International Trade
A sound knowledge of various points, such as an international sales contract, the purpose and relevance of the international commercial terms (Incoterms), common methods of payment in international trade, and the role of the bill of lading in international transport, is an essential requirement for one to participate in the freight market.
Generally we are well aware of the following
UNDER CIF-Cost, Insurance and Freight, as paid to a specific place, say, “CIF Belgium”.
It is a contract based on the “discharge port”. The basic purpose of a CIF contract, is more related with the “sale of the documents pertaining to the goods”, rather than the “sale of goods”. This enables the negotiability of the “bill of lading”. Goods will cost more on CIF terms, than on FOB terms. Notwithstanding this, on account of the advantages of CIF as related to normal international sale of goods, in which the “documentary credit system” of the banks necessitates the transfer of the “title” of the goods by way of “passing of the documents”(including the bills of lading and certificate of insurance), the major volume of international seaborne cargo shipments are “CIF”.
The “seller” must:
Pay all costs, including marine insurance and freight for transporting the goods to the specified destination. As stated earlier, the risk passes from the “seller” to the “customer”, as soon as the goods cross the ship’s rail at the loading-port.
Supply the goods and execute a contract at his own expense, for the carriage of the goods to the mutually-agreed port of destination, by paying freight and charges for the loading/unloading. Since the freight is paid by the “seller”, the bill of lading is usually marked as, “freight Pre-paid”. The Master is to make sure that the freight has been paid, before he signs the bill of lading.
Arrange at his own expense, a marine insurance cover with respect to the goods, against the “risk of carriage” for the (CIF-price + 10%). War risks insurance cover as required by the “customer”, needs to be arranged by the “seller”, but at the expense of the “customer”.
Provide the “customer” with clean, negotiable, bills of lading, an invoice (i.e. a list of goods sent or services provided, with a statement of the sum due for these), and, an insurance cover policy. If the bill of lading contains a reference to a charter-party, the “seller” must also provide a copy of the charter-party.
The ‘customer” must:
- Accept the documents when tendered by the “seller”.
- Pay the mutually-agreed “contract-price”.
- Bear all costs and charges, excluding freight, marine insurance cover and the unloading-costs unless included in the freight when collected by the carrier.
- Bear the risks during the voyage. However, the “title” of the goods is transferred when the documents are taken-up by the “customer”.
- Make the “seller” wholly responsible for arranging the “shipment”, which is an advantage of CIF to the “customer”. The “seller” is protected against loss or damage before payment by the insurance company.
UNDER FOB
Free on Board (as per the specified port of shipment), e.g. FOB Antwerp. This is advantageous when the cargo is of a typical type, say, oil, and size, such that the “customer” wishes to charter a particular vessel. The other case where this may be advantageous where foreign currency restrictions, compel an importer to use FOB, e.g. where government wants the importers to deploy national-flag vessels. The FOB contract is based on the “loading port”, so that the “customer” is free after loading to re-sell the goods, even while these are on the vessel. The FOB “invoice price” is lower than the CIF price.
The “seller” must:
- Supply the goods and documents, as stated in the contract of sale.
- Load the goods on board the vessel as specified by the buyer, at the mentioned port of shipment, within a stipulated period.
- Bear all costs and risks of the goods, until they have crossed the ship’s rails, at the specified port of shipment, in addition to the export charges, packing charges and taxes.
- Notify the “customer” when the loading of the goods have been completed.
- Give necessary information to the “customer” for him to arrange for insurance cover, failing which the risk stays-back with the “seller”.
The “customer” must:-
- Charter a vessel or reserve the necessary space on a vessel and notify the “seller” of the vessel’s name, loading berth and the dates of loading.
- Bear all costs, including the insurance which he ought to arrange, in addition to freight, right from the time the goods cross the vessel’s rails at the loading port, from where he is liable to pay the contract price.
- Pay the “seller” for providing the required documents, e.g. bills of lading. The “title” of the goods, does not pass to the buyer, until the shipment.
We are all aware that commercial ships are run by their owners for making earnings. This is achieved in moving goods by sea, from the “seller” of such goods to the “customer” (i.e. the buyer) interested to buy these goods. This process of buying/selling, invariably involves a number of entities in this “transaction-chain”, who are termed as Parties. Let us see, which are these prominent Parties, which are involved in this “transaction chain”.
The “seller” and the “customer”, are the Parties who get into a contract, agreeing on the “trade terms”, with each other for having the goods handed over to the appropriate entity. The “seller” may be either of the following:-
- The manufacturer of the goods;
- An agent of the manufacturer of these goods.
The trade-terms decide on the type of the shipping documents, which ought to be involved, e.g. bill of lading.
To the ship owner, the “shipper” (in some countries, the “shipper” is called the “consignor”) is the one who gets into the contract for carriage of the goods by sea and delivers the goods in the care of the “sea-carrier”. The “seller” could be engaging a “freight forwarder”, whose function is to perform the various steps which are involved with exporting the goods. It is quite possible that the “freight forwarder” who gets into the contract for carriage of the goods with the ship owner. In that case, the “freight forwarder” becomes the “de jure (i.e. legal) shipper”.
A “freight forwarder” is basically an “inter-link”, involved with liner-trades (i.e. either for ferrying passengers or cargo, on fixed-routes, with pre-advertised sailing schedules. Most liners are container-ships, ro-ro or multi-purpose vessels. The ship’s operator may be the owners or the bare-boat charterers or time charterers), who arranges the export of another Party’s goods, by land, sea or air, and forwards the goods onto the care of the “sea-carrier”. The functions of “freight forwarders” include:-
- Advise on routeing of the ship;
- Arranging, carriage of goods with a “sea-carrier”, involving activities like booking space, paying freight charges etc;
- Dealing with all customs activities, such as preparing customs documents, processing customs clearance of goods;
- Arranging the packaging and warehousing of goods before shipment;
- Arranging for the insurance of goods-in-transit.
A “sea-carrier” is a Party who gets into a contract with a “shipper” for the transportation of the goods by sea. A “consignee” is the entity to whom the goods are “consigned” or, sent by the shipper. The consignee can always be the “buyer” of the goods, or a Party acting as an “import agent” for the buyer. The “receiver” is the Party who takes delivery of the goods from the “sea-carrier” at the port of delivery of such goods. Although a few consignees may take direct delivery of the goods from the “sea-carrier”, it is common for consignees in the liner-trades to employ an agent, e.g. a “freight forwarder” to perform the duties of a “clearing agent” as required for the customs and for allied formalities related to the importing of goods and transporting them to their ultimate destination. In case there is reason for suspicion (i.e. say due to loss or damage of such goods) in the condition of the goods that have been discharged from the “sea-carrier”, it is the “receiver” which informs the “sea-carrier”. Most “bills of lading” and “seaway bills” contain a terminology called, “notify party”. The “notify party”, is the entity which must be intimated by the “sea-carrier” of, the ship’s arrival, so that collection of the goods can be arranged. This may be the consignee or the receiver. Needless to state, when payment for the goods is made by means of a “Letter of Credit” (LC), the relevant “bank(s)” will automatically become an inextricable link with the “transaction chain”.
The following entities are important in determining the passage of transportation of goods by sea:-
- The “seller” of the goods
- The “customer” of the goods
- The involved “bankers”
- The “cargo insurers”
- All the “carriers” involved in the full journey of the goods
The other important factor is to determine with precision, when the “right to ownership” and “risk of loss or damage”, passes on from the “seller” to the “customer”. This will enable the determining of the respective obligations, rights and liabilities of each entity, such that the scope for any disputes can be avoided. The terminology related to the trade in question ought to reflect the obligations of the seller and buyer, related to the delivery of the goods (including the allocated functions, costs and risks) and so indicated in the “contract of sale”.
In this regard, INCOTERMS, which are basically a set of terminology published by the “International Chamber of Commerce”, so that when these are used in the “international trade contracts” (i.e. defining the key parts of freight forwarding), there is no scope for misinterpretation or controversies.
In general, 13 INCOTERMS are laid-down, arranged in 4 groups E, F, C and D, delineating the seller’s basic obligations, as seen below:-
- E: goods are to be made available to the “customer”, at the premises of the “seller”;
- F: the “seller” and the “customer” must agree to the goods being delivered to a carrier, as appointed by the “customer”;
- C: the “seller” must contract for the carriage of the goods, without bearing the risk of loss of, or damage to the goods, or additional costs, following the shipment; and,
- D: the “seller” is bound to bear all the costs and risks involved in bringing the goods to their specified destination (i.e. upto the point of delivery).
Note: For E, F and C: the risk of loss or damage during transportation, is that of the “customer’s”. However, for “D”, the “seller” bears all the risks, upto the point of delivery.
