International Trade Terms

Unit 4

International Trade Terms

Trade terms determines weather the exporter or the buyers
will bear the responsibility, cost & risk for each stage of the
business transaction.
Although many trade terms seems self explanatory or easy to
understand, they can easily become a source of disagreement
between the exporter & the buyer unless they are carefully
defined.
In international Commercial terms(Incoterms) there is a
universally recognized set of definitions of International Trade
terms, such as Free on Board, cost & Freight , cost freight &
Insurance developed by International Chamber of
Commerce(ICC)

 It defines the trade contract responsibilities &

liabilities between the buyer & the seller.
It is an invaluable & cost saving tool
The exporter & importer need not undergo a
lengthy negotiation about the conditions of
each transaction.
Once they have agreed on a commercial terms
such as FOB, they can sell & buy at it without
discussing who will be responsible for the
freight, cargo insurance, & other cost & risk.

Representation of Incoterms
Group

Term

EXW

FCA
FAS
FOB

CFR & C&F

Stand for
Ex Work
Free carrier
Free Alongside Slip
Free on Board
Cost and Freight

CIF

Cost Insurance
Freight

CPT

Carriage paid To

CIP

Carriage & Insurance

Paid

DAF

Delivered at Frontier

DES

Delivered Ex Ship

DEQ

Delivered Ex Quay

DDU

Delivered Duty

International Trade Contract

The success or failure of the export business of the firm
depends entirely upon securing orders from buyers,
delivering products in a good condition at a correct time &
most important receiving payments.
This depends upon the correct handling of export procedure.
All documents & procedure must be carefully followed in
order to avoid violations of the laws of the country involved
& or refusal of the financial organization to honour demands
for payments.
Error in paper work in export transactions can cause major
delays & losses

 International contract serves as the ground for

export transaction.
It is supposed to spell out the rights and liabilities
of both the parties in such a manner that there is
no room for ay confusion or misunderstanding.
Both the parties therefore must understand clearly
the agreement before they finally approve it.
In addition to details of the goods & prices, the
sales contract will normally specify trade terms,
such as matters as insurance, transport, freight
cost etc. & payment details

Key clauses for International Trade

Contracts
There are certain key clauses of International Trade contract:
Description of the goods
Contract price
Delivery terms
Time of delivery
Payment condition
Documents
Inspection of the documents by the buyer
Retention of the title

Steps in International Trade

contracts

Inquiry & offer

Acceptance & confirmation of purchase order
Export sales contract
Export permission & licenses
Managing finance for export
Managing production/procurements of goods
Reserving shipping birth
Packing & marking
Pre shipment inspection

Payments Terms
Introduction
The currency of our country is not a legal tender in
other country & hence it will not be accepted abroad in
discharge of debts & obligations.
All importers faces this problem that their exporter in
other countries require payments in their homeland
currency.so, importer have to arrange for this.
This problem is mainly solved by foreign exchange to
dealers,banks,brokers,etc.
Also the importer faces the problem to transfer the
foreign exchange to their exporter & trading parties in
other countries

 To solve this problem ,different devices have been

introduced. These devices are called instruments of
making foreign payment & these ensure the safe , speedy
& reliable transfer of money from one country to other.
In order to get succeed in todays global market place the
exporter must offer their customer attractive sales terms
supported by appropriate payments method.
There are four primary methods of payments for
International transactions. These are:
a) Cash in advance
b) Open account
c) Letter of credit
d) Documentary collections

Factors to be considered while

deciding Payments Terms
There are various important factors which have to taken
into accounts while deciding payments terms these are as
follows:
1. Correct payment mechanism
2. Secure payments
3. Negotiations with customers
4. Currencies
5. Knowledge of various payment terms
6. Insolvency of buyer
7. Understanding of insurance terms

Types of Payment Terms

There are basically 4 types of payments terms
which are as follows:
1. Cash in advance: Cash in advance affords the
exporter the greatest protection because payment
is received either before shipment or upon arrival of
the goods. This method also allows the exporter to
avoid tying up its own funds. Receiving payments in
advance of shipment might seems ideal. In this the
payments is received in the form of demand draft
or cheque denominated in foreign currency or by
direct transfer against the supply of goods.

2. Open Account: In foreign

transaction, an open account can be a
convenient method of payment, if the
buyer is well established , has a long &
favorable payments records or has been
thoroughly checked for creditworthiness.
Open account is concerned with the
credit sales when this importer makes
payments on a pre- determined future
date. the exporter ships the goods
directly to the importer.

3. Letter of credit: Letter of credit refers to a written

undertaking given by the importers bank, at the request &
instructions of the importer(i.e the applicant), to the
exporter that the payments shall be made to him against
stipulated documents provided that the same appear on
their face to be in accordance with the terms & conditions
of the credit.
4. Documentary collections: It involves collection of a
given sum of money by a bank due from a importer against
delivery of certain documents at the instructions of the
exporter. The parties involved in the documentary
collection are as follows: exporter , Importer, Collecting
bank, remitting bank.
It may takes place in two forms: documents against
payments, Documents against acceptance.

Credit Risk Management

A credit risk may be defined as the risk that counterparty
to a transaction will fail to perform according to the
terms & condition of the contract, thus causing the
holder of the claim to suffer a loss, banks all over the
world are very sensitive to credit risk in various
financial sectors like loans, trade financing, foreign
exchange , bonds, equities & inter bank transactions.
It is generally difficult for the exporter to verify the
creditworthiness & reputation of an importer.
If the creditworthiness of the importer is unknown there
is a the increased risk of non payment, late payments or
even fraud.

 It is essential therefore, that the

exporter should strive to determine the
creditworthiness of the foreign buyer.
There are many commercial firms that
can provide assistance in credit
checking foreign companies.
In addition, the exporter should insist for
a secured method of payments such as
an irrevocable documentary credit. The
exporter could approach his bank in
home country for assistance regarding
international payments procedures.

 Credit risk is the possibility of

occurrence of a loss for an exporter
within the international trade, as a
result of an unpredictable situation
for a debtor.

Introduction of ECGC
For providing credit n finance & inuring
export credit risk, there are two primary
institutions which are ECGC & EXIM bank.
The Export credit Guarantee Corporation
of India Ltd , is an Indian government
owned company that provides export
credits insurance supports to Indian
exporter.
It works under Ministry of commerce &
industry, department of commerce, GOI

Credit Risk Determinant

There are various credit risk management policy for an establishment,
which are as follows:
Prospecting: The cases in which a company sells on a market
without having previously prospected are rare. This prospecting
requires financial & human resources. The result of this investment
cannot be guaranteed before.
Thrusting abroad: Prospecting can be followed by thrusting
abroad, cost that will have to be written off. Some insurance
companies conclude policies in order to cover the risk of thrusting.
Offer presentation: before being appointed as wining company of
an auction, it has to submit its offer. In international adjudication,
the company has to provide a good execution guarantee along with
offer guaranteeing the buyer that the wining company will comply
with the contract exactly according to conditions of the offer.

 Order: Between the order & the delivery , the

exporting company may faces several risk:
1. Either the growth of recovery cost( due to
growth of raw material cost or production
cost) being an economic risk.
2. Either market loss
. Packing shipment: Commodities which are
the subject of international trades go through
international transport, which supposes the
existence of the risk for them to depreciate, to
quantitatively & qualitatively suffer due to
transport conditions.
. Payment: payment is the last stage of the
commercial chain.

Transit Risk Management

It is the risk of goods being damaged
during shipment from the place of
origin to the place of destination.
Failure in addressing transit risk may
result in heavy replacement cost or
performance risk.
Transit risk is covered by marine
insurance companies registered
under General Act 1972

 The transit risk is quit different from other risk as it

includes a bundle of events & circumstances. That is
why premium is also very rates are also very higher &
there are very few prominent players in the Indian
market
Transit risk describe the possibility of the
merchandised being lost or damaged while being
transported from international marketer to the buyer.
Transit insurance covers all physical damage to or loss
of the goods in transit by land, sea & air, because of the
many dangers inherent in shipping most individuals &
business choose to insure their goods while they are in
transit.

Types of Transit Insurance

Basically there are 3 types of transit Insurance
which are as follows:
1. Open cover
2. Specific policy
3. Contingency insurance
1. Open cover: This is the most usual type of cargo
insurance, where a policy is drawn up to cover a number of
consignments. The policy can be either for a specific value
that require renewal once the insured amounts is exhausted
or an permanently open policy that will be drawn up for an
agreed period

2. Specific policy: Although not the

norm for cargo insurance, one may
form time to time need to approach an
insurance company to request an
insurance policy for a particular
consignment.
3. Contingency Insurance: or seller
interest.

Types of Transit Risk

According to the Marine Insurance Act, unless
the policy otherwise provides, the insurer is
liable for any loss proximately caused by a peril
insured against.
The insurer is not liable for any loss attributable
to the willful misconduct of the assured but,
unless the policy otherwise provides, he is liable
for any loss caused by the insured even though
the loss would not have happened but for
misconduct or negligence of the master.

 Thus losses of insurance may be classified into two

pats:
1. Total loss
2. Partial loss
Total loss: when the subject matter of insurance is being
lost totally, it is called as total loss.it is further divided
into two parts
a. Actual total loss
b. Constructive total loss
Actual total loss: when the subject matter insured is
destroyed or is damaged such that it ceases to be a thing
or a kind insured.
In case of an actual total loss, the insurer has to pay either
the insured amount or the actual loss whichever is less.

 Constructive total loss: There is a constructive total loss

where the subject matter insured is reasonably
abandoned on account of its actual loss appearing to be
unavoidable, or because it could not be preserved from
actual total loss without an expenditure which would
even exceed its value
2. Partial loss: In Marine insurance, the term partial loss
other than total loss. It may be divided into two parts
a. Particular average loss
b. General average loss
Particular average loss: When the subject matter is partially
post or damaged by the perils insured against, it is called
particular average loss. It is applicable only when only a
particular subject matter is lost n lost should be accidental

 General average loss: This occurs

where any extraordinary sacrifice or
expenditure is voluntarily &
reasonable made or occurred at the
time of perils, for the purpose of
preserving the property involved in a
common adventure.
For example: cargo ship caught fire,
water is used to extinguish fire due to
which cargo is damaged. The loss
caused by cargo is a general average
loss.

Procedures of Insuring Against

Transit Risk
Selecting the Insurance Company: General
Insurance business in India, the monopoly of General
Insurance Corporation of India & its four
subsidiaries. However , if an exporter intends to
insure with a foreign company it has to take prior
permission of the RBI
Deciding the appropriate type of policy: There are
various types of cargo insurance policies issued by
the GIC to suit the requirements of the exporter. They
have to decide the appropriate type of policy tailing
into consideration his requirement

 Application to the insurance company: When

the goods are ready for dispatched the exporter
should apply to the insurance company in the
prescribed declaration form which are:
a. Address of the exporter& importer
b. Description of the goods
c. Marks, number,& kind of packages
d. Value of packages
e. Transportation from warehouse to its final
destination
f. Risk to be covered for insurance

 Payment of premium: The insurance premium charges

may vary from company to company & country to
country
Issue of the Insurance policy: After the completion of
all the formalities the exporter has to produce the bill
of lading & the name of the ship- the insurance
company. The insurance company issues the certificate
in 3 copies as per the declaration given by the exporter
policy
Processing of the policy: The exporter will submit the
original copy to the bank with his other documents n
second copy will be sent to the importer n 3rd copy will
be with him only

Consignment Sale
Consignment sale is an arrangement in trade in which a
seller or the consignor sends goods to a buyer or consignee
without getting payments for the goods then itself. The
consignee or the buyer pays the amount only when the
goods are sold. It is actually a delivery of goods not
amounting to sale .
The seller retains the ownerships of the goods until the
payments is made in full by the buyer.
When the goods are shipped by exporter on consignment,
the title of the goods remain to lie with the exporter even
after the goods are received by the importer.
The importer remits money only after it sells the goods.

 The seller is usually responsible for

loss, shrinkage, or damage of its
merchandise while in its control &
custody of the buyer.s

Insurance policy
This is a written contract between the insurer & the insured
containing all terms & conditions of the agreement.
It shows the full details of the risk covered, & is also called
formal insurance documents.
Insurance policy certifies that the goods transported have
been insured under an open policy & is not actionable with
little details about the risk covered.
It is important that the date on which the insurance
becomes effective should be same or earlier then the date
of insurance transport document.
A policy may refer to a single consignment & sent with the
other commercial documents.

Requirements for completing of an

insurance policy
1. The name of the party in the favor of which the
documents have been issued
2. The name of the vessel or the flight details
3. The place of origin & the place of destination
4. Insurance value that specified in the credit
5. Marks & umbers to agree with those on other
documents
6. The description of the goods, which must be
consistent with date in the credit & on the invoice
7. The name & address of the claims settling agent
together with the place where claims are payable

8. Countersigned where necessary

Types of Insurance Policies:
There are various types of Insurance Policies which are
as follows:
1. Voyage policy
2. Time policy
3. Mixed policy
4. Valued policy
5. Open or unvalued policy
6. Floating policy
7. Port risk policy

Insurance Certificate

For each consignment an insurance certificate is issued,

cross-referencing the policy. An insurance certificate is a
document issued to the insured certifying that the
insurance has been affected.
It contains the same details as an insurance policy except
that version of provision is abbreviated.
It is a type of document indicating the type & amount of
insurance coverage in force on a particular shipment.
It is used to assure the consignee that insurance is
provided to cover loss of or damage to cargo while
transit.
This instrument is negotiable

Cargo Loss - Clauses

There are different clauses covering the cargo loss which are
as follows:
1. Institute Marine cargo clause Coverage A all risk policy
2. All risk coverage
3. Institute Marine cargo clauses Coverage B named perils
( whether damage not covered)
4. Institute Marine cargo clauses Coverage C- named perils
( whether damage covered)
5. With average coverage : in between all risk policy & coverage
B
6. Free of particular Average coverage: named perils , this will
cover all loss but will only cover partial losses in some case.
7. Strikes coverage.

Procedure & documentation for

cargo loss
1. Preliminary notice of claim: The export import
(insured) must file a preliminary claim by notifying
the carrier of a potential claim as soon a the loss is
known or expected. A formal claim may follow when
the name & value of the loss or damage is ascertained
2. Format notice of claim: The consignee must file a
formal claim with the carrier & the insurance
company once the damage or loss is ascertained. The
claim should include cost such as the value of the
cargo, inland freight, documentation & other item.

 Settlement notice of claim: If the claim is

covered by the policy & claims procedures are
appropriately followed, the insurance company
will pay the insured. If the insurance company
declines to approve payment, the insured could
pursue arbitration or other dispute settlement
procedure as provided in the insurance
contract.

Letter of credit
Letter of credit refers to a written undertaking given by the
importers bank, at the request & instructions of the
importer(i.e the applicant), to the exporter that the payments
shall be made to him against stipulated documents provided
that the same appear on their face to be in accordance with
the terms & conditions of the credit.
These terms & condition are indicated by the importer to
the bank issuing the letter of credit. The bank do not deal in
goods, they deal in documents, as such the importer the
importer has to specify to the bank the documents which it
should examine to conclude that the exporter has sent the
shipment in strict compliance with the terms & conditions
of the credit.

Parties involved in letter of

credit
1. Accepting bank: The bank named in a letter
of credit on whom terms draft are drawn & who
indicates acceptance of the draft dating &
signing across its face, thereby incurring a legal
obligation to pay the amount of the draft at
maturity.
2. Advising bank: A bank or correspondent bank
at or near the domicile of the beneficiary, to
which the issuing bank either sends the letter of
credit

 Applicant
Beneficiary
Discounting bank
Drawee bank
Drawer
Types of Letter of Credit:
1. Sight letter of credit: A letter of credit is known as sight LC if it involves
payment to the exporter against sight draft.
2. Confirmed letter of credit: An irrevocable LC is confirmed when another
bank add its confirmation to the LC upon the request or authorization of the
issuing bank. Confirmation means definite undertaking of the confirming bank
to honour or negotiate a complying presentation.
3. Negotiable LC: An LC is known as negotiable if it states that the credit shall
be available by negotiation. Negotiation means the purchase by the nominated
bank of drafts or the documents under a complying presentation, by advancing
or agreeing to advance funds to the beneficiary on or before banking day on
which reimbursement is due to the nominated banks

4. Revolving LC: It is one which provides for the renewal of the

amount of the credit without any amendments to the letter of
credit in relation to a given time period or a given amount. It may
be revocable or irrevocable
5. Red clause & green clause: A red clause LC is a kind which
enables the confirming bank or the nominated bank o advance to
the beneficiary even before the presentation of the documents.
Green clause LC it provides for the credit given to the exporter to
cover the period of storage of goods T the seaport.
6. Transferable LC: This means that LC is specifically
transferable.

UCPDC Norms
The uniform Customs & Practice for Documentary
credits (UPC) is a set of rules on the issuances & the
use of letter of credit. The UPC is utilized by banker
& commercial parties in more than 175 countries in
trade finance. Some 11-15% of international trade
utilizes letter of credit, totaling over a trillion dollars
each year.
The commercial parties, particularly banks, have
developed the techniques & methods for handling
letters of credit in international trade finance. This
practice has been standardized by ICC by publishing
UCP in 1933 & updating throughout the year.

 The result is the most successful

international attempt at unifying
rules ever, as the UCP has
substantially universal effect.
The 39 articles of UCP 600 are a
comprehensive & practical working
aid to bankers, lawyers, importers &
exporter

Major clauses of UCPDC

Major clauses under UCPDC are as follows:
Application of UCPDC (article 1):
1. If the documentary credit is to be subject to the UCP, this
fact must now be explicitly stated in the text of the
documentary credit
2. If a specific articles is to be excluded, it must be so noted
in the text of the documentary credit.
Definition & Interpretation (article 2,3)
1. A summary of definitions of key terms ( e.g negotiations),
interpretations & clauses is contained in article 2,3.
2. Revocable letters of credit are no longer listed. Therefore
a documentary credit should be considered irrevocable
unless otherwise noted

 Availability (article 6): Every documentary credit must state

the bank with which it is available or whether it is available
with at any bank.
Nominations ( article 12): By nominating a bank to accept a
draft or incur a deffered payment undertaking, the issuing bank
expressly authorizes the nominated bank to prepay the draft
accepted or deffered payment undertaking to discount it to the
beneficiary.

Standard for examination of documentation

( article 14):
1.The amount of time banks have to examine documents
has been reduced to five banks working days following
the day of receipt of the documents.
2. If the document contain a shipper/consignor field, a
party other than the beneficiary may be listed

 Multimodal or sea Transport documents ( article

19,20,21,22) : If the transport documents is signed by an
agent for or on behalf of the master :, the name of the
master does not need to be listed. The term multimodal
transport document & marine bill of lading have
been replaced by the terms transport documents
covering at least two different modes of transport &
bill of lading.
Air transport documents( article 23): If the air waybill
has a specific notation indicating the actual date of
shipment, this date is considered the date of shipment,
even if such a notation was not required in the
documentary credit.in all other cases, the date of
insurance will be considered to be date of shipment.