Chapter 8 Importing Exporting and Sourcing 9th Edition Keegan
Chapter 12: Global Marketing, Logistics - Access And Documentation
Chapter Objectives
Structure Of The Chapter
Complexity
Terms of access
International trade
Special trade terms in export sales
Export documentation
Commercial documents
Official documents
Insurance documents
Transport documents
Financial and financing documents
Export financing
Collection arrangements
Letters of credit
Conflict of law
Chapter Summary
Key Terms
Review Questions
Review Question Answers
References
Bibliography
Exporting and importing are two sides of the same coin; both supply customers with products manufactured outside the country. Exports now account for over 15% of global GNP and are growing at an annual compound rate in excess of 10%. Export marketing requires a knowledge of the target market, a marketing mix decision, planning, organisation and control and information systems. Exporting is often an incremental process, from unsolicited order filling to deliberate export planning. No doubt few firms will export unless profit and growth opportunities are expected. Theories of trade stress the basis as "comparative advantage", but in practice this is of little use. The most significant factors affecting trade are "firm" not "product" characteristics. McGuiness and Little (1981)1 found two firm characteristics "restrained from exporting" and "high technology" as opposed to product characteristics had an overwhelming influence on the decision.
Whilst exporting and importing are, this is not the way governments look at it when making policy. Simply, policy can be construed as two-faced. Often, every effort is made to improve and encourage exports whilst every effort is made to curb imports. The combination of policy measures can have an offsetting effect. Government, however, seeks to support export activities in three ways: by applying lower rates of tax to earnings from exporting or refunds; outright subsidies or assistance like information giving. Many African countries have incentives like export retention schemes and revolving schemes to aid potential exporters.
Chapter Objectives
The objectives of this chapter are:
· To give an understanding of the complexity involved in managing global marketing logistics· To describe the terms of access, trade and the different types of export documentation required in global marketing and
· To show the importance of ensuring that export documentation is in order and legal recourse of any defaulting in global transactions.
Structure Of The Chapter
This chapter is very detailed, necessarily so, given the nature of the subject matter covered. The various terms of access are described, including tariffs and duties, and the non-tariff barriers which can be quite effective in reducing the normal terms of trade. The chapter goes on to discuss international contracts, the special terms of trade (FOB, CIF etc.) and other important export documents. These include commercial documents like invoices, certificates of origin, and transport documents. The chapter concludes by looking at financial, insurance and transport documentation and the legal ramifications of any defaulting in international transactions. Note that all cases quoted in this chapter were sourced from Kwelepeta (1991)2.
Complexity
Exporting and importing requires an enormous amount of thought and attention to detail, especially documentation. If documents are missing or wrongly filled out then the transaction will be void. Consider the following example of the exportation of horticultural produce from Kenya.
Case 12.1 Kenya Horticultural Produce Export
In organising for export, the exporter needs to be within reach of and must have an office with telephone, fax or telex since the exporter is dealing with a highly perishable commodity and decisions have to made fast with no time lag. The documentation required is as follows:
1. a Certificate of Incorporation from the Registrar of Companies
2. a miscellaneous occupational Licence (Export) from the Ministry of Commerce
3. export Licence from HCDA (a fee of Kshs. 1,000/=)
4. a bank account
5. written contracts with farmers for supply of produce
6. have adequate knowledge on the quality standards for horticultural produce.
Flow of documents in export of horticultural Produce by Air
A shipper is required to submit the following documents to facilitate the processing of exports:
a) A duly complete invoice
b) CD3 form (from Central Bank of Kenya) available from commercial banks)
c) Appendix HCDA 3 from HCDA (Horticultural Crops Development Authority)
d) Certificate of Origin
i) EUR 1 (for European Economic Community countries from KETA)
ii) Certificate of Origin for Middle East countries from Kenya National Chamber of Commerce
iii) GSP (for all other countries)
e) Export Certificate
f) Phytosanitary Certificate
STEP 1 Shipper to submit Invoice to produce inspectors for inspection of produce.
STEP 2 HCDA officer to vet prices, weights declared by the shipper and issue export certificate which is endorsed by produce inspectors.
STEP 3 Shipper sends the documents to his/her agent (here the responsibility of the shipper ends), the agent prepares other documents, i.e. Airway Bill and Customs entry (C.29),
STEP 4 Produce is weighed by Kenya Airways Handling Services Ltd. and issue docket (correct weights of produce).
STEP 5 All the documents (invoice, CD3, Appendix 3, Certificate of Origin, Airway Bill and Docket) are verified by HCDA for final approval
STEP 6 Agent sends documents to customs officer for verification.
STEP 7 From customs, agent sends documents to Kenya Air freight Handling Ltd. who then passes the documents to the airlines.
Terms of access
Terms of access refer to the conditions that apply to the importation of goods manufactured in a foreign country. The major instruments covered by this include import duties, import restrictions or quotas, foreign exchange regulations and preference arrangements.
Tariff systems
Tariff systems provide either a single rate of duty for each item applicable to all countries, or two or more rates, applicable to different countries or groups of countries. Tariffs are usually grouped into two classifications:
Single column tariff: A simple schedule of duties in which the rate applies to imports from all countries on the same basis.
Two column tariff: The initial single column of duties is supplemented by a second column of "conventional" duties, which shows reduced rates agreed through tariff negotiations with other countries. The second column is supplied to all countries enjoying "most favoured nation" status within the framework of GATT. Signatories to GATT, with some exceptions, apply the most favourable tariff to products.
Preferential tariff: A reduced tariff rate applied to imports from certain countries. GATT prohibits preferential tariffs except historical preference schemes like the Commonwealth, those part of a formal economic integration treaty like a free trade area and preference to companies of a developing country importing into a developed country.
Types of Duties: Customs duties are of two different types - ad valorem or specific amounts per unit, or a combination of these.
i) Ad valorem - This duty is expressed as a percentage of the value of goods. As definitions of customs value vary from country to country it is best to secure valuation policy information first.A uniform basis for the valuation of goods for customs purposes was elaborated by the Customs Cooperation Council in Brussels and was adopted in 1953 (the Brussels Nomenclature came out of this). In this case the customs value is landed GIF cost at the port of entry. This cost should reflect the arm's length price of the goods at the time the duty becomes payable.
ii) Specific duties - Expressed as a specific amount of currency per unit of weight, volume, length, or number of other units of measurement, e.g. 25 cents per kg. Usually specific duties are expressed in the currency of the importing country.
iii) Alternative duties - In this case both ad valorem and specific duties are set out in the customs tariff for a given product. Normally, the applicable rate is the one that yields the higher amount of duty, although there are cases where the lower is specified.
iv) Compound or mixed duties - These duties provide for specific plus ad valorem rates to be levied on the same articles.
v) Antidumping duties - Applied if injury occurs to domestic producers. These are special additional import charges designed to cover the difference between the export price and the "normal" price, which usually refers to the price paid by customers in the exporting countries.
vi) Countervailing duties - Additional duties levied to offset subsidies granted in the exporting country.
Other import charges: These include variable import charges, temporary import surcharges and compensatory import taxes
i) Variable import charges - Can be used to raise imported product prices to the domestic price level.ii) Temporary import surcharges - Used as a local industry protection measure and in response to balance of payments deficits.
iii) Compensating import taxes - In theory these taxes correspond with various internal taxes, such as value added taxes and sales taxes. According to GATT such "border tax adjustments must not amount to additional protection for domestic producers or to a subsidy for exports". This can lead to great inequities.
Non tariff barriers
Non tariff barriers are measures, public or private, that cause internationally traded goods and services to be allocated in such a way as to reduce potential real world income (the attainable level when resources are allocated in the most economically efficient manner). They virtually prevent sales in a foreign market.
i) Quotas and trade control - Specific limits and controls, and once the quota is filled the price mechanism is not allowed to operate. Some countries, for example Zimbabwe, operate state trading.ii) Discriminatory government and private procurement policies - "Buy British" policies aimed at restricting foreign supply.
iii) Selective monetary controls and discriminatory exchange rate policies - Act distortively on import duties and export subsidies. Some countries require an import deposit, thus in effect raising the price of foreign goods.
iv) Restrictive administrative and technical regulations - Include antidumping, size regulations, safety and health. The EU, for example has very strict hygiene measures for imports of horticultural products.
Tariff classification
Before World War II specific duties were widely used and the tariffs of many countries were very complex. Tariff administration has been made more simple by the Brussels Nomenclature (BTN), worked out by an international committee of experts under the sponsorship of the Customs Cooperation Council, which in 1955 produced a convention that entered into force in 1959. These rules now apply to most GATT countries.
The BTN groups articles mainly according to the materials from which they are made. With many new products appearing the task of classifying becomes more difficult. Exporters should seek the most favourable classification for their products to minimise the duty levied. Sometimes products can be reclassified to get an advantageous rate. Difficulties of classification raise serious questions about the accuracy of data in international trade patterns. In using data on trade, the numbers may often reflect hasty and arbitrary classification which distorts the true picture of the trade flows. This often explains the discrepancies in import and export figures of the same commodity between two countries.
International trade
The export transaction is founded on a contract of international sale of goods with the special characteristic that it is entwined with other contracts, a thing that differentiates the international sale from the local sale. These connected contracts are the contract of carriage by sea or air under which goods are exported and the contract of insurance by which the goods are insured. In many export transactions, delivery of the shipping documents amounts to performance of the contract of sale. These shipping documents consist normally of the bill of lading, the marine insurance policy and the invoice. The position becomes more involved when payment is made under a banker's documentary credit because this common method of payment requires the addition of two other contracts to the export transaction viz: the contract of the bank with the buyer and seller respectively.
Export contracts
A contract is a general agreement between a seller making an offer and a buyer making an acceptance. The acceptance should be unqualified and any variation is regarded as a repudiation of the contract.
The export contract should be very explicit regarding goods and specifications, price, mode of payment, storage, packing, delivery schedule and so on. Normally the contract is sent with a pro forma invoice by airmail.
Although contracts may be oral or partly in writing and partly by word of mouth, it is always safer for the exporter to produce his terms of selling in writing and obtain the signatures of his buyer or authorised representative.
The essential elements of a contract of sale should include the following:
a) Names and addresses of the partiesb) Product, standards (quality) and specifications
c) Inspection of products
d) Packaging, labelling and marking requirements
e) Marine insurance
f) Port of shipment, destination and delivery schedule
g) Method of payment
h) Price FOB, CIF, C & F etc. in international currency or currency asked for by the buyer and,
i) Settlement of disputes including arbitration clause.
If the buyer is satisfied with the terms set out in the contract and the pro forma, the exporter can then get an order with duplicate copy of the contract, detailing payment arrangement and other details and an indication that a letter of credit (LC) has been opened in favour of the exporter. Details of documents required will also be indicated in the export order. The following must happen:
a) Acknowledgment - exporter must acknowledge receipt of the order indicating that confirmation followsb) Scrutiny - contents of the order in respect of product, sizes, specifications etc. as per quotation must be examined in terms of elements of contract conveyed by the exporter to his buyer. Qualities/volume should be examined and ascertained in respect of capability to supply within the stipulated time.
Delivery schedule: All efforts should be made to ensure adherence to delivery schedule as this would affect the requirements of the LC. The export order should indicate whether part shipment is permissible or not.
Terms of payment
This is very important: If payment is to be by LC the following should be borne in mind when examining the LC:
a) confirmation of the LCb) documents stipulated in the LC will be submitted by the exporter's bank
c) draft to be drawn against the LC is for the period set out in terms of the contract, "sight draft" is payment by the recipient or "usance draft" if credit has been allowed in the contract
d) the credit validity period allowed in the LC
e) payment against the LC is permissible according to requirements of foreign exchange control regulations.
Documents
Since the LC indicates the documents required along with the bill of exchange, the exporters should look for availability of the documents called for by the importer and particularly:
a) Commercial customs consular/legalised invoice. The Buyer should endeavour to send a special form of invoice required by him.b) Kind of Bill of Lading (usually "clean on board") and the number of copies required by him along with the bill of exchange and non-negotiable copies to be sent to the buyer.
c) Certificate of origin
d) Packing list - number of copies required
e) Marine Insurance Policy whether in FOB or CIF contract is to be effected by the exporter on behalf of the importer. The name of the company from which the insurance contract is to be obtained should also be mentioned.
Pre-shipment inspection
To be carried out by an appointed body or any other agency.
Packing, labelling and marking requirements
Special or usual activities for example, colour contents, language, packing etc.
Confirmation
If the exporter is satisfied with all of the above, then he must send his confirmation of the export order to the buyer. No special form of confirmation is needed as any letter giving details of order and indicating clearly terms and conditions would be sufficient.
If dissatisfied, the exporter should write to the importer to seek for clarification and necessary corrections, If the export transaction presents itself to the businessman as a natural and indivisible whole and he is apt to pay little attention to its constituent parts, like the motorist who thinks of the components of his car only when he notices a fault in them.
Special trade terms in export sales
Export transactions based on the contract of sale usually have terms which are not customary in the local trade. The most common are the FOB and CIF clauses. Other clauses are ex-works, or ex-warehouse or ex-store, the FOR, FOT, the COF, ex-ship, ex-quay and arrival.
Ex-works or ex-warehouse or ex-store (where the goods are situated)
This is an arrangement which is most favourable to the seller who desires to conduct export trade as closely as possible on the lines of a home market sale. The clause means that the overseas buyer or his agent must collect the goods at the place where the seller works or where his factory, warehouse or store is situated. The seller must provide goods of the contract description and place them at the agreed collection point. Notice should be given to the buyer that the goods are ready for collection.
Free on rail or free on truck (FOR/FOT)
Here, the seller has little to do with the actual exportation of the goods and many overseas risks. But unlike the above, the goods are not collected at the seller's doorstep but have to be delivered by him into the custody of the railway or transport authority at the agreed point.
The seller, under an FOR or FOT contract, has normally to procure the railway wagon or other means of transport. The seller should give immediate notice to the buyer of the loading or delivery to enable him to make a claim on the carrier within the time prescribed, in the event of loss.
Free alongside ship (FAS)
This involves certain elements which are absent in a sale on the home market. The seller will have performed his obligations when the goods are carried alongside the ship so that they can be placed on board. The actual loading of the goods is the responsibility of the buyer.
Under the FAS contract, the duty to nominate an effective ship falls on the buyer.
Once the seller has placed the goods alongside a ship in the customary way and at the agreed time, all subsequent expenses and costs are to be met by the buyer.
Free on board; named port of shipment (FOB)
Here, the seller assumes further responsibilities. He undertakes to place the goods on board a named ship at a named port and berthing place. All charges to, and including the delivery of the goods over the ship's rail, have to be borne by the seller while the buyer has to pay all subsequent charges such as the stowage of the goods on board ship, freight, marine insurance as well as unloading charges, import duties, consular fees and other incidental charges due on the arrival of the consignment in the port of destination.
This transaction differs markedly from an ordinary sale in the home market where no dealings in a port have to be carried out and yet it does not display the complexion which is a true mark of the export transaction. There are two types of FOB contract, the strict or classical type and the one with additional services. Under the strict FOB contract the arrangements for shipment and, if he so wishes, for insurance are made by the buyer direct. Under an FOB contract the duty to name an effective ship falls on the buyer. Failure to name such a ship will make the buyer liable to an action for damages for non-acceptance. This is shown in the following case:
Case 12.2 Federspiel And Co. Vs Charles Twigg and Co. Ltd.
In Carles Federspiel & Co. vs Charles Twigg & Co. Ltd., (1957), a company in Costa Rica bought from an English company 85 bicycles FOB British port and paid the purchase price in advance. The bicycles were packed into cases which were marked with the buyer name and registered for shipment in a named ship that was to load them at Liverpool. The cases containing the bicycles had not yet been sent to the port. A receiver and manager was appointed for the sellers. It was held that the property in the bicycle had not yet passed to the buyers so that the receiver could get them.
In an FOB contract with additional services, the parties agree that the arrangements for the carriage by sea and insurance shall be made by the seller but for, and on behalf of, the buyer. In both types of FOB contract the cost of putting the goods on board ship is borne by the seller. Delivery is complete when the goods are put on board ship. The risk of accidental loss under the Sale of Goods Act passes to the buyer when the seller has placed the goods safely on board ship. The seller must give notice of shipment to the buyer so as to enable him to insure. If the seller omits to do this, the goods shall be at his risk. This can be seen in the following case:
CASE 12.3 Groom vs Barber (1915)
In Groom vs Barber (1915), Barber sold Groom 100 bales of cloth on CIF terms. Barber shipped the goods, insuring them under a policy which did not cover war risks. There was no custom of trade that the seller should insure against war risks. Their ship carrying the cargo was sunk by a German cruiser. It was held that, Groom was bound to pay the price on tender of the shipping documents.
Cost Insurance Freight (CIF) (named port of destination)
This is the most common export clause. A CIF contract is not a sale of the goods themselves but a sale of the documents of title. Thus, a buyer is under an obligation to pay against the shipping documents even if the goods do not arrive. The right of the buyer where the goods have not arrived is to sue the contract of carriage or insurance which is assigned to him by the seller under the contract of sale. However, if the goods are lost from a peril not covered by the ordinary policy of insurance current in the trade, the buyer must nevertheless pay the full price on delivery of the documents. This can be seen in the following case:
Case 12.4 The Elafi (1982)
In The Elafi (1982), Swedish buyers bought 6,000 tonnes of copra under four identical contracts which provided for delivery CIF Karlshamn, Sweden. The goods were carried in the Elafi which carried altogether 22,000 tonnes of copra in bulk, 16,000 tonnes having been sold to other buyers. The 16,000 tonnes sold to the other buyers were located in intermediate ports of Rotterdam and Hamburg so that only the quantity bought by the Swedish buyers remained on board. The Elafi: Part of the cargo purchased by them was damaged on discharge in Sweden by the negligence of the shipowners. The buyers sued the shipowners in the tort of negligence. The shipowners claimed that at the time of the damage to the cargo, the buyers had no title To and therefore could not sue in negligence. It was held that:
i) the goods became ascertained when discharged was complete in Hamburg because the buyers could then say all the copra on board was destined to them; and,
ii) property hand passed on the goods becoming ascertained in Hamburg, because in a CIF contract the parties intend that either the property shall pass upon the shipping documents being transferred to the buyer or else, if the goods were not then ascertained, that property shall pass when they later become ascertained. The claim of the Swedish against the shipowners was successful.
CASE 12.5 Kwei Tek Chao Vs British Traders And Shippers Ltd., (1954
In Kwei Tek Chao vs British Traders and Shippers Ltd., (1954) British Traders and Shippers Ltd. sold goods to Kwei Tek Chao who were merchants, the shipment to be made by October 31st. The goods were shipped on November 3rd. The date of shipment shown on the bill of lading was forged to show a shipment in October, but British Traders were ignorant of It and not party to the forgery. All the same they took delivery of the goods, but as the market had fallen, were unable to sell the goods. It was held that:
i) the bill of lading though forged, was not a nullity as the forgery did not go to the root of the contract; and,
ii) Kwei Tek Chao although they had not rejected the documents still had a right to reject the goods and could recover the difference between the contract price and the market price.
However, if the buyer accepts the documents knowing that they are not in order he is estopped from later trying to reject them. (See following case).
The property under a CIF contract passes when the documents are taken up by the buyer but what the buyer obtains, when the title under the document is given to him, is the property in the goods, subject to the condition the goods reverts if upon examination he finds them not to be in accordance with the contract. If, however, the goods are not ascertained at the time the documents are taken up, no property in the goods will pass until the goods are ascertained. An example of this can be seen in the above case.
The duties of the seller under CIF contract are: to ship at the port of shipment goods of the description contained in the contract; to procure a contract of carriage by sea, under which the goods will be delivered at the destination contemplated by the contract; to arrange a contract of insurance on the terms current in the trade for the benefit of the buyer; to make out an invoice for the goods and to tender within a reasonable time after shipment the bill of lading, the policy of certificate of insurance and the invoice to the buyer so that the buyer may obtain delivery of the goods, if they arrive, or recover for their loss if they are lost on the voyage. The bill of lading tendered must correctly state the date of shipment otherwise the buyer can reject the goods. Under a CIF contract the buyer has the right to reject the documents and also a right to reject the goods. These two rights are quite distinct. This distinction can be seen in the following case:
Case 12.6 Panchand Freres S.A. vs Etablissment General Grain Co., (1970)
In Panchand Freres S.A. vs Etablissement General Grain Co., (1970), Panchand Freres sold a quantity of Brazilian yellow maize to Etablissement General Grain Co. The contract was CIF Antwerp and provided that shipment had to take place from Brazilian ports "during the period of June/July 1965" and the "bill of lading to be considered proof of date of shipment in the absence of evidence to the contrary". The goods were in fact shipped on August 11th and 12th, 1965, but the bill of lading was out dated and falsely gave as the date of shipment July 31st, 1965. However, a certificate of shipment issued by a superintendent company in Brazil stated as date of shipment August 10th to 12th, 1965, and this certificate was tendered together with the bill of lading. It was held that: by taking up the documents and paying for them, the buyers were aware that the goods were shipped later than provided in the contract and were estopped from complaining of the late shipment or the defect of the bill of lading.
CASE 12.7 Comptoir d'Achat vs Luis de Ridder (1949)
In Comptoir d'Achat vs Luis de Ridder (1949), a Belgian company bought 500 tonnes of la plate rye from an Argentine company. The terms were CIF Antwerp. The goods were part of a larger consignment and the documents tendered to the buyer included a delivery order addressed to the seller's agents in Antwerp instructing them to release 500 tonnes to the buyer. The buyers paid against the documents but the ship carrying the goods, the S.S. Juliana, was diverted to Lisbon because Antwerp had fallen into enemy hands. At Lisbon, the goods were sold cheaply. This was one of some 900 transactions concluded by the parties before on similar terms. It was held that, the contract, despite it being called a CIF contract, was an arrival contract because the delivery order unlike a bill of lading, passed neither possession nor property to the buyers but was merely a note from an agent of the sellers to another. Since, owing to the non arrival of the goods in Antwerp, the consideration had wholly failed, the buyers were entitled to recover the whole purchase price paid by them from the seller.
Contracts Expressed to be CIF but not True CIF Contracts
The strict rules discussed above do not apply to other contracts, in particular arrival contracts and other contracts which are not true CIF contracts, though they may be described as CIF contracts by the parties. Thus, the terminology used by the parties is not conclusive evidence as to the nature of the export contract. The following case evidences this.
Case 12.8 Urquhart Lindsay & Co. vs Eastern Bank, (1922)
In Urquhart Lindsay & Co. vs Eastern Bank, (1922), Urquhart sold machinery to a buyer in Calcutta to be delivered by instalments, payment to be paid for each shipment as it took place by means of a confirmed credit with the buyer's bank in England. The buyer's bank told Urquhart that a "confirmed irrevocable credit" was open in his favour. After two shipments had been made and paid for, the bank on the buyer's instructions refused Urquhart's bill of exchange. It was held that the bank was liable in damages.
Apart from the above situation where a bill of lading is replaced by a delivery order, a contract expressed to be a CIF one will not be truly such also where delivery of the goods is expressed to constitute performance of the contract.
Accepted variants of the CIF contract
The following are some of the variants of the CIF contract which are reconcilable with the legal nature of a true CIF contract.
CIF and C; CIF and E; CIF and C and I: CIF AND C STANDS FOR COST, insurance, freight and commission, E stands for exchange and I for interest. The commission is the export merchant's commission which he charges when acting as buying agent for the overseas buyer. The expression "exchange" is ambiguous; it is sometimes said to refer to the banker's commission or charge, while sometimes it refers to exchange fluctuations. In the former case it denotes that the banker's charges are included in the calculation, whereas in the latter it means that the purchase price is not affected by the subsequent rise or fall of the stipulated currency of payment against another currency. It is thought that the former interpretation is more common as currency fluctuation arrangements are most explicitly made. The clause CIF and C and I is used when goods are exported to distant places where some time elapses before the bill drawn on the buyer abroad is settled. When the seller negotiates the bill to his bank the latter charges him commission and interest until payment has been received on the draft in the seller's country, and the seller by adding in his contract of export the letter "I" to the clause indicates to the buyer that the quoted price includes the bank's interest and commission.
Date of arrival of goods is mere determinate for payment of price: The parties sometimes agree on CIF terms adding "payment on arrival of goods" or "payment 'x' days after arrival of goods". This clause is ambiguous and its meaning can be ascertained from the intention of the parties. As a general rule, these words refer to the time at which payment has to be made. If the goods do not arrive, payment shall be made on tender of the documents at the time at which the goods would normally have arrived.
C and F (Named Port of Destination)
This stands for cost and freight. The seller is responsible for procuring the contract of carriage of goods but not the contract of insurance which is to be effected by the buyer. However, the seller must promptly inform the buyer of the shipping of the goods to enable him to insure the goods. The C and F clause is not frequently used by export merchants except in the case of some countries, which for political reasons, or due to lack of foreign exchange, require their importers to insure at home rather than buy CIF.
Arrival of ex-ship (Named Ship and Named Port of Arrival): Where this clause is used, the goods must arrive at the place of destination. It is not sufficient that documents evidencing shipment of the goods to that destination are made available to the buyer. When examining whether a particular contract is a CIF contract or an arrival contract, attention must be paid to the situation of the parties; the terms used by the parties are not conclusive. (See previous case 12.8 Comptoir d'Achat vs Luis de Ridder).
Export documentation
In internal/inland trade, the commercial parties to a sales contract agree on a price based on the buyer taking over the goods at the seller's or supplier's warehouse, or on delivery by the seller to the buyer's warehouse, or delivery by the seller to a specified rail or road carrier. This is because it is simple for either buyer or seller to arrange to pay for all formalities involving the movement and insurance of the goods from one place to another in the same country.
In international trade, the position is a little complicated. There are likely to be three separate contracts of carriage of the goods, i.e. from the seller's or supplier's warehouse to a place within the seller's country, from which there will be an international movement of the goods to a place of arrival within the buyer's country, with a possible internal carriage within the buyer's country to his warehouse.
Basic export documents
Below is a list of basic documents used in export trade. These have been covered in detail in other sectors of this text.
| a) | Invitation to quote |
| b) | Quote |
| c) | Pro forma Invoice |
| d) | Order confirmation/acknowledgement |
| e) | Bill of lading/short form bill of lading |
| f) | Airway bill |
| g) | Marine (other) insurance policy |
| h) | Commercial invoice |
| i) | Consular invoice |
| j) | Certified invoice |
| k) | Certificate of origin |
| l) | Packing list/weight note |
| m) | Specification sheet |
| n) | Manufacturer's analysis certificate |
| o) | Health, sanitary, phytosanitary, veterinary certificates |
| p) | Quality inspection certificate/certificate of value |
| q) | Independent third party inspection certificate |
| r) | Dispatch advice note |
| s) | Dangerous goods declaration |
| t) | Shipping or export consignment notes |
| u) | Documentary credit of payment drafts |
| v) | Export licences |
| w) | Import licences |
| x) | Exporter's commission advice to agent |
| y) | Customs and Excise export entry forms |
| z) | EU Movement documents EUR 1 Form |
| a1) | Other specifically requested documents |
Not all of these will be relevant depending on whether the exporter is from a developed or less developed country.
Note:
A great number of exporters find it more convenient to control the volume and variety of paper work and related matters by designing a file folder that has printed on the covers the entire control procedure covering documentation, production of goods, payment, shipping instructions and so on. Each separate transaction is then allocated to a numbered filed folder.
The documents are either required by the importer to satisfy the country's trade control authorities or to enable a documentary credit transaction to be implemented. Trade control authorities want to ensure that each document controls the import of a good/commodity for sanitary/veterinary reasons, or to ensure no plant disease likely to affect the local seeds is imported from another country. The importer also wants to ensure that the exporter fulfills these requirements under documentary letter of credit operations in order for payment to be effected.
Commercial documents
Of the documents described earlier, this section will single out some and describe them in detail.
Pro forma invoice
This is a form of quotation by the seller to a potential buyer. It is the same as Commercial Invoice except for the words "Pro forma Invoice" which appear on it. It may be an invitation to the buyer to place a firm order and is often required by him so that the authorities of the importer's country will grant him an import licence and/or foreign exchange permit. The pro forma invoice normally shows the terms of trade and price so that once the buyer has accepted the order there is a firm contract to be settled as stipulated in the pro forma. Details from the accepted pro forma must be transposed identically to the commercial invoice that goods are in accordance with the pro forma invoice. No pro forma invoices are used in settlements:
· in advance
· on consignment
· subject to tender
· after an invitation to tender has been accepted by the seller.
Commercial invoice
The following details must appear on a commercial invoice used in international trade:
· Names and addresses of buyer and seller and date· Complete description of goods. If payment is to be obtained by means of documentary letter of credit, this description of goods must exactly match the details in the documentary credit
· Unit prices where applicable and final price against shipping terms
· Terms of settlement e.g. under documentary credit or 30 days sight Documents against Acceptance
· Shipping marks and numbers
· Weight and quantity of goods
· Name of vessel if known or applicable.
Sometimes it is necessary to show to the customs authorities in the buyer's country:
· Seller's signature
· Origin of goods
· Ports of loading and discharge or places of taking in charge and delivery
· Details of freight and insurance charges specified separately where applicable.
Certified invoice
A certified invoice may be an ordinary signed commercial invoice specially certifying:
a) That the goods are in accordance with a specific contract or pro forma
b) That the goods are, or are not, of a specific country of origin
c) Any statement required by the buyer from the seller.
There are also formal certified invoices which when submitted to the importing authorities will provide them with the necessary evidence to pass the goods through customs with a lower import duty or none at all. Combined certificates of value and origin (CVO) are used between members of the Commonwealth and special invoices for the other major trade areas such as the EU. All certified invoices must be signed and in case of combined certificates of value and origin they should be signed by a witness as well.
Weight note
This certificate may be issued by the seller or often by a third party - it indicates weight of goods, which should tally with that shown on all the other documents. Weighbridge tickets are sometimes produced for road or rail shipments. Banks will accept superimposed declaration of weight on shipping documents, unless credit calls for a separate or independent document.
Packing list and specification
These documents set out details of the packing of the goods. These are required by the customs authorities to enable them to make spot checks or more thorough checks on the contents of any particularly package. The packing list has no details of cost/price of the goods; the specification does have these details.
Manufacturers analysis certificate
The certificate states the ingredients and proportions revealed by an analysis of chemicals, drugs etc.
Third party certificate of inspection
This is a certificate declaring the result of an examination of the goods by a recognised independent inspection body. In order to protect himself from paying when substandard or worthless goods have been shipped an importer can call for an independent check or examination of goods before they are despatched.
This is important for the buyer as banks' liabilities and responsibilities under documentary credit are limited to documents and not goods represented by the documents. The usual independent body which serves buyers/sellers is the Société Generale de Surveillance.
Official documents
These are legion. This section looks at the following few official documents only for example purposes,
a) EURI form
b) TzL form
c) Consular invoice
d) Legalised invoice
e) Combined invoice and Certificate of Origin
f) Chamber of Commerce Certificate of Origin
g) Blacklist Certificate
h) Veterinary Certificate.
EC documents EURI and TzL
EURI form is used in respect of preferential exports from an EU country to a non EU country. The TzL is used for trade between EU member states, where the goods are being transported directly between member states and without passing through the territory of a non member country.
Consular invoice
Importing authorities of several countries require consular invoices to be produced before goods may be cleared through customs. These invoices are normally obtained by the exporter from the Embassy of the importing country and are submitted to the Embassy for stamping at a charge. Sometimes a Chamber of Commerce is required to certify on the Consular Invoice that the origin of the goods is as stated. This mainly happens in the South American countries. The selling price is mainly examined in the light of current market price to ensure that there is no "dumping" or that importers are not syphoning money overseas or that the correct basis for levying import duty can be determined by the Customs Authorities.
Legalised invoice
Some countries require that commercial invoices should be legalised by their own embassy or consulate in the seller's country. Sellers produce their own invoices and have them stamped (visaed) by the buyer's embassy. This is normally required in the Middle East countries.
Certificates of origin
These constitute signed documents evidencing origin of the goods and are normally used by the importer's country to determine the tariff rates. They should contain the description of goods and signature and seal of the Chamber of Commerce.
Blacklist certificate
Countries at war or with badly strained political relations may require evidence that:
a) The origin of the goods is not that of a particular countryb) That the parties involved (manufacturer, bank, insurance company, shipping line etc.) are not blacklisted or,
c) That the ship or aircraft will not call at ports in such a country unless forced to do so.
Health, veterinary and sanitary certificates
Sometimes these are required for official purposes in the purchase of foodstuffs, hides and skins, livestock and in the use of packing materials.
Insurance documents
The following are insurance documents required in international trade:
a) Letter of insurance
b) Insurance company's open cover certificate
c) Lloyds' open cover insurance
d) Insurance policy.
Letter of insurance
It is normally issued by a broker to provide notice that an insurance has been placed pending the production of a policy or a certificate. Sometimes this takes the form of a cover note. The above documents do not contain details of the insurance being effected and therefore are not considered satisfactory by banks which normally require evidence of an insurance contract in documents required under a documentary credit.
Broker's certificates, and cover notes are issued by a third party and not the insurer so that in the event of any claim, it would be made against the broker.
Insurance certificates
These are issued by insurance companies to embrace either open covers or floating policies. The systems of open cover and floating policies are similar in that:
a) Once the system has been arranged, the insured party is covered for all his shipments on the terms and for the risks agreed. The insured will declare to the insurance company the value and details of each shipment and will receive a pre-printed insurance certificate made valid and the document will show the risks covered and be presigned by the insurer.b) Under English Law, no action will be obtained on a contract of insurance evidenced solely by an insurance certificate. So, any action to be taken against insurers can only be on production of a policy to be sued on.
Transport documents
Airway bill
The IATA airway bill (sometimes called an air consignment note or air freight note) is often issued in a set of 12 of which 3 are commercially important, the remainder being copies for airline purposes. The three important documents are:
a) for the issuing carrier
b) for the consignee
c) for the shipper.
The waybill is a receipt only and not a document of title, and the goods are delivered to the named consignee without further formality once customs clearance has been obtained. If the third original document is in the hands of the shipper this can be surrendered to the airline before delivery is made to the consignee.
There might be an arrangement for payment whereby the bank might wish to have a lien over the goods until payment is effected by the importer. The goods will, therefore, be consigned to a correspondent bank (provided that the correspondent bank is agreeable to this) and in such a case the bank will release the goods or documents as instructed. The document should bear the airline stamp with date of despatch and flight number, and be signed on behalf of the airline.
Combined transport bill of lading
As a natural sequel to unitisation of cargo it has become increasingly customary for the "unit load", especially where the cargo has been packed in a container of 20 feet in length, to be shipped on one contract of carriage from a "place of taking in charge" to a "place of delivery". This is known as a "combined" or "multi-modal" transport, and is a substitute for the traditional port-to-port bill of lading. Its name is combined bill of lading "combined transport bill of lading" is used. When such a document is required under a documentary credit it does not make sense for such credit to specify ports of loading and discharge, or to prohibit transshipment as the essentials are the places of taking in charge and delivery.
House bill of lading
These documents are issued by freight forwarders for their own services. This exhibit is the form recommended by The Institute of Freight Forwarders Limited for trading members of the Institute and bears the IFF Standard Trading Conditions.
Under the Carriage of Goods by Sea Act 1971, any sea waybills, data freight receipts, house bills, forwarding agents' receipts or similar non-negotiable documents, not being bills of lading or title documents, are nonetheless, subject to the Hague Rules relating to bills of lading where the non-negotiable documents provide evidence that they relate to contracts of carriage of goods by sea.
Rail consignment note
With the growth of freight liner traffic the volume of goods being exported by rail through to final continental destination is increasing. Consequently, the carrier's receipt, or duplicate copy, frequently accompanies the other documents. Goods will be released to the consignee, upon application and normal proof of identify, by the rail authorities at destination or by delivery direct. Control over the goods would be arranged in the same way as for an air consignment. The rail consignment note should bear the stamp of the station of departure and the date of departure.
Road waybill (CMR)
The CMR (Convention Merchandises Routiers) consignment note is an internationally approved and recognised non-negotiable transport document used when goods are travelling by road through or to countries which are parties to the CMR. The contracting countries are Austria, Belgium, Bulgaria, Czechoslovakia, Denmark, Finland, France (including overseas territories), Federal German Republic, German Democratic Republic, Gibraltar, Greece, Hungary, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Romania, Spain, Sweden, Switzerland, United Kingdom (including Northern Ireland) and Yugoslavia.
As well as its function as a receipt and delivery document, the note provides written evidence that goods are being carried under the terms of the CMR.
Bills of lading
This document is the receipt given by the shipping company to the shipper for goods accepted for carriage by sea. If in negotiable form it also conveys title to the goods and the goods will only be released by the shipping company at destination against surrender of a signed original of the bill of lading. Finally, the bill of lading evidences a contract of carriage.
Short form bills of lading
One of the three functions of a bill of lading is to provide evidence of the underlying contract of carriage by sea which comes into being with the reservation of space on board a ship. The shipping company's terms are usually given in full on the reverse, but with the short form bill this is not the case. The essence of the "short form" is the complete removal from the reverse of the bill of lading of the "small print" which gives details of the contract of carriage. Article 19(b) (ii) of the Uniform Customs and Practice for Documentary Credits, defines such short form bills of lading as "bills of lading issued by shipping companies or their agents which indicate some or all of the conditions of carriage by reference to a source or document other than the bill of lading". In a number of countries, including the UK, the use is being encouraged of a short form bill of lading common to a number of different shipping companies. This is not pre-printed with the name of the shipping company, so the "name of the carrier" has to be typed in with the other data relating to the specific shipment. This type of document is known as the "common short form bill of lading". Banks wilt accept such bills of lading when presented under documentary credits unless the credit specifies otherwise.
Bills of lading (Liner)
These are issued by shipping companies in respect of goods carried on regular line vessels with scheduled runs and reserved berths at destination. Such means of transport has possible advantages over tramp vessels which do not necessarily adhere to a very strict schedule and may make unscheduled calls at various ports on the way to the ultimate destination. Shipping lines serving the same routes or destinations may form a conference, within which agreements are made over such matters as the terms and conditions of bills of lading, freight rates, and sometimes of sailing and use of berthing facilities.
Non-negotiable sea waybills
The processing of bills of lading is slow since they may have to pass through several hands. Therefore, these documents may not be received by the consignee before arrival of the vessel. The non-negotiable sea waybill was developed to avoid delay in handling of goods at destination, and has been adopted by a number of shipping lines as an alternative to bills of lading. It resembles the air waybill, as the goods are delivered to the named consignee without any need to hand over the waybill.
Mate's receipts
Rarely seen in trade circles, and rightly so, for this is merely a receipt for goods shipped abroad. Not being a document of title, it should be exchanged for the set of bills of lading by the shipper at the offices of the shipping company.
Financial and financing documents
The financial documents, bills of exchange and promissory notes are listed below. A short description then follows:
a) Bill of exchange drawn in foreign currency and payable at sight
b) Bill of exchange drawn in sterling and payable at sight
c) Bill of exchange accepted payable at 30 days' sight
d) Promissory note
e) Inspection and sampling order
f) Delivery order
g) Warehouse receipt
h) Trust receipt.
Bills of exchange
The legal definition (Bills of Exchange Act 1882, Section 3) of a bill of exchange is an unconditional order in writing, addressed by one person (drawer) to another (drawee), signed by the person giving it (drawer), requiring the person to whom it is addressed (drawee) to pay on demand, or at a fixed or determinable future time, a certain sum in money to, or to the order of, a specified person (payee), or to bearer. The words in brackets do not appear in the Act, but have been inserted for clarity.
Bills of exchange are widely used in international trade, partly since they are convenient vehicles for collecting payment from traders abroad. Finance may be arranged in a number of ways using bills of exchange, both for the buyer (drawee) and for the seller (drawer). Bills of exchange which have been dishonoured may be used in their own right as the basis for legal action. After payment, the discharged bill of exchange is retained by the drawee as evidence of payment, in other words it becomes a receipt for the money. It is the practice in some European countries for banks to avail bills of exchange by adding the bank's name to the bill; this raises the status of the document as the availing bank has guaranteed payment at maturity.
Promissory notes
Whilst not bills of exchange, these are largely subject to the same rules and are used for a somewhat similar purpose, the settlement of indebtedness. Instead of being drawn like a bill of exchange by the person expecting to be paid, they are made by the person who owes the money, in favour of the beneficiary. A simple way of looking at a promissory note is to consider it an IOU. When due, it is presented for payment by the holder, who may be the payee or someone to whom the promissory note has been negotiated.
Inspection and sampling order
When banks are protecting consignment stocks for foreign exporters to, say, the UK, or if they are lending to a UK importer against a pledge of goods, the goods are usually warehoused in the bank's name pending sale to buyers. Prospective buyers frequently need to inspect and sometimes sample the goods before buying them, and it is necessary to be able to authorise a warehouse to permit this to take place. Assuming that the overseas seller or UK importer authorises sampling and/or inspection, a bank may issue such an order on a warehouse and hand it to the prospective buyer.
Delivery order
This is an order on a warehouse instructing it to deliver goods to the bearer or a party named in the order. Banks issue such orders when goods stored in their name are to be delivered to a buyer or are to be reshipped and have to leave a warehouse.
Warehouse receipt
This is a receipt for goods issued by a warehouse. The document is not negotiable and no rights in the goods can be transferred under it. Delivery orders may be issued against the receipt for the goods which relate to it.
Trust receipt
When a bank wishes to release documents of title, or the goods themselves, to a customer of undoubted integrity, whilst still retaining its security rights in those goods and/or the proceeds of their sale, it may obtain a completed trust receipt from its customer to whom a loan has been made. This is an acknowledgement of the pledge of the goods to the bank and an undertaking of the customer to take the documents as trustees for the bank and to:
a) arrange for goods to be warehoused in the bank's name, orb) arrange for processing of the goods and their return to the warehouse in the bank's name, or
c) arrange for sale of the goods and to pay all sale proceeds without deduction to the bank immediately on receipt or within a short, stated period of time.
Export financing
There are various methods used in the international sale of goods to pay the purchase price. These are as follows:
Drafts covering exports
These may be on sight basis for immediate payment or drawn to be accepted for payment 30, 60 or 90 days after sight. Drafts directed to a bank for collection are accompanied by shipping documents consisting of a full set of bills of lading in negotiable form, airway bills of lading, or parcel post receipt, together with insurance certificates, commercial invoices, consular invoices and any other documents that may be required in the country of destination.
Sales against cost advances
These are used where credit is doubtful, exchange restrictions difficult, or unusual delays may be accepted. They are very little used today.
Sales on a consignment basis
No tangible obligation is created by consignment sales. In countries with free port or free trade zones, it can be arranged to have consigned merchandise placed under bonded warehouse control in the name of a foreign bank. Sales can then be arranged by the selling agent and arrangements made to release partial lots out of the consigned stock against regular payment terms. The merchandise is not cleared through customs until after the sale has been completed.
The two most common methods are payment under a collection agreement and payment under a letter of credit, also called a documentary credit. In both cases, banks are used as intermediaries and the shipping documents are used as collateral security for the banks.
In the case of a collection agreement the bank in the buyer's country is squarely responsible for effecting payment, whereas in the case of a letter of credit this responsibility falls on the bank in the country of the seller.
Usually, in international sales, the seller draws a bill of exchange either on the buyer or on a bank. This bill is usually payable a certain number of days after sight, e.g. 90 days after sight.
Collection arrangements
Where a collection arrangement is organised the seller hands the shipping documents including the bill of lading to his own bank, the remitting bank, which passes them on to a bank at the buyer's place, the collecting bank. The collecting bank then presents the bill of exchange to the buyer and requests him to pay or to accept the bill. When the buyer has complied, the collecting bank releases the shipping documents to the buyer, who is then able to receive the original bill of lading that enables him to obtain the goods from the carrier on arrival of the ship. The collecting bank is liable to the seller if it releases the shipping documents to the buyer without having received finance from him.
Letters of credit
These are of particular importance. A letter of credit arrangement will be agreed upon in the contract of sale. The buyer instructs a bank in his own country (the issuing bank) to open a credit with a bank in the seller's country (the advising bank) in favour of the seller, specifying the documents which the seller has to deliver to the bank for him to receive payment.
If the correct documents are tendered by the seller during the currency of the letter of credit arrangement, the advising bank pays him the purchase price or accepts his bill of exchange drawn on it, or negotiates his bill of exchange, which is drawn on the buyer. Whichever method used is pre-arranged between the seller and the buyer.
Types of letters of credit
Letters of credit can be revocable or irrevocable, confirmed or unconfirmed. Whether the credit is revocable or irrevocable depends on the commitment of the issuing bank. Whether it is confirmed or unconfirmed depends on the commitment of the advising bank. These commitments are undertaken to the seller, who is the beneficiary under the credit.
There are four main types of letters of credit, namely, the revocable and unconfirmed letter of credit, the irrevocable and unconfirmed letter of credit, the irrevocable and confirmed letter of credit, and the transferable letter of credit.
The revocable and unconfirmed letter of credit: Neither the issuing nor the advising bank is committed to the seller and as such the credit can be revoked at any time. This type of credit affords little security to the seller that he will receive the purchase price through a bank.
The irrevocable and unconfirmed letter of credit: In this case, the authority that the buyer gives to the issuing bank is not revocable and the issuing bank is obliged to pay the seller provided that he has tendered the correct document before the expiry of the credit. If the issuing bank defaults, the seller can sue them in the country where the bank has a seat. In some circumstances, the seller can sue the issuing bank in his own country if there is a branch office. From the point of view of the seller this type of letter of credit is a more valuable method of payment than a revocable and unconfirmed letter of credit.
The irrevocable and confirmed letter of credit: In this type of credit, the advising bank adds its own confirmation of the credit to the seller. Thus, the seller has the certainty that a bank in his own country will provide him the finance if the correct documents are tendered within the time stipulated. The confirmation constitutes a conditional debt of the banker, i.e. a debt subject to the condition precedent that the seller tenders the specified documents. A confirmed credit that has been notified cannot be cancelled by the bank on the buyer's instructions. See the following case:
Case 12.9 Equitable Trust Co. Of New York vs Dawson Partners Ltd. (1926)
Lord Summer said "There is no room for documents which are almost the same or which will do just as well". In this case, Dawson Partners Ltd. bought a quantity of vanilla beans from a seller in Batavia (Jakarta). They opened a credit in his favour through Equitable Trust Co, instructing them to provide finance on presentation of certain documents, including a certificate of experts. Equitable Trust Co. paid on tender of a certificate by a single expert The seller was fraudulent and had shipped mainly rubbish but the expert who inspected the cargo failed to notice it. It was held that, Equitable Trust Co, had paid contrary to Dawson Partners' instructions and could not debit there.
Transferable:
The parties to a contract of sale may agree that the credit is transferable. The seller can use such credit to finance the supply transaction. The buyer opens the credit in favour of the seller and the seller (who in the supply transaction is the buyer) transfers the same credit to the supplier (who in the supply transaction is the seller). This type of credit is used when a person buys goods for immediate resale and wishes to use the proceeds of resale to pay the original seller.
The doctrine of strict compliance
Under this doctrine, the seller, to obtain payment, must tender documents which strictly comply with specifications by the buyer, otherwise the correspondent bank will refuse to honour the credit. The banks which operate the documentary credit act as agents for the buyer, who is the principal, and as such they should not pay against documents that are different from those specified. Lord Summer emphasised the importance of this requirement in Equitable Trust Co. of New York vs Dawson Partners Ltd. (1926).
Fraud in letter of credit transactions
Letters of credit have been described by an English judge as "the life-blood of commerce" and as such the defence of the bank that it will not honour the credit because fraud has occurred is accepted rarely and with reluctance. Such a fraud may occur if the shipment of the goods is fraudulent or if the bills of lading tendered under the credit are falsified or forged. Where there is a mere suspicion by the bank that fraud has occurred, refusal to honour the credit is not accepted. Such refusal will only be accepted if it is proved to the satisfaction of the bank that the documents tendered are fraudulent and the seller is a party to the fraud or knew of it. The following case sets this out:
Case 12.10 United City Merchants (Investments) Ltd. vs Royal Bank Of Canada (1983).
In United City Merchants (Investments) Ltd. vs Royal Bank of Canada (1983), Glass Fibres and Equipment Ltd., a British company, sold glass fibre forming plant to a Peruvian company, Payment was arranged under an irrevocable letter of credit issued by a Peruvian bank and confirmed by the Royal Bank of Canada at its London branch. Shipment was to be made from London on or before December 15th, 1&76, while v the Credit was open until December 31st, 1976, shipment of the installation was made on board the American Accord on December 16th, i. e., out of shipping time. The bills of lading were altered and backdated to December 15th. This alteration was made fraudulently by an employee of the loading agents without the knowledge of the sellers of the transfers of the credit. It was held that, the confirming bank (The Royal Bank of Canada) should have honoured the credit of the document.
Conflict of law
Where a sale of goods transaction is made on the home market, little difficulty arises as problems that crop up are easily resolved by looking at the rules in The Sale of Goods Act (where the parties have not agreed otherwise). However, international sales pose the problem of conflict of law. The laws of the seller's country and those of the buyer's country may be different in some areas and the question arises as to where to sue and which law to apply.
In the absence of treaty provisions, rules of Private International Law are used to resolve these problems. It is normally advisable to sue in the country where the defaulting party resides or is incorporated and has an office and property, in the case of a company. This is so because the defendant can be more easily compelled to go to court and answer the case than when he is out of the jurisdiction of the court. On the type of law to apply, the proper law of the contract, i.e., the law of the contract country having the closest connection with the contract, is applied. Several factors are weighed in order to arrive at a conclusion as to which is the proper law of the contract, viz: the lex focii lex loci solutions, lex situs, lex loci contracts, the law of the country whose language, currency or flag (flying on the ship carrying the goods) is used.
Lex Focii
This means the law of the country in which the case is tried.
Lex Locii Solutions
This means the law of the country where the contract is performed.
Lex Situs
This means the law of the place where the property is situated.
Lex Loci Contracts
This means the law of the country where the contract is made.
Various treaties have been signed in order to unify the law relating to international sales, thereby avoiding the difficult task of weighing various factors in deciding on what law to apply. The two Hague conventions signed in 1964 are perhaps the most important of such international agreements. These are the Uniform Law on the formation of contracts for the International Sale of Goods, and the Uniform Law on the International Sale of Goods.
The uniform law on the formation of contracts for the international sale of goods
The provisions of the convention relate to offer and acceptance. An offer is generally revocable until the offeree has despatched his acceptance. However, under the convention an offer is not revocable if it either states a fixed time for acceptance, or that it is irrevocable. This is different from the common law position where such a standing offer would be revocable if not supported by consideration.
At common law, an acceptance which varies the terms of the offer is not valid. However, under the convention, the acceptance will only be invalid if the qualification consists of an additional or different term which materially alter the terms of the offer unless the offeror promptly objects to the discrepancy. The convention rules also deal with the case of late acceptances which will be good unless the offeror notifies to the contrary.
The uniform law on the international sale of goods
This agreement consists of provisions dealing with the obligations of the seller and the buyer as to the time and place of delivery, the insurance and carriage of goods, the conformity of goods with the contract and the giving of goods title. Other rules deal with the passing of risk and the buyer's obligations as to payment and the taking delivery of the goods. These rules are in several respects different from the rules under the Sale of Goods Act. In particular, the uniform laws do not recognise the concept of the "condition" which exists under common law for the breach of which the buyer can reject the goods even though the breach causes him no loss. The uniform laws instead introduce a concept of "fundamental breach". Thus, in order to determine whether the buyer has a right to reject, one must examine the breach that has occurred together with its consequences. Rejection will be possible only if the breach is "fundamental", i.e. if a reasonable person in the position of the buyer "would not have entered into the contract if he had foreseen the breach and its effects".
The two conventions have been given statutory effect in UK by the Uniform Law on International Sales Act 1967. Malawi, for example, has not passed any enactment to give legal recognition to the Hague conventions and as such the rules under it do not have legal effect here unless a seller and buyer expressly agree that these rules shall govern their contract.
On April 11th 1980, another important convention - The United Nations Convention on contracts for the International Sale of Goods - was signed in Vienna. The intention of the convention was to supersede the Hague Conventions.
The contract of international sale of goods reflects a complexity which is absent in the home market sale. This is so because this contract is entwined with other contracts, specifically the contract of carriage of goods, the contract of insurance and the letter of credit arrangement.
These different transactions are often looked at as one entire activity unless something goes wrong somewhere, when the fault is isolated, thereby requiring separate analysis of the contract in question. Trade terms which have evolved over the years from the custom of merchants are used. These serve to outline the rights and duties of the seller and buyer. The most common of such trade terms are the FOB and CIF clauses. Although the meaning of these trade terms may vary slightly from one country to another, uniformity is obtained when the parties adopt the International Chamber of Commerce meaning of trade terms.
The international sale also involves another complexity; the problem of jurisdiction and choice of law where rules as to obligations of the seller and the buyer are different in their respective countries. Although Private International Law rules help in dealing with this problem, there is need for the signing of treaties to try and provide ready rules on international sales which are uniform. This happened at the Hague in 1964. The United Nations Commission on International Trade Law is also busy promoting the convention of 1980. However, these efforts are wasted if countries do not pass national laws to give effect to the conventions as is the position in, for example, Malawi, with regard to the Hague conventions.
Chapter Summary
Global marketing logistics, referred to earlier in chapter four, can present to the unwary and uninitiated an enormously formidable barrier. Having the correct documentation internally and externally is vital or goods and services just simply cannot be exported.
Marketers or their agents must be familiar with Terms of Access, contracts, trade terms, commercial documents including insurance and financial documents, and the consequences of breaking any of the terms and conditions.
In many products, the more familiar the distribution network players are with each other and their individual systems, the easier the documentation process becomes to set up and operate. This reduction of transaction risk is a bonus and may involve the use of specialist agencies like freight forwarders and shippers.
Key Terms
| Bill of Exchange | FAS | Letter of Credit |
| Bill of Lading | FOB | Non Tariff Barriers |
| CIF |
Review Questions
1. What is the difference between the following contracts of trade?
a) FOB
b) FAS
c) CIF
2. Explain fully the meaning of bills of lading and bills of exchange
3. Describe the different types of letters of credit.
Review Question Answers
1. All the terms are used in contracts of sale.
a) FOB (Free On Board)
The seller undertakes to place the goods on board a ship (maybe named) at a named port and berthing place. All changes to, and including delivery of goods over the ship's rail are borne by the seller, whilst the buyer has to pay all subsequent storage, freight etc. Contracts may be "strict" or with additional services.
b) FAS (Free Alongside Ship)
Very similar to the above, except the seller will have performed his obligations when the goods are carried alongside the ship. The buyer must also nominate a ship.
c) CIF (Cost, Insurance, Freight)
It must be noted that a CIF contract is not a sale of goods itself but a sale of the documents of title. A buyer is under an obligation to pay against the shipping documents which are taken up by him. The seller arranges the shipping, invoice and freight. A buyer can reject the documents and the goods but not if he has accepted them.
2a) Bills of Lading
This document is the receipt given by the shipping company to the shipper for goods accepted for carriage by sea. If in negotiable form it also conveys title to the goods, and goods will only be cleared by the shipping company at destination against sender of a signed original of the bill of lading. The bill of lading endorses a contract of carriage. Bills can be "short", "linear" or "non-negotiable sea waybills"
b) Bills of Exchange
An unconditional order in writing, addressed by one person (drawer) to another (drawee) signed by the person giving it (drawer) requiring the person to whom it is addressed (drawee) to pay on demand, or at a final or determinable future time, a certain sum in money to, or to the order of, a specified person (payer) or to bearer.
c) Letters of Credit
Agreed in a contract of sale. The buyer instructs a bank in his own country (the issuing bank) to get a credit with a bank in the seller's country (the advising bank) in favour of the seller, specifying the documents which the seller has to deliver to the bank for him to receive payment. If the correct documents are tendered by the seller during the currency of the letter of credit arrangement, the advising bank pays him the purchase price or accepts his bill of exchange drawn on it, or negotiates his bill of exchange which is drawn on the buyer. Whichever method is used is pre-arranged between the seller and the buyer.
3. There are four main types of letter of credit:
a) The revocable and unconfirmed letter of credit.
Neither the issuing nor the advising bank is committed to the seller and as such the credit can be revoked at any time. This type of credit affords little security to the seller that he will receive the purchase price through a bank.
b) The irrevocable and unconfirmed letter of credit.
In this case, the authority that the buyer gives to the issuing bank is not revocable and the issuing bank is obliged to pay the seller, provided that he has tendered the correct document before the expiry of the credit. If the issuing bank defaults, the seller can sue it in the country where the bank has a seat. In some circumstances, the seller can sue the issuing bank in his own country if there is a branch office. From the point of view of the seller this type of letter of credit is a more valuable method of payment than a revocable and unconfirmed letter of credit.
c) The irrevocable and confirmed letter of credit.
In this type of credit, the advising bank adds its own confirmation of the credit to the seller. Thus, the seller has the certainty that a bank in his own country will provide him the finance if the correct documents are tendered within the time stipulated. The confirmation constitutes a conditional debt of the banker, i.e. a debt subject to the condition precedent that the seller tenders the specified documents. A confirmed credit that has been notified cannot be cancelled by the bank on the buyer's instructions.
d) Transferable
The parties to a contract of sale may agree that the credit is transferable. The seller can use such credit to finance the supply transaction. The buyer opens the credit in favour of the seller and the seller (who in the supply transaction is the buyer) transfers the same credit to the supplier (who in the supply transaction is the seller). This type of credit is used when a person buys goods for immediate resale and wishes to use the proceeds of resale to pay the original seller.
References
1. McGuiness, N.W. and Little, B. "The Influence of Product Characteristics on the Export Performance of New Industrial Products", Journal of Marketing, Spring 1981, pp 110-122.
2. Kwelepeta, S.L, "Legal Aspects of Foreign Trade", S. Carter (ed.), "Export Procedures" Network and Centre for Agricultural Marketing Training in Eastern and Southern Africa, August 1991, pp 78 - 85.
3. Kimweli P.K. "Exporting of Horticultural Produce in Kenya". In S Carter, ed. "Marketing Management in the Horticultural Industry". Network and Centre for Agricultural Marketing in Eastern and Southern Africa, FAO, November 1991, pp 131 -151
Bibliography
4. Keegan, W.J. 1989, "Global Marketing Management", 4th ed., Prentice Hall International Edition.
5. Kwelepeta, S.L., "Export Documentation", op. cit. pp 89-98.
Chapter 8 Importing Exporting and Sourcing 9th Edition Keegan
Source: https://www.fao.org/3/w5973e/w5973e0g.htm