Lecture 9 Special Trade Terms in Export Sales

AGENDA: Introduction The special terms explained: Ex works Free Carrier FAS FOB CIF CIP DDP DDU etc.

Introduction Export transactions usually include trade terms that are not used in home trade To avoid misunderstandings with their buyers abroad, the seller should clearly define the terms used in contracts or he should provide in the contract that the law of his country governs the contracts Another method is to use the Incoterms or Intraterms, ex : c.i.f. New York (Incoterms 2000) When resolving disputes, Courts will usually interpret the contracts according to CISG (or similar) while the special terms according to Incoterms or Intraterms

Purchase price is due on delivery of the goods unless otherwise agreed Ex works (named place) 1. Ex Works means: The overseas buyer (or his agent) must collect the contract goods at the place where seller’s works, factory, warehouse or store are situated The buyer must arrange by himself the collection of goods by a land carrier to be conveyed to a sea port, airport of railhead, so the would be carried to the country of destination Insurance is also arranged by the buyer because he bears the risks of loss/damage during transportation Purchase price is due on delivery of the goods unless otherwise agreed

Ex works (named place) Packing costs are determined according to the terms of the contract between the parties. Under Inconterms: the seller is responsible, but the parties must indicate this in the contract When there are several premises where seller’s business is carried out, he must indicate an address Ex store = Ex warehouse and represent the place where goods are stored (on land). When the goods are stored on a lighter (a ship), this is a marine risk. Ex store also includes a particular kind of storage (ex. refrigerators) Under the CISG: seller must deliver the goods (art. 30), while the buyer must take delivery and pay (art. 53)

Free Carrier (named place) 2. Free Carrier means: The term is used when the goods are to be transported by a container (ship, rail or road) Seller’s obligations are to deliver the goods into the custody of the carrier at the named point (similar to f.o.b.); when no place is indicated, the risk passes in the place/range of places where the carrier should take the goods into charge (otherwise – at seller’s choice) The risk of loss/damage passes when at that point Buyer is liable if he fails to name a carrier, or the named carrier fails to take the goods into his charge when he is supposed to (according to Incoterms 2000)

F.A.S. (named port of shipment) 3. F.A.S. (free alongside ship) means: The seller must deliver the goods alongside the ship (it is also the moment when he no more bears the risk) The buyer must arrange and pay the ship (unless agreed otherwise) Delivery alongside ship implies that the goods, when placed in the possession of the carrier, are his responsibility, thus the actual loading is carrier’s responsibility, and the charges for this are covered by the buyer If the ship cannot enter the port (some ships are loaded outside the port due to their big size), the seller provides and pays for the lighters that carry the goods from port to the ship, unless “free on lighter” was provided in the contract (the moment when seller’s responsibility ends)

F.A.S. (named port of shipment) F.A.S. is frequently used when the buyer has a matching contract on c. & f. or c.i.f. terms (see further in the slides) Port rates fall due depending on the practice of the specific port: when it is f.a.s. London, it means the seller wants to conform to the rules of this port Dock dues are payable when the goods enter the docks. They, together with the warfage, porterage, lighterage and similar charged, are covered by the seller (in the absence of a contrary agreement or custom of the port). When the goods are to be delivered free to docks or delivery to docks, then the buyer has to pay these charges The seller must provide documents proving the delivery

F.O.B. (named port of shipment) 4. F.O.B. (free on board) means: The seller undertakes further responsibility: he must place the goods on board of the ship that has been named to him by the buyer The seller pays all charges related to placing the goods on board, while the buyer pays for the subsequent charges such as stowage of the goods in or on board ship, freight and marine insurance, unloading, import duties, consular fees and other fees related to the arrival of goods in the port of destination F.O.B. is used to calculate the goods that have been sold, thus the licensing authorities use this price to calculate the export value of the goods

F.O.B. (named port of shipment) In container transport F.O.B. is sometimes used as a general delivery term, but because it is confusing, “free carrier” should be used instead The liabilities of the parties depend on the usage prevailing in a particular trade or port: in Stockholm, when trading with wood products, the buyer pays for loading, therefore, f.o.b. Stockholm resembles to a f.a.s contract, however, when you see the f.o.b. provision, the starting point is that the parties wanted to use its established meaning, BUT, usually, the risk passes to the buyer once the goods have crossed ship’s rail The responsibilities of the parties in relation to payment of port rates, dock dues, wharfage, porterage and similar charges are the same as under the f.a.s. provision In the American understanding, f.o.b. means a general delivery term, thus: f.o.b. New York would mean delivery at that place

A. “Strict” or “classic” F.O.B. contract: Types of F.O.B. contracts A. “Strict” or “classic” F.O.B. contract: The buyer has to nominate a ship The seller places the goods on board, enters into a contract of carriage by sea with the carrier, but the contract is made for the account of the buyer The bill of lading (B/L) is given to the seller (showing him as consignor and to his order) and he transfers is to the buyer Marine insurance is arranged and paid by the buyer (he can ask the seller to do it for him)

Types of F.O.B. contracts B. F.O.B. “with additional services”: Shipping and insurance are arranged by the seller but for the buyer’s account The seller nominates the ship The seller enters a contract of carriage of goods by sea with the carrier, receives the B/L and transfers it to the buyer C. “Simple” F.O.B.: Buyer enters a contract with the carrier, nominates the ship B/L goes directly to the buyer Seller puts the goods on board !!! Remember: There a considerable legal differences between these 3 types of contracts! Why is this important? Read the cases on p. 20-21!!!!

F.O.B. Airport, free carrier (FCA airport) When air transport is involved, it is more appropriate to use the free carrier term The risk passes from the seller when the goods are handed to the carrier (normally this is the carrier’s transit shed at the airport). If something happens from this point, to the moment the goods are on the airplane, it is buyer’s responsibility and he should insure against that The seller must arrange the transportation, but for buyer’s account It is unusual for the seller to be responsible for the goods until they are lifted into the aircraft

C.I.F. (named port of destination) 5. C.I.F. (cost, insurance, freight) means: The most common type used in contracts where carriage by sea is involved From the point of view of the business, c.i.f. contract is not sale of goods themselves, but rather a sale of the documents relating to the goods Seller discharges his obligations in relation to delivery of goods once he entered the B/L covering the goods

C.I.F. (named port of destination) The buyer’s aim is to obtain as soon as possible the right of disposal of the goods so he could sell them or secure a bank advance on them. In case he wishes to take physical delivery, he should insure against loss/damage The seller’s aim is to accommodate the buyer by providing carriage and insurance cover The delivery of the shipping documents represents, in a business sense, the equivalent of the goods If c.i.f. landed, the costs of unloading, including warfage and lighterage are to be paid by the seller

C.I.F. (named port of destination) Documents that are shipped are: a clean B/L, a marine insurance policy, certificate covering unusual marine risks and the invoice The right to reject the documents is different from the right to reject the goods Seller’s responsibility ends when he deliver’s the goods to the port of shipment on board ship, the goods travels at buyer’s risk, although the seller pays the freight and the marine insurance Property does not pass to the buyer after shipment, while the risk is

C.I.F. (named port of destination) The buyer pays the import duties, consular fees, while the seller must obtain the export license Payment of the price becomes due when the documents conforming to the contract are tendered There are some variations that might alter the essence of a c.i.f. contract: if the intention of the parties is the actual delivery of the goods (this being an essential condition of performance) or no direct relation is created between the transferee and the carrier on one hand, and the insurer on the other

C. and F. (named port of destination) 6. C. and F. (cost and freight) means: The seller must arrange the carriage of goods at his expense, but not at his risk which ceases when he places the goods on board ship The buyer must pay for the insurance If the seller fails to give notice to the buyer so the latter could arrange the insurance, the goods travel at seller’s risk This type is adopted by exporters in cases when in some countries there are political reasons or there is a lack of foreign exchange, thus the importers must insure at home rather than to buy on c.i.f. terms C. and F. leads to an artificial division of the arrangements for insurance and freight, whereas the c.i.f. stipulation, like the f.o.b. clause provides a natural division of responsibilities of the exporter and the buyer

C.I.F. and c., c.i.f. and e., c.i.f. and c. and i. C.I.F. and C. means “cost, insurance, freight and commission” Commission is the exporter’s commission which he charges when acting as buying agent for the overseas buyers (ex. Export houses) B. C.I.F. and E. means “cost, insurance, freight and exchange” Exchange is ambiguous and it can mean banker’s commission or exchange rate fluctuations C.I.F. and C. and I. means “cost, insurance, freight and commission and interest” Used when exporting to distant places and there could take some time before the bill drawn on the customer abroad is settled

CIP (named place of destination) & CPT (named place of destination) 7. C.I.P. (carriage and insurance paid to) means: The seller pays the freight for the carriage of goods to the named destination The seller procures transport insurance against the risk of loss/damage The seller has contracts with the carrier and insurer The risk is transferred from the seller to the buyer when the goods are transferred to the first carrier 8. C.P.T. (carriage paid to) means: The seller is not obliged to procure insurance cover for the transport In rest, observations made above apply

Arrival, ex ship or delivered ex ship (DES) (named port of arrival) 9. D.E.S. means: The seller has to pay the freight or otherwise to release the carrier’s lien, while the buyer only has to pay the purchase price This differs from c.i.f. by the fact that the documents delivered do not stand in the place of goods and the goods must be delivered at the named port of delivery If the goods are lost, the buyer must not pay the purchase price The seller bears all the risks, therefore it is up to him to decide to insure or not the goods against risks The reference to particular ship is a part of the description of goods, therefore if the goods are not shipped on that ship, this can be a breach of a contract. The same applies to the date of arrival

DEQ (named port of destination), DAF (named point at frontier) 10. Ex quay, delivered ex quay (DES): Seller’s duties are the same as under the arrival term, but in addition, the seller accepts the responsibility pays for unloading charges, warfage, lighterage and porterage 11. Delivered at frontier (DAF): Term is used in the continental export trade where no sea or air carriage is involved, usually specifies not only the frontier, but also the exact point and the seller is not oblige to procure insurance

DDP & DDU (named place of destination in the country of importation) 12. Delivery Duty paid (DDP), Delivery duty unpaid (DDU): These terms are the best terms the buyer could obtain Goods travel at seller’s risk until placed at buyer’s disposal at the named place of destination D.D.P.: seller pays all the charge up to the delivery of the goods (import duties, inland carriage in buyer’s country) and must obtain an import license D.D.U.: buyer pays the costs of importing the goods and import license is not seller’s responsibility Buyer must pay only when the goods are delivered (unless agreed otherwise)