text_TITL pruh_TITL logoC Terms of Sale and of Payment Ondrej Castek castek@econ.muni.cz www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 2 When and where: 1.title to the goods 2.responsibility (insurance) 3.care for shipment 4.responsibility for paying and arranging changes 5.payment for the goods 3. e.g. livestock – cows, pigs, etc. www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 3 Terms of sale 1.Cost of the product 2. 2.Risk of physical loss 3. 3.Cost of moving 4. 4.Jurisdiction: Incoterms 1. Not too low – dumping, not too high – „hard currency flight“, import duties and other charges: matters, where does the goods come from 2. Theft (high value), breakage (fragile), infestation (insect), infection (bacteries, viruses), rust and oxidation, dent (promáčknout) and scratch, thawing (unfreez, rozmrznout) and spoilage (zkazit se) – maso, sensitive to heat and humidity, delayed (seasonal goods), deliberate scuttling (záměrné potopení) man-made hazards (next to theft and scuttling): war, civil commotion (= public protest/unrest), strikes, negligence, piracy, collision, sinking, fire Even with good insurance inconveniences: time lost etc. 3. a) transportation: domestically door – door, internationaly becoming as a standard as well, outsourcing, a need to decide, who pays for what part of the transportation b) movement facilitation: documentation – import-export documents of entry, licenses, permits, declarations. Where and when to present. 4. legal suits complicated, application of international law www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 4 Incoterms: selling terms nGroup E – Departure nEXW – Ex Works (named place) n This trade term places the greatest responsibility on the buyer and minimum obligations on the seller. The Ex Works term is often used when making an initial quotation for the sale of goods without any costs included. n EXW means that a seller has the goods ready for collection at his premises (Works, factory, warehouse, plant) on the date agreed upon. n The buyer pays all transportation costs and also bears the risks for bringing the goods to their final destination. n nGroup F – Main carriage unpaid nFCA – Free Carrier (named places) nThe seller hands over the goods, cleared for export, into the custody of the first carrier (named by the buyer) at the named place. This term is suitable for all modes of transport, including carriage by air, rail, road, and containerised / multi-modal sea transport. This is the correct "freight collect" term to use for sea shipments in containers, whether LCL (less than container load) or FCL (full container load). nFAS – Free Alongside Ship (named loading port) nThe seller must place the goods alongside the ship at the named port. The seller must clear the goods for export. Suitable only for maritime transport only but NOT for multimodal sea transport in containers (see Incoterms 2010, ICC publication 715). This term is typically used for heavy-lift or bulk cargo. n n EXW - makes it particularly clear that this term is suitable only for domestic trade and no longer suitable for export because the buyer is responsible for export clearance in the seller's country. Clearly with modern security concerns this is almost impossible www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 5 Incoterms: selling terms nGroup F – Main carriage unpaid nFOB – Free on board (named loading port) nThe seller must themself load the goods on board the ship nominated by the buyer, cost and risk being divided at ship's rail. The seller must clear the goods for export. Maritime transport only but NOT for multimodal sea transport in containers (see Incoterms 2010, ICC publication 715). The buyer must instruct the seller the details of the vessel and port where the goods are to be loaded, and there is no reference to, or provision for, the use of a carrier or forwarder. It DOES NOT include Air transport. This term has been greatly misused over the last three decades ever since Incoterms 1980 explained that FCA should be used for container shipments. n nGroup C – Main carriage paid nCFR or CNF – Cost and Freight (named destination port) nSeller must pay the costs and freight to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods have crossed the ship's rail. Maritime transport only and Insurance for the goods is NOT included. Insurance is at the Cost of the Buyer. nCIF – Cost, Insurance and Freight (named destination port) nExactly the same as CFR except that the seller must in addition procure and pay for insurance for the buyer. Maritime transport only. nCPT – Carriage Paid To (named place of destination) nThe general/containerised/multimodal equivalent of CFR. The seller pays for carriage to the named point of destination, but risk passes when the goods are handed over to the first carrier. nCIP – Carriage and Insurance Paid (To) (named place of destination) nThe containerised transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier. www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 6 Incoterms: selling terms nGroup D – Arrival nDAF – Delivered At Frontier (named place) nDES – Delivered Ex Ship (named port) nDEQ – Delivered Ex Quay (named port) nDDU – Delivered Duty Unpaid (named destination place) nDAT (Delivered at Terminal) nSeller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. "Terminal" includes quay, warehouse, container yard or road, rail or air terminal. Both parties should agree the terminal and if possible a point within the terminal at which point the risks will transfer from the seller to the buyer of the goods. If it is intended that the seller is to bear all the costs and responsibilities from the terminal to another point, DAP or DDP may apply. nDAP (Delivered at Place) nSeller delivers the goods when they are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. Parties are advised to specify as clearly as possible the point within the agreed place of destination, because risks transfer at this point from seller to buyer. If the seller is responsible for clearing the goods, paying duties etc., consideration should be given to using the DDP term. nDDP – Delivered Duty Paid (named destination place) nThis term means that the seller pays for all transportation costs and bears all risk until the goods have been delivered and pays the duty. Also used interchangeably with the term "Free Domicile". The most comprehensive term for the buyer. In most of the importing countries, taxes such as (but not limited to) VAT and excises should not be considered prepaid being handled as a "refundable" tax. Therefore VAT and excises usually are not representing a direct cost for the importer since they will be recovered against the sales on the local (domestic) market. n n DAT Responsibilities Seller is responsible for the costs and risks to bring the goods to the point specified in the contract Seller should ensure that their forwarding contract mirrors the contract of sale Seller is responsible for the export clearance procedures Importer is responsible to clear the goods for import, arrange import customs formalities, and pay import duty If the parties intend the seller to bear the risks and costs of taking the goods from the terminal to another place then the DAP term may apply DAP Responsibilities Seller bears the responsibility and risks to deliver the goods to the named place Seller is advised to obtain contracts of carriage that match the contract of sale Seller is required to clear the goods for export If the seller incurs unloading costs at place of destination, unless previously agreed they are not entitled to recover any such costs Importer is responsible for effecting customs clearance, and paying any customs duties www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi n n Fall 2009, MWCC 7 http://www.searates.com/design/images/incoterms/risks_costs_oblagations_transfer.png www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 8 Incoterms n http://www.finetubes.co.uk/uploads/images/Finetubes-Incoterms-Datasheet-Chart-1.gif www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Incoterms http://www.elementlogistic.com/images/editorimages/Incoterms-2010-chart_element(1).jpg www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 10 Incoterm Guide www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 11 Incoterm Guide One cannot forget about Force majeure: crop failure etc. Bargaining for the risk and gain – at least one of them (seller/buyer) has to be willing to accept some risk. Find closest Incoterm and list and describe all exceptions: CIF Hamburg plus export packing Incoterms 2010 Sometimes plus conditions laid down by governments – against currency flights or market protection A problem is also the volatility of shipping prices, the client does not know the exact price until very last moment and the contracts are up to one year in advance First time importers/exporter prefer to let most of the issues on the other party. Being able to take care of that is a sign of firms’ maturity: 1987 Korea to US, 70% FAS or FOB, 1992 70% CIF www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 12 Terms of Payment 1.amount of commercial credit 2. 2.direct deal or intermediaries 3. 3.open accounts, progress payments, options, bonuses and penalties 4. 4.risk of being paid and of receiving the goods – how to solve it Amount of credit the seller is willing to extend to the buyer. Money come from owners, sales and credits. Credit not as a bank loan as we are used to in GE and CZ. Board of directors, shareholders (pension funds and private), management. Banks cannot issue equity or debt to a company they own. Management board (insiders and executives), shareholders (banks), supervisory board, management. Outside shareholders, independent directors, Government, Keiretsu, Management, Bank. 2. intermediaries – banks as collection agents www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 13 Documents related to terms of sale 1.Drafts (sight/documents against acceptance, date/time) 2.Bill of lading 3.Documentary letters of credit 1. draft is a demand for payment, payable on presentation or on a specified date (most likely after the delivery of goods). replaces the goods risks: buyer gets documents and does not pay, buyer pays and does not get the cargo, bank can become insolvent, foreing exchange issues Draft can be endorsed „in blank“ or to a certain person or company (bill of lading also). Once endorsed can be traded: discounting, discounted draft. It becomes a special security. 2. bill of lading – replacement of goods in marine cargo shipments – can be traded etc. It is „title to goods“ = means ownership. Blank endorsed bill of lading. 3. Matter of two contracts: between buyer and „opening/issuing“ bank and between this bank and the seller. Documentary because the bank deals with documents only. Must be 100% exact. Seller has to review LoC upon reception as detailed as possible. www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 14 Letter of Credit: Phase one No direct deals between buyer and seller after issuing LoC. Revocable x irrevocable Advised – second bank notifies seller what documents when to present, no obligation of this bank to the seller Confirmed – second bank, usually in seller‘s country confirms the LoC, is obligated to pay the money to seller if buyer does not. Usually if extra political or economical risk in buyer’s country. LoC sometimes required by governments. LoC under terms of Uniform Customs and Practices For Documentary LoC, issued by International Chamber of Commerce – like Incoterms www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 15 Letter of Credit: Phase two Exact conformity with requirements – extra L case Sodium chloride x salt Shipment required from Cleveland and point of loading Baltimore www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 16 UCP500 nFacsimile signed documents nBanks treat a facsimile signature as the equivalent of a hand signature. Accordingly, a document that appears to bear the document issuer’s facsimile signature is also treated as an original document. nPhotocopies nBanks treat as non-original any document that appears to be a photocopy of another document. If, however, a photocopy appears to have been completed by the document issuer’s hand marking the photocopy, then, consistent with . . . , the resulting document is treated as an original document unless it indicates otherwise. . . . Uniform Customs and Practices For Documentary LoC www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 17 Payment modes 1.Cash in advance 2.Letters of credit 3.Sight drafts/documents against payment 4.Date drafts/documents against acceptance 5.Open account Risk and costs, sellers’ and buyer’s view LoC fees: 0,5% - 2% or more, minimum fees, amendment fees (50 – 100 USD per amendment) www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 18 Example nSubj.: Your enquiry of 8Th April nIn reply to your letter, we are pleased to quote for the hotel furniture and fittings which interest you. nPrices: CIF Alexandria, Incoterms 2010 nPacking: one 40’ container nPayment: by L/C on our bank BNM Agenzia 4 nDelivery: by the end of July as requested if order received before 20th May 2010 www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 19 Exercise 1.Which Incoterms represent the minimum an maximum obligation for the supplier respectively? 2.Which Inconterms refer specifically to transport by sea? 3.What does the customer have to pay for under FOB terms? 4.At what point of a business transaction has the supplier fulfilled his/her obligations under FAS terms? 5.What is the main difference between DAP terms and DAT terms? 6.Does the supplier bear more responsibility under CIF or CIP terms? www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 20 nSince the UCP 500 (Uniform Customs and Practice for Documentary Credits - International Chamber of Commerce Publication No. 500) came into effect in January 1, 1994, introducing the new rules governing letters of credit (or documentary credits) operations, there have been many disputes over the conformity of the bills of lading to the UCP 500 articles. The main reason is that certain bills of lading that were compliant under the old UCP 400 rules are now no more acceptable by the banks. nAs a result, 90% of bills of lading in the U.S.A. and 60% in the U.K. are rejected by the banks. This does not in fact affect the carriers or the banks, even though the bills of lading cannot meet the bankers' requirements under the new rules. The customers of the banks or the carriers, for example, the shippers, the consignees and the notified parties, are the ones that suffer, even though they have done nothing wrong. www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi 21 Study material: Chapter 11 n International Logistics (2nd Edition) Wood, Donald F. Barone, Anthony Murphy, Paul Pages: 456, Publisher: AMACOM Books ISBN: 9780814426739 n nAvailable at: http://site.ebrary.com/lib/masaryk/ Risk and costs, sellers’ and buyer’s view LoC fees: 0,5% - 2% or more, minimum fees, amendment fees (50 – 100 USD per amendment)