to buyer when the goods are available for unloading; so
unloading is at the buyer's risk. The buyer is responsible for import clearance and any
applicable local taxes or import duties. This rule can often be used to replace the
Incoterms 2000: Delivered At Frontier (DAF), Delivered Ex Ship (DES) and Delivered
Duty Unpaid (DDU)
Summary:
- Mode of transport: any transport mode or multi modal.
- Point of delivery (Transfer of Risk): when goods are placed at Buyer‘s disposal on the
arriving means of transport at a named place at destination.
- Seller‘s responsibilities: Pre-Carriage, THC at origin, Main carriage, export customs
clearance.
- Buyer‘s responsibilities: Import customs clearance, THC at destination, On-Carriage.

40
1.7 Delivered Duty Paid (DDP)
DDP can be used for any transport mode, or where there is more than one transport mode.
DDP represents the seller‘s maximum obligation whenever the point named after the
trade terms indicates delivery at the buyer‘s premises. The seller is responsible for
arranging carriage and delivering the goods at the named place, cleared for import and all
applicable taxes and duties paid (e.g. VAT, GST)
Risk transfers from seller to buyer when the goods are made available to the buyer, ready
for unloading from the arriving conveyance by the buyer or by somebody on his behalf.
Note the difference as compared with DAT where the seller has to unload the goods from
the arriving means of transport. These last requirements can be highly problematical for
the seller. In some countries, import clearance procedures are complex and bureaucratic,
and so best left to the buyer who has local knowledge. Some taxes such, as VAT are only
payable by a locally-registered business entity, so there may be no mechanism for the
seller to make payment.
Summary:
- Mode of transport: any transport mode or multi modal.
- Point of delivery (Transfer of Risk): when goods are placed at Buyer‘s disposal on the
arriving means of transport at a named place at destination.
- Seller‘s responsibilities: Pre-Carriage, THC at origin, Main carriage, export customs
clearance, Import customs clearance.
- Buyer‘s responsibilities: THC at destination, On-Carriage.

2. Rules for marine-restricted transport

2.1. Free Alongside Ship (FAS)
FAS means that the seller fulfills his delivery obligation by placing the goods at the ship‘s
side irrespective of whether this occurs on the quay or by bringing lighters on to the ship
when she is lying on the roads. Seller delivers goods, cleared for export,' alongside the
vessel at a named port, at which point risk transfers to the buyer. The buyer is responsible
for loading the goods and all costs thereafter.
As with FOB, it is for the buyer to nominate the ship arid the term can only be used when
maritime transport or transport on inland waterways is intended. In practice it should be
used for situations where the seller has direct access to the vessel for loading, e.g. bulk
cargos or non-containerized goods. For containerized goods, consider ―Free Carrier FCA‖
instead.
Summary:
- Mode of transportation: sea and inland waterway
- Point of delivery (Transfer of risk): when goods are placed alongside the ship at the port
of shipment or by procuring the goods so delivered.
- Seller‘s responsibilities: Pre-Carriage, Export customs clearance.
- Buyer‘s responsibilities: Main-Carriage, Loading cost and all other costs beyond
41
delivery point.

2.2 Free On Board (FOB)

FOB is one of the oldest delivery terms and has traditionally held a dominant position in
world trade. The passage of the ship‘s rail was traditionally according to FOB decisive for
the division of functions, costs and risks between the seller and the buyer. In rather
frequent situation where nothing at all can be observed at the moment when the cargo
passes the critical point represented by the ship‘s rail (e.g.. in container and so- called roll
on/roll off carriage) it is a wholly unsuitable point for the risk distribution between the
seller and buyer. The same us usually the case with respect to loading costs since, in
practice, it is not customary to count the man- hours for the loading process before and
after the passage of the ship‘s rail. Instead, the distribution of such costs would follow
customs of the port. This means that it is important particularly for the FOB buyer to
assess in advance the effect of such customs of the port, since the seller probably
normally knows more about what is going on in the respective ports of his own country.
This explains why the ship‘s rail as risk transfer point has in Incoterms 2010 been
replaced by placing the goods on board.
In practice it should be used for situations where the seller has direct access to the vessel
for loading, e.g. bulk cargos or non-containerized goods. For containerized goods,
consider ―Free Carrier FCA‖ instead.
Summary:
- Mode of transportation: sea and inland waterway
- Point of delivery (Transfer of risk): when goods are placed on board the vessel at the
port of shipment or by procuring the goods so delivered.
- Seller‘s responsibilities: Pre-Carriage, THC at origin, Export customs clearance.
- Buyer‘s responsibilities: Main carriage, and all other costs beyond delivery point.

2.3. Cost and Freight (CFR)

CFR, like FOB, signifies that the seller fulfils his delivery obligation placing the goods
onboard the ship. But the distinguished from FOB, the seller has the obligation to procure
the contract of carriage and pay the freight for carriage to the indicated arrival point. It
also for the seller to clear goods for export.
Since it is obligation of the seller to procure the contract of carriage, it is not enough that
he produces a document showing that he has fulfilled the obligation to deliver the goods
on board. He must also prove that he has concluded a contract of carriage to the benefit of
the buyer. Traditionally, the document the seller must provide to the buyer according to
CFR has been the on board bill of lading.
In practice it should be used for situations where the seller has direct access to the vessel
for loading, e.g. bulk cargos or non-containerized goods. For containerized goods,
consider 'Carriage Paid To CPT' instead.
42
Seller arranges and pays for transport to named port. Seller delivers. goods, cleared for
export, loaded on board the vessel. However risk transfers from seller to buyer once the
goods have been loaded on board, i.e. before the main carriage takes place.
NB: seller is not responsible for insuring the goods for the main carriage.
Summary:
- Mode of transportation: sea and inland waterway
- Point of delivery (Transfer of risk): when goods are placed on board the vessel at the
port of shipment or by procuring the goods so delivered.
- Seller‘s responsibilities: Pre-Carriage, THC at origin, Export customs clearance, Main
carriage, provide Buyer with on board Bill of Lading.
- Buyer‘s responsibilities: Import customs clearance, THC at destination (if such charge is
excluded in a carriage contract), On-Carriage.

2.4. Cost Insurance and Freight (CIF)

The CIF term is wholly identical with the CFR term with only one exception namely that
according to CIF the seller‘s obligation include the obligation to procure and pay for
transport insurance. It could be more suitable for the buyer to arrange insurance himself
since he could then adapt the insurance cover according to his particular needs. This is
particularly appropriate since, according to CIF, the seller is only obligated to insure the
goods on minimum conditions (that is Institute Cargo Clause C), if the parties have not
agreed otherwise.
In practice it should be used for situations where the seller has direct access to the vessel
for loading, e.g. bulk cargos or non-containerized goods. For containerized goods,
consider 'Carriage and Insurance Paid CIP‘ instead.
Seller arranges and pays for transport to named port. Seller delivers goods, cleared for
export, loaded on board the vessel. However risk transfers from seller to buyer once the
goods have been loaded on board, i.e. before the main carriage takes place. Seller also
arranges and pays for insurance for the goods for carriage to the named port.
Summary:
- Mode of transportation: sea and inland waterway
- Point of delivery (Transfer of risk): when goods are placed on board the vessel at the
port of shipment or by procuring the goods so delivered.
- Seller‘s responsibilities: Pre-Carriage, THC at origin, Export customs clearance, Main
carriage, Insurance cover (under C clause unless otherwise stated by Buyer), provide
Buyer with on board Bill of Lading.
- Buyer‘s responsibilities: Import customs clearance, THC at destination (if such charge is
excluded in a carriage contract), On-Carriage.

3. Some notes when applying Incoterms 2010

- Incoterms do not automatically apply. Incoterms are not mandatory and are not implied
43
into commercial contracts. They must be agreed by the parties and can be adapted or
varied at their discretion. Incoterms are contract terms, not law. Therefore, Incoterms
should be incorporated into contracts of sale. However, they could be applied even if
there is no specific mention in the contract of sales as trade customs, commercial usages
recognized by the applicable law.
As before, Incoterms, by themselves, are not enough to create a valid contract. For
instance, they do not address what the goods are, incorporate price or payment terms, deal
with actual ownership of goods, or resolve matters of law and jurisdiction. However, they
do provide convenient and documented shorthand on matters of risk and shipping cost. It
must be noted that, in spite of extensive rules, ranging from providing goods in
conformity with the sale contract, obtaining licences, authorizations, contract of carriage,
contract of insurance to delivery, passing of risk, checking, packaging and marking,
division of costs and giving notice to buyer, Incoterms are not comprehensive. Issues
such as what constitutes conformity of goods with fee contract of sale, remedies for
breach of obligations. set by Incoterms, and passing of property, still need to be resolved
by looking to the law that governs the contract.
It is very important for sellers and buyers to agree to choose the appropriate Incoterm
rule. With Incoterms, the ICC has chosen only to deal with the delivery terms most
commonly used. The ultimate choice depends upon the bargaining position of the
respective parties. In practice, other factors shall determine the choice. It is important that
the choice be made on the basis of an economic analysis purporting to examine how the
lowest cost could be reached considering the position of both parties. An added cost for
the seller would invariably induce him to charge more for the goods provided, of course,
that he would observe the eventuality of added costs or risks. Regard could be had not
only the cost of freight but also to saving of time so that the capital invested in the goods
is not tied up more than absolutely necessary. Normally, it is far better to agree with
carriers who may undertake the responsibility for carriage of the goods from door to door
than to conclude a number of separate agreements with several operators, freight
forwarders, stevedores, cargo terminals and other cargo handling enterprises. If the goods
are intended to be moved in a predetermined flow, it is also possible to make agreements
with transport enterprises covering longer periods of time and thus to obtain better
certainty and economy. It is possible with the application of Incoterms to decide which
one of the parties has to bear each individual cost. Using the chronology of the transport
chain from the seller to buyer the costs arising could mainly be indicated as follows:
- Loading at the seller‘s premises
- Pre-carriage in the country of export.
- Costs for procuring the contract of carriage (booking of the cargo, issuance of transport
documents or other documents).
- Storage and cargo handling pending the main transport form the country of export.
- Rental of transport equipment etc. from the country of export.
44
- The costs for the main transport,
- Storage and cargo handling after discharge of the goods in the country of import.
- Rental of transport equipment etc. in the country of import.
- On - carriage in the country of import.
- Discharge at the buyer‘s premises.
In addition to the above list there are also other costs, such as customs duties, VAT and
other official charges levied upon import.

CIF and CIP costs of insurance

- It is quite common for parties to use Incoterms 2010 but also add extra qualifying
words. A frequently found variant of GIF Incoterms 2010 is ‗CEF landed port of
destination‘. Where variants are used, it is not possible precisely to state the extent of
obligations undertaken by the parties. The meaning of the term shall have to be gathered
by looking to the intention of the parties or the custom in the trade, if relevant. The
International Chamber of Commerce recommends that it is not advisable to use
abbreviations added to the C terms unless the meaning of the abbreviations is clearly
understood and accepted by the contracting parties or under any applicable law or custom
of the trade.
- Container trade terms. The terms FCA, CPT and CIP can be used for all modes of
transport, -but are particularly suitable for container transport and all forms of multimodal
traffic, including roll on-roll operations by trailers and ferries. The main object of these
terms is to take account of the increasing consolidation of cargoes. These terms shift the
―critical point‖, when the risk and possibly other legal incidents pass from the seller to the
buyer, away from ―goods on board‖ to an earlier point, that is when the first carrier take
charge of the goods. When shipping goods in containers, whether as full container load
(FCL) or less than full container load (LCL), die exporter should give preference to one
of the container terms rather than use a term appropriate to non- container shipment.

Review questions
1. Summarise the usage of 11 rules of Incoterms 2010.
2. Indicate the differences and similarities between FOB and CIF rules.
- If you are an exporter, which term should you choose? Explain your choice.
- If you are an importer, which term should you choose? Explain your choice.
3. Indicate the differences and similarities between FOB and FCA rules.
4. Indicate the differences and similarities between CFR and CPT rules.
5. Indicate the differences and similarities between CIF and CIP rules.

45
Unit 6 DOCUMENTS IN FOREIGN TRADE

Learning objectives
By the end of this unit, you will be able to:
- Identify most commonly used documents used in foreign trade
- Distinguish between the similar documents with different names and functions
- Analyze the application of these documents in different transactions of foreign trade

Introduction
Foreign trade documents are important for the exporter or importer establishments, in
terms of preparing according to the preferred qualities aware of customs, exportation and
importation regulations and prevention of all the sides, led by exporters/importers, being
wronged.
The documents incomplete, faulty or not given to the authorities on time may give rise to
some risks in the products delivery or during collection of the product costs.
Documents can be divided into 03 groups, namely documents related to goods,
documents related to shipment and documents related to loading and unloading. In this
unit, they will be studied and preparation of these documents shall be described with
examples.

1. Documents related to goods

1.1. Invoices
1.1.1 Proforma Invoice
Proforma invoice is the starting point of an export contract. As and when the exporter
receives the trade inquiry from the importer, exporter submits the Proforma invoice to the
importer.
The Proforma invoice contains details such as name and address of the exporter, name
and address of the intending importer, nature of goods, mode of transportation, unit price
in terms of internationally accepted quotation, name of the country of origin of goods,
name of the country of final destination, period required for executing contract after
receipt of confirmed order and finally signature of the exporter.
Importance and Significance of Proforma Invoice
- It forms basis of all trade transactions and further negotiation or contract is made on this
basis.
- It helps the importer to obtain the import licence, where required, and obtain foreign
exchange for completion of the contract.

46
1.1.2. Commercial Invoice
A commercial invoice is the seller‘s bill for merchandise or goods sold by him. Invoice
contains all the particulars and details in respect of name and address of seller (exporter),
name and address of buyer (importer), date, exporter‘s reference number, importer‘s
reference number, description of goods, price per unit at particular location, quantity, total
value, packing specifications, terms of sale (FOB, CIF etc), identification marks of the
package, total number of packages, name and number of the vessel or flight, bill of lading
number, place and country of destination, country of origin of goods, reference to letter of
credit, if opened, terms of payment, and finally signature of the exporter etc.
From the details, it is clear that invoice is an important and basic export document. It is
also known as ‗Document of Contents’ as it contains all the important information
necessary for the preparation of other export documents.
For many countries, there are no prescribed special invoice forms. Exporters can use their
normal invoices used for indigenous trade for exports made outside the country too and
show the particulars required by the importer in terms of the contract. However, there are
special invoicing procedures in respect of exports to certain countries like Canada, U.S.A.
and Australia. Some countries like Uganda, Mexico, Sudan and Tanzania require special
customs invoices.
Information about the special invoice forms required can be gathered from the respective
Export Promotion Councils apart from the procedures of trade to be followed in respect of
the importer‘s country. Any recognized Chamber of Commerce too can provide the
information in this respect.
- Commercial invoice is a document that gives details and value of the goods to be sold
- Its main content includes the name of seller and buyer, invoice No., date of the invoice,
descriptions of the goods, marking, unit price, terms of delivery and payment and
signature.
- It is made out by the seller.
- There is no fixed or compulsory form of the invoice. Each company has its own form.
- As stipulated in UCP 600, a commercial invoice:
+ must appear to have been issued by the beneficiary + Must be made out in the name of
the applicant for the UC + Must be made out in the same currency as the L/C
+ needn‘t be signed
+ the descriptions of the goods must be in correspondence with those in the credit.
- A commercial invoice is used:
+ to ask for payment of the goods
+ to make customs declaration, to take delivery of the goods and to make claims for
compensation
+ to supply details of the goods that serves as a benchmark on checking the goods.
It should be noted that the issuer of the invoice, date, commodity and its descriptions,
quantity, international trade terms, signature of the issuer etc. must be in line with the
47
requirements in the contract and in the credit.

Significance of Commercial Invoice

- It is prima facie evidence of the contract of sale and purchase of goods. On the basis of
the invoice, all the other documents, in the context of export, are prepared as it is the
basic document.
- Invoice constitutes the main document for various export formalities such as pre--
shipment inspection, quality, excise and customs procedures.
- It is useful for accounting purposes, both by the exporter and importer.
- This document is required in collection/negotiation of documents through the bank.
- For claiming incentives, this document is essential.

1.1.3 Consular Invoice

Some of the importing countries insist that the invoice is to be signed by the importing
county‘s consular located in the exporter‘s country. Such invoices are known as consular
invoice. The exporter has to pay a certain fee to obtain the certificate/invoice. Such
charges/ fees vary from country to country. The main purpose to obtain consular invoice
is to secure authentication of information contained in the invoice. Once the invoice is
signed by the consular of the country, the importer gets comfort and confidence in respect
of accuracy of information in respect of quality, source of goods, volume and grade.
Normally, on arrival of the goods, it is necessary to convince the customs authorities of
the importing country that the goods stated in the invoice and the actually imported goods
are one and the same. If the customs authorities get suspicious or not convinced, they
open the packages of the imported goods. If this happens, considerable delay takes place.
The importer is put to hardship by delayed receipt of goods. To avoid all these problems,
importer insists on the exporter to obtain the consular invoice from the consulate
stationed in the exporter‘s country. The consulate invoice is, generally, prepared in three
copies. One copy is retained by the consulate office, the second copy is sent to the
customs of the importing country and the third copy is given to the exporter to forward
the same along with other documents through the banker for collection/negotiation.
This information also facilitates in assessing import duties and also would be useful for
statistical purposes.

Significance of Consular Invoice:

Importance to the Exporter
(1) Once the invoice is signed by the consulate of the importing country, the exporter is
reasonably assured that there are no import restrictions in the importer‘s country for the
goods and that there would be no problem in realization of export proceeds or foreign
exchange.
(2) It enables prompt clearance from the customs of exporter‘s country for shipping the
48
goods.
Importance to the Importer
- In the importer‘s country, the customs do not normally open the packages. It helps the
importer to get speedy delivery of goods.
- Lot of unnecessary hardship which importer faces once the packages are opened is
avoided.
Importance to the Customs
- The customs of the exporting country can easily clear the goods.
- The customs of the importing country need not open the packages for checking and can
easily calculate the import duties.

1.1.4. Customs Invoice

When the commercial invoice is prepared on the format prescribed by the customs
authorities of the importing country, it is called ―Customs Invoice‖. This is the
requirement of U.S.A., Canada and Australia.

1.2. Packing List

This document is a list of all the items in a package. It gives specific descriptions on the
packing of the goods, including quantity of bags, packing materials, weight,
measurements and marks.
The packing list is made out by the manufacturer when the goods are packed. It includes
the information about Seller‘s name, Buyer‘s name, commodity, contract No., packages‘
order numbers, packing method, quantity of items in the package, weight, and possibly
names of the manufacturer, packer and technical inspector.
The packing list is often required to be made in 3 copies.
- One copy is put in the packaging in such a way that makes it easier for the buyer to find
out, or enclosed with the packaging so that the consignee, on checking the packages, can
use it to compare the goods to be delivered in the contract with ones actually delivered by
the Seller.
- One copy along with packing lists of other packages constitutes a full set of packing lists
of a consignment. It is put in the first package to make it easier for the consignee to check
the packages or to select some items out of the consignment.
- One copy along with packing lists of other packages constitutes a full set of packing lists
of a consignment, which are enclosed with other documents and submitted to the bank for
payment.

1.3. Certificate of Origin

As the very name indicates, certificate of origin is a certificate that specifies the name of
the country where goods are produced. This is absolutely necessary where the importing
country has banned the entry of goods of certain countries to ensure that the goods from
49
those countries are not allowed to enter in. At the time of arrival of the goods in the
importer‘s country, this certificate is necessary for the customs to permit preferential
tariff. Certain countries offer preferential tariff to goods produced and imported from
India. In such a case, this is a must to the importer to claim preferential tariff and importer
insists on this document from the exporter. This enables the importer‘s country to regulate
the concessional tariff only to select countries and deny to the rest of the countries.
A certificate of origin can be obtained from Chamber of Commerce, Export Promotion
Council and various trade associations which have been authorized by Government of
India to issue. The agency from which certificate of origin is obtained should conform to
the terms of letter of credit.

1.3.1 Significance of Certificate of Origin

- Certificate of origin is required for availing concession under Commonwealth
Preferences (CWP) as well as Generalized System of Preferences (GSP).
- It facilitates the importer to adhere to the rules and regulations of his country.
- Customs in the importer‘s country allow the concessional tariff only on production of
this certificate.
- When goods from some countries are banned, importing country requires this certificate
to ensure that goods from banned countries are not entering into the country.
- Exporting country may insist on this certificate to ensure that the goods imported are not
reshipped again.
This is a document on the origin of the goods, signed and issued by an authorized agency
in the exporter‘s country.
This document is required by a customs agency to apply taxes imposed on the goods
subject to Government policies and track on the use of quotas. Also, to some extent, it can
tell about the quality of the goods as the product quality is y the locality and production
conditions.

1.3.2 The forms of C/O:

Form A: used to confirm origin of the goods from developing to developed countries to
enjoy preferential taxes under General System of Preference (GSP)
Form B: used for all the goods exported to foreign countries, are C/O, not for tax
preference.
Form O: used for coffee products exported from ICA (International Coffee Association)
Form X: used for coffee products exported from non-ICA (Non-International Coffee
Association)
Form T: used for textiles and garments exported European Union (EU)
Form D: used for the goods traded in intra - ASEAN
Form AK: used for the goods traded between ASE/ South Korea, issued by the Ministry
50
of Industry and Trade (Decision 02/2007/QD-BTM promulgating Regulations on the
issuance Form AK to enjoy incentives, subject to the Agreement on the Goods under the
Framework Agreement on ASEA Comprehensive Economic Cooperation)
Form S: used for the goods traded between Vietnam and Laos. (Decision 865/2004/QD-
BTM promulgating Regulatory issuance of C/O. Form S to enjoy tax incentives under the
Agreement on Vietnam-Laos Economic, Cultural, Technical and Science Cooperation)
Form E: used for the goods traded between Vietnam and China. (Decision 12/2007/QD-
BTM promulgating Regulation issuance of C/O Form AK to enjoy incentives subject to
the Agreement on Trade in Goods under the Framework Agreement on, China
Comprehensive Economic Cooperation)

- C/O can be issued in two modes as follows:

+ An original C/O issued directly to businesses at C/O organization
+ C/O issued through Electronic Certificate of Origin (eCOSys), ratified by the Minister
of Trade under D No.0519/QD-BTM dated March 21, 2006 and other kinds o approved
by the Ministry of Trade
- C/O can be issued by:
+ Import-export management departments in Ha Noi, Hai Phong, Da Nang, Binh Duong,
Ho Chi Minh city, and Vung Tau.
+ Branches of Vietnamese Chamber of Commerce and Industry (VCCI)
+ Management departments of economic zones established under the Prime Minister‘s
Decision. According to the Decision, the Management departments can issue C/O to
businesses headquartered in those economic zones.

1.4. Certificates of Inspection

It is a certificate issued by the Export Inspection Agency certifying that the consignment
has been inspected under the Export (Quality Control and Inspection) Act, 1963 and
found that the requirements relating to quality control and inspection have been complied
with, as applicable, and the goods are export worthy.

1.4.1 Certificate of quality

- Subject to the agreement of the parties to the contract, certificate of quality may be
issued by the manufacturer or by the third party. The purpose of this document is to
confirm that the quality of the goods delivered is in conformity with the contract.
- The contents of this document consist of two parts:
+ Information on the consignment concerned, including names of the shipper and
consignee, commodity, contract No., marking, quantity and weight, means of
transportation, port of loading, port of discharge and date of loading.
+ Inspection results, which can be noted under quality criteria or can be noted generally
―the goods are in conformity with the contract No... dated...‖
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1.4.2 Certificate of quantity/ weight
- This document is issued by the exporter and given to the importer as a confirmation on
the quantity and weight of the goods delivered.
in fact, the importer can ask for a certificate of quantity issued third party such as an
inspection organization to guarantee the neutrality of delivery.
his document includes information on names and addresses of consignor and consignee,
commodity, contract No., marking, r and weight, net weight and gross weight, means of
Nation, port of loading, port of discharge and date, of loading, don organization.

1.4.3 Sanitary Certificate

This document serves as a confirmation on the inoffensiveness of the goods to consumers
in some aspects. It is issued by competent agencies or inspection organizations and used
for the trading of foodstuffs. The content of this certificate includes information relating
to the shipment and inspection results.

1.4.4 Veterinary Inspection Certificate

This certificate is used:
+ As a confirmation on the product quality and an evidence that the goods meet the
requirements of the contract.
+ To carry out customs formalities for the export.
+ To fulfill a set of documents to get payment.
In addition to information relating to the shipment, this certificate also contains test
status, validity, veterinarian‘s certification that products originated from healthy animals
in epidemic-free regions, or products have been properly processed and stored and are
free from poisons and harmful bacteria.

1.4.5 Phytosanitary Certificate

This document is issued by a plant protection and inspection organization to indicate that
consignments of plants and plant products are free from harmful bacteria, insects that
have potential for introducing pests to plants in the importing country.
This certificate has the same functions as Veterinary Inspection Certificate.
In addition to information relating to the shipment, this document contains name and
quantity of the goods, scientific names, remarks from the plant protection organization
(for example ―Plants and plant products have been processed in such a way that they have
no potential for introducing pests‖ or ―Plants and plant products are deemed to meet
current phytosanitary requirements of the importing country‖), and fumigation measures
applied to the consignment.
Halal Certificate: This certificate is to identify that the goods have been processed in a
proper condition that meet Muslim requirements.
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The Ho Chi Minh City Muslim Representative Committee receives the files and gives the
results within 7 days.

1.4.6 Fumigation certificate

This certificate shows that the goods, which are usually agriculture-based, have been
fumigated.

2. Documents related to shipment

2.1. Mate’s Receipt
A mate‘s receipt is issued by the mate (assistant to the captain of the ship) after the cargo
is loaded into the ship. It is an acknowledgment that the goods have been received on
board the ship.

2.1.1 Contents of Mate's Receipt

Mate‘ receipt contains the details about: Name of the vessel, Date of shipment, Berth,
Marks, Numbers, Description and condition of goods at the time they are shipped, port of
loading, Name and address of the shipper, Name and address of the importer(consignee)
and other required details.

2.1.2 Types of Mate's Receipts

Mate‘s receipt can be clean or qualified.
(1) Clean Mate’s Receipt: Mate of the ship issues a clean mate‘s receipt if the condition,
quality of the goods and their packing are proper and free from defects.
(2) Qualified Mate’s Receipt: If the mate‘s receipt contains any adverse remarks as to
the quality or condition of the goods/packing, it is known as ‗Qualified Mate‘s Receipt‘.
If the goods are not packed properly and the mate‘s receipt contains any adverse remarks
about the packing such as ―Poor Packing‘, the shipping company does not assume any
responsibility in respect of the goods during transit. It is necessary for the exporter to
secure the mate‘s receipt without any adverse remarks. On the basis of the mate‘s receipt,
the Bill of Lading is prepared by the shipping agent. If there are adverse remarks in the
mate‘s receipt, the same shall be incorporated in the Bill of Lading, which may turn to
become a claused Bill of Lading, and this may not be acceptable for negotiation.
Mate‘s receipt is first handed to the Port Trust Authorities who hands over to the exporter
soon after he clears their dues. This procedure is adopted to facilitate for collection of port
dues from the exporter.

2.1.3 Significance of Mate's Receipt

(1) Mate‘s receipt is an acknowledgment of goods. It is not a document of title.
(2) It is issued to enable the exporter or his agent to secure bill of lading from the
shipping company.
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(3) Bill of Lading, which is the title to the goods, is prepared on the basis of Mate‘s
receipt so it should be obtained without any adverse remarks.
(4) Port Trust Authorities are enabled to collect their dues as it is routed through them.

2.2. Certificate of Measurement

Freight is charged either on the basis of weight or measurement. When weight is the basis
of measurement, the shipping company for the purpose of calculation of freight may
accept the weight declared by the exporter. However, when measurement is the basis for
calculation of freight, the shipping company may insist on a certificate issued by
Chamber of Commerce or other approved organization in respect of goods. The
certificate of measurement contains the details in respect of description of goods,
quantity, length, breadth and depth of the packages, name of the vessel and port of
destination of the cargo etc.,

2.3. Bill of Lading

Bill of Lading is a document issued by the shipping company or his agent acknowledging
the receipt of cargo on board. This is an undertaking to deliver the goods in the same
order and condition as received to the consignee or his agent on receipt of freight, the
shipping company is entitled to. It is a very important document to the exporter as it
constitutes document of title to the goods.
Each shipping company has its own bill of lading. The exporter prepares the bill of lading
in the form obtained from the shipping company or agents of shipping company.
The goods can be consigned to order of the exporter, which means the exporter can
authorize someone else to receive the goods on his behalf. In such a case, the exporter
would discharge the bill of lading on its reverse. When the bill of lading is negotiated
through the bank, it would be endorsed in favour of the bank that would endorse further
to the importer, on receipt of payment.
Bill of Lading is made in signed set of 2 originals, any one of which can give title to the
goods. The shipping company also issues non-negotiable copies (unsigned) which are not
documents of title to goods but serves the purpose of record only.
The reverse side of Bill of Lading contains the terms and conditions of the contract of
carriage. The clauses on most of the bills of lading are common. A Bill of lading should
be clean to facilitate the exporter to obtain the proceeds of export without difficulty.

2.3.1 Main Purposes of Bill of Lading

A bill of Lading serves three main purposes.
(1) As a document of title to the goods
(2) As a receipt from the shipping company and
(3) As a contract of affreightment (transportation) of goods.

54
2.3.2 Types of Bill of Lading
(1) Received for Shipment B/L: A shipping company issues it when goods have been
given to the custody of the shipping company, but they have not been placed on board.
(2) On Board Shipped B/L: The shipping company certifies that the cargo has been
received on board the ship.
(3) Clean B/L: It indicates a clean receipt. In other words, it implies that there has been
no defect in the apparent order or condition of goods at the time of receipt or shipment of
goods by the shipping company.
(4) Claused or unclean B/L: It shows that the B/L is qualified which expressly declares a
defective condition of goods. The clause may state ―bale number 5 hook-damaged‖ or
―package number 10 broken‖. By superimposing this type of clause, the shipping
company is limiting its responsibility at the time of delivery of goods, at the destination.
It is very important to note that bank accepts only a clean B/L at the time of negotiation.
(5) Transshipment or Through B/L: When the journey covers several modes of transport
from the place of starting to the place of destination, this type of B/L is taken. It indicates
that transshipment would be en route. For example, part of the journey is by ship and the
rest of journey may be by road, rail and air.
(6) Stale B/L: According to international commercial practice, B/L along with other
documents must be presented to the bank not later than twenty one days of the date of
shipment as given in the B/L. In some cases, the importer may indicate the number of
days within which the documents are to be presented from the date of shipment. Exporter
has to comply with the stipulation indicated. Otherwise, the B/L becomes stale and is not
accepted by the bank for payment. A stale bill is one which is tendered to the presenting
bank so late a date that it is impossible for the bank to dispatch to the consignee‘s place,
in time, before the goods arrive at the destination port. In other words, bank finds it
impossible to see the documents reach before the ship reaches the destination.
(7) To Order B/L: In this case, the B/L is issued to the order of a specified person.
(8) Charter Party B/L: It covers shipment on a chartered ship.
(9) Freight paid B/L: When the shipper pays the freight, then this type of B/L is issued
with the words ―Freight paid‖.
(10) Freight Collect B/L: When the freight on the B/L is not paid and to be collected at
the point of destination, it is marked ―Freight Collect‖ and this B/L is known as ―Freight
Collect B/L‖.
Generally, the importer insists on the ―clean on-board shipped‖ bill of lading with the
prohibition of transshipment of goods as goods can suffer damage during transshipment.
If transshipment is allowed, even period of journey may take longer.
B/L is a non-negotiable document: A bill of lading is not a negotiable document while it
is a transferable document. Transferability enables the exporter to claim payment from
the bank even before the goods reach the destination. Similarly, it enables the importer to
sell the goods even before they reach the destination.
55
2.3.3 Parties mentioned in B/L:
There are three main columns in B/L. These are shipper (consignor), consignee or order
of and notifying party. Notifying party is party to whom notice is to be sent on the arrival
of goods at the place of destination. When the B/L is made to the order of, the person, in
whose name it is made to the order of, has the right to endorse further. To illustrate:
Consignor: Cherry & Co, Bhopal
Consignee or to the order of: Dimpy & Co, Newjersey, U.S.A.
Notifying Bank: Bank of America, Newjersey
In this case, Dimpy & Co has the total right for the cargo as the consignee. So, Cherry &
Co. cannot transfer title to the goods to the third party. If payment of the goods is not
received, consignor loses title to the goods and so B/L is not to be made in this way.
However, where advance payment has been received or goods are shipped under
irrevocable letter of credit, bill of lading can be made in the name of the consignee. In the
normal circumstances, exporter takes the bill of lading to his order and endorses to the
bank at the time of negotiation and in this way his interests are fully protected.
Who can lodge claim: B/L is the only evidence to file claim against the shipping
company in the event of non-delivery, defective delivery or short delivery. If the importer
makes payment, he can lodge the claim, as he shall be in possession of negotiable copy of
B/L. Otherwise, exporter can lodge the claim and receive the value of goods.

2.3.4 Contents of B/L:

- Name and address of the shipper.
- Name and address of the vessel.
- Name of port of loading.
- Date of loading of goods.
- Name of port of discharge and place of delivery.
- Quantity, quality, marks and other description.
- Number of packages.
- Freight paid or payable.
- Number of originals issued.
- Name of the shipping company.
- Voyage number and date.
- Signature of the issuing authority.

2.3.5 Significance of bill of lading

Importance to the Exporter
- It is an acknowledgment from the shipping company that the goods have been received
for the purpose of shipment.
- After receipt of B/L, it helps him to send the shipping advice to the importer.
56
- If any damage occurs to the cargo during transit, he can hold the shipping company
responsible, if he has received clean bill of lading.
- A copy of bill of lading is required to be attached to the application form to claim the
incentives
- It is a contract of carriage between the exporter (shipper) and the shipping company.

Importance to the Importer

- It is a document of title to the goods, which enables him to transfer the title by
endorsement and delivery.
- The exporter can send a non-negotiable copy of B/L as advance intimation of shipment
to the importer.
- It enables him to pay the freight amount as the B/L contains freight details.

Importance to the Shipping Company

- It helps the shipping company to collect the freight amount from the exporter (CIF
contract) or importer (FOB contract).
- Shipping company can protect itself from the wrongful claims of exporter/importer by
incorporating condition of goods/packaging, at the time of receipt. In case the shipping
company, inadvertently, omits to mention the adverse condition, at the time of receipt,
advantage can be claimed by exporter/importer, by submitting wrongful claim.

2.4. Airway Bill

Airway Bill is also called Air consignment Note. It is a receipt issued by an airline for the
carriage of goods. As each shipping company has its own Bill of Lading, so each airline
has its own airway bill.
Airway Bill or Air consignment note is not treated as a document of title to goods and is
not issued in negotiable form. Delivery of the goods is made to the consignee without the
production of airway bill.

Significance of Airway Bill

- It is a contract of carriage of goods between the consignor and airlines or his agent.
- It acts as a customs declaration form.
- It contains details of freight and so works as a freight bill.

3. Documents related to loading and unloading

3.1 Cargo manifest
Cargo manifest is a document that gives descriptions of all merchandize shipped on board
for transportation to different ports, issued by the vessel‘s agent at the port of shipment.
This document must be available after the goods have been shipped on board or before
B/L is issued and signed. Anyway, it must be available before the procedure for the
57
sailing of the vessel is made.
Cargo manifest serves as a notice from the vessel to the consignee that the goods have
been shipped on board and helps the captain make customs declaration on the goods on
board. This document also acts as a base for payment of charges relating to the goods to
the port or the vessel‘s agent, subject to weight of the cargo and as a base for making out
Report on Receipt of Cargo (ROROC)
The contents of Cargo manifest include the vessel‘s name, date of arrival, order numbers
of B/L, marking, commodity, number of packages, weight, names of the shipper and
consignee, port of destination.
In reality, when the vessel is about to arrive at the port, the captain* shall hand over the
Cargo manifest to the vessel‘s agent at the port of arrival. If import-export businesses are
to know their goods on the vessel, they can ask the agent to give them a copy of the cargo
manifest.

3.2 Stowage plan/ cargo plan

Stowage plan is a document that shows stowage locations of the cargo on the vessel. Each
port of discharge is indicated by different colors to keep track on the handling of the
goods easily.
On receipt of registration for goods transportation from shippers, the vessel‘s captain
shall work alongside with coordinators to make out a stowage plan so as to make use of
each hold and other space in the ship properly in transit.
Before loading the goods on board the vessel, import-export businesses should have a
stowage plan at hands to know, their stowage locations and to calculate the laytime. Also,
when the vessel is about to arrive at the port, they need this document to make a plan for
taking delivery of the goods as well as predict possible damage caused by such stowage
and have the goods checked timely.
The stowage plan contains stowage locations, weight and order numbers of the B/L
related to the goods stowed at those locations.

3.3 Statement of facts

This document is a record of the events in relation to the use of laytime, and therefore can
affect calculation of despatch money and demurrage.
Time-sheet
Time-sheet is the general counting of the laytime used and acts as a base for calculation
of despatch money and demurrage. This document contains two parts:
- The first part includes details of the vessel and such important terms in a Charter Party
or in a sale contract as commodity, weight of the goods transported, port of arrival, date
of arrival, date of Notice of Readiness (NOR), date of completion of vessel inspection,
date of the beginning of loading and discharging.
- The second part includes the laytime used, date, weekdays and working hours, time
58
allowed, time saved or prolonged, calculation of despatch money and demurrage.

3.4 Report on Receipt of Cargo (ROROC)

ROROC is made out between the port and the vessel after the consignment or all the
goods has been discharged to confirm quantity of the goods actually delivered at the
named port of discharge.
This document serves as a proof of discrepancies in the form of over or short cargo as
manifested. Therefore, it is a base for the consignee to complain the carrier or the
insurance agency (if the goods are insured). Also, the port can use this document as a base
to hand over the goods to the importer and as evidence of its fulfillment to deliver the
goods to the importer in the same quantity as it received from the carrier.
ROROC is made out in the availability of representatives from the customs department,
the vessel‘s agent, the port and the consignee.
ROROC contains the following columns:
+ Quantity of the goods as manifested.
+ Quantity of the goods actually received
+ The discrepancies between the above figures
On receipt of the goods, if any discrepancy in the form of over or short cargo as noted in
the B/L comes to light, the consignee should ask the port to supply ROROC to complain
the captain.

3.5 Cargo outturn report (COR)

On discharging the goods out of the vessel at the port of arrival, if any damage to the
goods comes to light, a detailed report must be prepared by representatives from the port
(or forwarding company) and the vessel to record such damage. This document is known
as COR. and used by the exporter and importer as clear evidence to complain the carrier
with respect to his duty to take care of the goods during transportation.
COR is also used by the port to divide the legal duty between the port and the vessel in
terms of stowage and storage. As a rule, COR is made out in the event of apparent
damage.
COR contains name of the vessel, voyage No., deck, date of departure, date of arrival,
B/L No., commodity, quantity, marking and state of the goods.

3.6 Certificate of short-landed cargo (CSC)

When taking delivery of the goods from the vessel, if there is any discrepancy in the form
of over or short cargo as manifested, the consignee should ask the vessel‘s agent to make
out CSC. In other words, CSC is made out based on ROROC and cargo manifest.
CSC contains commodity, B/L No., quantity of the goods noted on the B/L, marking,
quantity of the goods actually received, short quantity, ROROC No. and date of ROROC
used to make out CSC.
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3.7. Dock sheet/ Tally sheet
Dock sheet is a document that shows quantity of the goods delivered at the dock.
Tally sheet is a document that shows quantity of the goods shipped on board the vessel
and noted by a counting officer.
Subject to the port‘s regulations, there are some other documents related to counting like
daily report, quantity note etc.
Tally sheet is an original document that shows quantity of the goods shipped on board the
vessel. Thus, a copy of this document must be kept by a mate of the vessel. It is also
necessary for complaints about damage to the goods in future.

Review questions
1. What are the common types of invoice in foreign trade? Briefly specify the purposes of
each type.
2. What is a C/O (Certificate of origin)? What are the common forms of C/O and in which
countries are they used?
3. What is a Certificate of Inspection? How many types of Certificates of Inspection are
there? What are the purposes of each type of such certificate?
4. What is a Bill of Lading? What are the purposes of a Bill of Lading?
5. How many types of Bill of Lading are there? What are they? In which cases are they
used?
6. What is an Airway Bill? What is the importance of an Airway Bill?

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Unit 7 INSTRUMENTS OF INTERNATIONAL PAYMENT

Learning objectives:
By the end of this unit, you will be able to:
- identify the time in international payment process.
- discuss the main instruments of international payment and describe their features.
- know how to issue a Bill of Exchange and a Cheque in international payment

Introduction
International payment is payment activities between residents and nonresidents of a
country by using foreign currencies to one or more transaction parties. International
payment is usually conducted through banks who offer services to import-export
companies. Like any international activities, international payment involves different
kinds of risks and is subject to international rules, trade practices and government control
over foreign exchange. Internet-based technology is changing trade practices in the
banking sector so significantly and continuous update on the topic is so essential to
import-export companies.
It is necessary for international business people to thoroughly understand important topics
of payment currency, time of payment, payment instruments and modes of payment.

1. Payment currency
Payment currency is the one used to settle the payment for contracts. This payment
currency may be the same to the price currency or a different one.
Payment currency may be the common currency like the euro of the European Union or a
national currency for example: USD, HKD, SGD, CAD, JPY...

2. Time of payment
Time of payment is important as it strongly affects the profits and other financial aspects
of companies. In international business, it is much more important as foreign exchanges
fluctuate in unpredictable ways.
There are some possibilities of time of payment: advanced payment, at sight payment and
deferred payment.

2.1 Advanced payment

Advanced payment is payment for the whole or part of the contract value after contract
signature but before the delivery date.
The purpose of advanced payment may be to offer credit to exporters or to guarantee the

61
contract performance.

2.2 Sight payment

There are some bases to consider:
- Payment is made after the exporter delivers the goods at the named place, not loading on
the means of transport. This case is called: cash on delivery (C.O.D)
- Payment is made after the exporter delivers the goods at the named place, loading on the
means of transport.
- Payment is made after the importer receives the shipping documents.
- Payment is made after the importer takes delivery of the goods.
As there are different points to consider, parties should specify which case should be used
and stipulate that clearly in their sales contracts to avoid misunderstanding and possible
disputes.

2.3 Deferred payment

Deferred payment is payment made after delivery of the goods.
It may be made xxx days after:
- The date an exporter delivers the goods at a named place, not loading on the means of
transport,
- The date an exporter delivers the goods at a named place, loading on the means of
transport,
- The date an importer receives the shipping documents or
- The date an importer takes delivery of the goods.

2.4 Combination of different time of payment

Parties may settle the payment by combining different ways: one part of contract value
shall be by advanced payment, one part shall be at sight payment and the remaining shall
be by deferred payment. It shall be subject to the nature of transaction, of the goods and
the relationship between parties.

3. Payment instruments
Popular instruments for import-export companies utilize in international business are bill
of exchange and cheques. Others may include promissory notes, credit cards....

3.1 Bill of exchange

Bill of exchange is an unconditional order for payment drawn on a drawee by a drawer
requesting the drawee at sight of the bill of exchange or on a specific date or a
determinable future time to pay certain amount to a beneficiary or to order of this
beneficiary to pay to another one or to the bearer.
International legal foundation relating to bill of exchange includes but not limited to:
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- ULB- the 1930 Geneva Uniform Law on Bill of Exchange and Promissory Notes (in
short: ULB 1930). This law is applied popularly in Europe.
- The UK Bill of Exchange Acts of 1882, BEA.
- The US Uniform commercial code of 1962 - UCG
In Vietnam, the Law on transferable instruments of 2005 regulates bill of exchange and
other instruments.
As there is not yet a universal regime for international payment, parties have to rely on
the chosen applicable laws to identify the parties‘ rights and obligations.

(1) Sample of Bill of Exchange used in payment by collection:

(2) Sample of Bill of Exchange used in payment by documentary credit:

3.1.1 Parties in B/E circulation:

- Drawer: is the party who signs the B/E, requesting the payment.
- Drawee: is the party on whom the B/E is drawn. The drawee is the one who has to
accept and pay for the B/E. In foreign trade, the drawee may be the buyer or the

63
issuing/confirming bank.
- Bearer: is the last beneficiary who presents the B/E for getting payment.

3.1.2 Types of B/E

- Sight drafts are payable on demand when the drafts are presented.
- Time drafts (also called usance drafts) are payable at a future fixed (specific) date or
determinable (e.g., 30,60,90 days) date.

3.1.3 Features of Bill of Exchange

• A bill of exchange must be in writing.
• It must be dated.
• It must contain an order to pay a certain sum of money.
• The order must be unconditional.
• The money must be payable to a definite person or to his order or to the bearer.
• It must be for a specified amount and specified period.
• The bill must be accepted by the party on whom the order is made.
• The language: International laws allow any languages in B/E but in a B/E, one language
is used.
B/E is made out into many copies (two is popular) to avoid loss of B/E in sending. The
early arrived one has been paid and the later shall become null and void. That‘s why the
first copy includes ―Second of the same tenor and date being unpaid‖ and the second copy
includes ―First of the same tenor and date being unpaid‖.
• Corrections are not accepted in B/E.

3.1.4 The contents of a Bill of Exchange

(1) B/E title: This is a compulsory item under ULB 1930 and Vietnam‘s law but optional
under Anglo-American law.
(2) B/E number: This is an optional item in a B/E, fixed by the drawer for his reference
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of filing.
(3) B/E amount: In figures and/or in words.
(4) Place of drawing B/E: This is necessary item to identify the applicable law to the
B/E. It may be the place of drawing, the place of drawer‘s headquarters.
(5) B/E date: This item is compulsory under all legal sources. A B/E without date shall
become null and void. It helps to identify the legality of parties and the time limit that B/E
must be presented for asking payment. Under ULB 1930, the B/E must be presented
within 1 year, under Vietnam‘s law, it‘s 90 days.
(6) Time of payment
- Sight B/E: ―at....sight‖ or ―at...\...sight‖
- Time B/E: ―at xxx days after sight‖ with xxx: a number, for example: 30, 60, 90...
(7) Beneficiary
- Order B/E: ―pay to the order of….‘
- Nominated B/E: ―pay to…‖
(8) B/E amount
- This item is presented by ― the sum of...‖.
- Under ULB 1930, the B/E amount must be a specific number, written in figures and/or
in words without any relevant interest rates. Under Vietnam‘s law, the amount must be in
both figures and words.
- In case of difference between figure and word amounts, the solution depends on the
applicable law:
+ Under Anglo - American laws: the typed information shall prevail the printed ones; the
hand-written ones shall prevail the typed and printed ones, the word amount shall prevail
the figure ones.
+ Under ULB 1930: The amount in words shall be for payment but in case of difference,
the smaller amount shall be the amount for payment.
+ Under Vietnam‘s law: in case of difference, the smaller amount shall be the amount for
payment.
In case an L/C is relevant, B/E usually includes ―all charges and amount shall be to the
account of....(the importer)‖ with information about the L/C (date, number, issuing bank)
(9) Name, address of the drawee.
(10) Name, address of the drawer and signature of the legal representative of the
drawer.

3.2 Cheque
Cheque is an unconditional order in writing drawn and signed by a person for the benefit
of another to direct a bank to pay a fixed sum to a named recipient or bearer of the
cheque. The customer‘s own cheque is using in settlement of a debt in International.
While this is common for local payments it is not a convenient method on International
trade. There is no certainty of payment. This means that when the cheque is sent for
65
collection it may not be paid for some technical or regal reasons or simply because of lack
of funds. Because the cheque will have to be sent through the bank for collection, costs
will be involved and the supplier will have to pay them.
The cheque is not likely to be negotiated by the supplier‘s bank because it is drawn on
unknown person. Therefore it will be sent for collection and this will take some days or
weeks, even months in some cases before its fate is known. A cheque could equally be
lost in transit.
Sample of cheque:

According to the Convention Providing a Uniform Law for Cheques 1931(ULC 1931), a
legal cheque must meet all the following requirements:
- The term "cheque" inserted in the body of the instrument and expressed in the language
employed in drawing up the instrument;
- An unconditional order to pay a determinate sum of money;
- The name of the person who is to pay (drawee);
- A statement of the place where payment is to be made ;
- A statement of the date when and the place where the cheque is drawn
- The signature of the person who draws the cheque (drawer).
An instrument in which any of the requirements mentioned in the preceding article is
wanting is invalid as a cheque, except in the following cases:
- In the absence of special mention, the place specified beside the name of the drawee is
deemed to be the place of payment. If several places are named beside the name of the
drawee, the cheque is payable at the first place named.
- In the absence of these statements, and of any other indication, the cheque is payable at
the place where the drawee has his principal establishment.
- A cheque which does not specify the place at which it was drawn is deemed to have
been drawn in the place specified beside the name of the drawer.
According to The Law on assignment instruments of Vietnam 2005: Cheque is a valuable
paper, which a drawer draws up, orders drawee being a bank or an authorized payment
services supplier of the State Bank of Vietnam to deduct a certain money amount from his
account to make payment to the beneficiary.
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Contents of a cheque are:
- The word ―Cheque‘' to be printed on top of the cheque;
- A definite amount of money;
- Name of the bank or the payment service supplier being the drawee;
- Name for organization, full name for individual of the beneficiary who is designated or
requested by the drawer to make payment of the cheque in accordance with the order of
the beneficiary or requested to make payment of the cheque to the holder;
- Place of payment and drawing date;
- Name for the organization, full name for individual and signature of the drawer.
A cheque may be made payable to a specified person with or without the express clause
"to order", or to a specified person, with the words "not to order" or equivalent words, or
to bearer.
Relating to the sum of money expressed on a cheque, stipulation of the Law on
assignment instruments Vietnam 2005 and ULC 1931 is difference. The Law on
assignment instruments Vietnam 2005
Meanwhile ULC 1931 stipulates sum of money where the sum payable by a cheque is
expressed in words and also in figures, and there is any discrepancy, the sum denoted by
the words is the amount payable.
Where the sum payable by a cheque is expressed more than once in words or more than
once in figures, and there is any discrepancy, the smaller sum is the sum payable.

Review questions
1. What is advanced payment?
2. What is sight payment?
3. What is deferred payment?
4. Read the Bill of exchange below and answer the questions.

Questions:
- The value of the draft is: _______________________________________
- The drawee of the draft is: ______________________________________
- The payee of the draft is: ______________________________________

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- The drawer of the draft is: ______________________________________
- This draft was drawn under a letter of credit issued by: ________________________
- The beneficiary of this letter of credit is: ____________________________________

5. Issue a Bill of Exchange on the basis of the following data:

- Exporter: M. M and C.O Company, Dist. 10, HCMC, Vietnam.
- Importer: T. H Trading Co LTD., Pusan, Korea.
- Advising bank: Bank for Foreign Trade of Vietnam HCM City Branch.
- Opening bank: Sinhan bank Seoul, Korea.
- Confirming bank: Tokyo bank, Japan.
- Drawn on: Tokyo bank, Japan.
- Means of payment: L/C A/S.
- Amount of payment: USD 48,384.00.
- Shipment date: 25/9/2015.
- Irrevocable: Confirmed L/C No: M426300/NS02617 date 01/8/2015.
- Invoice No: 18/ M.M /2005 date : 25/09/2015.

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Unit 8 METHODS OF INTERNATIONAL PAYMENT

Learning objectives:
By the end of this unit, you will be able to:
- identify some common types of method of payment
- understand the usage of Cash in Advance, Open Account and Remittance
- analyse the application of Clean and Documentary Collection

Introduction
In international commercial procedures, sellers and buyers shall want to make the sale
under the best conditions for themselves. While the buyer will vote for the cheapest and
longest termed payment type in paying the cost of the goods, the dealers will prefer cash
payment, which is the most advantageous payment type and the types of collection with
the least risks.
The agreement of buyers and sellers on how and in which term the payment will be made
is a quite critical period for both sides.
The exporter that prepares the goods and gets them ready for dispatch, as agreed with the
importer, has to think of the payment terms and a financing program, as he/she will
experience serious difficulties if he/she is not paid. Therefore, it is necessary for the
exporter to have sufficient information about the different methods of payment available
to him/her.
The main payment methods in foreign trade are cash in advance, open account, on
consignment, remittance, draft or documentary collection and letter of credit. In this part,
the main characteristics of each payment method are explained and the advantages and
risks for each one are given, thus enabling one to choose the best method for the
transaction.
In this part, payment methods will be dealt upon in details, and their risks and
superiorities for dealers and buyers will be evaluated.

1. Cash in Advance (CIA)

The Cash in Advance or Advance Payment method allows the buyer to pay cash in
advance to the seller. Paying in advance gives the greatest protection for the seller and
puts the risk on the buyer. Payment does not guarantee the shipment or delivery of the
goods from the seller. Therefore, the buyer will rarely pay cash up front before receiving
an assurance that the goods will be shipped and that the quality and quantity of the goods
ordered will be delivered.

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Process of payment by Cash in advance

Although this method of payment is not uncommon, the seller requiring full payment in
advance may cause lost sales to a foreign or domestic competitor who is able to offer
more attractive payment terms. In some cases, however, where the manufacturing process
is specialized, lengthy or capital-intensive, it may be reasonable to ask for some of the
full payment in advance, or with progressive payments. This method is often too
expensive and risky for foreign buyers, but useful when shipping to politically unstable
countries, when the buyer's credit is unsatisfactory or when goods are custom made to the
customer‘s requirements.
In some circumstances this payment method can be modified to a partial payment in
advance with agreed upon installments or additional terms available.

1.1 Application
- When the goods are specialized or made under buyer‘s special designs
- Buyer's credit is doubtful.
- The political and commercial risks of buyer‘s home country are very high.
- The exporter‘s product is unique, not available elsewhere, or in heavy demand.
- The exporter operates an Internet-based business where the use of convenient
payment methods is a must to remain competitive.

1.2. Advantages and disadvantages

For seller:
Advantages:
- No risks, non-payment can be eliminated.
- Immediate use of fund
Disadvantages:
- May lose customers to competitors over payment terms
- No additional earnings through financing operations
For Buyer:
Advantages: None
Disadvantages:
- No control over the goods
- Use of the funds is lost

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- Seller may refuse to ship
- Political risk in the seller country

2. Open Account
Open account is an arrangement in which the seller shall ship the goods to the buyer and
the payment shall be made after certain periods of time or when a credit limit is reached.
Open account is convenient to the buyer as the payment shall be made after the delivery.
Buyers can get credit offering from sellers and are not afraid of non-delivery. Obviously,
it is risky to sellers as they deliver the goods without any guarantee from buyers. Buyers
may refuse or delay the payment. When the payment is due, it may be settled by
remittance through banks.
This mode of payment is popular for payment between subsidiaries and parents
companies or when the parties have high trust in each other. It may also be utilized when
the payment is for small amounts.
Process of payment by open account

Step 1. Seller sends goods and documents to Buyer

Step 2. Seller sends debit note to Buyer
Step 3. At maturity, Buyer transfers funds to Seller

1.1 Application
- It is used when there is a high degree of trust between parties (commonly between
parent companies and its subsidiaries)
- For payment of small amount (service fee)
- Mostly used in domestic transactions.

1.2 Advantages and disadvantages.

Advantages to buyer
- It is low fees and easy bookkeeping.
- Buyer is required to pay for the goods or services only when they are received and/or
inspected.
Disadvantages to seller:
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- It is risky to seller because he releases title to the goods without having assurance of
payment.
- Seller‘s own capital is tied up until the goods or services are received.

3. Remittance
Remittance is the simplest mode of payment in which a party asks the remitting bank to
send certain amount of money to a beneficiary at a named place at a definite time.

3.1 Forms of remittance

Basing on the means of communication to conduct the remittance transactions, remittance
can be categorized into mail transfer and telegraphic transfer.
(1) Mail Transfer (M/T) is a form of remittance in which the remittance order is in the
form of a letter sent by post.
Remittance order is an instruction from the remitting bank to the paying bank, asking the
latter to pay certain amount of money to a beneficiary named in that letter. A remittance
order may consist of name and account number of the beneficiary, amount to be paid, the
way the remitting bank reimburses money to the paying bank.
(2) Telegraphic Transfer (T/T) is a form of remittance in which the remittance order is
in the form of a telegraphic message sent by telex or through a communication network
like SWIFT.
Contents in remittance order by T/T are almost the same like in M/T. The remitting bank
and paying bank are members of SWIFT or have system of Electronic Data Interchange.
The instructions are standardised and secured. THT is becoming more popular due to its
outstanding advantages.

3.2 Participating parties

- Remitter: party who requests the banks to transfer the money to another party in a
foreign country who is usually importers or payers.
- Beneficiary: party who shall get the payment transferred by the banks. It can be
exporters or parties named by exporters.
- Remitting Bank: a bank offers services to the remitter.
- Paying Bank: a bank pays money to the beneficiary. It can be a correspondence bank or
a branch of the remitting bank in the beneficiary‘s country.

Time of remittance:
In view of the time to remit funds to a seller, buyer may conduct 03 payment at different
time:
- Advanced remittance
- Immediate remittance
- Deferred remittance

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3.3 Process of payment by deferred remittance
In business practice, deferred remittance is most commonly used. This process can be
looked like this:

- Step 1: The beneficiary (usually the exporter) delivers the goods and sends the shipping
documents to the remitter (the importer).
- Step 2: After checking the goods and/or the set of shipping documents, if the importer
finds everything is as agreed, he shall prepare a remittance order to the remitting bank.
- Step 3: The remitting bank checks the remittance order and debits the remitter‘s account
and sends a debit note to the remitter.
- Step 4: The remitting bank sends the instruction to the paying bank to effect the
payment.
- Step 5: The paying bank pays to the beneficiary as instructed.

The remittance instruction/order is the legal basis regulating the relationship between the
remitter and the remitting bank so that the bank can offer the service. The remittance
instruction/order usually consists of name, address and account number of the remitter;
amount and currency of remitted money; name, address and account number of the
beneficiary; remittance reasons and instructions on arising costs both in the home country
and the foreign country.
Under Vietnam‘s current regulation on foreign exchange control, remitters are required to
provide relevant documents as legal basis for the remittance.
Remittance is a simple and time-saving mode of payment. Banks are just intermediaries
in payment without undertaking any obligations. The payment depends so much on the
willingness of importers and involves high levels of risks. That‘s why exporters should
consider so carefully the reputation, financial capability of importers and situations of
current markets.

3.4 Application of Remittance

- In reality, this mode is only used when there is high level of trusts between the parties.
- It is used to pay an amount is not so much (advanced payment, down- payment, deposit,
payment of fees or services, commission, payment of balanced amounts...).

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3.5 Advantages and disadvantages of Remittance:
Advantages:
- Quick and easy book-keeping
- Low fee
Disadvantages:
- Risky to seller if remittance is made after shipment.
- Risky to buyer if remittance is made before shipment.

4. Collection
The International Chamber of Commerce issued Uniform Rules for Collections No. 522
in force as of January 1, 1996 (URC 522) to offer an international trade practice for banks
to handle collection. According to URC 522, ‗Collection‘ means the handling by banks of
documents in accordance with instructions received, in order to obtain payment and/or
acceptance or deliver documents against payment and/or against acceptance or deliver
documents on other terms and conditions.
Collection is a method of effecting payment, under which a seller or his/her bank, in
pursuant of the seller‘s instruction, collects payment from the buyer by presenting drafts
to the buyer with or without accompanying commercial documents.
Collection can be categorized into clean collection or documentary collection.

- Clean collection: a particular way of carrying out collection, in which a bank is

instructed to collect payment for a draft from a buyer who does not receive the relevant
commercial documents at the same time. As UCR 522, clean collection means collection
of financial documents not accompanied by commercial documents.

- Documentary collection: a particular way of carrying out collection, in which a bank,

under the seller‘s instruction, collect payment for a draft from a buyer who receive the
relevant commercial documents for exchange. As UCR 522, documentary collection has
two meanings: financial documents accompanied by commercial documents or
commercial documents not accompanied by financial documents.

4.1. Clean Collection

Clean collection means collection of financial documents not accompanied by
commercial documents. It means that clean collection is an arrangement in which
exporters entrust banks to collect money from importers, basing on financial documents
prepared by exporters. Commercial documents are sent directly to importers, not through
the banks.

74
4.1.1 Process of payment by clean collection

- Step 1: The exporter sends the goods and the commercial documents to the importer.
- Step 2: The exporter draws a draft/ bill of exchange and a collection instruction to ask
the remitting bank to help collect the money.
- Step 3: The remitting bank sends the B/E, collection instruction to the presenting bank
to ask to collect the money from the importer.
- Step 4: The presenting bank presents the B/E and collection instruction to the importer
to ask for payment.
- Step 5: The importer makes payment against the B/E or refuses to pay, which is subject
very much to the goodwill of the importer.
+ In case the importer agrees to pay, he shall sign the B/E (at sight or usance B/E).
+ In case the importer disagrees to pay, he shall reply by a refusal.
- Step 6: The presenting bank sends funds or refusal to the remitting bank.
- Step 7: The remitting bank sends funds or refusal to the importer.
In the above process, it should be noted that this mode of payment is not so safe to
exporters as exporters deliver goods together with commercial documents to importers
without any guarantee of payment. The banks act as intermediaries in payment without
helping to control the payment. Importers may delay or refuse the payment while the
goods have been at the destination. In that case, exporters may have to offer price
reduction to sell the goods or look for another buyer, which shall put exporters in a
favorable position for any negotiation.

4.1.2 Application
- This method of payment is used only when the seller has a high degree of trust to his
buyer or it is used in in-house relationship (E.g.: between parent company and
subsidiaries)
- When the amount is not so significant, for payment of services (freight charge,
insurance fee, commissions…)

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4.1.3 Advantages and disadvantages
Advantages:
- Simple procedures, low fees.
Disadvantages:
- Banks act simply as an intermediary, no guarantee for payment to seller.
- Slow speed of payment process.
- Risky to seller as payment is subject to buyer‘s willingness.

4.2. Documentary Collection

Documentary collection is collection arrangement in which financial documents are
accompanied by commercial documents or commercial documents are not accompanied
by financial documents.
It means that documentary collection is a mode in which exporters entrusts banks to
collect money basing on the B/E and the attached commercial documents and the banks
only give the documents to the importers if they have paid or accepted to pay for the
goods.

4.2.1 Process of payment by documentary collection

- Step 1: The exporter sends the goods to the importer.

- Step 2: The exporter draws a draft/ bill of exchange, a collection instruction and a set of
commercial documents to ask the remitting bank to help collect the money.
- Step 3: The remitting bank sends the B/E, collection instruction and the set of
commercial documents to the presenting bank to ask to collect the money from the
importer.
- Step 4: The presenting bank presents the B/E, collection instruction to the Importer to
ask for payment.
- Step 5: The importer makes payment or refuses to pay.
+ In case of agreement to pay, the importer signs the B/E (at sight or usance B/E), the
bank shall release the set of shipping documents to him.
+ In case of refusal to pay, the importer shall reply by a refusal.
- Step 6: If the importer pays or accepts the B/E, the presenting bank releases the shipping
documents to him for taking delivery of goods.
- Step 7: The presenting bank forwards the signed B/E (in case of payment) or refusal (in
76
case of non-payment) with the shipping documents to the remitting bank.
- Step 8: The remitting bank shall send the result of collection to the exporter. It may be a
signed B/E or a refusal with the set of documents.
With documentary collection, there are two cases:
- Documents against Payment (D/P): In this case, the payment is made immediately. The
bank only gives the documents to the importer when he pays (i.e. accepted the at-sight
B/E).
- Documents against Acceptance (D/A): In this case, the payment shall be made later. The
bank only gives the documents to the importer when he has accepted a usance B/E.

4.2.2 Application:
- It is used when the seller has a certain degree of trust to his buyer
- When the amount transacted is not so high

4.2. Advantages and disadvantages

Advantages to the seller:
- Documentary collections are uncomplicated and inexpensive
- Documents of title, are not released to buyer until payment or acceptance has been
effected. In the event of nonpayment or non-acceptance by buyers, Collecting Bank, if
properly authorized, may arrange for goods release, warehousing, insurance or even
reshipment to the seller.
- Collections may facilitate pre-export or post-export financing.
Disadvantages to the seller:
- He ships the goods without an unconditional promise of payment by the buyer.
- No guarantee of payment or immediate payment by buyer.
- He ties up his capital until the funds are received.
Payment by documentary collection can better protect the benefits of exporters as banks
only release shipping documents once importers have paid or accepted to pay. The banks
are more involved in this method to help exporters to control the shipping documents.
However, payment still depends on the willingness of importers as they can refuse to take
the documents. It is still risky to exporters as they start the procedure by delivering the
goods without any guarantee from importers of payment.

Review questions
1. What is Cash in advance? Indicate the process, application, advantages and
disadvantages of this method of payment.
2. What is Open account? Indicate the process, application, advantages and disadvantages
of this method of payment.
3. What is Remittance? Indicate the process, application, advantages and disadvantages of
this method of payment.
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4. What is Clean Collection? Indicate the process, application, advantages and
disadvantages of this method of payment.
5. What is Documentary Collection? Indicate the process, application, advantages and
disadvantages of this method of payment.
6. Indicate the differences between payments by DP and DA.

78
Unit 9 DOCUMENTARY CREDIT

Learning objectives:
By the end of this unit, you will be able to:
- have an overview of payment by documentary credit
- identify the participants in payment by Letter of credits
- comprehend the process of payment by letter of credit

1. Introduction of Documentary Credit

The International Chamber of Commerce issued The Uniform Customs and Practice for
Documentary Credits, 2007 Revision, ICC Publication no. 600 ("UCP") as rules that
apply to any documentary credit ("credit") (including, to the extent to which they may be
applicable, any standby letter of credit) when the text of the credit expressly indicates that
it is subject to these rules. They are binding on all parties thereto unless expressly
modified or excluded by the credit.
UCP 600 defines Credit as any arrangement, however named or described, that is
irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a
complying presentation.
Letter of credit is an arrangement whereby a bank acting at the request of another person
or on its behalf undertakes to pay, or authorizes another bank to pay or negotiate, the sum
specified in the credit to a beneficiary if the beneficiary perfectly fulfils all the terms of
the credit.

2. Participating parties
- Applicant: a person/company who requests or instructs a bank to issue a letter of credit.
- Issuing bank or Opening bank: a bank which issues a letter of credit upon the request of
the applicant.
- Beneficiary: a person/company in whose favour a letter of credit is issued. It may be the
exporter, the seller or the one nominated by the beneficiary.
- Advising bank: a bank which advises or is authorized to advise a beneficiary of the
availability of a credit and its terms.
- Confirming bank: a bank which guarantees/ confirms the payment of a credit issued by
another bank. In case of non-payment by the issuing bank, the confirming bank assumes
the obligation of payment. Confirming banks are usually banks of good international
repute and financial capability.

3. Process of payment by L/C

Procedures to conduct documentary credit can be seen as below:
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- Step 1: International sales contract signed with payment by letter of credit.
- Step 2: Basing on the signed contract, the importer applies to open an L/C at the issuing
bank.
- Step 3: If the application is qualified, the issuing bank opens an L/C on the basis of this
application, sends the L/C to the advising bank and asks the bank to advise the
beneficiary.
- Step 4: The advising bank sends the L/C to the beneficiary.
- Step 5: The beneficiary checks all the terms and conditions in the L/C. If all is
acceptable, the beneficiary makes delivery of the goods. If there is any term or condition
unacceptable, the beneficiary shall ask the applicant to amend until all is acceptable to
deliver the goods.
- Step 6: After delivering the goods, the beneficiary prepares the documents as stipulated
in the L/C, submits to the bank for payment.
- Step 7: The issuing bank shall check the documents to make sure that they are in strict
compliance with the L/C requirements. If the set of documents are perfect, the bank shall
inform the relevant parties of its payment decision. If the set of documents are not perfect,
the bank shall inform the relevant parties of its payment refusal.
- Step 8: The issuing bank gives the documents to the applicant so that he can contact the
carrier to take delivery of the goods. The applicant only accepts the documents if they are
in strict compliance with the L/C requirements. Or else, he can refuse the documents.
- Step 9: The beneficiary completes all of the payment obligation with the bank, if any.

Letter of credit is a letter issued by a bank upon request of the bank‘s client, the importer
in which the banks promises to pay certain amount of money within a certain period of
time to a beneficiary on the condition that he presents a set of documents in strict
compliance with the terms and conditions set in that letter.
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From this definition, it implies that once the L/C is issued by the issuing bank, the issuing
bank assumes the obligation of payment if the beneficiary presents a perfect set of
documents. That‘s why when an L/C is involved, the drawee in the B/E is the issuing
bank or confirming bank.
An L/C is applied to open on the basis of a sales contract. However, after being issued,
the L/C is independent of the original sales contract as in examining the set of documents,
the banks shall base on the requirements of the L/C rather than the sales contract. UCP
600 confirms that a credit by its nature is a separate transaction from the sale or other
contract on which it may be based; banks are in no way concerned with or bound by such
contract, even if any reference whatsoever to it is included in the credit. Consequently,
the undertaking of a bank to honour, to negotiate or to fulfill any other obligation under
the credit is not subject to claims or defenses by the applicant resulting from its
relationships with the issuing bank or the beneficiary.
Another feature of this mode of payment is that the bank shall base on the documents
only, not on the physical goods.
While the beneficiary prepares the document, he has to make sure that the documents are
consistent and accurate. If there are any errors in the presented documents, it shall offer
the applicant good excuse to delay the payment or refuse the documents.

Major components in an L/C:

- L/C number
- Place and date of issue
- Type of L/C (irrevocable or revocable...)
- Name, address of relevant parties to that IVC
- L/C amount
- Date and place of expiry
- Date of delivery
- Goods description
- Documents to be presented
- Engagement of the bank
- Signature

Review questions:
1. What is documentary credit?
2. Which parties participate in payment by Letter of credit?
3. How many steps are there in the process of payment by Letter of credit? What are
they?
4. What are the roles and responsibilities of an issuing bank in payment by Letter of
credit?
5. Under what conditions, will an issuing bank make payment to an exporter?
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Unit 10 TYPES OF LETTER OF CREDIT AND ASSOCIATED
DOCUMENTS

Learning objectives:
By the end of this unit, you will be able to:
- distinguish the different types of letter of credit
- analyse the application of each type of letter of credit
- identify the types of shipping documents prepared by an exporter for payment by
letter of credit

1. Types of Letters of Credit

Letter of Credit can be divided into different types in accordance with certain
considerations:

1.1 According to the nature of the L/C

- Revocable LC: a credit which can be revoked or withdrawn anytime before it has been
performed, for example, it has been negotiated or the compliant documents have been
accepted by an authorized bank.
- Irrevocable LC: A credit, under which the issuing bank undertakes not to revoke the
credit before a specific time or event, provided that the beneficiary complies with its
terms.
- Confirmed Irrevocable LC: an L/C to which a confirming bank has added its
confirmation that it shall undertake the responsibility of payment in case of non-payment
by the issuing bank.

1.2 According to the time of payment

- Sight Payment LC: an L/C in which if beneficiary presents a perfect set of documents,
he shall get immediate payment.
- Deferred Payment LC: an L/C in which if beneficiary presents a perfect set of
documents, he shall get a confirmation to get payment at a definite time in the future.

1.3 Other types of L/C

There are several special credits designed to meet the specific needs of buyers, suppliers,
and intermediaries. Special credits involve increased participation by banks, so financing
and service charges are higher. Each of the credits listed below is explained in greater
detail in the pages that follow. '
- Transferable LC: a credit which can be transferred by the beneficiary pursuant to the

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terms of the credit. A transferable documentary credit is one where the beneficiary may
request that part of the proceeds (payment) of the credit be transferred to one or more
other parties who become second beneficiaries.
- Standby credits: are often called nonperforming letters of credit because they are only
used if the collection on a primary payment method is past due. Standby credits can be
used to guarantee repayment of loans, fulfillment by subcontractors, and securing the
payment for goods delivered by third parties.
- Revolving LC: A revolving documentary credit is an obligation on the part of an
issuing bank to restore a credit to the original amount after it has been utilized, without
the need for amendment. A revolving documentary credit can be revocable or irrevocable,
cumulative or non- cumulative, and can "revolve" in number, time, or value.
- Back to back LC: This is a new credit opened on the basis of an already existing,
nontransferable credit. It is used by traders to make payment to the ultimate supplier. A
trader receives a documentary credit from the buyer and then opens another documentary
credit in favor of the ultimate supplier. The first documentary credit is used as collateral
for the second credit. The second credit makes price adjustments from which comes the
trader's profit.
- Red clause LC: A red clause documentary credit is an obligation on the part of an
issuing bank to guarantee advance payments made by a confirming (or any other
nominated bank) to the beneficiary prior to presentation of documents.

2. Letter of Credit and its associated documentation

(For more details of shipping documents, see unit 6)
There are no rules as to what documents a letter of credit may or may not require. The
bank must simply check that the documents specified in the letter of credit are in perfect
order - it does not question the necessity or value of the documents - nor is it interested in
the question of why the buyer wanted a particular document presented in a particular form
The bank is scrupulous, however, in checking that the documents are correct: this is the
doctrine of strict compliance mentioned above.
The letter of credit contains a list of the documents that the exporter must- present. Each
document should be carefully and correctly named - "Marine Bill of Lading" not simply
"BL" or "Bill of Lading."
The number of originals and the number of copies required should be stipulated: For
example, "3/3 Marine Bill of Lading" means that the ex-porter must produce three
originals and three copies of the marine bill of lading. Unless the letter of credit expressly
states otherwise, the bank expects all documents to be originals. (It is sometimes difficult
with modern documentation to decide what is an original and what is a copy. Any
document which is authenticated and which states that it is an original is usually
accepted)
The ICC suggests that documents are listed in a certain order:
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- Commercial invoice;
- Transport document;
- Insurance document;
- Other documents such as certificate of origin, certificate of analysis, packing list, weight
list, phytosanitary certificate, etc.
Let us now look at each of these documents in a little more detail to see what the banks
are looking for.

2.1 Commercial Invoice

A commercial invoice must be made out to the applicant for the letter of credit (normally
the buyer), unless otherwise stated in the credit. The description of the goods on the
invoice must conform with the description in the letter of credit. To avoid conflicts in
description, it is good practice to keep the description in the letter of credit as short as
reasonably possible. The amount shown on the invoice should not be more than the
amount permitted by the letter of credit; if it is, the bank may refuse to accept the invoice.
Sometimes the buyer requires that an invoice must be certified or notarized; if so, the
letter of credit should state exactly what is meant, for example, what kind of certification
made by whom. On the next page there is an example of a commercial invoice using the
SITPRO (United Kingdom Simplification of International Trade Procedures Board)
standard form.

2.2 Transport Documents

We saw that when the exporter passes over the goods to the carrier, the carrier issues a
transport document appropriate for the particular means of transport involved.
The main types are:
- Sea transport: Marine bill of lading (or sea waybill)
- Air transport: Air waybill
- Rail transport: Railway consignment note
- Road transport: Road consignment note
- Combined transport: Combined transport bill of lading
The letter of credit should state the type of document required. If alternative means of
transport or partial shipments are allowed perhaps by different modes of transport, the
letter of credit should have the words "or" (or "and/or") between the names of the
transport documents, e.g.: "Marine Bill of Lading and/or Road Consignment Note."
Some special problems associated with particular transport documents can be briefly
highlighted here.

Shipment by Sea: Some types of sea transport are not allowable unless the parties agree
on them and letter of credit is worded accordingly. In particular, transport on the deck of a
ship or in a pure sailing ship is not allowed. Thus, if the bank sees from a marine bill of
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lading that transport shall take place on deck, and if the letter of credit does not allow this,
the bank shall reject the shipping document
Often a marine bill of lading is a negotiable (sellable) document - is not necessary:
usually the buyer does not plan to resell the goods during shipment. In this case, the
carrier often issues a sea waybill, which is similar to the familiar road or rail consignment
note.

Shipment by Air: The form of the air waybill (air consignment note) has been
standardized by IATA (International Air Transport Association). The air waybill is
issued in three originals and nine copies. Only the second original goes to the consignee
(the buyer). Sometimes a letter of credit calls for "a full set of original air waybills"; this
is obviously a mistake - the exporter cannot provide the complete set. The bank, however,
shall follow the wording of the letter of credit exactly and refuse an "incomplete set" of
waybills. Another incorrect requirement is that the air waybill show the date of the flight:
a correctly completed waybill cannot show this information - but again the bank must
insist on strict compliance.

Shipment by Rail: As with the air waybill, letters of credit calling for a rail consignment
note occasionally make impossible demands. The "original consignment note" does not
come into the - possession of the exporter, so a letter of credit demanding the original is
certain to cause delay in payment.

2.3 Insurance Documents

If shipment is made on CIF or CIP terms, the letter of credit shall call for an insurance
policy or certificate. The exact risks to insured are also normally stated. (If shipment is
under Incoterms other than CIF or CIP, the buyer may still ask the exporter to arrange
some aspects of the insurance for him. In such cases, the letter of credit calls for
documents to prove that the exporter has taken the agreed steps.) Unless the letter of
credit states otherwise, insurance coverage on a CIF or CIP shipment must be for 110% of
the CIF (or CIP) value of the goods; if it is not, banks often refuse the insurance
document.

2.4 Customs Documents

Certificate of Origin: By far the most common of the "other documents" is the certificate
of origin. This is required for imports into the buyer's country under a preferential tariff or
other agreement. Procedures for obtaining certificates of origin vary from country to
country. A Chamber of Commerce or carrier can advise you.
Certificate of Inspection: Many countries, for example Indonesia, have found that the
passage of imported goods through their own customs is easier if the goods are inspected

85
and valued in the country of the exporter. A number of international inspection companies
specialize in such work. The Societe Generale de Surveillance (SGS) is one example. If
SGS inspection is required, the parties should make a note to this effect in their contract
and adjust the delivery schedule to allow time for inspection. Obviously the details of the
inspection certificate must correspond exactly with the details in the transport document
and the commercial invoice. Discrepancies shall almost certainly delay payment.

Special Requirements: Many countries require containers to be fumigated before

shipment; others have special requirements about packaging materials; for certain kinds
of products - foodstuffs in particular - a health inspection is necessary; some African
countries place severe restrictions on the import or export of wildlife or wildlife products.
These are only examples - the list is endless. In each case, the exporter and the buyer
should agree exactly what the certificate must show and who should issue it. The details
must appear in the letter of credit: vague requirements such as "appropriate wildlife
certificates" are likely to cause delay in payment - the bank and the exporter may have
different views on what is "appropriate."

Review questions
1. How many types of letter of credit are there? What are they?
2. What is a confirmed L/C? In which case should a seller use this type of L/C?
3. What is L/C at sight and after sight? In which cases are they used?
4. What is Transferable L/C? In which case is it used?
5. What is Standby L/C? In which case is it used?
6. What is Revolving L/C? In which case is it used?
7. What is Back-to-Back L/C? In which case is it used?
8. What is Red clause L/C? In which case is it used?

86
Unit 11 NEGOTIATING THE TERMS OF A LETTER OF CREDIT

Learning objectives:
By the end of this unit, you will be able to:
- comprehend the process of negotiating the terms of a Letter of Credit
- identify the way to complete an application for a Letter of Credit
- recognize some common discrepancies in documents which will result in non-
payment by a bank.

1. Negotiating the terms of a Letter of Credit

It is one of the buyer's main duties to provide the letter of credit. In fact, if an agreed letter
of credit is not issued on time, the exporter often has the right to cancel the contract
because of a fundamental breach by the buyer.
Unfortunately, many exporters pay little attention to the exact terms of the letter of credit
until it is too late. Usually exporters leave it to the buyer to apply to his house bank for a
letter of credit: the buyer provides the bank with outline information about the deal, and
leaves the bank to draft the letter of credit as it sees fit. This procedure meets the interests
of the buyer and the bank, but it often leaves the exporter with serious headaches. How
can the exporter best protect his interests?
The steps of negotiating the terms of an L/C can be seen as follows:

(1) Agreement
The first step is for exporter and buyer to agree exactly what documentation is required.
Some items are discretionary, for instance the nature of the transport document or the
terms of insurance. Other items are a matter of government regulation: the phytosanitary

87
certificate or certificate of origin, for example. The two parties may have to talk to their
Chambers of Commerce, to their banks or to the carrier to establish the complete list.
(2) Incorporation
Once the list of documents has been agreed, Step 2 is Incorporation of the list into the
contract. There are many ways of doing this, one of which is particularly effective. The
ICC has published a form that the buyer can use to apply for a letter of credit. In addition
to the form, the ICC has offered detailed notes on how to complete it. The exporter and
the buyer can complete this application form during their negotiations and append a copy
of the form to their contract.
(3) Specification
This form can then be passed to the bank as Specification of the required letter of credit.
Thus, the credit, when issued, should be exactly as agreed by the parties with no nasty
surprises for the exporter. We shall discuss the form in detail when we have mentioned
the remaining two steps.
(4) Verification
The Verification step is an obvious precaution: as soon as the exporter receives advice
that the letter of credit has been opened, he should check that it complies with the
agreement he negotiated with the buyer. The danger here is that when the bank drafts the
letter of credit, it lists documents or makes requirements that the exporter either does not
understand or has not agreed to. Immediate discussion with the advising/confirming bank
is essential since amendments are always time consuming. If the problem is spotted early
enough, however, payment should not be delayed.
(5) Compliance
And finally Compliance. It cannot be said often enough that timely payment depends on
exact compliance by the exporter with the terms of the credit.
Let us then turn to the form used to apply for a letter of credit. In practice, most banks
have a form of their own, but it seldom differs widely from the ICC standard. You shall
see on the next page that each box is numbered, and that instructions on how to complete
each box are given on the following pages. If you want more information, you should
consult the ICC booklet on standard documentary credit forms.

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2. Segments in a Letter of Credit
Applicant Issuing Bank
2
1
Date and place of expiry of the credit
4

Date of this application Beneficiary 5

3

Issue by air(mail) 6 With brief advice by

teletransmission
Issue by teletransmission (which shall be the operative
credit instrument)
Transferable credit
7
Amount
9
Confirmation of credit to the beneficiary
Not requested 8 requested

12
Partial shipments Transhipment 11 Credit available with
allowed not allowed not by by by
10 allowed sight payment acceptance negotiation
allowed by
deferred payment
Insurance shall be covered by us 13 against the documents detailed herein
and beneficiary‘s draft at
on
Loading on board/dispatch/taking in charge at/from
not later than for transportation to: 14

FOB CFR CIF

Goods (brief description without excessive detail)

15 Other terms 16

Shipping Documents required:

17

Documents to be presented within days after the Issuance of the transport document(s) but within the validity of the
credit.
18

Additional Instructions: 19

We request you to issue your irrevocable documentary credit for our

account in accordance with the above instructions (marked with an x
where appropriate). The credit shall be subject to the Uniform
Customs and Practice for Documentary Credits (1993 Revision,
Publication No. 500 of the International Chamber of Commerce,
Paris, France), insolar as these are applicable. 21
We authorize you to debit our account.
20 Name, stamp and authorized signature(s) of the applicant.

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Segment 1: Applicant

Applicant

The full name and address of the applicant (buyer), including normally the buyer's
account number with the issuing bank.

Segment 2: Issuing Bank

Issuing Bank

The name of the issuing bank. This can be left blank. If you obtain an application form
from a bank, the name is often preprinted.

Segment 3: Application Date

Date of this application

The date on which the application form is submitted to the bank. In negotiating your
contract, you can leave this blank.

Segment 4: Date and Place of Expiry

Date and place of expiry of the credit

All credits stipulate an expiry date: i.e., the last date for presentation of documents to the
bank. This should be carefully negotiated. The, buyer shall want an early date to save
bank charges; the exporter shall want enough time after delivery to present the documents
and to correct any discrepancies that might be discovered by the bank. A "stale"
(expired) letter of credit shall not be paid without an amendment.
This timing decision should obviously be coordinated with the other timing decisions on
the credit Segment 14, latest date for shipment, and Segment 18, the period allowed after
shipment for presentation of documents to the bank.
The place of expiry is often "At the counters of the confirming bank."

Segment 5: Beneficiary

Beneficiary
The full name and address of the beneficiary - the exporter in most cases. (The buyer is
normally suspicious of anyone other than the exporter being named as beneficiary.) In
addition to the postal address, telephone, telex and fax numbers are sometimes included,
especially if Segment 6 requests teletransmission.
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Segment 6: Method of Issue

Issue by airmail With brief advice

by teletransmission

Issue by teletransmission (which shall be

the operative credit instrument)

This segment deals with the method of issuing the letter of credit. In effect there are two
choices: issue by mail and issue by teletransmission (normally telex). The choice depends
on the time available to the panics: issue by mail is likely to be much slower than issue by
telex. If the exporter wants the best of both worlds, he can cross two boxes: Issue by mail
and Brief advice by teletransmission. The "brief advice" is a notification by telex that the
credit has been issued and is on its, way by mail. On this advice, the exporter might,
perhaps, begin preparations for delivery.

Segment 7: Transfer of the Credit

Transferable credit

A transferable credit is one which allows the first beneficiary (the exporter) to request the
confirming bank to pay a third party. The effect is that the buyer shall not necessarily
know who the actual supplier of the goods is - shall it be the exporter or the as yet
unknown third party? In principle a letter of credit is not "transferable," but it can be
made so by crossing the appropriate box.

Segment 8: Confirmation

Confirmation of credit to the beneficiary

Not requested Requested

This is a crucial issue for the exporter. Shall the bank in his own country merely handle
the paperwork, or shall it make payment itself and recover the funds from the buyer's
bank? Exporters greatly prefer confirmation.

Segment 9: Amount

Amount

The amount of the credit should be expressed both in figures and in words. The currency
91
of the credit should be stated using the ISO (International Standards Organization)
currency code, e.g. USD for United States dollars, GBP for pounds sterling, or DEM for
deutschemark.
It is sometimes difficult to know exactly what the final invoice figure shall be.
Accordingly, many credits use words such as "about" or 'approximately." In this case,
actual payment can be 10% more or 10% less than the stated amount. (See UCP Article
39) Another common phrase is "up to" or "not exceeding." This is useful when partial
shipment (and therefore partial payment) is not allowed, but when the final invoice may
be for considerably less than the stated amount of the credit.
It is sometimes the case that some part of the contract price is to be paid by letter of credit
and the rest by some other means - prepayment perhaps, or perhaps the buyer shall retain
a part of the price until the warranty period is over. In this case, the application should
state (in Segment 19) what percentage of the invoice price is covered by the credit.

Segment 10: Partial Shipment

Partial shipments

allowed not allowed

In principle, partial shipments are allowed unless the "not allowed" box is crossed.
You should distinguish carefully between partial shipments and-shipment installments.
Shipment in installments means that an agreed schedule has been set up (e.g., three equal
shipments in March, August and October 20--.) This schedule should be noted in
"Additional Instructions" (Segment 19). A partial shipment is simply an incomplete
shipment with some part of the goods to follow later. Unless the buyer has some clear
reason for wishing all the goods to arrive together, partial shipment should be "allowed."

Segment 11: Transshipment

Transshipment
allowed not allowed

Transshipment means moving the goods from one conveyance to another. Container
transport ("combined transport") obviously presumes transshipment. It is only when
goods travel by sea under a sea waybill or marine bill of lading that it makes sense to
forbid transshipment - and even then there would have to be special reasons for the
prohibition: extreme fragility of the goods would be one example. Normally
transshipment is allowed.

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Segment 12: Availability
Credit available with

By By By
sight payment acceptance negotiation

By deferred payment

Against the documents detailed herein

and beneficiary‘s draft at ______ on

"Credit available with..." - this is sometimes followed by the name of the advising bank
chosen by the exporter. More often it is left blank. In this case, the issuing bank is free to
decide which bank shall act for it in the exporter's country.
The various types of payment are discussed above. For the exporter, "by sight payment"
is most advantageous: as soon as the bank has "sight" of the documents, i.e., as soon as
the exporter presents them, it pays.
Sometimes, though not often, the beneficiary (exporter) must make a draft on the bank to
collect the money. In this case the box "and beneficiary's draft" is crossed, the word "at"
is followed by "sight" (or possibly some number of days); the word "on" is followed by
"nominated bank."

Segment 13: Insurance Covered by the Buyer

Insurance shall be covered by us

This box is "for information only" - it simply clarifies that insurance is taken care of "by
us," i.e.; by the buyer. The box is normally checked when the delivery term is FOB, CFR
or some other term where the exporter is not required to present an insurance document.

Segment 14: Transport Information

Loading on board/dispatch/taking in charge at/from
not later than ________ for transportation to:__________

This segment includes the "dispatch from...for transportation to..." information and the
latest date of shipment.
In stating where the goods shall travel from and where they shall travel to, the parties
should agree precise places – harbor, airports, and so on. Generalized references such as
"US East Coast Port" are sometimes used.
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After ―not later than‖, the parties should enter a final delivery date. If they do not, then
the date of expiry of the credit is taken to be the final delivery date. Sometimes, the
formula ―not later than‖ does not adequately state the agreed delivery time. In that case,
the words should be deleted and others substituted, such as ―during May 20--‖ or ―not
before 20th May 20-- and not after 28th June 20--.‖
This timing decision should be coordinated with the other timing decisions on the credit:
Segment 4, date of expiry, and Segment 18, the period allowed after shipment for
presentation of documents to the bank.

Segment 15: Description of the Goods

Goods (brief description without excessive detail)

The goods description should be kept as brief as possible. The more complicated the
description, the chance there is of a discrepancy with some other document – the
inspection certificate or the commercial invoice, for example.
Quantities are sometimes stated in specific terms: ―30 x 8 – gallon drums,‖ for example.
In this case, the bank checks the documents to ensure that the exact quantity has been
shipped. If the terms are less specific (―60 tons of grade 3 sand,‖ for example), then the
bank allows the tolerance of 5% either way unless the credit expressly excludes all
tolerances. Even more vague, the credit may state the quantity as ―about 60 tons‖ or
―circa 60 tons‖. In this case the bank allows a 10% tolerance before refusing payment.
To date, use of the Standard International Trade Classification Code or the Harmonized
System Code which allocate code numbers to specific products is rare in letters of credit.

Segment 16: Incoterms

FOB CFR CIF
Other terms: ________

Three boxes here specify the most common terms of trade, FOB, CFR and CIF. In each
case, the name of a place must be added in parentheses. If any other Incoterm is used, it
should be given in full.

Segment 17: Documents

The application form leaves the space where documents are to be listed without a heading
of any sort. (The reason for this omission is not clear.)
As discussed earlier in this Chapter, documents should be listed in the recommended
order. If there is not enough space, additional pages may be added. Each type of
document is discussed elsewhere in this book.

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Segment 18: Presentation Period

Documents to be presented within days after the issuance of the transport documents
but within the validity of the credit.

After the transport document is issued (i.e., after the goods are shipped), the exporter
needs some time to collect the required documents, to prepare them and to present them
to the bank. Most buyers fix a maximum time between shipment and presentation. If this
box is left empty, the UCP (Article 43) automatically allows 21 days, and that may be
taken as a normal figure.
This timing decision should be coordinated with other timing decisions: Segment 4, date
of expiry, and Segment 14, latest date for shipment.

Segment 19: Additional Instructions

Additional instructions:

Typical ―additional instructions‖ include a statement of the percentage of the invoice

price covered by the credit if this is less than 100% (additional to Segment 9), or the
delivery schedule if the delivery is in installments (additional to Segment 14).

Segment 20: Authorization to Debit

We authorize you to debit our account

This segment is the buyer‘s responsibility alone. Normally nothing is added here. If,
however, the buyer‘s account number is not mentioned under ―applicant‖ in Segment 1, it
may be stated after the word ―account‖.

Segment 21: Signature

Name, stamp and authorized signature(s) of the applicant

The buyer signs and stamps the form.

3. Common Discrepancies in documents

In making payment by L/C, sellers are required to take special care when arranging their
documents to submit to their banks for payment. If the banks find any problem with such
documents, they shall refuse to pay the sellers. The following problems are reported by
banks:
3.1 Problems with the letter of credit
- Documents required by the credit are missing.
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- Documents required to be signed are not signed.
- The credit amount is exceeded.
- The credit has expired.
- Documents are not presented within the required time.
- Shipment was short.
- Shipment was late.

3.2 Problems with the bill of lading

- The bill of lading is "unclean", it has comments on it relating to damage to or other
deficiencies in the goods.
- A marine bill of lading is required, but the bill does not state that the goods were
"shipped on board" a named vessel.
- The bill of lading shows shipment between ports other than those specified in the credit.
- The bill of lading shows that the goods were shipped on deck. This is normally
forbidden unless the credit expressly allows it.
- The bill of lading offers no evidence that freight was paid by the exporter (of this was
required).
- There is no endorsement (if endorsement is necessary).

3.3 Problems with insurance

- The insurance document is not of the type specified in the credit (e.g., a certificate of
insurance is produced while the credit calls for a policy).
- The insurance risks are not those specified in the credit.
- Insurance cover is expressed in a currency other than that of the credit. This is forbidden
unless the credit expressly allows it.
- The sum insured is below the figure required.
- Insurance cover does not begin on or before the date of the transport document.

3.4 Inconsistencies among the Documents

- Descriptions of the goods on the invoice and in the credit are different.
- Weights differ between two documents.
- Marks and numbers differ between two documents.

96
Review questions

1. Name the five steps for negotiating the terms of an L/C and the duties conducted by a
buyer and seller to perform each step.
2. Name some common discrepancies in payment by L/C.
3. Indicate the problems with the letter of credit which will result in non-payment by a
bank.
4. Indicate the problems with insurance which will result in non-payment by a bank.
5. Indicate the inconsistencies among the Documents of credit which will result in non-
payment by a bank.

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Unit 12 OVERVIEW OF INTERNATIONAL SALE CONTRACTS

Learning objectives:
By the end of this unit, you will be able to:
- identify the legal status of an international contract under Vietnamese law
- perceive the legal status of contracting parties
- recognize the object an international contract

1. Introduction
An international sale and purchase contract (also known as an import-export contract) is
an agreement between the parties whose places of business are in different countries,
whereby a party (referred to as the exporter) is obliged to transfer ownership of a certain
asset (goods) to another party (referred to as the importer) who is, in turn, obliged to
receive the goods and make payment.
This is an academic definition. Such codes on or in relation to commence as Civil Law
2005, Commercial Law 2005 just supply forms of sale contracts or forms of international
sale of goods (Article 24 and 27 - Commercial Law 2005) other than a definition of an
international sale contract.
Three essentials of the international sale contract can be seen through the above
definition, as follows:
- The parties have different nationalities and places of business located in different
countries.
- The object of the contract may be the goods movable out of country‘s border or not.
Take an example of a consignment from Hochiminh city to Singapore delivered at Saigon
port. It can be seen at in this example the goods move out of the country‘s border.
Another example is about a consignment of materials to produce exports from a business
in District 1 to another business located in Tan Thuan Export Processing Zone (EPZ). The
goods are, in this case, also considered to be exported, but they move out of the so-called
customs border rather than the country‘s border. In reality, there are some special zones in
the Vietnamese territory regarded as exclusive customs zones like EPZs, commercial and
industrial zones and other economic areas established under the Prime Minister‘s
decision, whose business transactions with domestic companies are considered import-
export relations.
- Payment currency may be foreign to either one party or both parties to the contract.
It can be said that nationality is a very important character that determines the
internationality of the sale contract.

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2. Requisites to the effect of an international sale contract
2.1. Legal status of contracting parties
- The contracting party is one who signs the contract
- Under Vietnamese legislation, an international sale contract is a lawful agreement when
the parties to the contact have legal capacity, act capacity and authority to sign the
contract.
- Foreign party is the trader whose legal status is identified in accordance with his
country‘s laws.
- Vietnamese party is the trader allowed to perform commerce-related activities directly
with foreigners.
By the Decree No. 12/2006/ND - CP of the government dated January 23,2006:
+ Vietnamese traders without foreign investment are allowed to import and export the
goods irrespective of their registered occupations and sectors. The branches are entitled to
perform the function of import - export under authorization of their parent companies. It
is clearly expressed in Commercial Law 2005 that traders include lawfully established
economic organizations and individuals that conduct commercial activities in an
independent and. regular manner and have business registration.
+ Foreign-invested traders and branches of foreign companies in Vietnam are permitted to
import and export in compliance with other relevant regulations and international treaties
to which Vietnam is a contracting party.
+ For conditional imported and exported goods, businesses must earn permits.

2.2. Object of an international sale contract

The object of an international sale contract is the items which can be imported and
exported in compliance with current regulations. Imported and exported goods are
grouped into three categories:
- Goods banned from export and import
- Goods imported and exported under conditions, for which businesses must get permits
from the Ministry of Industry and Trade or competent relevant Minis tries
- Goods freely imported and exported
Subject to the Decree No. 12/2006/ND-CP of the Vietnamese government dated January
23,2006,
+ The goods banned from export are weapons, ammunitions, explosive materials, military
technical equipment, antiques, narcotics, toxic chemicals, log, sawn timber, charcoal from
timber, wild animals and natural rare and precious plants and animals, special-use codes
and coded software programs.
- The goods banned from import are weapons, ammunitions, explosive materials,
narcotics, toxic chemicals/ debauched and reactionary cultural products; children‘s toys
badly affecting the personality education, assorted firecrackers, cigarettes, cigars, used
consumer goods including textiles and garments, electronic goods etc, right-hand drive
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means of transport, used supplies and means, products and materials containing asbestos
of amphibole group, special-use coding machines and coded software programs.
- The goods exported under government permits issued by the Ministry of Industry and
Trade are textiles and garments and items subject to export control under international
treaties.
- The goods imported under government permits issued by the Ministry of Commerce and
Industry are items subject to import control under international treaties, cement, steel
pipes, vegetable oil, refined and unrefined sugar, motorbikes and motor-tricycles, nine-
seat-passenger cars or less and the goods imported under quotas such as salt, raw material
tobacco, poultry eggs, refined and unrefined sugar.
- The goods imported under control of competent ministries like Ministry of Agriculture
and rural Development, the State Bank, Ministry of Health, Ministry of Industry and
Trade and Ministry of Information and Communication.

2.3. The form and essential clauses required in a sale contract

In general, a contract can be formed and defined in different ways, subject to its
governing law, but the most important principle is its content must not be contrary to the
laws.
- A written contract is one agreed, signed and executed by two parties.
- In international custom and practice, a contract can be formulated in the following ways:
A contract = offer + acceptance of the offer
A contract = older + confirmation of the order
- Under Vienna Convention 1980, a contract of sale needn‘t be concluded in or evidenced
by writing and is not subject to any other requirement as to form of the contract. It may be
pivoted by any means, including witnesses. This convention defines that a contract must
consist of the essential clauses such as: Quality, Quantity, Place of delivery, Price,
Payment and Settlement of disputes.
- Under Vietnamese Commercial Law 2005, an international sale contract must be made
in writing or in other forms of equal legal validity, including telegram, telex, fax, data
message. Subject to the provisions of this law, a contract must at least consist of such
essential clauses as: commodity, quantity, quality, price, payment, place and duration of
obligations performance, rights and obligations of seller, jurisdictions for breach of
contract.

Review questions
1. Under Vietnamese law, what three important factors make an international sale
contract?
2. Under Vietnamese law, what is a sale contract? Who can be a foreign party? Who can
be a Vietnamese party?
3. How many groups of imported and exported goods? What are they?
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4. Under Vietnamese Law, can a sale contract be verbal?
5. Under Vietnam Commercial Law 2005, what are the essential clauses required to be
incorporated into a sale contract?

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Unit 13 TERMS AND CONDITIONS IN INTERNATIONAL SALE
CONTRACTS

Learning objectives:
By the end of this unit, you will be able to:
- identify the general structure of an international contract
- understand how to draft major terms and conditions of an international contract

1. Introduction
- An international sale contract usually consists of the preamble, the terms and conditions
and the execution
- The provisions of the contract are freely agreed by the parties. Article 402, Vietnamese
Civil Law 2005 stipulates that the parties may agree on the following provisions, subject
to each type of contract:
(1) Object of the contract, which is an asset to be handed over, or a task to be performed
or not to be performed.
(2) Quantity and quality
(3) Price and method of payment
(4) Time limit, place and approach to execution of the contract
(5) Rights and obligations of the parties
(6) Liability for breach of the contract
(7) Penalty for breach of the contract
(8) Other provisions

2. General structure of a contract

2.1 Preamble
- Title: Contract or Agreement
- Contract No.: is used to manage and to keep on file or used as a reference in further
correspondence. Therefore, number and mark are usually expressed in such a way that
makes it easier to recognize the contract. Take an example of Contract No UPRO
TEC/04/08. This writing can be understood as a contract between Technology Company
and Technimex Company signed in April, 2008.
- Place and date of entry into the contract are written:
+ At the beginning of the contract, for example:

Hochiminh City, 15 May, 20...

The present Contract was made and entered into in Hochiminh City on this 15 May 20...
by and between...

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The place of entry into the contract helps to identify an applicable law. If the applicable
law is not agreed by the parties, it is the law of the place of signature that applies to the
contract. Unless otherwise agreed by the parties, the contract shall take effect at the time
of signature.
- Names and addresses of the parties: Names of the parties to the contract, including their
full name and transaction name, address, telephone and fax, email, and representatives
who have the signatory power. If the signatory is not the trader‘s representative at law, he
must be the representative under authorization. In addition, account No. and banks
concerned in payment should be specified.
+ Representation at law is the representation stipulated by law. The representative is the
head of legal entity as prescribed by the articles of association or decided by competent
state agencies.
+ Representative under authorization is the representation established under authorization
between the representative and the represented person. Scope of representation is
established in accordance with authorization, and the representative is permitted to
conduct transactions within the scope. Authorization must be made in writing.
- Definitions include definitions of complicated goods or services, terminologies that have
specific meanings ascribed in the contract in question.
- The background of the contract is Agreements, Decree, the volunteer and need of the
parties. It has been agreed that the Seller agrees to sell and the Buyer agrees to buy the
under-mentioned goods on the following terms and conditions.

2.2. Terms and conditions

- Scope of supply: name, quantity, quality and packaging
- Finance terms: price, payment and payment documents
- Delivery terms: time and place of delivery, shipments to be delivered, transshipment
- Legal terms: applicable law, claim, force majeure, arbitration

2.3. Execution
Some issues should be included:
- Number of the contract to be made and retained by each party
- Contract language: If the contract is written in more than one language, it should be
expressly stipulated which version shall prevail in the event of dispute.
- Validity of the contract
- Regulations with respect to the amendment and addition of the contract
- Authorized signatures of the contracting parties
For example:
The present Contract is made and entered into in Hochiminh City on this 15 May 20... in
quadruplicate of equal validity, two of which are kept by each party.
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3. Major terms and conditions
Upon drawing up import - export contracts, whether the parties make any difference in
composing specific terms and conditions depends on the seller‘s and buyer‘s relationship
and prestige, product features, market condition, as well as their business practice.
Another factor which also affects the complication of the contract is the applicable law.
Below are the common terms in import and export
contracts. Those with particular objects, such as technology transferring contracts, service
supplying contracts, etc., require specific regulations.

3.1. Scope of supply

3.1.1 Commodity
The term Commodity is used to stipulate the name of commodity for sale. It helps parties
identify accurately what is being traded; therefore, avoid confusion, and make it possible
to execute the contract.
It is up to the kinds of commodities traded that the parties can use different ways of
stipulation. Below are some examples of how to stipulate this term:
+ Trade name, followed by common name /scientific name
E.g. Frozen black tiger shrimp - Pennnues Monodon
+ Name of commodity, followed by its origin
E.g. Dalat wine, Bordeaux wine
+ Name of commodity, followed by name of manufacturer
E.g. Honda motorbike, Matshushita washing machine (Matshushita is a Japanese brand)
+ Name of commodity, followed by its brand
E.g. Motorbike Future brand
+ Name of commodity, followed by major contents
E.g. Urea fertilizer, nitrogen 46%
+ Name of commodity, followed by its use
E.g. cereals for human consumption
This way of stipulation is applied when the goods can be used for many purposes, among
which there is great difference in the corresponding values.
+ Name of commodity, followed by its code in the Harmonized System (HS)

3.1.2. Quality and Specifications

This term mentions the quality of the products on the aspects such as their functions,
specifications, sizes, use, status, etc. It is used not only for determining the
responsibilities of the seller, but also as a legal foundation to resolve conflicts relating to
the product quality.
It is up to the kinds of commodities that different ways of stipulating quality and
specification can be applied in import - export contracts. Below are some examples of
how to stipulate this term:
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Sale by sample
This way of stipulation is applied when it is difficult for both sides to standardize or
describe the goods quality which only has little change.
E.g. ―The specification of the goods shall be about as per sample No. 12FTS approved by
both sides on 01/04/20..., sealed and signed by both parties; such sample forms an
integral part of this contract. The samples are made into three (3) versions, to be
preserved by Seller, Buyer and The Vietnam Superintendence and Inspection Joint Stock
Company (VINACONTROL) as basis for dispute settlement. Parties shall preserve these
samples until the stipulated limitation of claim expires.‖

Sale by category or standard

E.g. TCVN 4193:2001 Vietnamese coffee standard
TCVN 6213:2004 Bottled natural mineral water
TCVN 6096:2004 Bottled drinking water

Sale by specifications
Quality terms can be stated by product specifications (i.e. details relating to quality such
as capacity, dimension, weight, etc.)
This can be applied for products such as machinery, vehicles, goods that are difficult for
standardization, etc.
E.g. Exporting furniture:
Love set wooden furniture 01 table (1.150 x 610 x 840) mm
01 lounge armchair (1.040 x 600 x 450) mm
02 love armchairs (590 x 610 x 840) mm

Sale by common criteria

Both sides can make use of common criteria such as:
+ FAQ (Fair Average Quality): Quality of the goods to be shipped shall not be lower than
the average quality at the port of loading at a specific time. FAQ is calculated by
collecting samples of shipments delivered from the same port
+ GAQ (Good Average Quality): GAQ is a level of quality which is higher than FAQ.
+ GMQ (Good Merchantable Quality): GMQ is the level of quality acceptable to common
customers in the market.
This way of stipulation is commonly applied for agricultural produce, whose quality is
difficult for standardization.

Sale by major contents of the product

The product quality can be defined based on the percentage of major or influential
contents. This can be used for materials, food, chemicals, etc.
Upon using this, parties should state minimum rate for expected contents and maximum
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rate for unexpected ones.
E.g. Exported rice
Broken 10% max
Moisture 14% max
Chalky grain 7% max
Damaged grain 0.5% max
Yellow grain 1% max
Foreign matter 0.2% max

Sale by “Inspected – approved”

Upon the application of this stipulation, the Buyer shall check the goods and sign the
contract if he/she agrees with the quality. In this case, he / she must make payment to the
Seller. In the other case, he / she may refuse to sign the contract if the quality is not up to
his / her requirements.
This can be used for trading like auctions, for second-hand or liquidated articles.

Sale by technical documents

The product quality and specification may be stated through technical documents, i.e.
technical drawings, assembly diagrams, explanation, as well as user manuals...
E.g. ―Product specification shall be in conformity with Technical document No..., signed
by both parties attached herein. This document shall serve as an integral part of the
present contract.”

Sale by description
There are many features of the product which parties can rely on to create descriptions
such as: shape, color, size, performance, etc. and other quality indicators.
Example:
Clean, dry, grayish black, hot taste
- Moisture: 14%Max
- Admixture: 1%Max
- Not mouldy or mouldy smelling

3.1.3 Quantity
This term should include unit of measurement, as well as method of stipulating quantity
and weight.
- Unit of measurement
+ Length measurement
+ Area measurement
+ Capacity measurement

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+ Collective measurement
Quantity terms can be defined by an exact number. In case the measurement unit is item,
unit, set,..., it is advisable to stipulate clearly the content of each item / unit / set... This
shall be applicable for industrial goods.

E.g. Quantity: 500 sets of computers, each includes 1 CPU, 1 monitor, 1 keyboard, 1
mouse and 2 speakers.

3.1.4 Packing and marking

Packing
In term of packing and marking, parties often define: packing quality, packing supply
method and method of determining packing price.
E.g.: Packing shall be suitable for transportation by sea/ rail / air.
Packing must follow carriers‘ rules relating to size, shape, kinds of package...
Marking
Marking refers to signs showing how to forward, to transport and to preserve the goods.

3.2 Financial terms

3.2.1 Price
In this term, parties often define the currency, price level, price fixing method, terms of
delivery and discount.

Price currency
It is necessary to fix the expected currency of price accurately and avoid using too general
expressions which can lead to misunderstanding. Egg. Dollar (as there are so many
countries calling their currency dollar, such as US dollar, Canada dollar, Singapore
dollar...).
- Fixed price: is determined when the contract is signed and remains unchangeable unless
parties have other agreements.
- Deferred price: is determined at one specific moment, in accordance with one specific
definition.
- Flexible price, revisable price: is determined when the contract is signed.

Reference of Incoterms
- Commercial terms specify responsibilities of parties in delivery and receiving goods. As
a result, it directly affects the price. Thus, parties shall define exactly delivery conditions
expected to apply when stipulating prices.
For example: the above price is understood as CIF price, subject to Incoterms 2010,
including packaging and packing.

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Discount
Type of discount: Cash discount, Seasonal discount, Trade discount, Second-hand
discount, Quantity discount
- In the terms of price, it is necessary to stimulate fully the following: unit price, total
price, commercial conditions, discount, other costs included or excluded.
Eg.: Unit price: 200 USD / unit
Total price: 40 000 USD (Say: Forty thousand of dollars only)
This price is understood as FOB price at Singapore port, subject to Incoterms 2010,
including packing and accessories charges.

3.2.2 Terms of payment

Parties often reach an agreement about payment currency; time of payment; mode of
payment and payment currency.
(i) Payment currency: Payment currency can be the currency of price or other
currencies. If the payment currency is different from the currency of price, the exchange
rate or the method of defining exchange rate shall be fixed.
(ii) Time of payment: The buyer can make immediate payment, deferred payment, and
advance payment or combine the above payment times.
(iii) Mode of payment
+ Cash payment- consisting of CWO (cash with order), CBD (cash before delivery), COD
(cash on delivery) and CAD (cash against documents).
+ Transfer-consisting of MT. (mail transfer), T/T (telegraphic transfer).
+ Open account: when the delivery has been made, the seller debits against the buyer.
After a fixed term or the debit roaches the agreed limit, the buyer has the duty to make
payment.
+ Collection: is the mode in which the seller has his money collected by the bank after
making delivery to the buyer.
Clean collection: Collection instruction from the seller does not include documents which
have already been sent before.
Documentary collection: the seller sends documents together with collection instruction
to the bank so that the bank can secure them. In order to obtain the documents for
receiving goods, the buyer has to either: D/P: Documents against Payment or D/A:
Documents against Acceptance
- Documentary credit: is the mode in which the bank, subject to the buyer‘s request,
guarantees payment to the seller (or the one nominated by the seller) when the seller
presents a full set of documents showing his completion of stipulated obligation. All of
the above content shall be stated in a Letter of Credit (L/C) issued by the bank.
In the terms of documentary credit payment, normally the follow information is required:
kind of L/C (at sight L/C, deferred L/C; revocable L/C, irrevocable L/C, confirmed L/C ),
currency of L/C, amount of L/C, the issuing bank, beneficiary, date of application and
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expiry, conditions of payment (document required).

Examples of terms of payment

The Buyer shall apply for an irrevocable at sight LC in United States Dollar at UFJ Bank
- Japan in the Seller’s favour for the total value of the goods to be shipped, and advise the
seller through the Bank for Foreign Trade of Vietnam. IVC should reach the Seller no
less than 15 days prior to and be valid for 30 days from the expected date of shipment and
be against the full presentation of the following documents:
- At sight Bill of Exchange, drawn for the buyer.
- A full set of received for shipment Bill of Lading (3 originals), marking freight unpaid,
issued by the carrier.
- Signed Commercial Invoice with signature in quadruplicate.
- Packing list in duplicate.
- Certificate of Origin.
- Certificate of Quality.

3.3. Terms of delivery

3.3.1 Time of delivery
Time of delivery is the period that the seller must complete his obligation for delivery. If
there are no other regulations between parties, this is the time for passing of risks and
damage from the seller to the buyer (this period of time relates closely to terms of
delivery)
There are many ways to stipulate time of delivery for the parties to choose from:.
+Time of delivery is a fixed and determinable point/period of time. It can be:
- A fixed date: May 10th, 20xx
- The last day allowed for delivery, not later than May 10th, 20xx
or A period of time: In the third quarter of 20xx
+ Unspecific Regulations
- Delivery subject to the availability of the vessel/ vessel’s space
- Delivery subject to the issuance of an L/C
- Delivery subject to the availability of an export license

3.3.2 Place of delivery

Place of delivery is defined based on commercial terms that both parties have agreed on.
However, the parties can add more details or allow some options on port of shipment and
ports of destination.
- Place of delivery can be
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+ A fixed place: Saigon port, HCM City, Vietnam
+ Or optional: Main port of Japan.
3.3.3 Advice of delivery
- The seller‘s obligation of delivery is defined in terms of delivery. However, the parties
can stipulate specific time of each notice related to delivery and the information contained
in those notices.
- Pre-delivery: information about the readiness of goods, and ships and delivery
instructions.
- After delivery: Information about the result of delivery, actual quantity of goods
shipped, particulars of goods, bill of lading (B/L) No., the estimated date of departure and
arrival of the ship.

3.3.4 Other stipulations relating to delivery

- Partial shipment allowed or partial shipment not allowed.
- Transshipment allowed or not allowed
- Stale bill of lading acceptable (in case the arrival of documents is later than that of
goods).
- Third party B/L acceptable.

E.g.: Delivery
- Time of delivery: August 20th 20...
- Place of Delivery
+ Port of Shipment: Yokohama Port
+ Port, of Destination: Saigon Port
- Delivery in one lot, transshipment not allowed
- Advice of Delivery
+ First advice: 10 days before the expected date of delivery, the seller shall ^notify by fax
the availability of the goods for delivery, including: Commodity, Quantity, Specification,
Packing, Marking.
+ Second advice: 7 days after receiving NOR, the buyer is to inform by fax the vessel
sent, including: vessel’s name, nationality, flag, carrying tonnage, ETA.
+ Third advice: After delivery, the seller notify by fax the delivery, including:
Commodity, quantity, specification, packing, markings, vessel’s name, nationality,
vessel’s flag, carrying tonnage, B/L No., ETD, ETA.
- Stale B/L acceptable.

3.3.5 Transportation
- This term regulates how the goods shall be transported. It includes mode of
transportation and related problems. The parties can choose to ship by road, rail, ocean,
air or, in other cases, a combination of these modes (multi-modal transport)
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- In case of sea transport, the parties must define the mode of vessel chartering: Liner,
Voyage chartering or Time chartering. Depending on the mode of charter, the parties
shall define the vessel, time of loading, loading/discharging cost, freight rate and
payment, demurrage/dispatch money...

3.4. Legal terms

3.4.1 Making claims
- Common of claims made are about inadequate quantity and quality of delivery, inferior
packing, documents discrepancy, delayed delivery, etc.
- Terms of claim shall include:
+ Claim procedures
+ Time limit for lodging claims,
+ Rights and obligations of the relevant parties, and
+The methods of resolving claim.

3.4.2 Warranty
- Warranty is the guarantee of the seller about the quality in certain duration of time,
known as the warranty period.
- In terms of warranty, parties can agree on warranty coverage, warranty period and
seller‘s responsibility during the warranty period.

3.4.3 Force majeure

Force majeure refer to cases that are
+ Beyond the parties‘ control
+ Reasonably unforeseeable and
+ Reasonably inevitable

3.4.4 Settlement of disputes- Arbitration

There are two kinds of Arbitration
- Institutional Arbitration: The arbitrator works regularly according to an available
regulation.
- Ad hoc Arbitration: established to solve a case and dispersed after that. In this
situation, the parties need to deal with:
+ Place of arbitration
+ Sequence of arbitration
+ Applicable laws
+ Enforcement of arbitral awards
3.4.5 Applicable law
The applicable law is defined by the agreement of both parties or by Arbitration
Committee.
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E.g.

- All disputes arising from or in connection with the present contract shall be fully settled
under the Rules of Conciliation and Arbitration of the International Chamber of
Commerce by one or more arbitrators appointed in accordance with the said Rules,
(recommendation of ICC)
- All disputes arising from or related to the performance of this contract, first, shall be
settled by the parties with efforts through negotiations. In case such settlement cannot be
reached, the disputes shall be finally settled by the Vietnam International Arbitration
Centre "(VIAC) at the Vietnam Chamber of Commerce and Industry (VCCI) in
accordance with its arbitration rules and procedures, whose award shall be final and
binding by both parties. Applicable Law is Vietnam Law. Language of arbitration is
English; Place of arbitration is Hanoi. Arbitration fee and all of fees and charges
relating to arbitration shall be borne by the losing party.

From the above example, we can learn of some necessary information to be defined in the
contract such as:
- Cases chosen to be solved at Arbitration court.
- Arbitrators chosen for judgment
- Rules of Arbitration
- Applicable Laws
- Language, Time, Place of Arbitration
- Validity of Arbitration award.
- Allocation of arbitration fees and other related costs.

3.4.6 Penalty
According to Article 300 of the Commercial Law of Vietnam (revised - 2005), Penalty /
Fine for breach means a remedy whereby the aggrieved party requests the breaching party
to pay an amount of fine for its breach of a contract, if so agreed in the contract (except
for cases of liability exemption specified).
Fine level: The fine level for a breach of a contractual obligation or the aggregate fine
level for more than one breach shall be agreed upon in the contract by the parties but must
not exceed 8% of the value of the breached contractual obligation portion (except for
cases of assessment service), according to Article 301 of the above law.
This clause defines the solutions when contract is not totally or partly performed. This
clause aims to the two simultaneous targets:
- Prevent one party from failing to perform or has improperly performed his obligation.
- Define the sum of money paid for damage caused Cases of Penalty

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+ Penalty for delayed shipment:
For example: if the seller fails to deliver on the fixed date, a fine shall be imposed upon
him as follows: first week of delay, no penalty; second week to fifth week of delay, 1 %
per delayed week; from the 6th to all succeeding weeks: 2% per late week, but the total
penalty is not to exceed 10% of the total value of delayed shipment.

3.4.7 Performance guarantee

- Contract performance guarantee is the measure agreed by the parties in conformity with
the legal framework in order to ensure the contract implementation as well as prevent and
cover the consequence of non-execution or improper performance of the obligation
specified.
- According to the Civil Code of Vietnam (2005), there are 7 measures to secure the
performance of civil obligations, including: pledge of property, mortgage of property,
deposit, escrow account, security collateral, guaranty, pledge of trust.
- In import - export business, the forms often used are: escrow account and guaranty.
+ Escrow account is an act whereby an obligor deposits a sum of money, precious metals,
gems or valuable papers into a blocked bank account to secure the performance of a
contract obligation towards the obligee.
In cases where the obligor has failed to perform or has improperly performed an
obligation, the obligee shall be entitled to receive payment and compensation for damage
caused by the obligor from the bank where the escrow account is effected.
+ Guaranty is an act whereby a third party (hereinafter referred to as the guarantor)
commits with the obligee (hereinafter referred to as the guarantee) to perform an
obligation for the obligor (hereinafter referred to as the guaranteed), when the obligation
becomes due and the guaranteed has failed to perform or has improperly performed the
obligation.
Common contents of Guaranty consist of Guaranty of payment and Standby Letter of
Credit, Guaranty of Bidding, Guaranty of contract performance, Guaranty of goods
quality, guaranty of repayment, guaranty of warranty, guarantee of maintenance...
In conclusion, import - export contract is an important document throughout the process
of performance and includes many complicated terms. The compiler needs to have a
thorough grasp of legal problems, professional knowledge and language in order to draw
up a contract with tight terms and conditions. Businesses need to take proper care of
contract compilation so as not to face any obstacles upon the performance of the contract.

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Review questions
1. As a Vietnamese exporter, correct the following clauses of a rice contract.
- Commodity: Rice
- Quantity: 10,000 Ton
- Unit price: USD 265/Ton, Hochiminh city port.
- Shipment: First shipment: At the end of Sep, 2016
Second shipment: At the end of Oct, 2016
- Payment: D/A 180 days after shipment date
2. As a Vietnamese importer, correct the following clauses of a contract of hot rolled
steel.
- Commodity: Steel
- Quantity: 587MT
- Unit price: USD 630/Ton, Hochiminh City Port.
- Payment: By irrevocable confirmed L/C, at sight.
3. As a Vietnamese exporter, correct the following clauses of a contract of coats.
- Commodity: Coats
- Quantity: 6000 Pcs
- Price: USD 7.5/ Pcs
- Shipment: 20 days after contract signatures
- Payment: clean collection.
4. As a Vietnamese importer, correct the following clauses of a contract of NPK fertilizer.
- Commodity: NPK
- Quantity: 10,000 Tons
- Unit Price: USD 260/Ton, CIF
- Shipment: June/ July 2016
- Payment: L/C
5. As a Vietnamese exporter, correct the following clauses of a contract of coffee:
- Commodity: Coffee
- Quantity: 100 Tons
- Unit Price: USD 250/Ton, CIF
- Shipment: June/ July 2016
- Payment: L/C

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Unit 14 PERFORMANCE OF INTERNATIONAL SALE
CONTRACTS

Learning objectives:
By the end of this unit, you will be able to understand:
- the duties and obligations of an exporter in performing an international contract.
- the duties and obligations of an importer in performing an international contract.

The following table shall illustrate the steps which an exporter and importer shall perform
when dealing with an International sale contract:

Steps Exporter Importer

1 Ask for export license Ask for import license

2 Remind the buyer to take Take professional operations

professional operations relating relating to international payment
to international payment (advance payment, deposit,
(advance payment, deposit, opening L/C)
opening L/C)
3 Prepare the goods Prepare storage warehouse to
take delivery

4 Contract for carriage and Contract for carriage and

insurance insurance

5 Conduct customs formalities Carry out customs formalities

6 Make delivery Take delivery and check the

goods
7 Prepare shipping documents, Make payment for the goods
present the documents to ask for
payment

8 Deal with claims (if any) Make claims (if any)

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1. Obtaining import-export licenses
Businesses are required to obtain 'licenses for the import and export of some items subject
to the government‘s import-export controls in a certain period of time. Items under import
and export control are specified in Decree no. 12/2006/ND-CP of January 23, 2006,
detailing the implementation of the Commercial Law regarding the international sale and
purchase of goods, sale and purchase agency, processing and transit with foreign parties.
For the goods to be exported, two kinds of licenses must be obtained. They are export
license and automatic export license.
For the goods to be imported there are three kinds of licenses. They are import license,
license subject to quotas and automatic import license.
The issuance of the import license is subject to specialized management of competent
ministries, for example:
(1) The import of scrap materials for production is governed by the Decision
No.I2/2006/QD-BTNMT dated September 8, 2006 issued by Minister of Natural
Resources and Environment.
(2) The import of toxic chemicals, pre-narcotics and chemicals is regulated by the
Circular No. 01/2006/TT-BCN dated April 11, 2006 of Ministry of Industry (and now
Ministry of Industry and Trade)
(3) The import and export of telecommunication equipment is subject to the Circular
No.02/TT-BBCVT dated April 24, 2006 of Ministry of Postal and Telecommunication
(and now Ministry of Information and Communication)
(4) The import of incinerators and vault doors is controlled under the Circular
No.04/2006/TT-NHNN dated July 3, 2006 of the State Bank of Vietnam
(5) The import and export of plant breeds is specified in the Circular No.32/2006/TT-
BNN dated May 8, 2006 of Ministry of Agriculture and Rural Development.
(6) The import of some kinds of books is governed by the Circular No.48/2006/TT-
BVHTT dated May 5, 2006 of Ministry of Culture and Information (and now Ministry of
Culture, Sport and Tourism)
An automatic import license shall be granted in the form of certification of the trader‘s
import registration for each consignment. The issuance of automatic import licenses is
subject to the Decision No.24/2008/QD-BCT dated August 1, 2008 of Ministry of
Industry and Trade.
Therefore, it is necessary to study carefully relevant regulations on import and export
control in order to execute an import-export contract legally.

2. Arranging the goods for export

- Producing, processing and collecting the goods which are of the quality, quantity and
description required by the sale contract
- Packaging in conformity with the sale contract. The goods can be packed in different
materials. The factors that determine the choice of packaging materials are:
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+ Contract stipulations
+ Nature of goods
+ Mode of transport, weather and climate in transit + Regulations of the host country
- Marking includes:
+ Information relating to the contract such as shipper, consignee, weight and contract No.
+ Information relating to the shipment such as port of shipment, port of destination, B/L
No.
+ Instructions for storage and handling etc.

3. Examining the quantity and quality of goods

- Sanitary inspection
- Government inspection of imported and exported goods
The examination is conducted to guarantee that the goods are of quality in conformity
with the contract and are packed in the manner required by the contract. If the goods ate
plants and animals, it is advisable to invite a competent agency to conduct phyto-sanitary
and veterinary inspection.
Examine the quality of the exported goods
The examination of product quality is conducted in two levels as follows:
+ In the company, quality control department or quality assurance department conducts
the processes of quality control in compliance with international standards like ISO,
HACCP etc.
+ In the independent inspection agency, the process of sampling, inspection and issuing
inspection certificate is applied.
Examine the quality of the imported goods
Under the Decision No.50/2006/QD-TTg dated March 7, 2006 promulgating the list of
products and goods subject to quality inspection, the following items are required to be
inspected before being launched into the market or imported:

Products State management Inspection organizations

agencies organizing nominated
quality inspection
Medical Department of Medical - Institute of Medical Equipment
equipment Equipment (Ministry of and Health Projects
Health)

Vaccines Department of Preventive - National Center of Medical

Medicine (Ministry of Biological Inspection
Health)

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Aquaculture National Fisheries Quality - National Fisheries Quality
foods, aqua- Assurance and Veterinary Assurance and Veterinary centers -
products; Department Branch 1-6
instant aqua- (NAFIQAVED), Ministry - Standardization, Quality Control
products of Fisheries (and now and Technical centers 1,2 and 3
Ministry of Agriculture
and Rural Development)
Plant Plant Protection - Southern and Northern Center of
protection Department (Ministry of Plant Protection Medicine
medicines Agriculture and Rural Inspection
Development) - Standardization, Quality Control
and Technical centers 1,2 and 3
- FCC Control and Fumigation
Corporation
Fertilizers Department of Agriculture -Soils and Fertilizers Research
(Ministry of Agriculture Institute (SFRI)
and Rural Development) -Institute of Agricultural Science
for Southern Vietnam (IAS)
-Standardization, Quality Control
and Technical centers 1,2 and 3
-FCC Control and Fumigation
Corporation
Veterinary Department of Animal -National Center 1,2 of Veterinary
medicines and Health (Ministry of Medicine Inspection
production Agriculture and Rural -National Center of Veterinary
materials Development) Sanitary Inspection
-FCC Control and Fumigation
Corporation
Breeding Department of Agriculture -National Institute of Animal
foods (Ministry of Agriculture Husbandry (NIAH)
and Rural Development) -Vietnam Institute of Agricultural
Engineering and Post-harvest
Technology (VIAEP)
-Standardization, Quality Control
and Technical centers 1, 2 and 3
-FCC Control and Fumigation
Corporation

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Explosives Science and Technology -Center of Industrial Explosive
Department (Ministry of Materials
Industry and Trade) -Institute of Explosives (Ministry
of Defense)
-Industrial technical safety
inspection centers 1,2
Vehicles and The Vietnam Register - Technical centers of the Vietnam
equipment (Ministry of Transport) Register
Cements Science and Technology - Institute of Construction
Department (Ministry of Materials
Construction) - Standardization, Quality Control
and Technical centers 1,2 and 3

Labor safety Labor Safety Department - Standardization, Quality Control

equipment (Ministry of Labor, War and Technical centers 1,2 and 3
Invalids and Social - Regional technical safety
Affairs) inspection centers 1,2 and 3
(Ministry of Labor, War Invalids
and Social Affairs)
Safety General Department of - Standardization, Quality Control
helmets Standardization and and Technical centers 1,2 and 3.
Quality Control (Ministry
of Science and
Technology)

On receipt of the goods, if any apparent loss or damage comes to light, businesses must
prepare the following documents:
- Survey Report
- Report on Receipt of cargo - ROROC
- Cargo outturn Report- COR
- Certificate of short-landed cargo-CSC
For non-apparent loss or damage, a letter of reservation (LOR) must be prepared.
If the goods insured prove to be damaged, it is advisable to invite a representative from an
insurance agency to make out a Survey Report.

4. Contracting for carriage

- Subject to the need of transportation and the agreement signed by both parties, the party
responsible for carriage can charter a vessel in the form of liner, voyage chartering and
time chartering, of which liner is most popular.

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5. Contracting for insurance
It is necessary for businesses to decide insurance clause, amount insured, kind of goods to
be covered and form of insurance contract before taking out insurance. A contract
insurance may be either open policy or voyage policy and in the form of an insurance
certificate or an insurance policy.
6. Conducting customs formalities
The customs formalities for the export of the goods
Customs procedures are as follows:
- Make customs declarations
- Present the goods for customs inspection
- Pay customs duties and fulfill other financial obligations as prescribed by law (if any)
- Clear the goods and carry out post-clearance inspection
The following documents are required:
- Customs declaration form (2 originals)
- Sale contract (1 copy). It is unnecessary in case of export of the goods through borders.
Other documents are required in each specific case as follows:
- Commercial invoice (for the taxed goods): 1 original
- Cargo list (for the goods of many categories): 1 original and 1 copy
- Export license (for the goods banned from export or exported under conditions) 1
original
- Entrusted export contract (for entrusted export): 1 copy
- A list of consumption of raw materials (for processed goods and the goods produced for
export) 1 original
Customs formalities for the import of the goods
The following documents are required:
- Customs declaration form: 2 originals
- Sale contract: 1 copy. (It is unnecessary in case of export of the goods through borders)
- Commercial invoice: 1 original and 1 copy
- Bill of lading: 1 copy
Other documents are required in each specific case as follows:
- Cargo list (for the goods of many categories): 1 original and 1 copy
- Declaration of import value (for the goods required for declaration of import value): 2
originals
- Import license (for the goods banned from import or imported under conditions) 1
original
- Certificate of origin (required in case of preferential taxes applied): 1 original and 1
copy
- Written registration for quality inspection or inspection exemption notice (for the goods
subject to State quality inspection) 1 original
- Entrusted import contract (for entrusted import): 1 original
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- Import quota (required in case of quota tariffs applied): 1 original
- Certificate of inspection (if necessary for customs clearance): 1 original
- Other documents must be submitted on Customs agencies‘ request subject to the form of
import or for the purpose of clarifying issues relating to the imported goods.

7. Making and taking delivery of import-export goods

7.1 Making delivery of exported goods
- Prepare documents and the goods for delivery
- Transport the goods to port of shipment
- Obtain Bill of Lading
- Make out necessary documents and reports
For bulk goods
- The shipper makes out a cargo list and sends it to the carrier
- The carrier gives a stowage plan to the shipper and Port Coordination Center
- The shipper contacts the Port Coordinator Center to know when the goods are to be
shipped on board the vessel.
- The shipper gets Mate‘s Receipt
- The shipper approaches the carrier to exchange the Mate‘s Receipt for B/L
For containerized goods
(1) Full container load (FCL)
- The shipper on acting on his behalf fills in a booking note and sends it along with a
cargo list to the carrier for signature.
- The shipper receives an empty box delivery order from the carrier.
- The shipper takes an empty container to his own place for packing and invite customs
officers or inspectors (if any) to supervise the packing process. Afterwards, the container
shall be sealed by the customs officer.
- The shipper hands over the container to the carrier at Container Yard (CY) before
closing time of each shipment (usually 8 hours prior to stowage) and gets Mate‘s receipt.
- After the container is shipped on board, the shipper shall exchange the Mate‘s receipt
for B/L
(2) Less container load (LCL)
- The shipper sends a booking note to the carrier or its agent, giving them necessary
information on the exported goods. After the booking note is accepted, an agreement on
the time and place of delivery shall be made between the shipper and the carrier.
- The shipper or person acting on his behalf hands over the goods to the carrier or its
agent at Container Freight Station (CFS) or Inland Container Depot (ICD)
- The shippers ask customs officers to inspect and supervise the packing made by the
carrier or the consolidator and have the container sealed by the customs officers. The
shippers fulfill the procedures for loading the goods on board and ask for B/L
- The carrier provides a Master B/L
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7.2 Taking delivery of imported goods
For containerized goods
(1) Full container load (FCL)
- On receipt of Notice of Arrival (NOA), the consignee brings with himself the original
B/L and a referral from the company to get Delivery Order (D/O) from the carrier.
- The consignee takes D/O to the customs office to carry out customs formalities for the
import of the goods and register inspection.
- After fulfillment of customs procedures, the consignee brings with himself shipping
documents and D/O to Ship Management Office at the port to have D/O confirmed.
- The consignee gets Delivery Note and take delivery of the goods.
(2) Less container load (FCL)
- The consignee brings the original B/L or House B/L to the carrier or the consolidator‘s
agent to get D/O, then take delivery of the goods at CFR and also follow the above
procedures.

8. Making payment for imports and exports

8.1 Payment procedures for exported goods
Subject to the method of payment agreed by both parties, the seller is obliged to prepare
the documents as stated in the contract or L/C and present to his bank within the given
period of time to get payment It should be noted that if the seller fails to present the
documents as proof of his fulfillment of delivery and particulars of delivery, payment
may be dishonored or delayed.

8.2 Payment procedures for imported goods

Subject to the method of payment agreed by both parties, the remittance or acceptance of
Bill of the buyer is obliged to make payment, for instant Exchange (B/E) etc. In
documentary credit, the issuing bank shall naturally compare the documents presented by
the exporter with the terms and conditions stated in L/C to make decision on payment of
the goods without resort to the importer‘s subjective opinion.

9. Making and settling complaints

Make complain against the seller:
- The seller is complained in case of non-delivery, short delivery, inferior quality and
delay in delivery etc.
- Complaints may take the form of letter, lax, email (otherwise, a guarantee letter is
required to be sent to the seller‘s address)
- The content of a complaint includes:
+ Name and address of the complainant and respondent + Background of the complaint
(contract and state of the goods) + Reasons for complaint + Buyer‘s specific suggestions
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- The following documents are enclosed:
+ Sale contract
+ Bill of Lading
+ Survey Report and other reports
+ Pictures of the state of the goods
Make complaint against the carrier
- The carrier is complained in case of loss of or damage to the goods due to his faults.
- Documents for complaint include a letter of complaint and such enclosed documents as
contract, B/L, Tally sheet, Report on Receipt of cargo (ROROC), Certificate Of short-
landed cargo (CSC), Cargo outturn Report (COR), Survey Record, Customs Inspection
Report.
Make claim against the insurer
- The insurer is claimed in case the loss of or damage to the goods is due to the risks
within the scope of the insurance clause under which the goods are covered.
- Documents for claims include a letter of claim and such enclosed documents as contract,
insurance certificate, B/L, copy of invoices, certificate of quantity and quality, Survey
Report issued by the insurance agency, Report on Receipt of cargo (ROROC), Certificate
of short-landed cargo (CSC), Cargo Outturn Report (COR), General Average Declaration
letter, General Average Adjustment.

Review questions
1. Specify the steps for making performance of an export contract.
2. Specify the steps for making performance of an import contract.
3. Name the common documents required for conducting export customs formalities.
4. Name the common documents required for conducting import customs formalities.
5. In case of exporting the goods in full container load (FCL), what must a shipper do to
clear the goods at customs?
6. In case of exporting the goods in Less container load (LCL), what must a shipper do to
clear the goods at customs?
7. In case of importing the goods in full container load (FCL), what must a consignee do
to clear the goods at customs?
8. In case of importing the goods in Less container load (LCL), what must a consignee do
to clear the goods at customs?

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Unit 15 SPECIMEN CONTRACTS FOR REFERENCE

Learning objectives:
By the end of this unit, you will be able to:
- identify the ITC and ICC model contracts used for small firms
- analyse of specimen clauses and apply them into a particular contract.

1. ITC model contract used for small firms

1.1 Introduction
This Model Contract contains the substantive rules for an international sales contract, i.e.
the main rights and obligations of the Parties, the remedies for breach of contract by the
Buyer; the remedies for breach of contract by the Seller; the general rules that apply
equally to both parties. It also contains the boilerplate clauses broadly accepted in
international commercial contracts.
The Model Contract is greatly influenced by the United Nations Convention on Contracts
for the International Sale of Goods (CISG), widely accepted by lawyers of different
traditions and backgrounds. It articulates practical requirements arising from commercial
practice with the general rules of the CISG.
The Model Contract can be viewed as a general framework for the numerous types of
sales contracts in international trade. In implementing it, the Parties should adapt it to the
nature of each particular sales contract as well as to the specific requirements of the
applicable law, where such requirements exist.
Attention is drawn on the following points:
1. The Model Contract for the International Sale of Goods is presented in two versions -
the ―standard‖ and the ―short‖ one. The standard version contains definitions of relevant
notions (i.e. on the concept of lack of conformity), special comments (i.e. on the notice of
non-conformity), explanations and/or warnings to the Parties (i.e. on the limitation of the
Seller‘s liability, on the validity of the agreed interest clause). The short version is more
practice-oriented, covering the main rights and obligations of the Parties with no special
explanations. In addition, the short version contains only selected boilerplate clauses,
whereas the standard version provides for all the boilerplate clauses inserted in other
Model Contracts of this handbook.
2. The Model Contract can be divided into four parts. The first part lays down rules on the
Goods: Delivery, price, payment conditions and documents to be provided. The second
part governs the remedies of the Seller in case of non-payment at the agreed time; the
remedies of the Buyer in case of non-delivery of goods at the agreed time, lack of
conformity of goods, transfer of property and legal defects. The third part contains the

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rules on avoidance of contract and damages — grounds for avoidance of contract,
avoidance procedure, effects of avoidance in general, as well as rules on restitution,
damages and mitigation of harm. The fourth part contains the standard provisions.
3. The Model Contract adopts the CISG concept of lack of conformity.
This concept is wider than the concept of material defects (traditionally adopted in civil
law countries) and includes differences in quality, as well as differences in quantity,
delivery of goods of different kinds and defects in packing. Nevertheless, specific cases
of non-conformity defined under the CISG largely correspond to how material defects are
defined in civil law countries. Such cases include unsuitability of the Goods for ordinary
purpose or for particular purpose, as well as non-conformity with a sample or model.
Liability of the Seller for non-conformity is dealt with almost identically under the CISG
and most national rules dealing with liability of the Seller for material defects.
Furthermore, in the system of the CISG, ―non-delivery‖ and ―lack of conformity‖ are
strictly separate forms of breach of contract. The same system is adopted in this Model
Contract, specifying: a) special rules on remedies of the Buyer in case of non-delivery at
the agreed time; b) special rules on remedies of the Buyer in case of non-conformity of
goods; c) general rules on contract avoidance due to non-performance of contractual
obligations.
4. On contract avoidance (the term ―avoidance‖ of contract, also taken from the CISG,
means termination of contract), the Model Contract uses the CISG concept of
fundamental breach of contract, but with significant modifications. The Model Contract
first of all defines cases that constitute a breach of contract (where a party fails to perform
any of its obligations under the contract, including defective, partial or late performance).
On that basis, the Model Contract establishes the rules for two different situations.
First is the case where the breach of contract amounts to a fundamental breach. That
would be the case where strict compliance of the obligation which has not been
performed is of the essence under the contract; or where non-performance substantially
deprives the aggrieved party of what it was reasonably entitled to expect. The Model
Contract also leaves the possibility for the Parties to specify cases which are to be
considered as a fundamental breach, i.e. late payment, late delivery, non-conformity, etc.
In the case of a fundamental breach, the Model Contract allows the aggrieved party to
declare the contract void, without fixing an additional period of time to perform what is
specified in the contract.
In the second situation, the breach of contract does not amount to a fundamental breach.
The aggrieved party is obliged to fix an additional period of time for performance. Only
when the other party fails to perform the obligation within that period, may the aggrieved
party declare the contract void. The Model Contract adopts the CISG rule: A declaration
of avoidance is effective only if made by notice to the other party.
5.The clause on applicable law of the Model Contract is specific to the international sale
of goods. It specifies that questions that are not regulated by the contract itself are
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governed by the CISG. Questions not covered by the CISG are governed by the
UNIDROIT Principles; and to the extent that such questions are not covered by the
UNIDROIT Principles, they are governed by reference to the national law chosen by the
Parties. Concerning the application of the CISG, one should note that the Parties may
exclude the CISG in whole or only in part. The Parties may also agree on rules that
modify, replace, or supplement those of the CISG.
6.The main sources of uniform contract law used in drafting the present Model Contract
are the following: United Nations Convention on Contracts for the International Sale of
Goods (CISG); Uniform Law on the International Sale of Goods (ULIS); UNIDROIT
Principles of International Commercial Contracts; Principles of European Contract Law
(PECL); ITC Model Contract for the International Commercial Sale of Perishable Goods;
ICC Model International Sale Contract - Manufactured Goods Intended for Resale.

1.2. Contents of ITC Model International Commercial Sale of Goods

PARTIES:
Seller
Name (name of company)
Legal form (e.g. limited liability company)
Country of incorporation and (if appropriate) trade register number
Address (address of place of business of the seller, phone, fax, e-mail)
Represented by (surname and first name, address, position, legal title of representation)
Buyer
Name (name of company)
Legal form (e.g. limited liability company)
Country of incorporation and (if appropriate) trade register number
Address (address of place of business of the buyer, phone, fax, e-mail)
Represented by (surname and first name, address, position, legal title of representation)
Hereinafter: ―the Parties‖

1. Goods
1.1 Subject to the terms agreed in this Contract, the Seller shall deliver the following
good(s) (hereinafter: ―the Goods‖) to the Buyer.
1.2 Description of the Goods (details necessary to define/specify the Goods which are
the object of the sale, including required quality, description, certificates, country of
origin, other details).
1.3 Quantity of the Goods (including unit of measurement).
1.3.1 Total quantity ..................................................................................
1.3.2 Per delivery installment ........................................... (if appropriate)
1.3.3 Tolerance percentage: Plus or minus ....................................... % (if
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appropriate)
1.4 Inspection of the Goods (where an inspection is required, specify, as appropriate,
details of organization responsible for inspecting quality and/or quantity, place and date
and/or period of inspection, responsibility for inspection costs).
1.5 Packaging..................................................................................................
1.6 Other specification ....................................................................................
2. Delivery
2.1 Applicable International Chamber of Commerce (hereinafter: ICC) Incoterms (by
reference to most recent version of the Incoterms at date of conclusion of the Contract).
2.2 Place of delivery .......................................................................................
2.3 Date or period of delivery ........................................................................
2.4 Carrier (name and address, where applicable) ........................................
2.5 Other delivery terms (if any) ...................................................................

3. Price
3.1 Total price .................................................................................................
3.2 Price per unit of measurement (if appropriate) ........................................
3.3 Amount in numbers .................................................................................
3.4 Amount in letters .....................................................................................
3.5 Currency ..................................................................................................
3.6 Method for determining the price (if appropriate) ..................................

4. Payment conditions
4.1 Means of payment (e.g. cash, cheque, bank draft, transfer) ....................
4.2 Details of Seller‘s bank account (if appropriate) ......................................
4.3 Time for payment ....................................................................................
The Parties may choose a payment arrangement among the possibilities set out below, in
which case they should specify the arrangement chosen and provide the corresponding
details:
□ Payment in advance [specify details] ......................................................
□ Payment by documentary collection [specify details] .............................
□ Payment by irrevocable documentary credit [specify details] ................
□ Payment backed by bank guarantee [specify details] ..............................
□ Other payment arrangements [specify details] ........................................

5. Documents
5.1 The Seller shall make available to the Buyer (or shall present to the bank specified by
the Buyer) the following documents (tick corresponding boxes and indicate, as
appropriate, the number of copies to be provided):
□ Commercial invoice .................................................................................
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□ The following transport documents (specify any detailed requirements).
□ Packing list ..............................................................................................
□ Insurance documents ...............................................................................
□ Certificate of origin .................................................................................
□ Certificate of inspection ..........................................................................
□ Customs documents .................................................................................
□ □ Other documents ..................................................................................
5.2 In addition, the Seller shall make available to the Buyer the documents indicated in
the ICC Incoterms the Parties have selected under Article 2 of this Contract.

6. Non-performance of the Buyer's obligation to pay the price at the agreed time
6.1 If the Buyer fails to pay the price at the agreed time, the Seller shall fix to the
Buyer an additional period of time of (specify the length) for performance of payment. If
the Buyer fails to pay the price at the expiration of the additional period, the Seller may
declare this Contract avoided in accordance with Article 10 of this Contract.
6.2 If the Buyer fails to pay the price at the agreed time, the Seller shall in any event
be entitled, without limiting any other rights it may have, to charge interest on the
outstanding amount (both before and after any judgment) at the rate of [specify] % per
annum. [Alternatively: Specify other rate of interest agreed by the Parties.]
[Comment: The Parties should take into consideration that in some legal systems payment
of interest is unlawful, or is subject to a legal maximum rate, or there is provision for
statutory interest on late payments.]

7. Non-performance of the Seller's obligation to deliver the Goods at the agreed

time
7.1 If the Seller fails to deliver the Goods at the agreed time, the Buyer shall fix to
the Seller an additional period of time of (specify the length) for performance of delivery.
If the Seller fails to deliver the Goods at the expiration of the additional period, the Buyer
may declare this Contract avoided in accordance with Article 10 of this Contract.
[Option: ―7.2 If the Seller is in delay in delivery of any goods as provided in this
Contract, the Buyer is entitled to claim liquidated damages equal to 0.5% (parties may
agree some other percentage: _________%) of the price of those goods for each complete
day of delay as from the agreed date of delivery or the last day of the agreed delivery
period, as specified in Article 2 of this Contract, provided the Buyer notifies the Seller of
the delay.

Where the Buyer so notifies the Seller within _________days from the agreed date of
delivery or the last day of the agreed delivery period, damages shall run from the agreed
date of delivery or from the last day of the agreed delivery period. Where the Buyer so
notifies the Seller more than _________days after the agreed date of delivery or the last
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day of the agreed delivery period, damages shall run from the date of notice. Liquidated
damages for delay shall not exceed _________% of the price of the delayed goods.
Liquidated damages for delay do not preclude avoidance of this Contract in accordance
with Article 10.‖]

8. Lack of conformity
8.1 The Buyer shall examine the Goods, or cause them to be examined within as short
period as is practicable in the circumstances. The Buyer shall notify the Seller of any lack
of conformity of the Goods, specifying the nature of the lack of conformity, within
_________days after the Buyer has discovered or ought to have discovered the lack of
conformity. In any event, the Buyer loses the right to rely on a lack of conformity if he
fails to notify the Seller thereof at the latest within a period of two years (other period of
time) from the date on which the Goods were actually handed over to the Buyer.
8.2 Where the Buyer has given due notice of non-conformity to the Seller, the Buyer
may at his option:
8.2.1 Require the Seller to deliver any missing quantity of the Goods, without any
additional expense to the Buyer;
8.2.2 Require the Seller to replace the Goods with conforming goods, without any
additional expense to the Buyer;
8.2.3 Require the Seller to repair the Goods, without any additional expense to the
Buyer;
8.2.4 Reduce the price in the same proportion as the value that the Goods actually
delivered had at the time of the delivery bears to the value that conforming goods would
have had at that time. The Buyer may not reduce the price if the Seller replaces the Goods
with conforming goods or repairs the Goods in accordance with paragraph 8.2.2 and 8.2.3
of this Article or if the Buyer refuses to accept such performance by the Seller;
8.2.5 Declare this Contract avoided in accordance with Article 10 of this Contract.
The Buyer shall in any event be entitled to claim damages.
[Option: ―8.3 The Seller‘s liability under this Article for lack of conformity of the Goods
is limited to [specify the limitation(s)‖.]

9. Transfer of property
The Seller must deliver to the Buyer the Goods specified in Article 1 of this Contract free
from any right or claim of a third person.
[Option: ―Retention of title. The Seller must deliver to the Buyer the Goods specified in
Article 1 of this Contract free from any right or claim of a third person. The property in
the Goods shall not pass to the Buyer until the Seller has received payment in full of the
price of the Goods. Until property in the Goods passes to the Buyer, the Buyer shall keep
the Goods separate from those of the Buyer and third parties and properly stored,
protected and insured and identified as the Seller‘s property‖.]
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10. Avoidance of Contract
10.1 There is a breach of Contract where a party fails to perform any of its obligations
under this Contract, including defective, partial or late performance.
10.2 There is a fundamental breach of Contract where:
10.2.1 Strict compliance with the obligation which has not been performed is of the
essence under this Contract; or
10.2.2 The non-performance substantially deprives the aggrieved party of what it was
reasonably entitled to expect under this Contract.
[Option: ―The Parties additionally agree that the following is to be considered as a
fundamental breach of Contract:
(Specify the cases that constitute a fundamental breach of Contract e.g. late payment, late
delivery, non-conformity, etc.)‖.]
10.3 In a case of a breach of Contract according to paragraph 10.1 of this Article, the
aggrieved party shall, by notice to the other party, fix an additional period of time of
(specify the length) for performance. During the additional period of time the aggrieved
party may withhold performance of its own reciprocal obligations and may claim
damages, but may not declare this Contract avoided. If the other party fails to perform its
obligation within the additional period of time, the aggrieved party may declare this
Contract avoided.
10.4 In case of a fundamental breach of Contract according to paragraph 10.2 of this
Article, the aggrieved party may declare this Contract avoided without fixing an
additional period of time for performance to the other party.
10.5 A declaration of avoidance of this Contract is effective only if made by notice to
the other party.
* Note: For the purposes of this Model Contract, the term ―Avoidance‖ is taken from the
CISG and means termination of Contract.
11. Force majeure-excuse for non-performance
11.1 ―Force majeure‖ means war, emergency, accident, fire, earthquake, flood, storm,
industrial strike or other impediment which the affected party proves was beyond its
control and that it could not reasonably be expected to have taken the impediment into
account at the time of the conclusion of this Contract or to have avoided or overcome it or
its consequences.
11.2 A party affected by force majeure shall not be deemed to be in breach of this
Contract, or otherwise be liable to the other, by reason of any delay in performance, or the
non-performance, of any of its obligations under this Contract to the extent that the delay
or non-performance is due to any force majeure of which it has notified the other party in
accordance with Article 11.3. The time for performance of that obligation shall be
extended accordingly, subject to Article 11.4.
11.3 If any force majeure occurs in relation to either party which affects or is likely to
affect the performance of any of its obligations under this Contract, it shall notify the
130
other party within a reasonable time as to the nature and extent of the circumstances in
question and their effect on its ability to perform.
11.4 If the performance by either party of any of its obligations under this Contract is
prevented or delayed by force majeure for a continuous period in excess of three [specify
any other figure] months, the other party shall be entitled to terminate this Contract by
giving written notice to the Party affected by the force majeure.
[If preferred, replace 11.4 with the following alternative:
―11.4 If the performance by either party of any of its obligations under this Contract is
prevented or delayed by force majeure for a continuous period in excess of three [specify
any other figure] months, the Parties shall negotiate in good faith, and use their best
endeavours to agree upon such amendments to this Contract or alternative arrangements
as may be fair and reasonable with a view to alleviating its effects, but if they do not
agree upon such amendments or arrangements within a further period of 30 [specify any
other figure] days, the other party shall be entitled to terminate this Contract by giving
written notice to the Party affected by the force majeure‖.]

12. Entire agreement

12.1 This Contract sets out the entire agreement between the Parties. Neither party
has entered into this Contract in reliance upon any representation, warranty or
undertaking of the other party that is not expressly set out or referred to in this Contract.
This Article shall not exclude any liability for fraudulent misrepresentation. [Add where
relevant: ―This Contract supersedes any previous agreement or understanding relating its
subject matter‖].
12.2 This Contract may not be varied except by an agreement of the Parties in writing
(which may include e-mail).

13. Notices
13.1 Any notice under this Contract shall be in writing (which may include e-mail)
and may be served by leaving it or sending it to the address of the other party as specified
in Article 13.2 below, in a manner that ensures receipt of the notice can be proved.
13.2 For the purposes of Article 13.1, notification details are the following, unless other
details have been duly notified in accordance with this Article:

14. Dispute resolution procedure

Any dispute, controversy or claim arising out of or relating to this Contract, including its
conclusion, interpretation, performance, breach, termination or invalidity, shall be finally
settled under the rules of [specify the arbitration institution] by [specify the number of
arbitrators, e.g. sole arbitrator or, if appropriate, three arbitrators] appointed in accordance
with the said rules. The place of arbitration shall be [specify]. The language of the
arbitration shall be [specify].
131
[The following are alternatives to a specified arbitral institution under Article 14.
Alternative 1: Ad hoc arbitration
―Any dispute, controversy or claim arising out of or relating to this Contract, including its
conclusion, interpretation, performance, breach, termination or invalidity, shall be finally
settled under the rules of UNCITRAL [specify other rules] by [specify the number of
arbitrators, e.g. sole arbitrator or, if appropriate, three arbitrators] appointed by [specify
name of appointing institution or person]. The place of arbitration shall be [specify]. The
language of the arbitration shall be [specify]. ‖]
[Alternative 2: State courts
―Any dispute, controversy or claim arising out of or relating to this Contract, in particular
its conclusion, interpretation, performance, breach, termination or invalidity, shall be
finally settled by the courts of (specify place and country) which shall have exclusive
jurisdiction.‖]

15. Applicable law and guiding principles

15.1 Questions relating to this Contract that are not settled by the provisions
contained in the Contract itself shall be governed by the United Nations Convention on
Contracts for the International Sale of Goods (Vienna Sales Convention of 1980,
hereafter referred to as CISG).
Questions not covered by the CISG shall be governed by the UNIDROIT Principles of
International Commercial Contracts (hereafter referred to as UNIDROIT Principles), and
to the extent that such questions are not covered by the UNIDROIT Principles, by
reference to [specify the relevant national law by choosing one of the following options:
The applicable national law of the country where the Seller has his place of business, or
The applicable national law of the country where the Buyer has his place of business, or
The applicable national law of a third country (specify the country).]
15.2 This Contract shall be performed in a spirit of good faith and fair dealing.

DATE AND SIGNATURE OF The Parties

Seller Buyer
Date ..................................................... ........................
Name ................................................... ........................
Signature Signature

132
2. ICC model sale contract

CONTRACT FOR THE SALE OF GOODS

BETWEEN
………………………………… hereinafter called ―the SELLER‖
AND
……………………………........ hereinafter called ―the BUYER‖
PREAMBLE
(NOTE: The Preamble is optional)
The agreement between the parties to this Contract is based on the following
understandings:
(NOTE: The following clauses are examples only. Delete as appropriate)
1. The BUYER is acting partly on its own behalf and partly as a purchasing
agent for other companies
2. The BUYER is acting as purchasing agent for…....................1
3. Both parties understand that Goods made to meet the BUYER‘s special
specifications may have no value or very limited value on the open market.
4. The SELLER understands that the BUYER in specifying the Goods has
relied to a large extent on the expertise of the SELLER
5. The SELLER understands that the BUYER is under contract to resell the
Goods are defective or non-conforming in quality or quantity, the BUYER may be liable
for damages in an amount exceeding ……………2
6. The SELLER understands that the BUYER intends to install the Goods as a
component part in equipment to be resold, and that if the Goods are defective or non-
conforming in quality or quantity, the BUYER may be liable for substantial damages
7. ………………………………………………3
1. Applicable Law
This Contract and all questions relating to its formation, validity, interpretation of
performance shall be governed by the law of………4
(NOTE: The subclause below is optional)
This Contract shall not include, incorporate or be subject to the provisions of the ―United
Nations Convention on Contracts for the International Sale of Goods‖
2. Definition
In this Contract the words below have the meanings ascribed to them unless the context
otherwise clearly dedicates:

1
Name of Principal
2
Currency and amount
3
List of additional background understandings between the parties
4
Name of country
133
2.1. Unless expressly modifies by the parties, ―FOB‖, ―CIF‖ and other trade terms
have the meanings and obligations ascribed to them in Incoterms 2000, Publication 460 of
the International Chamber of Commerce, Paris
2.2. ―Contract‖ means this Contract, its Preamble and Appendices, as well as all
documents expressly mentioned in this Contract
2.3. ―Goods‖ means the Goods specified in Clause 4 below
2.4. ―Price‖ means the Price as specified in Clause 9 below payable to the SELLER for
the Goods
2.5. ―Delivery‖ means Delivery as specified in Incoterms 1990 under the Incoterms or
Incoterms agreed in this Contract
2.6. ―Day‖ means a calendar Day. For the purposes of this Contract, Saturdays,
Sundays and all holidays are considered as Days
2.7. ―Direct‖ costs and losses are costs and losses arising in immediate connection with
any failure to deliver, any delay in Delivery or any defect in Goods delivered under this
Contract. Such costs and losses must have an immediate, foreseeable and provably causal
connection with the delay or defect. All other costs and losses are deemed by this
Contract to be ―indirect‖; In particular, loss of profit, loss of use, and loss of contract are
considered indirect losses
2.8. ―Government‖ means national Government, local Government, local authorities,
and their agencies. In particular customs and/or excise departments are considered as
Government agencies
2.9. Termination‖ means the discharge of the Contract by one of the parties under any
right expressly granted by this Contract. The discharge of the Contract by ant other right
arising from the applicable law or any other source is deemed to be ―cancellation‖ of the
Contract
2.10. ………………………………………………..5
3. Entire Agreement and Contract Documents
This Contract constitutes the entire agreement and understanding between the parties.
There are no understandings, agreements, conditions, reservations, or representation, oral
or written, that are not embodied in this Contract or that have not been supersede by this
Contract
(NOTE: The sub-clause and list below are optional)
In addition to the text of this Contract itself, the documents listed below shall form part of
the Contract. All listed documents and the clauses of this Contract shall be read, if
possible, so as to be consistent. In the event of conflict, the order of precedence for the
provisions and documents which constitute this agreement shall be as follows:
(NOTE: The list below contains examples only. Delete as appropriate)
a. Any alterations made on the face of the printed Contract

5
List of additional definitions agreed between the parties

134
 b. The Contract itself
c. Specifications
d. Manufacturing drawings
e. The BUYER‘s Special/General Conditions of Purchase
f. The SELLER‘s Special/General Conditions of Sale
g. ………………………………………………………6
4. Scope of Supply
The Goods to be delivered under this Contract are specified………………..
……………………………………………………………………………….7

5. Delivery
5.1. Date, Place and Terms of Delivery
Delivery of the Goods shall be made…..8; the schedule date of Delivery shall be …….9;
Risk and title the Goods shall pass from the SELLER to the BUYER on Delivery.
The place of Delivery under this Contract is …………………10
5.2. Naming the Arrival of Vessel
(NOTE: This clause is intended primarily for use in FOB and FAS contracts).
The BUYER shall advise the SELLER of the name of the vessel not later than ……… 11.
Days before the agreed Delivery date
If the vessel named by the BUYER fails to arrive on or before……… 12 then the SELLER
mat at his discretion deliver the Goods to a bonded warehouse in the port of ……… 13 and
shall be deemed to have fulfilled his Delivery obligations under this Contract. In this
event, the SELLER must notify the BUYER of the full circumstances of the Delivery to
the warehouse. With Delivery to the warehouse, all costs, including but not limited to cost
of storage and insurance are to the BUYER‘s account
5.3. Shipping Marks and Packaging
(NOTE: The following two sub-clauses are examples. Reword as appropriate).
On the surface of each package delivered under this Contract shall be marked: the
package number, the measurements of the package, gross weight, net weight, the lifting
positions the letter the credit number, the words RIGHT SIDE UP, HANDLE WITH
CARE, KEEP DRY, and the mark …………14

6
Further contract documents
7
Use “below” or the name of the annex where the goods are specified
8
Agreed Incoterm
9
Agreed date of delivery
10
Agreed place of delivery. Note: In FOB, FCR, CIF and CIP (etc.) contract, this is part of shipment.
11
Number (of days)
12
Date of arrival of ship
13
Port of shipment
14
Shipping mark

135
Goods are to be packed in ……………15 and are to be well protected against dampness,
shock, rust or rough handling. The SELLER shall be liable for any damage to or loss of
the Goods attributable to improper or defective packaging.
(NOTE: The following sub-clause is relevant only to deliveries in Germany).
5.4. Disposal of Packaging
Responsibility for the disposal of any packaging shall be the BUYER‘s
6. Notifications of Delivery
(NOTE: This clause applies largely to contracts under which delivery takes place in the
country of the seller).
Immediately on Delivery, the SELLER shall notify the BUYER of Delivery by ……… 16
This notification shall include …………17
7. Inspection before Shipment
7.1. Inspection by the Buyer
The BUYER may, at the BUYER‘s option, inspect the Goods prior to shipment. At least
…………18 Days before the actual Delivery date, the SELLER shall give notice to the
BUYER, or to any agent nominated by the BUYER, that the Goods are available for
inspection. The SELLER shall permit access to the Goods for purposes of inspection at a
reasonable time agreed by the parties
(NOTE: Customs requirements for importation of goods into Indonesia and the
Philippines require inspection by SGS prior to shipment from the Seller’s country. The
following clause is recommended for sales to these countries).
7.2. Inspection by Inspection service
The parties understand that importation into ……….19 requires inspection of Goods by
SGS before shipment from the SELLER‘s country. The SELLER agrees to cooperate
fully with the SGR in providing access to and necessary information about the Goods for
the purpose of such inspection

8. Early Delivery, Partial Shipment, Delay in Deliver

8.1. Early Delivery
(NOTE: The three sub-clauses below are alternatives. Delete as necessary).
Under this Contract Delivery up to ……20 Days early is permitted. However, payment
shall not become due until the date agreed for payment in this Contract; Delivery up to
…….21 Days early is permitted. In this case payment shall false due as though the actual

15
Description of required packing
16
Means of notification, e.g., FAX
17
List of documents and information required
18
Number (of days)
19
Name of country
20
Number (of days)
21
Number (of days)

136
Delivery date were the Delivery date agreed in the Contract.
8.2. Partial Shipment
(NOTE: The two sub-clauses below are alternatives. Delete as necessary).
Partial shipment is not permitted under this Contract, subject to the agreement of both
parties. However, any costs arising from partial shipment shall be to the account of the
………22
8.3. Delay in Delivery
In the event of late Delivery for reasons other than force majeure as defined in Clause 17
below, the SELLER shall pay as liquidated damages and not as a penalty the sum of
……23 of the value of the undelivered part per Day of late Delivery up to a maximum of
……24 of the Contract Price. Payment of liquidated damages shall be due without the
BUYER having to furnish proof of any loss, damage or injure
(NOTE: The two sub-clauses below are alternatives. Delete as necessary).
Payment of liquidated damages shall constitute full and complete satisfaction of any
claim of the BUYER against the SELLER arising from the or in connection with late
Delivery of any Goods. In particular the SELLER shall not
Be liable for any indirect loss or damage, as defined in Clause 2.7 above, arising from or
in connection with late Delivery of any Goods. Payment of liquidated damages by the
SELLER shall not preclude the BUYER from seeking compensatory damages from the
SELLER for any loss, injure or damage arising from or in connection with late Delivery
of any of Goods. In particular the BUYER shall be entitled to compensation the SELLER
for any indirect or consequential loss or damage, including but not limited to loss of
profit, loss of use or loss of contract, arising from or in connection with late Delivery of
any Goods. However, payments made as liquidated damages shall be offset against any
compensatory damages recovered from the SELLER for the late Delivery of any Goods
8.4. Termination for delay
In the event that the SELLER becomes liable to pay the maximum sum payable as
liquidated damages under Clause 8.3 above, then the BUYER shall, upon due notice,
have the right to terminate the Contract.
9. Price
The price for the Goods to be delivered under this Contract is…………………25
(…………. 26)
10. Terms of payment
Payment shall be made by means of an irrevocable, confirmed letter of credit. The

22
BUYER or SELLER
23
Figure
24
Figure
25
Currency symbol and figure
26
Currency and figure in words

137
BUYER shall open the letter of credit on or before ……..27. On the terms agreed by the
parties and annexed to this Contract as Appendix…….28
This Contract shall not come into force under Clause 16 below until the SELLER has
received advice that the letter of credit has been opened in his favour and has ascertained
that the terms are in accordance with those agreed between the parties. Any discrepancies
between the terms agreed by the parties and the letter of credit as issued shall be notified
by the SELLER to the BUYER immediately.
11. Inspection of the Goods
11.1. Duty to Inspect and Notify Discrepancies
The Buyer shall inspect the Goods on their arrival at the place of destination. If the Goods
fail to conform with the Contract in either quality or quantity, then the BUYER shall
notify the SELLER of any discrepancy without delay.
11.2. Failure to notify Discrepancies
If the BUYER does not notify the SELLER of any such discrepancy within ….. 29 Days of
the arrival of the Goods, then the Goods shall be deemed to have been in conformity with
the Contract on arrival.
11.3. Buyer’s Rights in the Event of Discrepancy in Quantity
If an material discrepancy in quantity exists and is duly notified to the SELLER, the
BUYER at his discretion and subject to Clause 8.2 above may either:
a. Accept the delivered portion of the Goods and require the SELLER to deliver
the remaining portion forthwith; or
b. Accept the delivered portion of the Goods and terminate the remaining portion
of the Contract upon due notice given to the SELLER.
If any material discrepancy in quantity exists such that …… 30 and if such
discrepancy is duly notified the SELLER, the BUYER may at his discretion:
a. Adopt either of the remedies prescribed above in this clause; or
b. Reject the delivered portion of the Goods and recover from the SELLER all
payments made to the SELLER as well as all costs, expenses and customs duties incurred
by the BUYER in association with shipment, movement through customs, insurance or
storage of the Goods.
(NOTE: Clause 11.4 below may be necessary if SGS’s inspection takes place before
shipment).
11.4. Buyer’s Rights in the Event of Discrepancy in Quality
Discrepancies in quality shall be considered as defects and shall give rise to claims under
the defects liability provision of this Contract in Clause 12 below.
However, a fundamental discrepancy in quality shall give the BUYER the right to refuse

27
Date of opening of letter of credit
28
Appendix number
29
Number (of days)
30
Description of fundamental discrepancy
138
Delivery of Goods in whole or in part and to recover from the SELLER all payments
made for the unaccepted portion of the Goods as well as all costs, expenses and customs
duties incurred by the BUYER in association with the shipment, movement through
customs, insurance or storage of the unaccepted portion of the Goods.
12. Defects Liability
12.1. Seller’s Liability for Defects
The SELLER warrants that the Goods supplied under this Contract shall at the date of
their Delivery:
a. Be free from defects in material
b. Be free from defects in workmanship
c. Be free from defects inherent in design, including but not limited to selection of
materials, and be fit for the purpose for which such Goods are normally used.
If any defect provably present in any of the Goods on the date of Delivery comes to light
during the defects liability period, then the BUYER shall forthwith notify the SELLER.
The SELLER, without undue delay, shall at his own risk and costs and at his discretion
repair or replace such item or otherwise make good the defect.
The SELLER‘s liability for defects is subject to the BUYER having adhered to all
procedure and instructions applicable to the …..31 of the item, and expressly excludes
damage to the Goods caused by fair wear and tear or by misuse occurring after Delivery.
12.2. Defect Liability Period
The SELLER shall be liable for defects which come to light during a period of …… 32
days from ……33 After the end of this period, the BUYER shall have no right to raise
claims of any kind against the SELLER for any defects in any Goods of the SELLER‘s
supply
The defects liability period shall be prolonged by the length of any period of during
which the Goods cannot be used by the BUYER because of a defect. However, if new
Goods are delivered to replace defective Goods, the defects liability period shall not begin
again on the replacement Goods.
12.3. Limitation of Defects Liability
(NOTE: The two clauses below are alternatives. Delete as necessary)
The duty to repair and replace or otherwise to make good the defects is the only duty of
the SELLER in the event of the Delivery of defective Goods. In particular the BUYER
shall not be entitled to compensate the SELLER for any indirect loss or damages as
defined in Clause 2.7 above, arising from or in connection with Delivery of defective
Goods The SELLER shall indemnify and hold harmless the BUYER against any loss or
damage however arising whether direct or indirect which shall be suffered by the

31
Condition of use (e.g., “storage, installation, use or operation”)
32
Number (of days)
33
Date of start of defects liability period

139
SELLER as the result of defective or faulty Goods delivered by the SELLER
13. Liability to Third Parties
(NOTE: The two clauses below are alternatives. Delete as necessary)
The……..34 shall compensate and hold harmless the………35 from any award of damages,
reasonable costs, expenses or legal fees, in the event of any action or lawsuit by a third
party resulting from any injury, loss or damage to the third party caused by a defect in the
Goods delivered under this Contract
In the event of such Lawsuit, the…… 36shall immediately notify the……37and shall fully
cooperate with the…….38in taking any necessary legal action.
In the event of any action or lawsuit by a third part resulting from any injury, loss or
damage to the third party caused by a defect in the Goods delivered under this Contract,
the party against whom the action or lawsuit is brought shall bear all costs, expenses,
awards of damages or legal fees arising therefrom
14. Taxation
All income taxes, value added taxes, customs duties, excise charges, stamp duties or other
fees levied by any Government, Government agency or similar authority shall be borne
exclusively by the party against whom they are levied
15. Assignment of Rights and Delegation of Duties
The rights under this Contract may not be assigned nor the duties delegated by either
party without the prior written consent of the other party
16. Coming Into Force
This Contract shall come into force after signature by both parties and after:
a. The issuance of a letter of credit in accordance with the terms of Clause 10 above;
b. ………………………………………………………………………..39
If the Contract has not come into force within….40Days of its signature by both parties, all
its provisions shall become null and void
17. Force majeure
(NOTE: The word duty is marked by an asterisk in this clause. For contracts under
Philippines law, the word duty should be replaced by the word obligation)
If either party is prevented from or delayed in, performing any duty under this Contract
by an event beyond his reasonable control, then this event shall be deemed force majeure,
and this party shall not considered in default and no remedy, be it under this Contract or
otherwise, shall be available to the other party

34
Name of the party giving the indemnity (BUYER or SELLER)
35
Name of the party receiving the indemnity (BUYER or SELLER)
36
Name of the party receiving the indemnity (BUYER or SELLER)
37
Name of the party receiving the indemnity (BUYER or SELLER)
38
Name of the party receiving the indemnity (BUYER or SELLER)
39
List of events which must occur before contract comes into force
40
Number (of days)

140
(NOTE: The subclause below contains examples only. It should be modified as necessary)
Force majeure events include, but are not limited to: war, (whether war is declared or
not), riots, insurrections, acts of sabotage, or similar occurrences, strikes, or other labour
unrest; newly introduced Laws or Government regulations; delay due to Government
action or inaction, or inaction on the part of any inspection agency, fire, explosion, or
other unavoidable accident, flood, storm, earthquake, or other abnormal natural event
(NOTE: The subclause below on non-force-majeure events is optional)
Force majeure events do not include ……………………………… …………
…………………………………………………………………………….41
If either party is prevented from or delayed in, performing any duty under this Contract,
then this party shall immediately notify the other party of the event, of the duty affected,
and of the expected duration of the event
If any force majeure event prevents or delays performance of any duty under this Contract
for more than……Days, then either parties may on due notification to the other party,
terminate this Contract
18. Termination
Notice of Termination as defined in Clause 2.9 of this Contract shall be in writing and
shall take effect…..42Days from the receipt of such notice by the party notified
In the event of Termination, the duties of the parties shall be as incurred up to the date of
Termination. In particular, the SELLER shall receive the full Price of any Goods
delivered and accepted by the BUYER. The provisions of this Agreement dealing with
defects liability, arbitration, and such other provisions as are necessary in order to resolve
any post-Termination disputes shall survive Termination
19. Partial Invalidity
If any provision or provisions of this Contract are invalid or become invalid, then this
shall have no effect on the remaining provisions. Further, the parties agree to replace any
invalid provision with a new, valid provision having, as far as possible, the same intent as
the provision replaced
20. Modification and Waiver
Modification of the terms and conditions of this Contract shall be binding on both parties
even without consideration if the modification is in writing, is signed, and is expressly
stated to be a modification of this contract
Any waiver of any right under this Contract is binding on the party making the waiver
even without consideration provided the waiver is in writing, is signed and is expressly
stated to be a waiver of the sad right
21. Language
The language of the Contract, of all Contract Documents, and of all correspondence and
other communication between the parties shall be English.

41
List of events not considered to be “force majeure events”
42
Number (of days)
141
22. Notices
Notices served by one party to the other under this Contract shall be made, in the first
instance by facsimile transmission (hereinafter called ―FAX‖). A further copy of each
notice shall be sent by registered mail and signed
The effective date of the notice shall be the date of FAX transmission. In the event of a
dispute about the receipt of a FAX, however, the effective date of the notice shall be the
date of receipt of the registered letter or a date seven days after the registered mailing,
whichever is earlier
Notices shall be sent to the following addresses and FAX number:
SELLER:……………………………………………………………………..
Address: ………………………………………………………………………
FAX Number: ………………………………………………………………..
BUYER: ………………………………………………………………………
Address: …………………………………………….………………………...
FAX Number: …………………………………..…………………………….
Any change in an address or FAX number shall be the subject of a required notice under
this Contract
23. Settlement of Disputes
All disputes arising in connection with this Contract shall be finally settled under the
Rules of Conciliation and Arbitration of the International Chamber of Commerce by….. 43
arbitrator appointed in accordance with the said rules
The place of arbitration shall be …….44 . The language of arbitration shall be English.
(NOTE: The three sub-clauses below are alternatives. Delete as necessary).
In the event of arbitration, each party shall bear its own costs. In the event of arbitration,
the court shall assess the amount of the costs to be borne by each party. In the event of
arbitration, the party against whom the award is made shall bear the entire costs of both
parties to the action
The parties agree that any award made in accordance with the provisions of this clause is
final and binding on both parties
Execution
The parties, intending to be legally bound, have signed this Contract on the dates and at
the places stated below:
For and on the behalf of: For and on the behalf of:
SELLER: BUYER:
Title: Title:
Date: Date:
Place: Place:

43
Number (of arbitrators)
44
Name of the place (city) of arbitration

142
(NOTE: The witnessing of signatures is not required by all national laws).
Witness of SELLER‘s Signature Witness of BUYER‘s Signature

3. ICC General CIF contract

Please note: The contracts and guides contained in the present collection have been
selected for illustrative purposes only. International Jurisdiction shall not be liable for
their contents or use.
General cost insurance freight terms contract (C.I.F.)
Date ____________
Sellers ____________ have this day entered into a contract on the following terms and
conditions.
1. Goods ____________
2. Quantity ____________
____________
3. Price
At ____________ per tonne of 1000 kilograms, cost, insurance and freight to
____________
4. Quality

Specifications ____________
5. Period of shipment
As per bill(s) of lading dated or to be dated ____________
6. Shipment and classification
Shipment from ____________
Shipment to be made in good condition, direct or indirect, with or without transhipment
by first class mechanically self-propelled vessel(s) suitable for the carriage of the contract
goods classed Lloyds 100A1, or equivalent class, or in accordance with the Institute
Classification Clause of the Institute of London Underwriters.

7. Extension of shipment
The contract period for shipment, if such be 31 days or less, shall, if desired by the
Shipper, be extended by an additional period of not more than 8 days, provided that the
Shipper gives notice claiming extension by telegram, or telex sent not later than the next
business day following the last day of the originally stipulated period. The notice need not
state the number of additional days claimed, and such notice shall be passed on by Sellers
to their Buyers respectively in due course after receipt. Sellers shall make an allowance to
Buyers, to be deducted in the invoice from the contract price, based on the number of
days by which the originally stipulated period is exceeded as follows: for 1, 2, 3 or 4
additional days, 0.50% of the gross c.i.f. price; for 5 or 6 additional days, 1% of the gross
143
c.i.f. price; for 7 or 8 additional days 1.50% of the gross c.i.f. price. If, however, after
having given notice to the Buyers as above, the Sellers fail to make shipment within such
8 days, then the contract shall be deemed to have called for shipment during the originally
stipulated period plus 8 days, at contract price less 1.50%, and any settlement for default
shall be calculated on that basis. If any allowance becomes due under this clause, the
contract price shall be deemed to be the original contract price less the allowance and any
other contractual differences shall be settled on the basis of such reduced price.

8. Appropriation
Notice of Appropriation stating the vessel's name, the port of shipment, date of the bill of
lading and the approximate weight shipped, shall, within 10 consecutive days (unless
otherwise agreed), from the date of the bill of lading be despatched by or on behalf of the
Shipper direct to his Buyers or to the Selling Agent or Broker named in the contract. In
case of resales, notices of appropriation to be passed on without delay. The Non-Business
Days Clause shall not apply.

9. Payment ____________
Final Invoices for monies due may be prepared by either party and shall be settled
without delay. If not settled, either party may declare that a dispute has arisen which may
be referred to arbitration as herein provided.
10. Interest
If there has been unreasonable delay in any payment interest appropriate to the currency
involved shall be charged. If such charge is not mutually agreed, a dispute shall be
deemed to exist which shall be settled by arbitration. Otherwise interest shall be payable
only where specifically provided in the terms of the contract, or by an award of
arbitration. The terms of this clause do not override the parties obligation under the
Payment Clause.

11. Shipping documents

Shipping documents shall consist of:
1. Invoice.
2. Full set(s) of on board Bill(s) of Lading and/or Ship's Delivery Order(s) and/or other
Delivery Order(s) in negotiable and transferable form. Such other Delivery Order(s) if
required by Buyers, to be certified by the Shipowners, their Agents or a recognised bank.
3. Policy(ies) and/or Insurance Certificate(s) and/or Letter(s) of Insurance in the currency
of the contract. The Letter(s) of Insurance to be certified by a recognised bank if required
by Buyers.
4. Other documents as called for under the contract. Should documents be presented with
an incomplete set of bill(s) of lading or should other shipping documents be missing,
payment shall be made, provided that delivery of such missing documents be guaranteed,
144
such guarantee to be signed, if required by Buyers, by a recognised bank. Acceptance of
this guarantee shall not prejudice Buyers' rights under this contract. No clerical error in
the documents shall entitle Buyers to rejection or to delay payment provided that Sellers
furnish at the request of Buyers a guarantee, to be countersigned by a recognised bank, if
required by Buyers. Sellers shall be responsible for any loss or expense incurred by
Buyers on account of such error. Buyers agree to accept documents containing the
Chamber of Shipping War Deviation Clause and/or other recognised official War Risk
Clause.
12. Duties, taxes, levies, etc
All export duties, taxes, levies, etc., present or future, in country of origin, shall be for
Sellers' account. All import duties, taxes, levies, etc., present or future, in country of
destination, shall be for Buyers' account.
13. Discharge ____________
14. Weighing ____________
15. Sampling and analysis
Samples required for the purposes of the contract shall be taken and analytical
instructions shall be given in accordance with the GAFTA Sampling Rules Form No. 124.
When superintendents are required for the purposes of supervision and sampling of the
goods in accordance with these Rules, then the parties agree to appoint from
superintendents in the GAFTA Approved Register of Superintendents.
16. Insurance
Sellers shall provide insurance on terms not less favourable than those set out hereunder,
and as set out in detail in The Grain and Feed Trade Association Form. 72 viz Risks
Covered:

Cargo Clauses (W.A.), with average payable, with 3 %

- Section 2 of Form 72
franchise or better terms;
War Clauses (Cargo); - Section 4 of Form 72
Strikes, Riots and Civil Commotions Clauses (Cargo); - Section 5 of Form 72

17. Prohibition
In case of prohibition of export, blockade or hostilities or in case of any executive or
legislative act done by or on behalf of the government of the country of origin or of the
territory where the port or ports of shipment named herein is/are situate, restricting
export, whether partially or otherwise, any such restriction shall be deemed by both
parties to apply to this contract and to the extent of such total or partial restriction to
prevent fulfillment whether by shipment or by any other means whatsoever and to that
extent this contract or any unfulfilled portion thereof shall be cancelled. Sellers shall
advise Buyers without delay with the reasons therefor and, if required, Sellers must

145
produce proof to justify the cancellation.

18. Force majeure, strikes etc

Sellers shall not be responsible for delay in shipment of the goods or any part thereof
occasioned by any Act of God, strike, lockout, riot or civil commotion, combination of
workmen, breakdown of machinery, fire or any cause comprehended in the term "force
majeure". If delay in shipment is likely to occur for any of the above reasons, the Shipper
shall give notice to his Buyers by telegram, telex or by similar advice within 7
consecutive days of the occurrence, or not less than 21 consecutive days before the
commencement of the contract period, whichever is the later. The notice shall state the
reason(s) for the anticipated delay. If after giving such notice an extension to the shipping
period is required, then the Shipper shall give further notice not later than 2 business days
after the last day of the contract period of shipment stating the port or ports of loading
from which the goods were intended to be shipped, and shipments effected after the
contract period shall be limited to the port or ports so nominated. If shipment be delayed
for more than 30 consecutive days, Buyers shall have the option of cancelling the delayed
portion of the contract, such option to be exercised by Buyers giving notice to be received
by Sellers not later than the first business day after the additional 30 consecutive days. If
Buyers do not exercise this option, such delayed portion shall be automatically extended
for a further period of 30 consecutive days. If shipment under this clause be prevented
during the further 30 consecutive days extension, the contract shall be considered void.
Buyers shall have no claim against Sellers for delay or non-shipment under this clause,
provided that Sellers shall have supplied to Buyers, if required, satisfactory evidence
justifying the delay or non-fulfillment.

19. Notices
All notices served on the parties pursuant to this contract shall be served by letter, if
delivered by hand on day of writing, or by telegram or by telex or by other method of
rapid written communication. A notice to the broker or agent shall be deemed a notice
under this contract.
For the purpose of time limits, the date and time of despatch shall, unless otherwise
stated, be deemed to be the date and time of service. In case of resales all notices shall be
passed on without delay by Buyers to their respective Sellers or vice-versa.

20. Non-business days

Saturdays, Sundays and the officially recognised and/or legal holidays of the respective
countries and any days which The Grain and Feed Trade Association may declare as non-
business days for specific purposes, shall be non-business days. Should the time limit for
doing any act or giving any notice expire on a non-business day, the time so limited shall
be extended until the first business day thereafter. The period of shipment shall not be
146
affected by this clause.

21. Default
In default of fulfillment of contract by either party, the following provisions shall apply:
(a) The party other than the defaulter shall, at their discretion have the right, after giving
notice by letter, telegram or telex to the defaulter to sell or purchase, as the case may be,
against the defaulter, and such sale or purchase shall establish the default price.

(b) If either party be dissatisfied with such default price or if the right at (a) above is not
exercised and damages cannot be mutually agreed, then the assessment of damages shall
be settled by arbitration.

(c) The damages payable shall be based on the difference between the contract price and
either the default price established under (a) above or upon the actual or estimated value
of the goods, on the date of default, established under (b) above.
(d) In all cases damages shall, in addition, include any proven additional expenses which
would directly and naturally result in the ordinary course of events from the defaulter's
breach of contract, but shall in no case include loss of profit on any sub-contracts made
by the party defaulted against or others unless the Arbitrator(s) or Board of Appeal,
having regard to special circumstances, shall in his/their sole and absolute discretion think
fit.
(e) Damages, if any, shall be computed on the quantity appropriated if any but, if no such
quantity has been appropriated then on the mean contract quantity, and any option
available to either party shall be deemed to have been exercised accordingly in favour of
the mean contract quantity.
(f) Default may be declared by Sellers at any time after expiry of the contract period, and
the default date shall then be the first business day after the date of Sellers' advice to their
Buyers.
If default has not already been declared then (notwithstanding the provisions stated in the
Appropriation Clause) if notice of appropriation is not passed by the 10th consecutive day
after the last day for appropriation laid down in the contract, where the Appropriation
Clause provides for 7 or more days for despatch of the appropriation, or if notice of
appropriation is not passed by the 4th business day after the last day for appropriation laid
down in the contract where the Appropriation Clause provides for less than 7 days for
despatch of the appropriation, the Sellers shall be deemed to be in default, and the default
date shall then be the first business day thereafter.

22. Insolvency
If before the fulfillment of this contract, either party shall suspend payments, notify any
of the creditors that he is unable to meet debts or that he has suspended or that he is about
147
to suspend payments of his debts, convene, call or hold a meeting of creditors, propose a
voluntary arrangement, have an administration order made, have a winding up order
made, have a receiver or manager appointed, convene, call or hold a meeting to go into
liquidation (other than for re-construction or amalgamation) become subject to an Interim
Order under Section 252 of the Insolvency Act 1986, or have a Bankruptcy Petition
presented against him (any of which acts being hereinafter called an "Act of Insolvency")
then the party committing such Act of Insolvency shall forthwith transmit by telex or
telegram or by other method of rapid written communication a notice of the occurrence of
such Act of Insolvency to the other party to the contract and upon proof (by either the
other party to the contract or the Receiver, Administrator, Liquidator or other person
representing the party committing the Act of Insolvency) that such notice was thus given
within 2 business days of the occurrence of the Act of Insolvency, the contract shall be
closed out at the market price ruling on the business day following the giving of the
notice. If such notice be not given as aforesaid, then the other party, on learning of the
occurrence of the Act of Insolvency, shall have the option of declaring the contract closed
out at either the market price on the first business day after the date when such party first
learnt of the occurrence of the Act of Insolvency or at the market price ruling on the first
business day after the date when the Act of Insolvency occurred.
In all cases the other party to the contract shall have the option of ascertaining the
settlement price on the closing out of the contract by repurchase or re-sale, and the
difference between the contract price and the re-purchase or re-sale price shall be the
amount payable or receivable under this contract.

23. Domicile
Buyers and Sellers agree that, for the purpose of proceedings either legal or by arbitration,
this contract shall be deemed to have been made in England, and to be performed there,
any correspondence in reference to the offer, the acceptance, the place of payment, or
otherwise, notwithstanding, and the Courts of England or arbitrators appointed in
England, as the case may be, shall, except for the purpose of enforcing any award made in
pursuance of the Arbitration Clause hereof, have exclusive jurisdiction over all disputes
which may arise under this contract. Such disputes shall be settled according to the law of
England, whatever the domicile, residence or place of business of the parties to this
contract may be or become. Any party to this contract residing or carrying on business
elsewhere than in England or Wales, shall for the purpose of proceedings at law or in
arbitration be considered as ordinarily resident or carrying on business at the offices of
The Grain and Feed Trade Association, and if in Scotland, he shall be held to have
prorogated jurisdiction against himself to the English Courts; or if in Northern Ireland to
have submitted to the jurisdiction and to be bound by the decision of the English Courts.
The service of proceedings upon any such party by leaving the same at the office of The
Grain and Feed Trade Association, together with the posting of a copy of such
148
proceedings to his address abroad, or in Scotland or in Northern Ireland, shall be deemed
good service, any rule of law or equity to the contrary notwithstanding. Where goods
forming the subject of this contract are not for consumption in Great Britain or Northern
Ireland nothing in the foregoing shall make the sale subject to the provisions of the
Agriculture Act for the time being in force.

24. Arbitration
(a) Any dispute arising out of or under this contract shall be settled by arbitration in
accordance with the Arbitration Rules, No. 125, of The Grain and Feed Trade
Association, in the edition current at the date of this contract, such Rules forming part of
this contract and of which both parties hereto shall be deemed to be cognisant.
(b) Neither party hereto, nor any persons claiming under either of them shall bring any
action or other legal proceedings against the other of them in respect of any such dispute
until such dispute shall first have been heard and determined by the Arbitrator(s) or a
Board of Appeal, as the case may be, in accordance with the Arbitration Rules and it is
expressly agreed and declared that the obtaining of an award from the Arbitrator(s) or a
Board of Appeal, as the case may be, shall be a condition precedent to the right of either
party hereto or of any persons claiming under either of them to bring any action or other
legal proceedings against the other of them in respect of any such dispute.

25. International conventions

The following shall not apply to this contract:
(a) the Uniform Law on Sales and the Uniform Law on Formation to which effect is given
by the Uniform Laws on International Sales Act 1967;
(b) the United Nations Convention on Contracts for the International Sale of Goods of
1980; and
(c) the United Nations Convention on Prescription (Limitation) in the International Sale
of Goods of 1974 and the amending Protocol of 1980.
Sellers ____________ Buyers ____________

4. ICC General FOB contract

Please note: The contracts and guides contained in the present collection have been
selected for illustrative purposes only. Juris International shall not be liable for their
contents or use.
General free on board terms contract (F.O.B.)
Date ____________
Sellers ____________
Intervening as brokers ____________
Buyers ____________ have this day entered into a contract on the following terms and
conditions.
149
1. Goods ________________________
2. Quantity ________________________
3. Price
____________ per tonne of 1000 kilograms, free on board
4. Quality
Specifications ____________
5. Delivery
Buyers shall tender vessel(s) in readiness to load between ____________
____________ both dates inclusive.
Vessel(s) to load in accordance with the custom at the port of loading unless otherwise
stipulated. Bill of lading shall be considered proof of delivery in the absence of evidence
to the contrary. Buyers have the right to substitute the nominated vessel, but in any event
the original delivery period and any extension shall not be affected thereby.
6. Nomination
Sellers shall be entitled to receive at least ____________ consecutive days notice of
probable readiness and of the estimated tonnage required.
7. Extension of delivery
The contract period of delivery shall, if desired by Buyers, be extended by an additional
period of 21 consecutive days, provided that Buyers give notice in accordance with the
Notices Clause not later than the next business day following the last day of the delivery
period.

In this event Sellers shall carry the goods for Buyers' account and all charges for storage,
interest, insurance and other such normal carrying expenses shall be for Buyers' account.
Any differences in export duties, taxes, levies etc., between those applying during original
delivery period and those applying during the period of extension shall be for the account
of Buyers and Sellers shall produce evidence of the amounts paid for if required by
Buyers and in such cases Clause 11 shall not apply. Should the Buyers fail to present a
vessel in readiness to load under the extension period, Sellers shall have the option of
declaring the Buyers to be in default or shall be
entitled to demand payment at contract price plus such charges as stated above, less
current F.O.B. charges, against warehouse warrants and the tender of such warehouse
warrants shall be considered complete delivery of the contract on the part of the Sellers.
8. Shipment and classification
Shipment by first class-mechanically self-propelled vessel(s) suitable for the carriage of
the contract goods classed Lloyds 100A1, or equivalent class, or in accordance with the
Institute Classification Clause of the Institute of London Underwriters, excluding tankers
and vessels which are either classified in Lloyd's Register or described in Lloyd's
Shipping Index as "Ore/Oil" vessels.
9. Payment ____________
150
Final invoices for monies due may be prepared by either party and shall be settled without
delay. If not settled, either party may declare that a dispute has arisen which may be
referred to arbitration as herein provided.
10. Interest
If there has been unreasonable delay in any payment interest appropriate to the currency
involved shall be charged. If such charge is not mutually agreed, a dispute shall be
deemed to exist which shall be settled by arbitration. Otherwise interest shall be payable
only where specifically provided in the terms of the contract or by an award of arbitration.
The terms of this clause do not override the parties obligation under the Payment Clause.
11. Duties, taxes, levies, etc
All export duties, taxes, levies, etc., present or future, in country of origin or of the
territory where the port or ports of shipment named herein is/are situate, shall be for
Sellers' account.
12. Weighing
____________
13. Sampling and analysis
If required by Buyers, samples shall be taken at time and place of shipment by Buyers'
and Sellers' representatives and analysis instructions given in accordance with the
GAFTA Sampling Rules Form No.124. When superintendents are required for the
purposes of supervision and sampling of the goods in accordance with these Rules, then
the parties agree to appoint from superintendents in the GAFTA Approved Register of
Superintendents. Methods of Analysis to be prescribed by the Grain and Feed Trade
Association being the GAFTA Regulations, Form 130.
14. Insurance
Marine and War Risk insurance including strikes, riots, civil commotions and mine risks
to be effected by Buyers with first class underwriters and/or approved companies. Buyers
shall supply Sellers with confirmation thereof at least five consecutive days prior to
expected readiness of vessel(s). If Buyers fail to provide such confirmation Sellers shall
have the right to place such insurance at Buyers' risk and expense.
15. Prohibition
In case of prohibition of export, blockade or hostilities or in case of any executive or
legislative act done by or on behalf of the government of the country of origin or of the
territory where the port or ports of shipment named herein is/are situate, restricting
export, whether partially or otherwise, any such restriction shall be deemed by both
parties to apply to this contract and to the extent of such total or partial restriction to
prevent fulfillment whether by shipment or by any other means whatsoever and to that
extent this contract or any unfulfilled portion thereof shall be cancelled. Sellers shall
advise Buyers without delay with the reasons therefor and, if required, Sellers must
produce proof to justify the cancellation.
151
16. Force majeure, strikes etc
Sellers shall not be responsible for delay in delivery of the goods or any part thereof
occasioned by any Act of God, strike, lockout, riot or civil commotion, combination of
workmen, breakdown of machinery, fire or any cause comprehended in the term "force
majeure". If delay in delivery is likely to occur for any of the above reasons, Sellers shall
give notice to Buyers by telegram, telex or by similar advice within 7 consecutive days of
the occurrence, or not less than 21 consecutive days before the commencement of the
contract period, whichever is later. The notice shall state the reason(s) for the anticipated
delay. If after giving such notice an extension to the delivery period is required, then the
Sellers shall give further notice not later than 2 business days after the last day of the
contract period of delivery. If delivery be delayed for more than 30 consecutive days,
Buyers shall have the option of cancelling the delayed portion of the contract, such option
to be exercised by Buyers giving notice to be received by Sellers not later than the first
business day after the additional 30 consecutive days. If Buyers do not exercise this
option, such delayed portion shall be automatically extended for a further period of 30
consecutive days. If delivery under this clause be prevented during the further 30
consecutive days extension, the contract shall be considered void. Buyers shall have no
claim against Sellers for delay or non-delivery under this clause, provided that Sellers
shall have supplied to Buyers, if required, satisfactory evidence justifying the delay or
non-fulfillment.
17. Notices
All notices served on the parties pursuant to this contract shall be served by letter, if
delivered by hand on day of writing, or by telegram or by telex or by other method of
rapid written communication. A notice to the broker or agent shall be deemed a notice
under this contract.
For the purpose of time limits, the date and time of despatch shall, unless otherwise
stated, be deemed to be the date and time of service. In case of resales all notices shall be
passed on without delay by Buyers to their respective Sellers or vice-versa.
18. Non-business days
Saturdays, Sundays and the officially recognised and/or legal holidays of the respective
countries and any days which The Grain and Feed Trade Association may declare as non-
business days for specific purposes, shall be non-business days. Should the time limit for
doing any act or giving any notice expire on a non-business day, the time so limited shall
be extended until the first business day thereafter. The period of delivery shall not be
affected by this clause.
19. Default
In default of fulfillment of contract by either party, the following provisions shall apply:
(a) The party other than the defaulter shall, at their discretion have the right, after giving
notice by letter, telegram or telex to the defaulter to sell or purchase, as the case may be,
against the defaulter, and such sale or purchase shall establish the default price.
152
(b) If either party be dissatisfied with such default price or if the right at (a) above is not
exercised and damages cannot be mutually agreed, then the assessment of damages shall
be settled by arbitration.
(c) The damages payable shall be based on the difference between the contract price and
either the default price established under (a) above or upon the actual or estimated value
of the goods, on the date of default, established under (b) above.
(d) In all cases the damages shall, in addition, include any proven additional expenses
which would directly and naturally result in the ordinary course of events from the
defaulter's breach of contract, but shall in no case include loss of profit on any sub-
contracts made by the party defaulted against or others unless the Arbitrator(s) or Board
of Appeal, having regard to special circumstances, shall in his/their sole and absolute
discretion think fit.
(e) Damages, if any, shall be computed on the quantity called for, but if no such quantity
has been declared then on the mean contract quantity, and any option available to either
party shall be deemed to have been exercised accordingly in favour of the mean contract
quantity.
20. Insolvency
If before the fulfillment of this contract, either party shall suspend payments, notify any
of the creditors that he is unable to meet debts or that he has suspended or that he is about
to suspend payments of his debts, convene, call or bold a meeting of creditors, propose a
voluntary arrangement, have an administration order made, have a winding up order
made, have a receiver or manager appointed, convene, call or hold a meeting to go into
liquidation (other than for re-construction or amalgamation) become subject to an Interim
Order under Section 252 of the Insolvency Act 1986, or have a Bankruptcy Petition
presented against him (any of which acts being hereinafter called an "Act of Insolvency")
then the party committing such Act of Insolvency shall forthwith transmit by telex or
telegram or by other method of rapid written communication a notice of the occurrence of
such Act of Insolvency to the other party to the contract and upon proof (by either the
other party to the contract or the Receiver, Administrator, Liquidator or other person
representing the party committing the Act of Insolvency) that such notice was thus given
within 2 business days of the occurrence of the Act of Insolvency, the contract shall be
closed out at the market price ruling on the business day following the giving of the
notice. If such notice be not given as aforesaid, then the other party, on learning of the
occurrence of the Act of Insolvency, shall have the option of declaring the contract closed
out at either the market price on the first business day after the date when such party first
learnt of the occurrence of the Act of Insolvency or at the market price ruling on the first
business day after the date when the Act of Insolvency occurred.
In all cases the other party to the contract shall have the option of ascertaining the
settlement price on the closing out of the contract by re-purchase or re-sale, and the
difference between the contract price and the re-purchase or re-sale price shall be the
153
amount payable or receivable under this contract.
21. Domicile
Buyers and Sellers agree that, for the purpose of proceedings either legal or by arbitration,
this contract shall be deemed to have been made in England, and to be performed there,
any correspondence in reference to the offer, the acceptance, the place of payment, or
otherwise, notwithstanding, and the Courts of England or arbitrators appointed in
England, as the case may be, shall, except for the purpose of enforcing any award made in
pursuance of the Arbitration Clause hereof, have exclusive jurisdiction over all disputes
which may arise under this contract. Such disputes shall be settled according to the law of
England, whatever the domicile, residence or place of business of the parties to this
contract may be or become. Any party to this contract residing or carrying on business
elsewhere than in England or Wales, shall for the purpose of proceedings at law or in
arbitration be considered as ordinarily resident or carrying on business at the offices of
The Grain and Feed Trade Association, and if in Scotland, he shall be held to have
prorogated jurisdiction against himself to the English Courts; or if in Northern Ireland to
have submitted to the jurisdiction and to be bound by the decision of the English Courts.
The service of proceedings upon any such party by leaving the same at the office of The
Grain and Feed Trade Association, together with the posting of a copy of such
proceedings to his address abroad, or in Scotland or in Northern Ireland, shall be deemed
good service, any rule of law or equity to the contrary notwithstanding. Where goods
forming the subject of this contract are not for consumption in Great Britain or Northern
Ireland nothing in the foregoing shall make the sale subject to the provisions of the
Agriculture Act for the time being in force.
22. Arbitration
(a) Any dispute arising out of or under this contract shall be settled by arbitration in
accordance with the Arbitration Rules, No. 125, of The Grain and Feed Trade
Association, in the edition current at the date of this contract, such Rules forming part of
this contract and of which both parties hereto shall be deemed to be cognisant.
(b) Neither party hereto, nor any persons claiming under either of them shall bring any
action or other legal proceedings against the other of them in respect of any such dispute
until such dispute shall first have been heard and determined by the Arbitrator(s) or a
Board of Appeal, as the case may be, in accordance with the Arbitration Rules and it is
expressly agreed and declared that the obtaining of an award from the Arbitrator(s) or a
Board of Appeal, as the case may be, shall be a condition precedent to the right of either
party hereto or of any persons claiming under either of them to bring any action or other
legal proceedings against the other of them in respect of any such dispute.
23. International conventions
The following shall not apply to this contract:
(a) the Uniform Law on Sales and the Uniform Law on Formation to which effect is given
by the Uniform Laws on international Sales Act 1967;
154
(b) the United Nations Convention on Contracts for the International Sale of Goods of
1980; and
(c) the United Nations Convention on Prescription (Limitation) in the International Sale
of Goods of 1974 and the amending Protocol of 1980.
Sellers ____________ Buyers ____________

155
REFERENCE

Vietnamese corpus
1. Bộ tài chính. (2013). Danh mục thuế suất. Nhà xuất bản Lao động
2. Đinh Xuân Trình, Đặng Thị Nhàn (2011). Giáo trình Thanh Toán Quốc Tế. Nhà xuất
bản Khoa học kỹ Thuật.
3. Nguyễn Minh Hằng (2012). Giáo trình Pháp luật Kinh doanh quốc tế. Nhà xuất bản
Đại học Quốc gia Hà nội.
4. Nguyễn Ngọc Lâm (2014). Giải quyết tranh chấp hợp đồng thương mại quốc tế. Nhà
xuất bản Hồng Đức.
5. Nguyễn Thị Mơ (2011). Giáo trình pháp luật thương mại quốc tế. Nhà xuất bản Lao
động.
6. Phạm Duy Liên (2012). Giáo trình giao dịch thương mại quốc tế. Nhà xuất bản thống
kê.
7. Quốc hội Việt Nam (2005). Luật thương mại Việt Nam. Nhà xuất bản lao động-Xã
hội.

English corpus
1. Gopal, C. Rama (2008). Export Import Procedures-Documentation and Logistics.
New age International (p) Limited, Publisher.
2. ICC (2000). The ICC Model International Sale Contract. Published by ICC
PUBLISHING S.A. (Paris)
3. ICC (2001). UCP 600. Published by ICC Publishing S.A. (Paris)
4. ICC (2010). Incoterms 2010. Published by ICC Publishing S.A. (Paris)
5. ICC. (1995). Uniform Rules For Collection (URC 522). Published by ICC Publishing
S.A. (New York)
6. ITC, (2010). Model contracts for small firms. Legal guidance for doing international
business. International Trade Centre 2010, Geneva 2010.
7. Johnson, Thomas E. (2002). Export/Import Procedures and Documentation 4th
Edition. American Management Association. 1601 Broadway, New York, NY 10019.
8. Nguyen Xuan Minh (2011). Import-Export and International payment. Hochiminh
City National University Publishing House.
9. Nguyen Tien Hoang. et al. (2013). An Introduction to International Commercial
transactions. VNU Publishing House.
10. Pinnells, James R (1994). Exporting and the export contract. PRODEC programme
for development cooperation at the Helsinki school of economics. Printed by Kyriri
Oy, Helsinki. Finland.
11. Reynolds, Frank (2003) Managing Exports. Published by John Wiley & Sons, Inc.,
Hoboken, New Jersey.
12. Sherlock Jim & Reuvid Jonathan (2004).The hand book of international trade, a
guide to the principles and practice of export. GMB Publishing Ltd. 120 Pentonville
Road London N1 9JN, United Kingdom.
13. Weiss, Kennth D. (2008). Building an Import/Export Business, Fourth Edition.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

156