Sam Vaknin's Psychology, Philosophy, Economics and Foreign Affairs Web Sites. The Export Transaction and its Documents The Transaction Finding a market for the goods (market research) Selecting the marketing channels Negotiations Pricing Distribution channels Order Contract Commercial Invoice Commercial Invoice must include (minimum): Payment Terms Mode of Payment Division of Costs Details of Carrier Details of Receiving Party Details of Buyer Other Details For best results use the ECE (Economic Commission for Europe) Standard Commercial Invoice Packing List must include (minimum): Contents of the Packaging ( = of the shipment) If more than one package or outer and inner packing - all contents per each packing and per each package must be detailed separately Permits and Licenses Export licenses if needed Standards certificates Labeling Quality control certificates (highest is ISO, such as ISO-9002 or ISO-9000) Health and certificates Veterinary certificates Other permits, licenses and certificates Service Providers Marine Transport Air Transport Land Transport (lorry, train) Insurance Warehousing Banking and other Financial Services (factoring, forfeiting, etc. ) Airway Bill of Lading (ABL) (More details later - see appendices for samples) Holder of ABL does not own goods Air Transport Contract not effected - but ABL proof of existence of such contract, including weight, measurements, number of packages and invoice. Marine Bill of Lading (MBL) Proof of receipt of goods in a certain condition Proof of existence of transport contract MBL facilitates the transfer of ownership Negotiable, transferable and assignable Subject to the Hague conditions and MUST INCLUDE: Name and address of sender Port of loading and Port of discharge Date of lading and place of issuance of bill of lading Name of vessel and number of voyage Identity marks of cargo Description of goods - number of packing units, weight, volume Condition of goods - statement of carrier (if not stated - the goods are in good condition) "Clean on Board" not "Foul" Types of Bills of Lading (BL) Shipped BL - Goods are on deck of ship Received for Shipment - Prior to loading onto ship Direct BL - From origin to destination, transshipment not allowed Ocean Through BL - In case of transit involving a few carriers. In such a case, each carrier imposes its own conditions on each leg of the voyage and for the limited duration it handles the cargo. Pure Through BL - First carrier must transport from port of loading to a mid-point and is responsible for damages to the goods.

Combined Transport BL - Pure BL which covers shipment by all means of transport (sea, air, land). Forwarder BL - An agent's BL. Issued by an international forwarder. Freight Forwarder BL - BLs of the International Forwarders Association - FIAT A Types of Insurance Policies (IP) The IP is prepared by the insurance agent or the insurance company.

Open Time IP - One time IP, used in air / marine transport. Policy expires with the completion of the transport (with delivery). Open IP - Open or current policy used to insure a number of shipments. Payment of premium only for actual shipments.

Entails a declaration by the insured to the insurer pertaining to each and every shipment on a pre-determined basis (ad how, weekly, monthly and so on). The rights of the insured party are NOT effected if it BONA FIDE forgot or had no time to declare to the insurer as per above, or if it gave the insurer a declaration containing wrong information. The right declaration can be filed even after the goods are lost or delivered. Types of Certificates of Origin (CO) Required by the authorities as a basis for customs duties and taxes discounts or exemptions under trade agreements. Some destination require CO per each shipment. Others require CO only for specific goods.

Sometimes the buyer demands a CO. The exporter sends the CO to the buyer separately or with the goods. Issued by the Chamber of Commerce, or by the Customs, or by the exporter itself or by its forwarder in trust. EUR 1 - To the European Union FORM A - To the USA / NAFTA (the customs union of the USA, Canada and Mexico) CO Warehouse Receipt proves warehousing of goods in the port area. Needed prior to commencement of the release of the goods by the customs.

Orders Inquiry Indication / Quotation Order Firm Order Acceptance (the order becomes a contract by accepting it) Revolving Orders are considered contracts Order through an agent - identical to order issued directly by a buyer (Important: demand from the agent proof of agency or representation, such as a power of attorney) Should include: Price of Goods (including price ex factory, shipment / transport - freight costs, insurance, port taxes and expenses, other taxes, customs costs, forwarding costs, costs of issuing certificates, permits and licenses) IMPORTANT: Make sure WHO pays WHAT Specifications of Goods - Type of goods, quality, packing, number of units / quantity per package, packing sub-units IMPORTANT: Prepare a sample for the buyer - which will be WORSE than actually delivered goods. Quantity and Delivery Terms If it is an on-going (revolving) order - get from the buyer a projection of its purchases in the future. TIME OF DELIVERY IS CRITICAL! ! ! Mode and Method of Payment Transaction Documents Documents demanded by the authorities (permits, licenses, standards and quality certificates, veterinary certificates, health certificates, labeling, etc. ) Transaction documents (bill of lading, certificate of origin, commercial invoice and specifications, port and customs clearances, banking documents, etc.

) Packing, Freight and Insurance Define outer and inner packing and sub-packing (materials, shape, size) Quantities Measurements Quality IMPORTANT - Get freight offers from a few forwarders / carriers and make sure ALL the components are included in the price quoted! ! ! Remember: All costs, including the insurance premiums, are negotiable. USE an insurance agent or an insurance expert within your company. Insurance is a complicated subject and the insurance companies do their best not to pay on claims. Proforma Invoice (PI) Is actually an order and constructed as a commercial invoice - But a commercial invoice MUST be provided separately.

Seller sends PI in duplicate ( = 2 copies) Buyer signs one copy and returns it to seller Buyer can prepare order or PI on its letterhead and send it to seller Must include mode of payment Sale Contract Use in case of a complicated transaction, the provision of services (or of goods which contain a service element - for example, maintenance or training) Sole Distributorship Contract In case of doubt, use the ICC (international Chamber of Commerce) Model Contract (see appendix). A distributor BUYS the goods and distributes them through a network of sub-distributors. He participates in advertising, marketing and sale promotion of the products he distributes. In return, he gets exclusivity for a certain territory, for a prescribed period of time and under certain terms and conditions. He does not distribute competing products and he uses a brand name. An agent get a commission on sales generated through him - but does NOT buy the goods.

The Sole Distributorship contract MUST include: Definition of territory and products Commitment to act bona fide and with best efforts Roles of the distributor Non competition clause Distributorship and distribution channels Fairs, exhibitions, advertising, marketing and sales promotion Delivery terms and retail price list Sales plan and minimum sales obligations Sub-distributors and agents Information exchange Prices to distributor (distributor price list) Sales outside the territory Brand names and Trademarks - protection and allowed usage Inventories and spare parts levels, maintenance and service Exclusivity Direct sales (by the supplier in the territory of the distributor) Updates and upgrades Validity and Expiry of the contract Termination of the contract Compensation for damages in case of early termination of the contract Obligation to return documents and inventory to supplier in case of termination of the contract Agency Contract In case of doubt, use the ICC Model Contract (see appendix). A Del Credere Agent undertakes to compensate the producer / manufacturer if the buyers (clients) default. MUST include as a minimum: Appointment of the agent by the seller First right of refusal regarding new products Exclusion of OEM (sale to a third party which re brands the goods with his own brand) Type of clients the agent may sell to Exact geographical definition of the territory Exclusivity (or lack of it) Bona fide collaboration and commercial fairness The roles and functions of the agent Endorsement and adoption of orders concluded by the agent with buyers No competition clause Marketing, advertising, fairs and exhibitions Minimal sales targets Sub-agency Obligation to exchange information Financial arrangements (Del Credere, other) Trademarks and brand names Complaints of clients and buyers Right of seller to sell directly in territory of the agent Special clients / buyers Fees and commissions and formulas for their calculation Right of seller to reject business Expiry or termination date or absence thereof Survival clauses and unfinished business in case of termination of the contract II. The Process of Exporting Generalized Process of Export Order received Letter of Credit or other payment document opened Production and pre-export phases Preparation of documents (EUR 1, FORM A, specified invoice, licenses and permits, certificates of origin, etc.

) Instructions to forwarder and customs agent Checking the prices of freight, insurance and forwarding Commercial export (at the port facilities or customs terminal) Receipt of documents (bill of lading, confirmed certificate of origin, etc. ) Presentation of documents at the bank and their transfer to the buyer's bank Payment received The Phases of the Export Process Phase A - Decision Phase B - Preparations Phase C - Performance Phase D - Post shipment Phase A - DECISION Collect Information (internet, specialized databases, market research, meetings, travel, fairs and so on) Proforma Invoice Production, quantity, quality, delivery terms, licensing Price offer (firm offer) Sale or Supply Contract MAKE SURE THAT... You are allowed to export the goods (no export restrictions on your goods) Is there credit available for purchasing imported and domestically produced raw materials and parts - going into your exported goods? Can you honor the order? Do you have sufficient capacity, the right manpower, the needed financing? It is better to say no than to renege on a contract. Phase B - PREPARATIONS Import of raw materials / parts (imported or foreign inputs) Purchase of imported raw materials / parts in the local markets (domestic or local inputs) Financing the imports Financing the production Production Preparation of documentation Engaging customs agents and international forwarders Insurance Quality certification Export license Freight and transport arrangements Certificate of origin Consular confirmation Phase C - PERFORMANCE Forwarding instructions to the customs agent Packing Withdrawal by customs agent Preparation of invoice and specifications Preparation of VAT claim back Inspection of exported goods by authorities Warehousing at the port Custom clearance Inspection of exported goods by the client Port clearance Authorization to load Loading and release of documents Receipt of bill of lading Receipt of confirmed certificate of origin Receipt of other documents Phase D - Post Shipment Financing the documents ( = receiving payment) Presentation of documents in local bank Statistical registration Tax and port tax rebates (in some countries) Pricing the Exported Goods Fixed Costs (Overhead) - Administration, rent, accounting, amortization / depreciation, etc. Should be divided by man-hours or product units to determine their contribution to the costs. PLUS Variable Costs - Directly related to the production process.

Wages, raw materials, fuel, etc. Increases with increased production. Incoterms Costs - See Incoterms hereunder Transporting the goods from factory to export port or terminal Shipping the goods from export port or terminal to import port or terminal Transporting the goods from import port or terminal to buyer. III. Incoterms Incoterms Last determined by the ICC in 1994.

There is also a 1936 American version. Used by all parties to an international trade transaction: buyer, seller, banks, financial institutions, agents, forwarders, insurance companies, carriers, government authorities, lawyers and courts. See Appendix for detailed analyses of all 13 Incoterms EX (Ex Works) - Seller provides goods in his factory yard. Buyer is responsible for all the rest, including loading the goods onto trucks in the seller's yards. Best to add: "loaded upon departing vehicle." FCA (Free Carrier) - Seller provides export licenses, customs clearances and port documents to first carrier (determined by buyer) in an agreed location within the export country. Useful for Multi Modal Transport (MMT) in land, air, or sea.

Seller pays all port and customs inspection expenses. Seller's responsibility ends with delivery to carrier. Buyer pays all expenses from point of delivery (transport, insurance, special inspections). FAS (Free Alongside Ship) - Seller delivers goods to a loading quay, alongside a ship, in an agreed port in export country. Buyer obliged to clear goods for export after having received loading documents from seller. Buyer pays all port expenses and expenses related to required documentation.

Use only for marine freight. FOB (Free On Board) - Seller delivers customs-cleared goods with bill of lading, export license, all taxes and duties paid clean (unharmed) on board a vessel. Seller pays all expenses until goods are clean on board. Buyer determines carrier and pays the carriage (including loading expenses if part of the transport costs). Marine freight only. Best to add: "stowed and trimmed." Buyer must insure itself when using an "F" Incoterm.

CFR (Cost and Freight) - Seller pays all expenses and transport costs to port of discharge. But responsibility for damage or loss or additional expenses is buyer's after goods loaded and stowed under deck. Seller obtains customs and port clearances, licenses, contracts with the carrier and with the insurance company regarding transport of goods to the point of loading. Buyer must obtain the import licenses, release the goods in port of discharge, issue insurance and pay for transit and inspection of goods. Marine freight only. CIF (Cost, Insurance, Freight) - Seller arranges marine freight insurance for buyer and provides buyer with valid insurance policy in addition to obligations under CFR.

Unless otherwise agreed, seller buys a limited "C" policy. Best to add: "free out." It is important to mention the type of insurance and coverage sought by buyer. CPT (Carriage Paid To) - Similar to CFR but when MMT involved (car, train, ship and then airplane, for instance). Instead of On Board - use First Carrier.

CIP (Carriage and Insurance Paid To) - Similar to CIF but when MMT is involved. Responsibility reverts to buyer when goods delivered to First Carrier. DAF (Delivered At Frontier) - Seller to deliver export cleared goods at a precise point at the border of either import or export country. Buyer obliged to clear goods through customs terminal, to obtain import license and to bear all import related duties, fees and charges. Seller must inform buyer ETD (Expected Time of Delivery) and precise location of delivery. If preceded by international marine or air transport, point of delivery will follow the Main Carriage (used in train transport).

DES (Delivered Ex Ship) - Marine freight only. Seller must deliver export cleared goods to buyer on board a ship in port of discharge but has no responsibility to clear the goods for import in the destination country, to unload them and to ship them to final destination within the buyer's country. DEQ (Delivered Ex Quay) - Marine freight only. Seller must deliver goods buyer outside the quay after unloading them from the ship and clearing them for import through port authorities and customs. Seller pays import taxes and port expenses.

Seller must provide buyer with bill of lading and gate pass. Buyer must transport goods to his yards and if he does not must pay demurrage and warehousing. DDU (Delivered Duty Unpaid) - Seller must deliver goods to buyer in a location within the destination country but buyer must clear them for import through the port and customs authorities. Buyers must pay all taxes and expenses related to the clearance.

DDP (Delivered Duty Paid) - Seller must deliver goods directly to buyer's location (or to any other address) after having fully cleared them for import and fully paid all taxes and expenditures related to such clearance. Best to add: "DDP-VAT unpaid" in case seller does not agree to pay the VAT. IMPORTANT! ! ! The buyer and the seller must include all special conditions, not covered by the Incoterms - in their sale contract or order or commercial invoice. Even if you include an Incoterm in a contract it is advised, to remove doubt, to also include a detailed list of rights obligations of the parties ( = an agreed interpretation of the Incoterm). Always mention the version of Incoterms used (for instance: "FOB - Incoterms 1990"). The transfer of responsibility to the goods from seller to buyer does NOT constitute a transfer of title (ownership) to the goods.

There are Exit Contracts (seller delivers to buyer's carrier in country of origin of the goods and such a delivery ends the seller's responsibility) - All the Incoterms which start with the letters E, F and C. For example: CIF does NOT mean that the seller is responsible to deliver the goods in a port in the destination country - only that it has to pay for the voyage and for the insurance. There are Delivery Contracts (seller delivers to buyer in country of destination and is responsible to them until they are delivered there) - All the Incoterms, which start with the letter D. Insurance This is why insurance is critical (policy types A, B, or C). It must include: Location in which the policy becomes valid Location at which the policy expires Extensions to the basic policy Political risks Value of coverage and types of coverage (replacement value, damages, etc. ) Insurance of loss of profits The policy's currency Currency hedging Important - The buyer must provide full specifications of packing of goods If the parties use a C Incoterm, the buyer is usually responsible for costs associated with an inspection of the goods by the authorities of the country of origin (PSI - Pre Shipment Inspection).

If the buyer demands an inspection (quality and quantity controls) - it must be stated clearly who will bear the cost. If not specified - the buyer shall bear it. It is recommended to use FCA when goods are not delivered to the carrier on quay or on board. Buyer must arrange the transport and provide the seller with exact instructions.

"FOB Airport" should not be used. FOB is ONLY for marine transportation. For air transport use FCA. Incoterms in conjunction with Bill of Lading (BL) When CIF or CFR is used, use "on board BL" (goods have been loaded on board ship).

If goods shipped in containers, carrier may issue "Received for Shipment" (when he receives the goods and prior to their loading on board) - instead of BL. It is preferable to use CPT or CIP if BL not required to conclude the transaction. If goods arrive prior to original BL - they are delivered to buyer against a bank guarantee. Avoid it as it negates the function of the BL. Non Negotiable Waybills and Receipts If a waybill is non-negotiable, there is no need to present its original to obtain delivery of the goods. The following are non-negotiable: Liner Waybill Ocean Waybill Data Freight Receipt Cargo Key Receipt Sea Waybill All air waybills are non-negotiable.

Only the seller can instruct the carrier (not the buyer or his bank). Importers dislike non-negotiable waybills (unless explicitly stated that they are irrevocable). The names of the parties in the waybill must be irrevocable - otherwise, the seller can change them. BLs, Receipts and Waybills Let us call all waybills and receipts - as well as bills of lading - transport documents (TD).

TDs are delivered to the buyer or to the seller according to instructions given to the carrier (never mind who paid for the carriage). The seller might get them to prove delivery. The buyer needs them to release the goods (to instruct the carrier). TDs can be divisible (article A 8 of Incoterms) in case one TD covers goods deliverable to many buyers. Buyers responsible to release the goods and accept delivery - or to compensate seller for any damages.

Buyer is liable for damages to the goods after the transfer of responsibility from seller to buyer ("Price Risk"). It is recommended to use "Force Majeure" articles in sales contracts. Some countries oblige exporters and importers to insure the goods in their own countries (to minimize foreign exchange outlays). Rules of Use of Incoterms Use DEQ, DES, CIF, FOB and FAS only in marine carriage and for marine freight. Use CPT, CIP, FCA universally except if goods are in bulk of carried in chartered vessels.

Be clear: how are the goods to be transported, who has the obligation to have them loaded, who pays for what, who is responsible to clear the goods, to release them and to unload them and so on. Be clear: how much insurance you require and what type (A, B, C) What restrictions and special demands would you like to impose on the carriage and the carrier. Include "Force Majeure" and validity, expiry and termination clauses Indicate which Incoterms version is used (example: FOB-Incoterms 1990). The Incoterms CPT, CIP, CFR and CIF deal only with the transport aspect of the transaction - not with the transfer of responsibility or ownership. IV. Payment Payment Payments schedule (when? ) Payment mode or method of payment (how? ) Place of payment (where? ) Currency of payment (which? ) Payments Forms Advance payments (cash in advance) Open account credit Cash Against Documents (CAD) Documents for collection, Cash on Delivery (COD) Letter of Credit or Documentary Credit (L/C) General Principles of Payment If cash was paid in advance by buyer, seller will give buyer the documents, courier them to the buyer or airmail them (Captain Mail them).

COD - the carrier delivers the good against cash (collect). But in all other forms of payment: The carrier of the goods is hired by either the seller or the buyer to carry the goods, in accordance with instructions, to a destination. The seller sends the goods to a bank in geographical proximity to the final destination of the goods. The transport documents (bill of lading, waybill, receipt) are sent to that CONSIGNEE bank.

The consignee bank - having received the transport documents, the commercial invoice, the certificate of origin, the insurance policy and other documents, invites the buyer to buy (to redeem) these documents (with which he can get the goods). The buyer pays the bank and the bank endorses the bill of lading and instructs the carrier (if the BL is non-negotiable) to give the goods to the buyer. The buyer pays the carrier, presents the endorsed bill of lading and gets a delivery order with which the buyers releases the goods, having paid customs, duties, taxes and port expenses. He receives a gate pass which allows him to load the goods to his lorries and transport them to his yards. Open Account Either with big, reliable clients, or with agents, distributors, subsidiaries which maintain a consignment warehouse or a forward warehouse. Use Exchange Note - A financial instrument in which the seller instructs the buyer to pay his bank for the goods.

The buyer signs the note. Buyer's signature confirms receipt of the goods in good order and the buyer's debt. Exchange notes are transferable, negotiable, and assignable. It is a stand-alone document which does not refer to the underlying transaction.

It is recommended to date the exchange note (on its back) and thus transform it into a Time Note. Cash On Delivery (COD) Payment with delivery of goods. Exporters which maintain warehouses in destination countries - use COD. Payment can be in cash, deposit receipt, bank guarantee, bankers' acceptance. Be careful to receive payment only by your authorized representative. Cash Against Documents Contract Carriage of goods to port of discharge Documents (commercial invoice, bill of lading, insurance policy, certificate of origin) transferred by to seller's bank for collection Seller's bank (usually through carrier) transfers documents to buyer's bank Buyer's bank (the consignee) invites buyer to receive endorsed (ownership transferred to buyer) documents Buyer deposits payment (or arranges credit line) for the goods in his bank Goods delivered to buyer (using the endorsed documents) Buyer's bank transfers the payment to seller's bank Seller's bank credits seller's account with the payment minus fees and charges and commissions If bank endorses documents to buyer prior to receipt of payment - the bank assumes the buyer's obligation to pay.

CAD not to be used with branded or customized goods (buyer might refuse the goods and if they are branded or customized - they cannot be sold to another buyer). Banker's or Bank's Acceptance (Accept) Exporter can ask buyer to provide a bank draft. An acceptance stamp and signature on the draft ("Accept") transforms it into an obligation of the bank itself to pay, on a given date to bearer. Both Exchange Notes and Bankers' Acceptances are traded in special exchanges in the world. Letter of Credit and Documentary Credit A letter in which a bank undertakes to pay the exporter if and when the exporter meets certain terms and conditions enumerated within the L/C. The bank's commitment is usually irrevocable (the L/C should contain this word: "irrevocable" - although it is irrevocable even by default).

If the exporter fulfils all the conditions of the L/C - the bank will pay, regardless of the situation of the buyer. If the seller did not comply with the conditions in the L/C, the bank will pay only if buyer expressly agrees to it. IMPORTANT The letter of credit is only as good as the issuing bank Check: are the conditions of the L/C identical to the conditions specified in the sale contract, the commercial invoice or the order? UCP-500 These are the uniform rules of international payments determined by the ICC in Paris, France: Importer signs sales contract which includes prices, schedules of delivery and payment, types of packing, modes of carriage, volume, documents to be exchanged and more. Importer gets pro-forma invoice from exporter Based on the pro-forma invoice, Importer asks his bank to open letter of credit in favor of Exporter.

Importer instructs the opening bank which details to add to the L/C which are not included in the Sales Contract or in the pro-forma invoice. Such details may include: permission or prohibition of transit, transshipment, division of the L/C, part shipment, the number of copies of the documents, certificates of origin, the coverage amount of the insurance policy, should the policy be endorsed and so on. The bank uses its letter of credit form and incorporate all the terms and conditions of the sales contract in the letter of credit The Importer's bank send the details of the L/C to the Exporter's bank (the Correspondent Bank) The Correspondent Bank informs the Exporter that an L/C was opened in the Exporter's favor and conveys to the Exporter the details of the L/C Exporter compares the conditions of the L/C to the conditions of the sales contract and especially whether the Importer's Bank has irrevocably agreed to accept the Correspondent Bank's signature regarding the receipt of the documents Exporter consults his bank and others whether the Importer's bank is a prime, world bank of good standing Exporter makes sure the L/C is valid and corresponds to the timetables agreed with the Importer regarding both the delivery of the goods and payments. Another question: can the documents be negotiated or transferred within the term of the L/C? Can the Exporter accept all the restrictions and limitations of the L/C? Are there any impossible conditions (for instance, in contravention of the foreign exchange regime) or wrong details (name of a port which does not exist, etc.

) If the L/C is accepted by the Exporter, he starts production and manufacturing operations. When the goods are ready, Exporter contacts a carrier. After the goods are loaded, Exporter gets a bill of lading, a certificate of origin EUR 1 or FORM A signed by the Customs, an export list and other documents Exporter presents documents to his bank which checks whether all required documents have been presented and whether they comply with the conditions of the L/C. The correspondent bank then issues an ACCEPTANCE. The L/C then.