#How to Draft International Sales Contracts# By SN Panigrahi,
Essenpee Business Solutions,
International Sales Contract,
Essentials Elements of a Valid Contract,
Export Contract,
UNIDROIT Principles of International Commercial Contracts,
ITC MODEL CONTRACT FOR THE INTERNATIONAL COMMERCIAL SALE OF GOODS
2. 2
SN Panigrahi is a Versatile Practitioner, Strategist, Energetic Coach, Learning Enabler.
He is an International-Corporate Trainer, Mentor & Author – PMP Trainer
He has diverse experience and expertise in Project Management, Contract
Management, Supply Chain Management, Procurement, Strategic Sourcing,
Global Sourcing, Logistics, Exports & Imports, Indirect Taxes – GST etc.
He had done more than 150 Workshops on above
Published more than 500 Articles; More than 60 YouTube
Presentations & More than 70 SlideShares
He is an Engineer + MBA +PGD ISO 9000 / TQM with around 29 Yrs of
Experience
He is a certified PMP® from PMI (USA) and become PMI India Champion
Also a Certified Lean Six Sigma Green Belt from Exemplar Global
Trained in COD for 31/2 Yrs. on Strategy & Leadership
GST Certified – MSME – Tech. Dev. Centre (Govt of India Organization)
ZED Consultant – Certified by QCI – MSME (Govt of India Organization)
Member Board of Studies, IIMM
Co-Chairman, Indirect Tax Committee, FTAPCCI
Empanelled Faculty in NI MSME
He has shared his domain expertise in various forums as a speaker & presented a number of papers in various national and
international public forums and received a number of awards for his writings and contribution to business thoughts.
SN Panigrahi
9652571117
snpanigrahi1963@gmail.com
Hyderabad
3. SN Panigrahi 3
Business tends to be more international than
ever. Commerce crosses borders not only within the
Country which guarantees free movement of goods and
services but often enough involves interacting with parties
outside the boarders and vice versa.
The export contract is used for the international sale of
certain products (industrial supplies, raw materials,
manufactured goods), which are projected for use for
Manufacturing, resale, where the buyer is a
trader, importer, distributor or wholesaler that will sell the
products to another company or merchant.
Though it is common practice to export products based
a proforma invoice or quotation received from exporters, it
is a safe practice to use written and legal export contracts.
Drafting of international trade contracts requires the ability
to network with professionals in other jurisdictions to
ensure that the contract is binding for all the parties doing
commerce with each other in different countries.
4. . .
International contracts refers to a legally binding agreement between parties, based in different
countries, in which they are obligated to do or not do certain things.
International contracts may be written in a formal way. Most businesses create contracts in writing to make
the terms of agreement clear, often seeking legal counsel when drafting important contracts.
Contracts can cover all aspects of international trade, although the most commonly used are:
•International sale contract.
•International distribution contract.
•International agency Contract.
•International sales representative contract.
•International supply contract.
•International manufacturing
contact.
•International services contract.
•International strategic
alliance contract.
•International joint contract.
•International franchise contract.
5. 5
CONTRACT
AGREEMENT
(meeting of the minds )
+
=
ENFORCEABLE BY LAW
Competent To Contract
Free Consent
Lawful Object
Lawful Consideration
Not Void
PROMISOR /
OFFEROR /
SELLER
PROMISEE /
OFFEREE /
BUYER
PROMISE / OFFER
ACCEPTANCE
Mutuality of Obligation
LEGAL OBLIGATIONS
LegalRelationship
LegalRelationship
Acknowledgment
6. SN Panigrahi
6
a) a Promise / an Offer;
b) an Acceptance of that offer which results in a meeting of the minds (agreement);
c) a Promise to Perform (Mutuality of Obligation);
d) a Valuable Consideration (which can be a promise or payment in some form);
e) a time or event when Performance must be made (meet commitments);
f) Definite Terms : Terms of the contract are reasonably certain;
g) Capacity : The parties must have competency and capacity in order to create a binding contract.
h) a written Instrument.
i) Legal Purpose: A contract must be for a legal purpose in order to be binding
j) Performance (as per agreement).
Some of the Features of a Contract
7. Essentials Elements of a Valid
Contract
1. Agreement.
2. Enforceability by law.
3. At least 2 parties.
4. Proposal.
5. Acceptance.
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6. Intention to legal
relations.
7. Free consent.
8. Contractual capacity.
9. Consideration.
10. Lawful objects.
11. Possibility of
performance.
8. 8
“All agreements are contracts if they are made by the free consent of
parties competent to contract, for a lawful consideration and with a lawful
object, and are not hereby expressly declared to be void”.
COMPETANT TO CONTRACT
FREE CONSENT
LAWFUL OBJECT
LAWFUL CONSIDERATION
And
NOT DECLARED AS VOID
According to The Indian Contract Act, 1872
It refers to the following five criteria’s to be a valid contract :
ALL CONTRACTS ARE
AGREEMENTS
ALL AGREEMENTS ARE NOT
CONTRACTS
9. 9
• of the Age of Majority (above 18 yrs of age)
• Of Sound Mind
• Not Disqualified by any Law
Competent
• Free from Coercion, Undue Influence
• Fraud, Misrepresentation or MistakeFree Consent
• Not Forbidden by law or Fraudulent
• Would not Defeat the provisions of any laws
• Involves or implies injury to the person or property of another
• Immoral or opposed to public policy
Lawful Object
• Not Unlawful
• Void agreements are not contractsNot Void
Contract : Explanation
10. 10
• Promise for a Promise - exchange of mutual promises
• A value that can be objectively determined
• Lawful consideration and with a lawful object.
• An agreement without consideration is void
Consideration
• Performance of contract' means fulfillment of the obligations by the
parties. The parties who make the contract must fulfill their obligations
according to the terms laid down in the contract
Performance
• In order to form a legally binding contract, the offer must contain definite
and certain terms – that means capable of readily understanding the
terms.
Definite Terms
• A valid contract must be capable of being performed, An agreement to
do an impossible act is void. If the act is legally or physically impossible to
perform, the agreement cannot be enforced by law.
Possibility of
Performance
Contract : Explanation
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Some of the Essential Elements of an Export Contract are:
Name and Addresses of the Parties Involved
Product Descriptions - Standards and Specifications – Quality Standards or Norms / Criteria.
Units of Measure in Mutually Agreed Term.
Price & Quantity - Total value. The total contract value in words and figures, and in a Specific Currency.
Terms of Delivery. Delivery terms, based on the Incoterms.
Part-shipment, Trans-shipment and Consolidation of Cargo. State whether the parties to the contract have agreed on part-
shipment or trans-shipment. Indicate the port of trans-shipment and the number, if any, of partial shipments agreed. If the
goods are likely to be shipped under a "consolidation of export cargos" scheme, mention this in the contract.
Terms of Payment. Amount, Mode and Currency. Also Specify Discounts and Commissions if any
Inspection. State the nature, manner and focus of the envisaged inspection, as well as the inspection agency. A number of
goods are now subject to pre-shipment inspection by designated agencies, and foreign buyers may stipulate their own
inspection agencies and conditions for inspection.
Packaging, Labelling and Marking. Note all packaging, labelling and marking requirements in the contract.
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Some of the Essential Elements of an Export Contract are:
Documentary Requirements. Documents needed for international trade transactions.
Special Documents Required by the nature of the goods, and conditions of sale (e.g., certain engineering goods may involve
documents relating to construction, repair and maintenance).
Licences and Permits. State whether the export transaction will require any export or import licences, and whose responsibility and
expense it will be to obtain them. Import licences may be difficult to obtain in the buyer's country.
Common Export Documents include the bill of exchange; Commercial Invoice & Packing List; Bill of Lading or Airway Bill; Insurance Policy etc.
Product Guarantee. Fix and specify the length of the period of guarantee.
Delay in Delivery. Damages due to the importer from the exporter in the event of late delivery owing to reasons other that force majeure.
Insurance: A contract should provide for the insurance of goods against loss, damage or destruction during transportation.
Force Majeure. Provisions in the contract defining circumstances that would relieve partners of their liability for non-performance of the
contract.
Applicable Law – Language & Jurisdiction. The law of the country that is to govern the contract.
Remedial Action. As defaults in contractual obligations by any of the parties can occur, it is always advisable to include in the sale or
purchase contract certain specific remedial actions. These remedial actions should reflect the mandatory provisions of the law
applicable to the contract.
Arbitration Clause to facilitate amicable and quick settlement of disputes or differences that may arise between the parties.
Signature of the Parties. The signing of the contract indicates the agreement of both parties to the terms and conditions of the contract.
Cont………….
13. . .
International contracts
In international trade, the UNIDROIT Principles establishes general Rules
Applicable to Commercial Contracts.
They shall be applied when the parties have agreed that their contract be
governed by them.
They also may be applied when the Parties have not chosen any law to govern
their contract.
In other cases they may be used to interpret or supplement domestic law.
Models of International Contracts in several languages available.
14. . .
UNIDROIT
The Institute for the Unification of Private Law is an international governmental
organization headquartered in Rome whose tasks are to study needs and methods
for modernising, harmonising and coordinating private and in particular commercial
law as between States and groups of States and to formulate uniform law instruments,
principles and rules to achieve those objectives.
Membership of UNIDROIT is restricted to States acceding to the UNIDROIT Statute.
UNIDROIT’s 63 member States are drawn from the five continents and represent a
variety of different legal, economic and political systems as well as different cultural
backgrounds.
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UNIDROIT Principles of International Commercial Contracts (UPICC)
UNIDROIT has worked extensively in the area of contract law and
adopted a variety of instruments intended to offer harmonized and
effective rules to respond to the evolving needs of modern transactions.
The UNIDROIT Principles of International Commercial Contracts (UPICC)
constitute a non-binding codification or “restatement” of the general part of
international contract law, adapted to the special requirements of modern
international commercial practice.
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Model Clauses for the Use of the
UNIDROIT Principles of International Commercial Contracts
INTRODUCTION
1. The UNIDROIT Principles of International Commercial Contracts
(hereinafter “the UNIDROIT Principles”), first published in 1994, with a
second edition in 2004, a third in 2010 and now in their fourth (2016)
edition (hereinafter “UNIDROIT Principles 2016”), represent a non-
binding codification or “restatement” of the general part of international
contract law.
17. SN Panigrahi 17
The Model Clauses are divided into four categories according to whether their purpose is
(i) to choose the UNIDROIT Principles as the rules of law governing the contract (see Model
Clauses No. 1, infra p. 4 et seq.),
(ii) to incorporate the UNIDROIT Principles as terms of the contract (see Model Clause No.
2, infra p. 14 et seq.),
(iii) to refer to the UNIDROIT Principles to interpret and supplement the CISG when the latter is
chosen by the parties (see Model Clauses No. 3, infra p. 16 et seq.), or
(iv) to refer to the UNIDROIT Principles to interpret and supplement the applicable domestic
law, including any international uniform law instrument incorporated into that law (see Model
Clauses No. 4, infra p. 20 et seq.).
18. . .
Terms and Conditions (T & Cs)
The terms and conditions that detail the rules that apply to
fulfilling a particular contract and that form an integral part of that
contract.
Buyers and sellers must agree the terms and conditions to form a
contract. In international trade are also know as General
Conditions of International Sale.
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General conditions of international sale
It is a document that details the general conditions that a seller (exporter) offers to a buyer (importer) for
the supplying of goods or for rendering a service. It is usually used for repetitive sales or for sales with a
medium or small amount of money.
This document must include the most important aspects of the international sale, such as:
a description of goods,
price and payment conditions,
delivery conditions (Incoterms), etc.
It can also include some other specific conditions, typical of contracts, like
retention of title of property,
delivery and risk transfer or
the applicable law.
The general conditions are usually attached to the commercial offer or can also be provided in the
purchase order overleaf.
ITC MODEL CONTRACT FOR THE INTERNATIONAL COMMERCIAL SALE OF GOODS (SHORT VERSION) can be
Viewed @
file:///G:/SNP%20Desk/GST%20Street%20-%20Export%20Import%20Course/SNP%20Presentations%20-
%20Export%20&%20Import/International%20Contracts/ITC%20Model%20International%20Contracts%20Sale%20of
%20Goods.pdf
20. 20
International Contract
Seller
Exporter
Buyer
Importer
Payment Terms
Required Documents
Quality Standards / Performance
Parameters / Criteria for Acceptance
Pre-Shipment Inspection - Third Party
Certifications
Non-Performance / Non-Confirmity of
Goods – Claims / Return of Goods
Pre-amble : Parties to a Contract
Effective Date
Description / Scope of Work / Goods Sold
– Specifications / Standards / Qty - UoM
Contract Price : Validity & Price Variance
Clause; Taxes & Various other Levies
Delivery Schedules / Shipment Terms -
Incoterms
Packing – Labeling - Markings
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Pricing and costing are two different things and an exporter should not confuse
between the two – of course one influence the other.
Cost is typically the expense incurred for a product or service being sold by a
company. The amount of cost it takes to Produce / Purchase and Deliver a Product
can have a direct impact on both the price of the product and the profit earned from
its sale.
Price is what an exporter offer to a customer on particular products. Price is the
amount a customer is willing to pay for a product or service.
The difference between the price paid and the costs incurred is the profit. If a
customer paid $10 for an item that cost $6 to produce and sell, the company
earned $4 in profit.
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Export pricing is the most important factor in for promoting export and facing international
trade competition. It is important for the exporter to keep the prices down keeping in mind all
export benefits and expenses.
However, there is no fixed formula for successful export pricing and is differ from exporter to
exporter depending upon whether the exporter is a merchant exporter or a manufacturer
exporter or exporting through a canalising agency.
26. 26
Cost
Demand
Competition – Target Pricing
Product Differentiation and Brand Image
Country / Region Specific
Nature & Volume / Frequency of
Purchases
Quality and Price Relationship
Early Delivery Schedule
Company Policies and Marketing Mix
Export Strategy - Differential Pricing
Strategy
Exchange and Inflation Rate
Objectives of the Firm – Profit
Maximization / Market Share
International Business Risk Factors
Government Policies – Incentives &
Restrictions – Taxes & Duties
Special Offers / Unique Deliverables or
Value to Customers – After Sales Service
Innovative / Technological Advanced /
Unique / New Product - Patented
Pricing of goods to be exported depends on several factors. The demand for exported goods in the
international market, competitive environment, Promotions & Regulations of the Government etc
should also be evaluated by the exporters besides manufacturing / purchase costs.
27. . .
Identify Cost Elements
Know the Type &
Nature of Costs
Know INCOTERMS –
Payment Terms –
Exchange Risk & other
Cost Exposures
Collect Cost Details &
Budget Costs
Measure Costs – Cost
Matrix
Audit :
Budget Vs Actual
& Take Corrective
Measures
Lesions Learned
Measures to Minimize
Costs
Engage with all
the Stakeholders
Prior to Shipment
& Ensure Proper
Costing,
Documentation &
Avoid Mistakes
Export Costing
Model
29. SN Panigrahi 29
Exports have played a pivotal role in the growth of the Indian economy. It contributes 16
per cent to GDP, therefore, it has become imperative that there should be a focus on not
only increasing exports base but also improving their export competitiveness in the world
market.
A key factor hindering export competitiveness has been the high transaction cost involved
in exports.
Transaction cost related to trade involves a host of Explicit and Implicit costs associated
with Enforcement of Legislation, Regulatory Requirements, Procedures and
Compliance Measures and administration of trade policies involving several
agencies such as customs, airport and port authorities, banks, trade ministry etc;
besides infrastructure-related cost - including Transport Cost to bring product to
the border, Time and Money Spent in Ports on border procedures, International
Transportation Costs and Communication Costs. Along with this, Documentation has
become an additional burden.
30. SN Panigrahi 30
The Government policies in respect of imports and exports must be taken into account while
fixing prices. The importing as well as exporting countries’ governments play an important
role in export pricing.
The Government may influence the price by:
Controlling Export Price (Minimum Export Price)
Export Promotion / Incentive Schemes
Customs Duties & Taxes
International Agreements (FTAs / PTAs)
32. 32
Export
Pricing
Methods
Cost
Based
Pricing
Cost Plus Method
Markup Method
Marginal Costing Method
Differential Costing Method
Market
Oriented
Pricing
Demand Based Costing
Market Penetration Pricing
Competition Based Pricing
Niche Market Pricing
Skimming Pricing
Differentiation Pricing
Bundle Pricing
33. 33
EXW
(Ex-Works) Price
Product Costs
Manufacturing / Purchase Cost + Modification Costs + Export
Packing & Labeling + Marking Cases + Strapping + Administration
Cost + Domestic Financing (-) Taxes Refunded
Cost of Sales and Promotion
Travel Expenses + Participation in Exhibitions / Trade Fairs +
Promotional Activities + Communications + Legal & Negotiation
Expenses + Export Sales Commissions (if any)
Documentation & Other Misc. Expenses
Documentation + Pre-Shipment Inspection & Third Party
Certifications (if any) + Licences / Authorizations / Permissions
Profit
Banking & Financial : Cost of Credit
Engage with all
the Stakeholders
Prior to Shipment
& Ensure Proper
Costing,
Documentation &
Avoid Mistakes
34. 34
EXW
(Ex-Works Price)
=
FOB Price
+
Loading on to Carrier +
Inland Transport & Insurance
(From Your Location to Delivery @
Port of Loading; Insurance if
Required) +
Un-Loading @ Port +
Cost of Documentation &
Certificates if any +
Port (Loading Port) Charges
(Including Demurrage & Storage) +
THC & Wharfage & Charges of
Loading into Vessel+
Other Shipping & Forwarding &
CHA Charges +
Customs Clearing Charges (@
Loading Port)
35. 35
EXW
(Ex-Works Price)
FOB Price
Inland Transportation
Costs till Port of Loading &
Port & Shipping &
Customs Clearance
(Loading Port) Charges
FOB Price CNF PriceOcean Freight
CNF Price CIF PriceInsurance
36. SN Panigrahi 36
Functions of Packing
Containment of the Product to Ensure Integrity and Safety
Protection of the Product from Physical Damage
Convenience of Use and Ease of Handling by Users
Compliance to Legal and Regulatory Requirements
Communication of Information
Environmental Acceptability and Ease of Disposal and/or Recycling
37. SN Panigrahi 37
Handling and
Ergonomics
Material Handling Guidelines
Acceptable Loads
Handholds
Fastener Packaging
Unique Packaging Requirements
Recommended Practices
38. SN Panigrahi 38
Recommended
Practices
Minimum Packaging Requirements
Packaging Design Reviews
Packaging Reduction
Packaging Reusability
Packaging for Recyclability
Incorporation of Recycled Materials
39. SN Panigrahi 39
Like packaging, labeling should also be done with extra care. It is also important for an exporter to be
familiar with all kinds of sign and symbols and should also maintain all the nationally and internationally
standers while using these symbols. Labelling should be in English, and words indicating country of origin
should be as large and as prominent as any other English wording on the package or label.
Labelling on product provides the following important information:
Shipper’s Mark
Country of Origin
Weight Marking (in pounds and in kilograms)
Number of Packages and Size of Cases (in inches and centimeters)
Handling Marks (international pictorial symbols)
Cautionary markings, such as "This Side Up."
Port of Entry
Labels for Hazardous Materials
Labelling of a product also provides information like how to use, transport, recycle, or dispose of the
package or product. With pharmaceuticals, food, medical, and chemical products, some types of
information are required by governments.
Export Labelling
40. 40
Labelling Requirements
Label Concept - Specific Markings and Labeling
Shipper’s Mark
Country of Origin
Weight Marking
Number of Packages and Size of Cases
Handling Marks (i.e., International Pictorial Symbols)
Cautionary markings, such as “This Side Up” or “Use No Hooks” (in English and in the language of the destination country)
Port of Entry / Destination
Cautionary markings, such as “This Side Up” or “Use No Hooks” (in English and in the language of the destination country)
Port of entry
Labels for hazardous materials (i.e., universal symbols adopted by the International Air Transport Association and the International Maritime
Organization)
Ingredients (if applicable, also included in the language of the destination country)
41. SN Panigrahi 41
On 1 January 2019, the new German Packaging Act (“GPA”) enters into force, replacing the German Packaging Regulation from 1998 (“GPR”). The GPA
obliges more producers and distributors – including online retailers – to register and participate in a disposal and recycling system.
Most important: Without proper registration, producers or retailers must not offer the packaging – nor therefore the
products contained therein – for sale – in Germany, including via e-commerce (sec. 9 para. 5). Moreover, the authorities
may impose fines up to EUR 200.000,00 (sec. 34 para. 1 and 2) on producers and retailers, including importers.
Furthermore, competitors and consumer associations can claim from producers and retailers to cease and desist from any sales (as decided for non-compliance
with the previous GPR by the Higher Regional Court of Hamm on 17.10.2006, Case No. 4 U 92/06). In addition, authorities may confiscate the proceeds (sec.
10 Unfair Competition Act).
The GPA introduces several new changes, among which there is the obligation, under certain circumstances, to register on the online database of the newly
established foundation “Zentrale Stelle” – subject to the supervision of the German Federal Environmental Agency, the Umweltbundesamt – in order to be entitled
to introduce new packaging items on the market.
Packaging items that require registration and licensing under the new GPA are sales packaging (“Verkaufsverpackungen”) and secondary packaging or
outer packaging (“Umverpackungen”) under two conditions: They
1.are filled with products, and
2.typically end up, after being used, as waste at (i) a private final consumer or (ii) equivalent places of waste generation (“gleichgestellte Anfallstellen”) –
such as
restaurants,
hotels,
canteens,
administrations,
hospitals,
educational , charitable or military institutions,
service stations etc. – all irrespective of the quantities of waste generated there
smaller craft and agricultural businesses – if the packaging waste produced is collected in separate waste containers for paper, cardboard and board, as
well as plastic, metallic and composite packaging not exceeding 1,100 litres each and subject to disposal at a conventional household rate (instead of a
business-like rate).
These obligations generally also apply to online retailers – because the new GPA explicitly states that it also applies to shipping packaging: If their packaging
fulfils the conditions above, they must register their packaging and participate in a disposal and recycling system. This also applies to so-called secondary
packaging, in which packaged products are additionally packed. The Zentrale Stelle will provide guidance on how to interpret the GPA in form of a guideline and a
catalogue (listing, in its latest 2018 draft, 36 product groups for 417 products) – which, has yet, despite being announced for autumn 2018, not been published (cf.
the latest info on the consultation process).
New German Packaging Act (“GPA”)
42. SN Panigrahi 42
Practical Tips:
1.Producers and all other economic operators who market packaged products in Germany have to comply with the new law – even if
based abroad if they sell into Germany. The term “producer” is quite broad and includes importers and distributors putting the packaging into
circulation for the first time (sec. 3 para. 12 GPA).
2.Producers and retailers must not place packaging on the market if it is not registered or not properly registered though being subject to
registration. Non-compliance may result in severe consequences, including fines, damage claims and confiscation of profits.
3.The new German Packaging Act applies from 1 January 2019. It implements the EU Packaging Directive 94/62/EC (as did the previous
German Packaging Regulation). The new GPA aims at further raising the ecological standards and specific conditions for a well-functioning
competition among the companies participating in the dual system for waste disposal and recycling and a fair behaviour among all parties on
the market (thus developing the goals of the precedent GPR).
4.There is no transition period. Registration, if a new obligation not previously provided for under the GPR, must take place by 01.01.2019
at the latest. Producers, importers and retailers as all other economic operators concerned can easily register
online: https://lucid.verpackungsregister.org/
5.It is not aimed at raising import taxes however and would not impact the total landed costs calculations as such. For more detailed information on the new
Packaging Law (VerpackG), you may wish to consult:
6.In light of the definitions above, not requiring registration are, e.g., the following exceptions:
any export packaging that is not going to end up as waste in Germany;
large commercial packaging ending up as waste in the industry sector – i.e. not at private final consumers nor at equivalent places of
waste generation;
transport packaging aimed at facilitating the transportation but usually not passed on to the final consumer;
reusable packaging and sales packaging for pollutant-containing products.
7.Producers and retailers have to comply with several further laws on packaging and their labelling if selling products within packing in
the European Unio
44. 44
The new Incoterms 2020 have been published by the International Chamber of Commerce (ICC) and come
into force on 1 January 2020.
Who is responsible for dealing with each stage of the international journey.
Who is responsible for arranging Insurance, customs and payment of duties.
Who is responsible for organisation of freight and transportation, at origin and destination
Who is responsible for documentation and what documentation is required.
What are the main changes in Incoterms 2020?
There are seven (7) keys changes to the 2010 Incoterms, specifically:
DAT Incoterm changed to DPU
Change of insurance in CIP/CIF
Costs are clarified
Security in relation to transport is now clearly detailed
Provisions to allow for own transport rather than assuming 3rd party transport
FCA, FOB and Bills of Lading
Presentation and design is much more user friendly
45. 45
1. DAT Incoterm changed to DPU (Delivery at Place Unloaded)
Following on from several rounds of consultation, the Drafting Group made the choice of
removing the word ’terminal’ as it often caused confusion.
DAT required Delivery at Terminal (unloaded), however, following on from feedback to the
drafting committee, it was decided to change the term to DPU (Delivery at Place
Unloaded), to broadly cover ‘any place, whether covered or not’.
2. Insurance cover differs between CIF and CIP
Under CIF / CIP, the seller buys insurance for the buyer. In Incoterms® 2010, insurance is
required under clause C, but in Incoterms® 2020, CIP requires insurance complying with
Institute Cargo Clause (A) whereas CIF requires insurance under Clause C. Why?
Because Clause A covers a more comprehensive higher level of insurance (e.g. for the
manufactured goods), whereas a lower level of cover from Clause C would probably
apply to the commodities world.
46. 46
3. The Listing of Costs
All costs are now listed in the ‘Allocation of Costs’ sections for each rule, to avoid
confusions. Because the ordering of articles within the Incoterms 2020 rules have also
changed, these now appear in the A9/B9 section of each rule.
Costs were a big issue in the 2010 Incoterms®. Carriers often changed their pricing
structure to deal with add ons and sellers were often surprised by being back charged
terminal handling charges. The A9 sections in the Incoterms rules guide now collects
together the costs, with the principle aim of clearly stating the costs to each party.
4. Security Requirements
Cargo security has been particularly important since 9/11, and the 2020 rules now address
many of the security-related requirements that became so prevalent in the early part of this
century.
From a carriage requirements perspective, security related allocations have been added to
A4 and A7 of each Incoterms rule, and the necessary costs associated have been added to
A9/B9 (see 3).
47. 47
5. Own transport
Incoterms 2010 rules assumed that goods carried from the seller to the buyer were via a 3rd party.
Incoterms 2020 allows for own means of transport by the buyer in the FCA rules and by the seller in the D
rules.
6. FCA and Bills of lading
According to FCA, part B4, ‘The buyer must contract or arrange at its own cost for the carriage of the
goods’.
There is a gap in delivery between FCA and FOB. If you’re selling FCA, your delivery point is different to
FOB. The difference between FCA and FOB to the seller is a significant cost and risk. In the 2010
Incoterms rules, exporters of goods in containers were encouraged to use FCA, which seemed best for
both parties. However, many people were using FOB when they should’ve really been using FCA.
Why? Even sophisticated sellers said they wanted to use FOB, because a standard Letter of Credit
requires an onboard Bill of Lading to be presented. Therefore the sellers were often taking the risk and
using FOB instead, because they wanted to get paid under the LC. The Incoterms® 2020 FCA extra
provision now states that if the parties have so agreed, the buyer must instruct the carrier to issue to the
seller, at the buyers cost and risk, a transport document stating that the goods have been loaded (such as
a Bill of Lading with an on board notation).
7. Presentation and design
Incoterms® 2020 rules have much more extensive explanatory notes, with better diagrams, a different
structure for users and a reordering of rules to make delivery and risk more obvious. Maritime related rules
still haven’t changed and remain at the back of the rule book as they still might be used for bulk
commodities.
48. 48
What is ‘Effective date’ in Incoterms?
Despite an ‘effective’ date of the 1st January 2020, Incoterms 2020 can be used now. That said, after this
date, there is still no obligation to use Incoterms 2020.
So what does ‘Effective 1st January 2020’ actually mean? If you haven’t made it clear in your contract
which Incoterms version to refer to, or have a flexible contract which states that when the contract is
effective, the latest Incoterms® rules apply, then the 2020 rules will apply in these circumstances. That
said, it’s estimated that the Incoterms 2020 rules might take 1-2 years for the market to adopt.
3 tips on how to use Incoterms correctly:
Choose the right rule
Specify the place / port precisely
Incorporate them into the contract as well as the LC and invoice
50. Buyer Makes
Payment Before
the Good
Delivered.
No / Low Risk to
Exporter.
High Risk to
Importer
An open account transaction
is a sale where the goods
are shipped and delivered
before payment is due.
Obviously, this option is the
most advantageous for the
importer in terms of cash
flow and cost, but it is
consequently the highest
risk option for an exporter.
A Documentary Collection
(DC) is a transaction
whereby an exporter
entrusts collection of a
payment to the remitting
bank (i.e., exporter's bank),
which sends documents to a
collecting bank (i.e., importer's
bank), along with instructions
for payment.
An LC is a
commitment by a
bank on behalf of
the buyer that
payment will be made
to the exporter,
provided that the
terms and conditions
stated in the LC have
been met
SN Panigrahi
52. SN Panigrahi 52
How to Choose a Freight Forwarder / CHA
Know Your Needs
What to Look For : Experience Counts
Comparing Prices – Low Cost Alone not a Good Selection Criteria
53. SN Panigrahi 53
Freight Forwarders / CHA: Selection
About experience: About Pricing:
– How many years have you been in
business?
– How much experience do you have with my
specific type of cargo?
– How large is your network?
– What government licenses do you have?
– How is your network in my country?
– What accreditations do you have?
– How large is your staff?
– Will you bring in any partners to help you
deliver my shipment?
– What are the names of any partners that
you are bringing in?
– What is included in your rate?
– Do you have a volume discount, if so, how
does it work?
– How often do your rates change?
– Do I have to make a commitment to you to
get your best rates?
– How much do you charge for preparing
documents?
– How much is insurance, and what does it
protect me from?
– Can I eliminate services that I don’t need
for a price reduction?
– How quickly can you give me a quote?
– What costs will there be at the destination?
Questions To Ask Your Freight Forwarder / CHA
54. 54
Type of Risk Mitigation
Commercial Risks
Commercial risks refer to potential losses arising
from the trading partners or the market.
Adaptability of your Export Product in
Foreign Market
Your trading partner does not want to act
in accordance with the agreement.
You have differences in interpreting the
Trade Agreement.
Your Trading Partner not delivering as
Agreed.
Possible insolvency or unwillingness to
pay
Changes / Amendments in Export
Order, cancellation etc.
Changes in International Market that
are not anticipated before export
Adopt, Change & Modify According to Market /
Customer Requirements.
Ensure that the Trading Partners are Reliable
Enter into the Contract with Clear &
Unambiguous Terms with enough Safeguards.
55. 55
Type of Risk Mitigation
Country / Political Risks
A country's political circumstances may affect the
import and export regulations and consequently
Risks arise due to Political Situations
Sudden changes in monetary and currency
policies or export and import Regulations.
Wars and changes in political and economic
alliances.
Instability – Social unrest - Attitudes & Dispositions
towards business – society & government - Level
and type of legal standards & supportive
institutions - Government involvement
This is prevalent in those countries that may experience major
political instability, which could result in defaults on payments,
exchange transfer blockages, nationalisation or confiscation of
property.
Research the country of destination of its goods
and identify any associated risks
Up to some extent, political risks can be minimized
by updating the status of dealing country’s day to
day movements through communication.
The political risks under export import trade also
can be avoided by judicious selection of the
countries to which goods are exported or imported.
Insurance covering Credit Risks
56. SN Panigrahi 56
Type of Risk Mitigation
Currency Exchange Risk
This risk arises due to the change in
the value of currency – Depreciation
or Appreciation
Contracting to in Local Currency.
Entering into a Foreign Exchange Contract
through Bank - Hedging.
Offsetting Export receivables against Import
payables in the same currency by using a
Foreign Currency Account.
Where Pre / Post-Shipment Finance is provided
with a Foreign Currency Loan in the currency of
the transaction and Export receipts repay the
loan.
57. 57
Type of Risk Mitigation
Credit / Financial Risks
Once goods are sold on credit, risks arising in realizing the
sale proceeds are referred as credit risks.
Risk may arise due to Inability of the Foreign Buyers to Pay on
the due date – Customer Default
Political or Economic volatility
Alternatively, even if the overseas buyer makes the payment,
situations may change in the buyer’s country that the funds of
buyer do not reach the exporter.
An outbreak of war, civil war, coup or an insurrection may block or
delay the payment for goods exported. Whatever the reason may
be, if funds are not received, sufferer is finally, exporter.
Credit risk has assumed an alarming proportion on account of
large volumes in international business and sweeping changes in
political and economic conditions, globally.
Exchange Controls and Limitations
A customer's insolvency
The Identity of the Customer – Verify Credentials
Trading History of their Customer
Are the products being sold compatible with the
customer's normal business profile.
The usual period of credit offered in the customer's
country and the acceptable methods for payments.
In such a high risky situation, credit risk insurance
is of immense help to the exporters as well as
banks that finance the exporter
58. 58
Type of Risk Mitigation
Legal Risk
Differences in local laws can exist in
overseas countries, which may have an impact
in areas such as import procedures, taxation,
employment practices, currency dealings,
property rights, the protection of intellectual
property, agency/distributorship and other
related subjects
Obtaining advice from respected/reputable legal
practitioners in the target countries concerned is,
therefore, important in order to understand the legal
obligations for the company, before it starts to
export its products to the target country
59. SN Panigrahi 59
Type of Risk Mitigation
Delivery Risk
Delayed Delivery or Non-Delivery
Contractual Clauses for Penalizing Late Delivery
Linking Payment to Specific Delivery
Cargo Theft Risk
This is a growing areas of risk where the cost of
insurance cover is rising regularly because the
incidence of theft is also rising rapidly
Taking Proper Insurance
Understanding & Avoiding Risky Routes in
Transport
Logistics Risk
•Transport Risk – This risk is associated with the loss
of goods during transportation.
•Delivery Risk – This risk arises when the goods are
not delivered on time.
Right Selection of Shipping Line / Freight
Forwarders
60. SN Panigrahi 60
Whenever you look at new export customers and markets, there’s always a chance something could go wrong.
While you can’t completely eliminate that possibility, there are specific steps you can take to identify potential risks,
analyze and evaluate them, and take the proper precautions.
Customer due diligence, at its most basic level, involves verifying a customer’s identity and the business in
which they are involved, to a sufficient level of confidence.
Customer Due Diligence (CDD) information comprises the facts about a customer that should enable an
organisation to assess the extent to which the customer exposes it to a range of risks.
Identify bribery and corruption risks.
Measure country risk.
Measure business regulations.
Review fairness of trade.
Understand and manage bank risk.
Use industry and government resources.
Understand regulations and documentation requirements.
Import-Export Due Diligence: Assessing Country and Customer Risk
61. SN Panigrahi 61
A country's risk can generally be divided into two groups:
Economic Risks and
Political Risks.
Economic risks are associated with a country's financial condition and ability to repay its debts. For instance, a country
with a high Debt-to-GDP ratio may not be able to raise money as easy to support itself, which puts its domestic
economy at risk.
Political risks are associated with a country's politicians and the impact of their decisions on investments. For instance,
desperate politicians supporting nationalizations could pose a threat to Exporters in certain strategic industries.
The most common way that investors assess country risk is through sovereign ratings. By taking these quantitative and
qualitative factors into account, these agencies issue credit ratings for each country and give investors an easy way to
analyze country risk.
The three most-watched rating agencies are
Standard & Poor’s,
Moody's Investor Services, and
Fitch Ratings.
Country’s Risk
62. SN Panigrahi 62
Checklist & Other Tips
International investors can determine country risk using this simple three-step
process:
1.Check Sovereign Ratings: Look-up the country's sovereign ratings issued
by the S&P, Moody's, and Fitch to get a baseline look at the country's level of
risk.
2.Read the Latest: Search on Google News or other international news
aggregators for any economic news surrounding a country as a form of
qualitative research, or check public data sources like the International
Monetary Funds or World Bank.
3.Check the Specific Risk: Determine the specific Importers Risk by looking
at quantitative factors.
63. 63
Dun & Bradstreet www.dnb.co.in Risk & Business Credentials
Report
ICP (International Company
Profile)
www.icpcredit.com/companies/A12
0.asp-Credit
provide international credit status
reports, company profiles and
business information
CCM http://www.cnchemicals.com/ Desk Research, search the related
information about the supplier or
buyer, in China
Globexia http://globexia.com/commodity-
trade-consulting/due-diligence-
checks-in-nigeria/
Carry out in-depth due diligence
checks of organisations in Nigeria
for international buyers
