session 2 - inco terms

7/29/2019 Session 2 - Inco Terms

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INCO TERMS


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INTERNATIONAL COMMERCIAL TERMS

A codification of international rules for the

uniform interpretation of common contract

clauses in export/import transactions

developed and issued by the International

Chamber of Commerce (ICC).

It defines trade contract responsibilities

between buyer and seller


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EX WORKS

Means that the seller fulfills his obligation to deliver when he

has made the goods available at his premises (i.e. works,

factory, warehouse, etc.) to the buyer

He is not responsible for loading the goods on the vehicle

provided by the buyer or for clearing the goods for export,

unless otherwise agreed

The buyer bears all costs and risks involved in taking the

goods from the seller's premises to the desired destination.

This term thus represents the minimum obligation for the

seller


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FREE CARRIER (forwarder)

"Free Carrier" means that the seller fulfills his obligation to

deliver when he has handed over the goods, cleared for

export, into the charge of the carrier named by the buyer at

the named place or point.

This term may be used for any mode of transport, including

multimodal transport.


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FREE ALONGSIDE SHIP - FAS

"Free Alongside Ship" means that the seller fulfills hisobligation to deliver when the goods have beenplaced alongside the vessel on the quay at thenamed port of shipment

This means that the buyer has to bear all costs andrisks of loss of or damage to the goods from thatmoment.


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FREE ON BOARD- FOB

"Free on Board" means that the seller fulfills his obligation to

deliver when the goods have passed over the ship's rail at the

named port of shipment

This means that the buyer has to bear all costs and risks of

loss of or damage to the goods from that point.

The FOB term requires the seller to clear the goods for export


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CFR - COST AND FREIGHT (... named port of

destination)

- Means that the seller must pay the costs and freight necessaryto bring the goods to the named port of destination

CIF - COST, INSURANCE AND FREIGHT (...named port of destination )

- Means that the seller has the same obligations as under CFR butwith the addition that he has to procure marine insurance against

the buyer's risk of loss of or damage to the goods during the

carriage.


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CPT - CARRIAGE PAID TO (... named place of

destination)

- Means that the seller pays the freight for the carriage of the goodsto the named destination

- Prepaid vs. Collect

CIP - CARRIAGE AND INSURANCE PAID TO (... namedplace of destination)

- Means that the seller has the same obligations as under CPT

but with the addition that the seller has to procure cargo

insurance against the buyer's risk of loss of or damage to thegoods during the carriage.


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DAF - DELIVERED AT FRONTIER (... named

place)

- Means that the seller fulfills his obligation to deliver when thegoods have been made available, cleared for export, at the

named point and place at the frontier, but before the customs

border of the adjoining country


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DES - DELIVERED EX SHIP

Means that the seller fulfills his obligation to deliver when

the goods have been made available to the buyer on board

The ship has cleared the border but uncleared for import at

the named port of destination.

The seller has to bear all the costs and risks involved in

bringing the goods to the named port of destination


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DEQ - DELIVERED EX QUAY

Means that the seller fulfills his obligation to deliver whenhe has made the goods available to the buyer on the quay(wharf) at the named port of destination, cleared forimportation

The seller has to bear all risks and costs including duties,taxes and other charges of delivering the goods thereto.

This term can only be used for sea or inland waterwaytransport.


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DDU - DELIVERED DUTY UNPAID

Means that the seller fulfills his obligation to deliverwhen the goods have been made available at the namedplace in the country of importation.

The seller has to bear the costs and risks involved in

bringing the goods thereto (excluding duties, taxes andother official charges payable upon importation) as wellas the costs and risks of carrying out customs formalities.

The buyer has to pay any additional costs and to bear anyrisks caused by his failure to clear the goods for import in

time. This term may be used irrespective of the mode of

transport.


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DDP - DELIVERED DUTY PAID

means that the seller fulfills his obligation to deliverwhen the goods have been made available at the namedplace in the country of importation.

The seller has to bear the risks and costs, including

duties, taxes and other charges of delivering the goodsthereto, cleared for importation.

This term may be used irrespective of the mode oftransport.

EX WORKS REPRESENT LEAST BURDEN ON SELLERWHEREAS DDP REPRESENTS MAXIMUM OBLIGATION


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FOBFASFCA

Bill of

Lading

Ex-worksFactory

loading

Export

clearance

Insurance

+

CFR

CIF

Customs

DAF before the

customs borderDESunloading

DEQ

+

DDU

Bringing goods to the

named destination

without custom

clearance

DDP


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COMMON PAYMENT TERMS

Cash in Advance

Letter of Credit

Documents againstPayment/DA

Open Account


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CASH IN ADVANCE

Receive cash from the buyer before shipping

Telegraphic Transfer

Demand Draft

*In case of HUGE payments (importer may demand

a bank guarantee)

**if exporter is in a strong trading position &

particular product is not available


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Parties to a Letter of Credit

Applicant/Importer Importer is the Opener on whose behalf

or account, the letter of credit is issued by

his bank (Issuing Bank)

Exporter

Exporter is the Beneficiary of the letter of

credit who is entitled to receive thepayment of his bills according to the terms

of Letter of Credit.


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Intermediary Bank/Confirming Bank

Usually a branch or the correspondent of the

opening bank in the exporting country

Advising or Notifying Bankmerely forwards the

credit, without any obligation on its part

Confirming Bank adds its own undertakings to

the credit while advising it to the beneficiary

Parties to a Letter of Credit


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LETTER OF CREDIT

In short, an L/C is

A formal document of payment

Opened by a party wishing to import

Communicated through banking channels

Paid by the opening bank within a specified

timeframe upon presentation of docs


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LETTER OF CREDIT

(1) Contract

(5) Shipment

EXPORTER- SELLER

(BENEFICIARY)

IMPORTER - BUYER

(APPLICANT)

EXPORTERS BANK

(NEGOTIATING/

CONFIRMING BANK)

IMPORTERS BANK

(L/C ISSUING BANK)

(2) Application

(3) L/C

(4) Advising(6) Documents

for negotiation

(7) Dispatch of Documents -

Claim Reimbursement

(9) Remit the payment

(8) Retirement

Documentary Credit Cycle


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L/C PAYMENT PROCEDURE Buyer and Seller agrees on terms and conditions of the sale

Buyer instructs its bank to open an L/C incorporating previously agreed terms of sale

The buyer's bank prepares a Letter of Credit (L/C), including all instructions to the seller's bank

concerning the shipment and sends the L/C to the seller's bank, requesting confirmation

The seller may request confirmation from a confirming bank for added security

The Seller's bank prepares a letter of confirmation to forward to the seller along with the L/C

The seller reviews carefully all conditions in the L/C, specially shipment schedule in consultation withhis freight forwarder

The seller arranges the goods and hand over to freight forwarder for delivery at appropriate port orairport

Once goods are loaded/shipped, the forwarder completes necessary documentation and hand themover to the seller.

The seller then presents the documents to his bank, informing full compliance with terms andconditions of L/C

The seller's bank reviews the documents.

The documents are airmailed to the buyer's bank for review and passing necessary documents tobuyer.

The buyer's bank sends the draft to buyer for payment/acceptance

Buyer pays bank/sends acceptance

The buyer gets the documents needed to claim the goods.

The seller's bank gets payment and pays seller immediately or at a later date


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L/C PAYMENT PROCEDURE

The buyer's bank prepares and issues an L/C(including all instructions concerning the shipment)

to the seller's bank, requesting confirmation

Buyer instructs its bank to open an L/C incorporatingpreviously agreed terms of sale

Buyer and Seller agrees on terms and conditions of

the sale


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The seller reviews carefully all conditions in the L/C,specially shipment schedule in consultation with his

freight forwarder

The Seller's bank prepares a letter of confirmation toforward to the seller along with the L/C

The seller may request confirmation from aconfirming bank for added security


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The seller then presents the documents to his bank,informing full compliance with terms and conditions

of L/C

Once goods are loaded/shipped, the forwardercompletes necessary documentation and hand them

over to the seller.

The seller arranges the goods and hand over to

freight forwarder for delivery at appropriate port orairport


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The buyer gets the documents needed to claim thegoods.

The documents are airmailed to the buyer's bank forreview and passing necessary documents to buyer

The seller's bank reviews the documents


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The seller's bank gets payment and pays seller.

Buyer pays bank

The buyer's bank returns accepted draft and informsbuyer.


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Types of letters of credit

a. SIGHT L/C

b. USANCE L/C

c. REVOCABLE L/C

d. IRREVOCABLE L/C

e. CONFIRMED IRREVOCABLE L/C

f. UNCONFIRMED IRREVOCABLE L/C

g. WITH & WITHOUT RECOURSE L/C

h. BACK TO BACK L/C


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Types of letters of credit

i. TRANSFERABLE L/C

j. ANTICIPATORY L/C RED CLAUSE, GREEN CLAUSE

k. REVOLVINGL/C

l. DEFERRED PAYMENT L/C

m. TRANSIT L/C

n. RESTRICTED & UNRESTRICTED L/C

o. NEGOTIABLE L/C


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Sight L/C (L/C at Sight)

Involves payment to exporter against Sight Draft

Payment is made against Usance Draft

Usance Draft is jointly accepted by Issuing Bank and

Importer which can be discounted through any

commercial bank before due date

Usance L/C


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Revocable L/C

can be amended/cancelled by the issuing bankw/o the consent of the beneficiary, often at the

request and on the instructions of the applicant.

NO security of payment

Does not constitute a legally binding

undertaking/limitedutility/not much in use


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Irrevocable Letters of Credit

It constitutes a legally binding undertaking of the

issuing bank for the payment bills drawn under the

credit, PROVIDED the beneficiary presents the

stipulated documents to the credit nominated bank or

to the issuing bank and complies with all the

conditions of the credit

CANTbe modified OR cancelled w/o approval of the

beneficiary, therefore, widely accepted


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*Exporters payment is confirmed even if

the importer or the issuing bank defaults.

Confirmed Irrevocable L/C

opened by the issuing bank whoseauthenticity has been confirmed by the

advising bank

the advising bank adds its confirmation to the

credit

+


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opened by an issuing bank in which the advising

bank does not add its confirmation to the credit

The promise to pay comes from the issuing bank

only, UNLIKE in a confirmed irrevocable L/C where

both issuing & advising bank promise to pay the

beneficiary.

Unconfirmed Irrevocable L/C


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With Recourse L/C

If the buyer fails to pay the bank after the

specified period, the bank can have

recourse on the exporter


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Without Recourse L/C

the bank has NO recourse on the exporter, IF thebuyer fails to pay the bank after the specified

period

THE BEST L/C CONFIRMED IRREVOCABLE

WITHOUT RECOURSE L/C because in this case the

Indian bank has added obligation to pay


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Back to Back L/C

the exporter uses his L/C as a cover foropening an L/C in favour of the local

suppliers

Its preferred over Transferable L/C to

maintain secrecy of the identity of

ultimate buyer


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Transferable L/C

In this the beneficiary is entitled to request the

paying, accepting, negotiating bank to pay, accept,

negotiate bills tendered by one or more OTHER

PARTIES. E.g. LI & FUNG

For partial transfer to one SECOND BENEFICIARY

or more than one second beneficiaries, the credit

must permit partial shipment


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Anticipatory L/C

This credit provides for advance payment, or atleast part payment to the beneficiary against his

undertaking to effect the shipment and submit the

bill and/or documents in terms of credit within the

validity

Ultimate liability lies with the applicant (buyer)


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Anticipatory L/C - Red Clause

Since the clause is printed /typed usually in red

ink, its called Red Clause credits.


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The Green Clause is an extension of the Red

Clause

it envisages the credit given to the exporter tocover the period of storage of goods at the sea

port

Green Clause L/C


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Revolving Letters of Credit

In revolving L/C, the amount involved whenutilized is reinstated, without issuing another L/C

and usually under the same terms and

conditions.

It can be revocable / irrevocable and may be

revolving in relation to time or value within a

given overall period of validity.


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Deferred Payment L/C

the exporter supplies plant, machineries, capitalgoods, etc.

Importer pays in installments over a period

ranging from 1 to 7 years or even more

no draft is drawn, payment by the opening bank

is determined in accordance with the terms laid

down in the credit


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Transit L/C

It is issued in one country with the beneficiary in

another country but is advised through and

usually confirmed by a bank in London


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Restricted & Unrestricted L/C

If no specific bank is designated to pay, accept or

negotiate, the credit is termed as unrestricted or

open or general credits

if a specified bank is designated to pay, accept or

negotiate, the credit is termed as restricted orspecial


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Negotiable L/C

Issuing Bank authorises the Negotiating Bank to

honour the drafts drawn under the terms of

credit

Exporter submits docs to his bank

Negotiating bank examines docs 1)sends docs

to issuing bank 2)pays the exporter even before

issuing bank sees the docs**


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Negotiable L/C

** if Issuing Bank doesnt pay, exporter will have

to REFUND the payment

L/C states that payment is allowed by

negotiation

Name of bank may or may not be stated


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Contents of L/C

Be Sure to Verify:

Correct name and address of the exporter

Correct name and address of the importer

Type of L/C

Amount of L/C


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How credit shall be available e.g. by sight

payment, deferred payment, acceptance or

negotiation

Name of drawee of the draft and tenor of the

draft

Description of goods, quantity or items and the

unit price

Contents of L/C


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List of documents required to be submitted by

the beneficiary

Whether docs required are obtainable andaccording to terms of sale

Port of discharge and the place of final

destination

Contents of L/C


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CONTENTS OF L/C

Terms of delivery i.e. FOB, CFR, CIF, etc.

Status of transshipment, allowed or not

Status of partial shipment, allowed or not

Last date of sending shipment

Time period for presentation of docs fornegotiation by exporter after dispatch of goods


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Date and place of expiry of L/C

Transfer of L/C allowed or not

Mode of advice of L/C i.e. by mail or tele-

transmission

CONTENTS OF L/C

Guidelines for the Beneficiary when


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Guidelines for the Beneficiary when

reviewing the L/C

Consult banker to validate L/C

Terms & conditions in L/C should be as per export

contract

Docs required can be obtained and presented

Last date of shipment and time allowed for

presentation of docs is feasible


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- DOCUMENT AGAINST PAYMENT

- DOCUMENT AGAINST ACCEPTANCE

Document Collection

D t i t P t


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Documents against Payment

1) The exporter makes shipment and sends the

shipment

2) Exporter sends shipping documents to the

his/her bank for collection

3) The exporter's bank sends the shipping

documents along with a COLLECTION LETTER to

the importer's bank

D t i t P t


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4) The importers bank sends a COLLECTION

NOTICE to the importer.

5) The importer makes payment upon receiving the

collection notice

6) The importers bank receives payment, hands

over the original shipping documents

7) Importer takes physical possession of goods

Documents against Payment

D t i t A t


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Documents against Acceptance

Everything is the same as DP except.

When the importers bank sends a COLLECTION

NOTICE to the importer, the importer gives theACCEPTANCE to pay at a later date I/O making

payment upon receiving the collection notice


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Risks under D/P and D/A??

LIQUIDITY CRUNCH

exchange control undertaking - realise export

proceeds within a period of 6 months or due date


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The possible options:

Re-negotiate with importer, offer discount

Bring the goods back to India

Look for an alternate importer in the same

country or in another country

Go to importing country, sell goods locally

Abandon the goods


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Precautions :

Obtain credit report on the importer through

bank

Consign goods to the importers bank I/O the

importer

Should obtain Credit Risk Insurance Policy

OPEN ACCOUNT


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OPEN ACCOUNT

Ship the goods

forward the shipping docs directly to buyer

await payment

RISK vs TERMS of PAYMENT


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RISK vs. TERMS of PAYMENT

Comparison of Various Methods of


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Payment

Method

Goods

Available

to Buyer

Usual Timeof Payment

Risk toExporter

Risk toImporter

Cash In

Advance

After

Payment

Before

Shipment

Very Low Maximum-Relies

on exporter to

ship goods as

ordered

Letter of

Credit

Confirmed

Unconfirmed

(Advised)

Documentary

CollectionSight Draft

Documents

against

Payment

After

Payment

On

presentationof draft to

importer

If draft unpaid,

goods mustbe returned or

disposed of,

usually at loss

Assured of

quantity, alsoquality, if goods

are inspected

before shipment

After

Payment

When

documents

are available

at shipment

Very Low Assured of

quantity and also

quality at

shipment if

inspection report

is required



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Method

Goods

Available To

Buyer

Usual Time

Of Payment

Risk To

Exporter

Risk To

Importer

Documentary

Collection Time Draft

Documents against

Acceptance

Before payment On maturity of

draft

Relies on importer

to pay draft

MinimalCan check

shipment for

quantity and quality

before payment

Consignment Before payment,

exporter retains

title until goods

are sold or used

After use;

inventory and

warehousing cost

to exporter

Substantial risk

unless through

foreign branch or

subsidiary

Very Low

Open Account Before payment As agreed Relies on importer

to pay as agreed -complete risk

Very Low

Co pa so o a ous et ods o

Payment