1.

Conduct of Transaction

The whole operation generally goes through four stages:

preparation for exporting,
business negotiation,
processing the sales contract,
settlement of disputes (if necessary).

1. Preparation for exporting

Before he starts an export transaction, an exporter has to acquire a good
knowledge of the foreign market. He must get to know whether his products
are marketable or not?
What about the competition there? What about the customers' credit and
financial standing of the foreign buyer or importer. What about the economic
and political situation of the importing count and so on. Besides, the exporter
must also make his business known to others abroad by advertising.
2. Business negotiation
Business negotiation plays an important roles in conducting an export
transaction. It usually consists of four links:
enquiry, offer, counter-offer and acceptance.
3. Processing the sales contract
Making the goods ready for shipment
examination and amendment of the L/C, booking shipping space, make
shipment customs formalities and insuring goods, bank negotiation.
4.Settlement of disputes(if any)

Quality & Quantity of Goods

The quality of the goods

The quality of the goods refers to the outward appearance and the
essential quality of the goods, such as shape, structure, colour, flavour, as
well as chemical composition, physical and mechanical property, biological
feature, etc. In international trade, the quality of the goods not only concerns
the value in use and the price of the goods, but also concerns the sales of the
goods and credit of the manufacture.
In international trade, the quality clause in the sales contract is the basis for
delivery of the goods. In case the quality of the goods is not in conformity with
the stipulation of the contract, the seller shall undertake the relevant legal
responsibility, the buyer is entitled to file a claim against the seller or even
cancel the contract.
Therefore in business negotiation and conclusion of the contract, the quality
clause shall be stipulated clearly.
A. Methods of Stipulating Quality of the Goods
In international trade, there are two ways to indicate the quality of the goods
either by description or by sample.
1. Sale by Description
In international business, most commodities are suitable to sale by description
which can be subdivided into four kinds.
1) Sale by specification, Grade or Standard:
The specification of the goods refers to certain main indicators which indicate
the quality of the goods, such as composition, content, purity, size, length,
etc.
The way of determining the quality of the goods by specification is called sale
by specification. Sale by specification is comparatively convenient and
accurate, so it is the most widely used method in international trade.
The grade of the goods refers to the classifications of the commodity of one
kind which is indicated by words, numbers or symbols. The classifications are
usually decided by different qualities, weights, compositions, appearances,
properties, etc.
The standard refers to the specifications or grades which are stipulated and
announced by the government or the chamber of commerce, etc.
In the international agricultural and by-product market, there is a commonly
adopted standard, i.e., fair average quality (F. A. Q. ).
According to the explanation of some countries, F. A. Q. refers to the average
quality level of the export commodity within a certain period of time. This kind
of standard is quite ambiguous. In fact, it does not represent any fixed,
accurate specification. At present, we adopt F. A. Q. to indicate the qualities of
some of our agricultural products and by-products which are usually
determined by the average quality level.
When adopting this kind of method, we shall stipulate the main specification
indexes as well in the contract.
For example, Chinese Groundnut, 1994 crop, F. A. Q. ,
Moisture (max.) 13%,
Admixture (max.) 5%,
Oil content (min.) 44%.
Sometimes G. M. Q. , i. e. , good merchantable quality, is adopted to indicate
the quality of the goods, which is even more unclear than F. A. Q.
2) Sale by brand name or trade mark.
As to the goods whose quality is stable, reputation is sound and with which
the customers are quite familiar, we may sell it by brand name or trade mark.
3) Sale by name of origin.
There are some agricultural products and by-products whose origins are well
known all over the world. As to these products, the origins may well indicate
their qualities.
4) Sale by description. The quality of some commodities, such as
technological instruments, electric machines, etc. can not be simply indicated
by quality indexes, instead it is quite necessary to explain in detail the
structure, material, performance, as well as method of operation. Thus, the
specific descriptions of products are required to indicate the quality of the
goods. If necessary, pictures, photos, etc, must also be provided.
2. Sale by Sample
In our export business, owing to the feature of some commodities themselves,
it is quite difficult to indicate the quality of those goods only by words, thus,
sale by sample comes into being. For example, handicraft articles, clothes or
native products, etc. are usually sold by sample.
The sample refers to the article which can be used to represent the quality of
the whole lot.
Sale by sample includes two cases, i.e., sale by the seller's sample and sale
by the buyer's sample.
1)Sale by the seller's sample:
In this case, the seller shall supply a representative sample which will possess
the moderate quality among a large quantity of the physical goods, and at the
same time keep a duplicate sample, which shall be in quality as or on the
whole as the same as the standard sample. The sample dispatched and the
duplicate sample kept shall have the same article number so as to make it
convenient for delivery, verification when handling quality disputes or future
transactions.
2) Sale by the buyer's sample
In this case, the seller shall first take into consideration the availability of
the new material and the possibility of providing the processing technology.
In order to take the initiative, the seller may reproduce the buyer's sample,
i.e. , counter sample, and send it back to the buyer as a type sample[21].
After the buyer confirms the counter sample, sale by the buyer's sample is
changed into sale by the seller's counter sample.
The two parties shall stipulate that in case the buyer's sample results in
any disputes of infringement of industrial propertyn32, the seller will have
nothing to do with it.
B. Quality Clause in the Sales Contract
The quality clause usually includes the specification, grade, standard or
brand, etc. of the goods. In the case of sale by sample, it is necessary to
indicate the number of the sample and the date of dispatch.
For example,
1) 9371 China Green Tea Special Chunmee;
2) Sample No. 612 Cloth Doll;
3) White Rice, Long-Shaped,
Broken Grains (max.) 25%,
Admixture (max.) 0. 25%,
Moisture (max.) 15%.
As to the goods whose specifications and properties or performances are
complicated, we shall adopt the following clauses:
1) Quality as per sample No... and the technical features indicated in the
illustrations submitted by the seller.
2) Quality and technical data as per the seller's catalogue No
3) Quality and technical data to be in conformity with the attached technical
agreement which forms an integral part of the contract.
In many cases, the quality indexes shall be stipulated flexibly and
scientifically. We usually adopt the quality latitude which means that the
quality indexes of the goods delivered by the seller may be controlled flexibly
within a certain latitude.
There are 3 ways to stipulate the quality latitude.
1) To stipulate a certain scope, for example, the width of the cotton cloth is
47/48 inches.
2) To stipulate more or less clause, for example, as to grey duck's down, we
may stipulate "duck's down content 18% (1% more or less).
3) To stipulate "max" or "min',
For example,
Rice Broken Grains (max.) 25%,
Admixture (max.) 1%.
Moisture (max.) 15%.
The quality tolerance is used in the trade of industrial products, which
means that the quality of the goods delivered by the seller is allowed to have
certain differences within a certain range since such differences are usually
unavoidable and commonly accepted as the usage of the same special trade.
C. Importance of Quality
The quality of the goods is not only the focus of attention which the both
parties to the transaction always concern themselves with in their business
negotiation, but also the major point which the distributing or operating
enterprises, trading corporations or commercial firms, end-users or consumers
follow with great interest on the market.
It is self-evident that the importance of quality can not be over-
emphasized:
1) It involves the fundamental rights and obligations of both parties.
2) It determines the price value of the goods.
3) It is the most important one of the many factors that exerts a tremendous
influence over the sales and prestige of the goods.
4) The fine-quality goods always find themselves in an advantageous position
in the intense competition.
5) The well-known goods of high quality are always welcomed by the end-
users or consumers.
6) If the quality of the goods is not in conformity with the contractual
description, it is regarded as a breach of the contract and thus leads to
disputes.
Therefore, the quality of the goods has a great and close bearing upon the
sales volume. Constantly improving the quality of the goods and maintaining
the high quality standard is no doubt a powerful means to secure, keep and
expand big market.

Quantity of Goods
In international trade, both the buyer and seller must take the agreed
quantity of the good as the foundation for performance of the contract. The
quantity of the goods refers to the weight, length, volume, area, capacity, etc.
which are indicated by different measuring units. The goods not only find
expression in a certain quality, but also in a certain quantity. The quantity of
the goods not only concerns the volume of the specific transaction, but also
influences the changes of the market. According to some international
practices, the quantity of the goods delivered by the seller must be in
conformity with that stipulated in the contract. Article 52, Item 2 in "the
United Nations Convention on Contracts for the International Sale of Goods"
stipulates "If the seller delivers a quantity of the goods greater than that
provided for in the contract, the buyer may take delivery or refuse to take
delivery of the excess quantity. If the buyer takes delivery of all or part of the
excess quantity, he must pay for it at the contract rate." So the quantity of
the goods is very important to both parties to the transaction. Trade without
quantity of the goods is not trade at all.
A. Calculating Methods of Quantity of the Goods
1. Calculating Units of Quantity of the Goods
In international trade, when determining the quantity of the goods, we
have to be clear about the measuring units at first.
The adoption of measuring units is decided by the nature of the goods.
Owing to the fact that the measuring systems in different countries are not
the same, the measuring units and measuring methods are accordingly
different. Usually the following measuring units are adopted in China:
1) Weight: Usually used for mineral products, agricultural and by-products, it
includes gram, kilogram, ounce, metric ton, long ton, short ton, etc.
2) Number. Constantly used for measurement of industrial products and
general products, it includes piece, pair, set, dozen, gross, ream, etc.
3) Length: Mostly used for textile products, metal cords, etc., it includes
meter, foot, yard, etc.
4) Area: Often used for glass, textile products, etc., it includes square meter,
square foot, etc..
5) Volume: Generally used for timber, chemical gases, etc., it includes cubic
meter, cubic foot, cubic yard, etc.
6) Capacity: Mostly used for grain, petroleum, etc., it includes liter, gallon,
bushel, etc..
Since different countries adopt different measuring systems, the same
name of the measuring unit does not always refer to the same quantity.
Currently, the commonly used measuring systems in international trade
are International System of Units, the Metric System, the U. S. system and the
British System.
 The basic measuring system adopted in our country is the Metric System,
and we are adopting SI gradually. According to Article 3 in the Measurement
Act of the People's Republic of China, our country adopts SI. SI and the other
measuring units selected by our country are legal measuring units of the
nation.
Beginning in January, 1991, except in a few special fields, non-legal measuring
units are not allowed to be used in China. In foreign trade, we shall also adopt
legal measuring units, if the metric system or the British system or
the U.S. system is not stipulated in the contract. We usually do not import
non-legally measured machines and equipment. In case of some special
needs, they shall be used subject to the authorization by the relative standard
measurement administrations.
2. Methods of Calculating Weight
In international trade, there are many goods which are calculated by
weight.
The following calculating methods are often used:
1) Gross weight: The gross weight refers to the weight of the cargo itself plus
the tare, i.e., the weight of the cargo plus the weight of the packing material.
2) Net weight: The net weight is the actual weight of the goods. The tare is
not included. In international trade, the goods which are calculated by weight,
in most cases, are calculated by net weight so as to figure out the price value.
Some cargoes, such as tobacco flakes, news reels whose pickings are not
convenient to be calculated by net weight, or those ,the values of the packing
materials are almost the same as the values of the cargoes themselves, such
as grain, fodder, etc., are often calculated by gross weight, which is called
"Gross for Net in international trade. For example, "Northeast
China soybean, 1,000 M/T, packed in single new gunny bags, 100 kilograms
per bag, gross for net."
The method of calculating the net weight is pursued by means
of the gross weight minus the tare. The methods of calculating the tare are
as follows:
Actual tare: In order to get the actual tare of the goods, we shall calculate
the weight of each packing of the goods one by one for the whole lot.
Average tare: As the packing materials and specifications of some cargoes
are uniform, we can get the average tare by weighing a part of the cargo
packing.
Customary tare. As for more unified packing, we can take the weights of
them commonly accepted by the market as the customary tares.
Computed are: We may take the agreed packing weight as a standard, so
that it is unnecessary to weigh any more.
In international trade, sometimes, the net weight also includes the
marketing packing weight. For instance, the weight of fruit sweets usually
includes the weight of the sugar coating. However, some noble metals and
chemical materials are usually weighed in the light of the net weight. The so-
called net refers to the weight of the cargo itself, which does not include any
packing weight.
3) Conditioned weight: In order to get the conditioned weight, we shall first of
all by a scientific method abstract water from the cargo, then put the standard
water content in it. This kind of calculating method is suitable to those
cargoes whose water contents are not stable, such as wool, raw silk, etc. The
conditioned weight is calculated by a standard regaining rate of water. The
regaining rate of water is the ratio between the water content and the dry
weight of the cargo. The standard regaining rate of water is the ratio between
the water content and the dry weight of the cargo which is accepted on the
world market. The actual regaining rate of water is the ratio between the
actual regaining water content in the cargo and the actual dry
weight.

The formula of calculating the conditioned weight is.

conditioned weight
actual weight * (l+ standard regaining rate of water)
=--------------------------------------------------------------------------
1+ actual regaining rate of water
The accepted international standard regaining water content of wool
and raw silk is 11%.
4) Theoretical weight: Some fixed cargoes, such as tin plate, steel plate, etc.
have unified shapes and measurements, as long as the specification is
identical, the size is conformable, the weight will be about the same, we can
calculate the weight according to the number of pieces.
B. Quantity Clause in the Contract
The quantity clause in the contract is very important; it is the foundation
for effecting shipmentCX32and taking delivery of the goods. The basic
contents of the quantity clause are the quantity to be delivered and the
measuring unit to be used.
As to the goods calculated by weight, we should clearly stipulate the specific
calculating method, such as the gross weight, net weight, conditioned weight,
etc. in the contract. For example," Chinese rice, 500 M/T packed in gunny
bags, 50 kg. each, net weight." The weights of some goods are not easy to be
accurate. Owing to the influence of natural conditions, limitations of packing
or transportation conditions, the actual quantity of the goods tends to be not
in conformity with that stipulated in the contract. In order to avoid disputes
during the fulfillment of the contract, both parties shall determine the delivery
quantity reasonably and flexibly beforehand by setting a more or less clause,
plus or minus clause or allowance clause in the contract. There are 2 ways to
stipulate the quantity latitude.
1. More or Less
In the contract, we can stipulate that the seller may deliver the goods with a
certain percentage more or less in quantity ac- cording to the agreed quantity
latitude. This kind of stipulation is usually called "more or less clause."
The more or less clause is usually at the seller's option.
For example, we may stipulate in the contract "Datong steam coal, shipment
5% more or less at the seller's option, value of the excess or shortage
quantity to be calculated at the contract rate. "Shandong Peanut, 800,000
M/T, 1995 Crop. F.A. Q. with 5% more or less both in quantity and amount to
be allowed at the seller's option." But it may also be at the buyer's option.
As to the purchase price of the goods more or less delivered,
there are 2 ways to calculate:
1) According to the unit price stipulated in the contract;
2) According to the market price when the cargo is shipped.
The purpose of adopting the latter method is to prevent the party who
enjoys more or less rights from loading more or less deliberately owing to the
fluctuation of the market price. If the contract does not stipulate the method
for pricing of the goods more or less delivered, we usually assign the price to
them according to the stipulation in the contract.
2. About or Circa or Approximate
If we put "about" before the quantity of the goods it indicates that the
quantity of the goods is not exact. For example, "heavy magnesium
about 7,000 M/T". As to the word "about", the implications are different in
different countries. Some interpret it as 2.5%, some. The Uniform Customs
and Practice for Documentary Credits of International Chamber of Commerce
(revised edition 1983, No. 400 publication) stipulates that "about" should be
interpreted as not exceeding 10% of the total quantity.
Cargo Packing

1. NEEDS OF CARGO PACKING

The majority of the cargoes shipped between countries have packing of
one type or another. Generally speaking, cargo packing is needed for three
main reasons.
First and foremost, packing protects cargoes and reduces losses. This is
relevant to most types of cargoes, no matter what means of transport is used.
Secondly, packing aids transport and reduces transport cost. Cargoes in
transit will go through a number of procedures such as loading, shipping,
unloading, inspection, and warehousing, etc. The handling can be made more
convenient with proper packing and such convenience helps protect the
cargoes being shipped.
Thirdly, packing facilitates stowage and distribution and promotes sales.
When they are packed in proper quantity/weight and with proper marking,
cargoes can be stowed and distributed efficiently. Cargo packing may also
promote sales if it is designed wisely, although its promotional function is not
as important as that of sales packing.

2. FACTORS INFLUENCING TYPES OF CARGO PACKING

1) Nature of cargo
Packing should be designed according to the need of the cargo. Cargoes
like grains, crude oil, steel and automobiles are shipped bulk or with only
minimal packing. General merchandises need adequate packing of various
types. For example, fruits are usually shipped in cartons; chemicals are often
packed in bags; wooden cases are commonly used when electrical equipment
is shipped. Besides, the value should also be considered. High-value goods
normally require more extensive packing.
2) Transport
In addition to the nature of cargo, many other factors in relation to
transport should be taken into consideration. To begin with, one should
consider the nature of transit. When containers are used, packing can be less
extensive as the container itself offers effective protection to the cargo. If
cargoes are shipped by air, the packing should be stronger than that for
containerization in ocean transport, cargoes should be more carefully packed
with even stronger materials.
Then the facilities available at terminals should be considered, for
example, the type and the capacity of the loading/unloading equipment and
the availability of suitable warehouse or container base, etc. The packing
should fit the facilities that are to be used.
The cargo measurement is another factor to consider. The dimension and
the weight limit, for instance, would decide the shape, size and weight of the
cargo package.
If the cargo is going through different temperature zones, the packing
should be so designed as to permit cargo to breathe and to avoid damage to
the cargo. Soaps, bamboo or leather products will shrink or crack in dry
weather; bikes, food or leather goods will sweat and get rusty or moldy in
humid weather. Packing should effectively protect the cargo from such
hazards.
3) Customs or statutory requirements
This is particularly relevant to dangerous cargoes to which strict
regulations apply concerning acceptance, packing, stowage, documentation,
marking and carrier liability. For instance, in countries such
as Japan, Canada, Iraq and New Zealand, straw is unacceptable by law as
packing or dunnage material. If wood is to be used as packing material, it
should be suitably treated, for example, fumigated, to kill any pests inside. It
is advisable to obtain a certificate to prove the proper treatment of the
packing material.
4) Insurance acceptance conditions
Packing must meet the prescribed packing specifications for particularly
fragile cargoes and cargoes with a bad record of damage and pilferage,
otherwise the insurance company will refuse to cover them or refuse to cover
them at a regular rate.
5) Cost
 Packing should be economical as well as adequate? Some packing
materials have resale value in some countries and that can help reduce the
packing cost.
6) Ease of handling and stowage
For irregular-shaped cargo, it is especially important to correctly design
the packing to make the handling as easy as possible. This helps ensure the
safety of the cargo, reduce handling charges and insurance premium, and
utilize transport capacity to its maximum.
Packing which fails to meet the specified standards will cause problems
concerning carrier acceptance or liability and double insurance coverage.
Exporters and importers, therefore, should work out adequate packing
specifications.
3. IMPROVEMENTS NEEDED
International consignments travel a long way, a long time, in different
weather and by different modes. Exporters should constantly improve cargo
packing to be more competitive in the world market.
1) The standards of packing
The standards of packing should be improved to reduce risks of damage
and pilferage. The improved standards would help get more favorable cargo
insurance premium and help maintain good relations with importers.
2) The utilization of transport capacity
The utilization of transport capacity should be maximized to lower distribution
cost. Since 80% of cargo is measured by volume rather than by weight in
international trade, it is important to keep broken stowage to minimum,
particularly for ISO containerization. By doing so, both the cost of distribution
and the risk of damage are reduced. Besides, the need to use dunnage is also
reduced.
3) Design of cargo packing
Design of cargo packing (shape & dimension) should facilitate the most
economical method of handling. As mechanical cargo handling equipment can
reduce labor cost and speed up cargo handling, packing should be designed
to fit the use of the equipment. If cargo must be handled by hand, packing
should have suitable size and design. For instance, cartons for home
appliances often have one aperture on each side to make the handling easier.
4) The packing cost
The packing cost should be minimized provided that the packing is adequate.
The need of each overseas sales contract should be considered individually.
The best results can be achieved when modes of transport, types of
commodities and transit routing, etc have all been carefully considered.
4. TYPES OF PACKING
1) Bale
A bale is a heap of material pressed together and tied with rope or metal
wire. It is most suitable for paper, wool, cotton, and carpets, etc.
Bale is an effective, low-cost and easy-to-handle mode of packing, but it
only offers limited protection to cargoes.
2) Bags
Bags can be made of cotton, plastic, paper or jute (fibre from the outer
skin of certain plants). They are ideal for cement, fertilizer, flour, chemicals
and many consumer products.
Their advantage is low cost and the disadvantage is their vulnerability to
damage by water, sweat, leakage and breakage.
3) Barrel/drum
This type of container is made of wood, plastic, or metal. It is used for
liquid or greasy cargoes such as casing for sausage.
The advantage is the resale value in some countries and the disadvantage
is that a metal drum can get rusty and resulted in leakage if the container is
not sealed properly.
4) Box/case
A case is made of wood and varies in size. Some cases are lined to create
airtight packing.
The advantages are its resale value in some countries, its reliable
protection for expensive cargoes such as equipment and car accessories, its
strength against the risk of pilferage, and the ease of handling. The
disadvantage is its high cost. It is getting less popular because of increasing
containerization and rising cost of timber.
5) Glass container
This type of packing is often used for dangerous liquid cargoes such as
acids. It protects workers and transport vehicles but requires more careful
handling.
6) Carton
Cartons are now a very common form of packing with the development of
containerization and palletization, particularly for consumer products.
Cartons have several advantages. For one thing, they are relatively
inexpensive. They are also expandable and therefore easy to handle and stow.
Cartons also aid marketing as words can be printed on them. The
disadvantage is their susceptibility to crushing and pilferage.
7) Crate/skeleton case
This form of packing is halfway between a bale and a case and has a wooden
structure. It is often used for lightweight goods of large cubic capacity such as
machinery and domestic appliances.
5. STOWAGE OF CARGO
Factors to consider in the stowage of cargo
(1) The best possible use of the available dead weight or cubic capacity to
keep broken stowage7 to minimum.
Generally speaking, a broken stowage of no more than10% of total cubic
capacity is considered allowable. But we must try to keep broken stowage as
small as possible. By saving space, we can reduce the stowage cost of and the
risk of damage to the goods. This is particularly important when irregular-
shaped packages are stowed.
(2) Prevention of damage to transport vehicles If some broken stowage is
unavoidable, dunnage must be used to keep the cargo stable to prevent
shifting and ensure the safety of the transport vehicle.
(3) Proper segregation of cargoes
Cargoes of different nature should be properly separated.
For example, oranges are not to be closely stowed to tea; and heavy tools
are not to be placed on top of chinaware.
(4) Proper segregation of consignments
To prevent delay in distribution and to avoid duplicated handling, cargoes
should be loaded or stowed by the right order. The cargo that is going to be
unloaded first should be loaded last, for instance.
6. MARKING OF CARGO
1) Types of mark
(1) Shipping marks
Shipping marks are used for identification of shipment during transit to
ensure smooth and prompt delivery. Shipping marks normally include the
following information:
Name of exporter and his address
Name of importer and his contract number/shipping mark
Case or crate number (e.g., 1-2.5)
Weight (gross, net)/measurement
Name of carrying vessel
Ports of shipment and destination
Origin of goods
Shipping marks are generally designed by individual business themselves
in foreign countries, In China, the Ministry of Foreign Trade and Economic
Cooperation requires a standardized format of shipping marks for Chinese
consignees.
An example of a Chinese importer's shipping mark might be: 90MKE-
47001 CF.
In this code:
90 is the year of order -- 1990;
M is the abbreviation of the importer -- Machinery I/E Corp;
KE is the abbreviated name of the end user --- the Ministry of Post &
Telecommunications;
47 is the code of the type of merchandise m electronic instrument;
001 is the contract number --- 001;
CF is the abbreviation of the country of export --- France.
To improve efficiency of cargo handling and to reduce cost, ISO has suggested
a standardized form of shipping mark that has four lines in total with no more
than 1 7 letters in each line and contains no graphs. For example, a
standardized shipping mark might look like the following:
CMC (Name of importer)
90MKE-47001 CF (Reference number)
SHANGHAI (Port of destination)
1-5 (Serial number)
Requirements for shipping marks for road, railway and air transport are
different from those for ocean transport. For instance, for railway transport,
importer's name must be written in full; for air transport, AWB number can be
used to replace importers name and reference number.
(2) Indicative marks
Indicative marks give instructions to facilitate the smooth handling of the
cargo that needs special care.
(3) Warning marks
When dangerous goods are shipped, warning marks are used to avoid any
possible harm to workers and damage to transport vehicles.
2) Marking requirement
(1) Use recognized international cargo marking symbols
Designed by international organizations such as ISO and International Air
Transport Association (IATA), some cargo marking symbols are easily
recognized and widely used. The use of those symbols not only helps identify
the cargo but also enhances the chances of acceptance by foreign authorities
as some countries require the use of international symbols.
(2) Make marks visible
Marks should have the right placement on the package, ie, they should be
placed neither on the top nor the bottom of a large package but on the side(s)
and they should not be covered by bindings.
(3) Make marks legible
Marks should be made easy to read in terms of language, size and
handwriting. English is the international language, particularly for commerce;
the size of letters should be proportionate to the size of package; and all
letters should be neat and written in capitals.
(4) Make marks indelible
Marks should not rub off easily. The ink used to make marks should be
waterproof. In addition, the color of the ink should stand out against the color
of package.
7. CLAUSE OF PACKING
In most cases, the parties to a contract should know beforehand what
packing is needed for the safe carriage of the goods to the destination.
However, since the sellers obligation to pack the goods may vary according
to the type and duration of the transport envisaged, it has been felt necessary
to stipulate that the seller is obliged to pack the goods in such a manner as is
required for the transport, but only to the extent that the circumstances
relating to the transport are made known to him before the contract of sale is
concluded.
The general considerations in drafting this stipulation are:
The specifications should be clear. Phrases such as "sea-worthy packing" or
"customary packing" should not be used as their meanings are ambiguous.
Statutory requirements should be considered. For example, according to
laws and regulations, what materials can be or cannot be used and, if certain
material has been used, what mark and certificate are required?
The party who is to bear the packing charges should be specified.
Generally speaking, normal packing charges are to be provided by the
exporter together with the goods. If sometimes an importer requires extra
packing, he pays the additional charges. If importer's packing material will be
used, the contract should set a deadline for the importer to supply the
packing material to ensure that the exporter can ship the goods in time.
The quantity or weight for each package is sometimes also stipulated, for
example, "cartons, 24 tins per carton".
Price Terms

1. VITAL ASPECTS OF A TRANSACTION

International trade has, even in a single transaction, numerous procedures
encompassing packing, insurance, license, customs entry, shipping,
loading/unloading, transshipment, and import/export duties. Each procedure
must be completed by either the seller or the buyer. There must be a clear
specification regarding the following issues.
1) Responsibilities and associated costs
There must be no ambiguity in the interpretation by either party of the
terms of delivery quoted, particularly in the area of costs and expenses.
Problems would often mean loss of good relations and loss of repeat orders. It
is therefore essential for both the buyer and the seller to agree on the terms
of delivery and their interpretations.
2) Time and place of delivery
Time and place of delivery are crucial factors in defining the point where
the responsibilities and the risks pass from the seller to the buyer. Sellers and
buyers can choose the place of delivery according to the responsibilities and
risks that each party wants to take.
3) Documents and expense
International trade transactions require more documents than domestic
sales and purchases. Almost for each procedure there is a document and
nearly each of the documents entails a cost, either hidden or apparent.
It needs to be clear what documents the exporter should
prepare and who should pay the expense so that a transaction
can be processed smoothly.
4) Title to goods
Different terms of delivery mean different responsibilities of the seller and
the buyer. Accordingly, title to the goods3 will pass over from the seller to the
buyer at different time and places. Sellers and buyers need to know when and
how they will lose or acquire the title to the goods.
It is therefore of vital importance to establish a clearly defined cut-off point to
show where the exporter's responsibilities and risks end and where the
importer's begin so that the exporter can price his goods accurately and
the importer can calculate the full cost of import.

2. International Rules for the Interpretation of Trade Terms

The problem in international trade is that different countries might have
different ways of interpreting the same contract wording. Such a problem can
be solved only by creating a set of internationally agreed terms.
The Incoterms aim to provide such a set of standardized terms which
mean exactly the same to both parties to a contract and which will be
interpreted in exactly the same way by courts in every country. Incoterms are
not part of national or international law, but they can be binding on buyers or
sellers provided the sales contract specifies that a particular Incoterms will
apply.
If it is necessary to refer to the customs of a particular trade place or to
the practices which the parties themselves may have established in their
previous dealings, it is desirable that sellers and buyers clarify their legal
positions by appropriate clauses in their contract of sale. Such special
provisions would supersede or vary anything that is set forth as a rule for
interpreting the various Incoterms.
Besides Incoterms, there are also Warsaw-Oxford Rules1932 and Revised
American Foreign Trade Definitions 1941that respectively provide standard
interpretation for CIF and delivery terms which are widely used in America.
However, it is Incoterms that have been most widely used in international
trade.

3. A VIEW OF THE STRUCTURE OF INCOTERMS 2000

For the purpose of easier reading and understanding, the terms in Incoterms
2000 are grouped in four basically different categories: (1) Group E term, (2)
Group F terms, (3) Group C terms and (4) Group D terms, with increasing
responsibilities, costs and risks for the seller and decreasing responsibilities,
costs and risks for the buyer.
Group E has one (departure) term only, Ex Works (EXW).
It is called a departure term whereby the seller makes the goods available
to the buyer at the seller's own premises.
Group F has three (shipment) terms: Free Carrier (FCA), Free Alongside
Ship (FAS) and Free On Board (FOB). These terms call upon the seller to
deliver the goods to a carrier appointed and paid by the buyer.
Group C contains four (shipment) terms: Cost and Freight (CFR), Cost,
Insurance and Freight (CIF), Carriage Paid To (CPI')
and Carriage and Insurance Paid To (CIP). In these terms the seller has to
contract and pay for carriage, but the seller does not assume the risk of loss
of or damage to the goods or additional costs due to events occurring after
shipment and dispatch.
 Group D includes five (arrival) terms whereby the seller has to bear all
costs and risks needed to bring the goods to the country of destination:
Delivered At Frontier (DAF), Delivered Ex Ship (DES), Delivered Ex Quay (DEQ),
Delivered Duty Unpaid(DDU) and Delivered Duty Paid (DDP).
Further, under all these terms, the respective obligations of the parties have
been grouped under ten headings where each heading on the seller's side
"mirrors" the position of the buyer with respect to the same subject matter6.
The ten headings (Seller A1 -Al 0, Buyer B1 -B10) are:
A1 Provision of goods in conformity with the contract
A2 Licenses, authorizations and formalitiesA3 Contract of carriage and
insurance
A4 Delivery
A5 Transfer of risks
A6 Division of costs
A7 Notice to the buyer
A8 Proof of delivery, transport document or equivalent electronic message
A9 Checking-packaging-marking
A10 Other obligations

B1 Payment of the price

B2 Licenses, authorizations and formalitiesB3 Contract of carriage
B4 Taking delivery
B5 Transfer of risks
B6 Division of costs
B7 Notice to the seller
B8 Proof of delivery, transport document or equivalent electronic message
B9 Inspection of goods
B10 Other obligations

4. BRIEF EXPLANATION OF THE TERMS

1) Ex Works ... named place
This term means that the seller fulfils his obligation to deliver when he has
made the goods available at his premises (i.e., works, factory, warehouse, etc)
to the buyer. In particular, he is not responsible for loading the goods on the
vehicle provided byte buyer or for clearing the goods for export, unless
otherwise agreed. The buyer bears all costs and risks involved in taking the
goods from the seller's premises to the desired destination.
This term thus represents the minimum obligation for the seller.
This term should not be used when the buyer cannot carry out directly or
indirectly the export formalities.
The buyer must assume any risk of export prohibition and must ascertain
that a customs clearance performed byte buyer himself, a party not domiciled
in the seller's country, is accepted by the authorities. If the buyer would like
the seller to clear the goods for export, the words cleared for export could be
added to EXW ... named place.
2) Free Carrier ... named place
This term means that the seller fulfils his obligation to deliver when he has
handed over the goods, cleared for export, to the charge of the carrier named
by the buyer at the named place or point. If no precise point is indicated by
the buyer, the seller may choose within the place or range stipulated where
the carrier shall take the goods into his charge. When, according to
commercial practice, the seller's assistance is required in making the contract
with the carrier, the seller may act at the buyer's risk and expense.
This term may be used for any mode of transport, including multimodal
transport. It is expected that this term will be used for maritime transport in
all cases where the cargo is not handed to the ship in the traditional method
over the ships rail.
Carrier means any person who, in a contract of carriage, undertakes to
perform (performing carrier) or to procure (contracting carrier) the
performance of carriage by rail, road, sea, air, inland waterway or by a
combination of such modes.
If the buyer instructs the seller to deliver the cargo7 to a personae, a
freight forwarder who is not a carrier, the seller is deemed to have fulfilled his
obligation to deliver the goods when they are in the custody of that person.
Transport terminal means a railway terminal, a freight station, a container
terminal or yard, a multipurpose cargo terminal or any similar receiving point.
Container includes any equipment used to unitize cargo, eg, all types of
containers and/or flats, whether ISO(International Standards Organization)
accepted or not, trailers, swap bodies, ro-ro equipment, igloos, and applies to
all modes of transport.
3) Free Alongside Ship ... named port of shipment
FAS means that the seller fulfils his obligation to deliver when the goods have
been placed alongside the vessel on the quay or in lighters at the named port
of shipment. This means that the buyer has to bear all costs and risks of loss
of or damage to the goods from the moment.
This term requires the buyer to clear the goods for export.
It should not be used when the buyer cannot carry out directly or
indirectly the export formalities. Similar to EXW, the buyer must assume any
risk of export prohibition and must ascertain that a customs clearance
performed by the buyer himself, a party not domiciled in the seller's country,
is accepted by the authorities. If the buyer would like the seller to clear the
goods for export, the words cleared for export could be added to FAS ...
named port of shipment.
This term can only be used for sea or inland waterway transport.
4) Free On Board ... named port of shipment
FOB means that the seller fulfils his obligation to deliver when the goods have
passed over the ship's rail at the named port of shipment. This means that the
buyer has to bear all costs and risks of loss of or damage to the goods from
that point. However, this term also requires the seller to "deliver the goods on
board the vessel". Clearly, it is hard to use ship's rail as a point to divide
responsibilities and costs because the loading of the goods is a continuous
performance. As the stipulations in Incoterms are not imperative, the seller
and the buyer can negotiate the division point of responsibilities and costs.
There are several derived terms available to serve this purpose.
FOB Under Tackle
The seller fulfils his obligation of delivery once the goods are placed
beside the carrying vessel within the reach of the vessel's crane.
FOB Liner Terms
The ship will be responsible for loading.
With these two terms, the buyer bears the loading cost since he is
responsible for contracting and paying for carriage.
FOB Stowed
The seller is responsible for loading the goods on board the vessel and
packing the goods carefully and closely in the vessels hold.
FOB Trimmed
Besides loading the goods on board the vessel, the seller should also trim
the goods to make the vessel evenly balanced.
FOB Free In
This is a combination of a sales term and a transport term.
Free In means the carrying vessel is not responsible for loading the goods.
The seller pays the loading cost under the above three terms.
FOB term requires the seller to clear the goods for export.
This term can only be used for sea or inland waterway transport. It is
inappropriate when the seller is called upon to hand over the goods to a cargo
terminal before the ship arrives, since he would then have to bear the risks
and the costs before the goods have passed over the ship's rail when he is no
longer able to control the goods or to give instructions with respect to their
custody. When the ship's rail serves no practical purpose, such as in the case
of roll-on/roll-off or container traffic, the FCA term is more appropriate to use.
5) Cost And Freight ... named port of destination
CFR means that the seller must pay the costs and freight necessary to bring
the goods to the named port of destination but the risk of loss of or damage to
the goods, as well as any additional costs due to events occurring after the
time the goods have been delivered on board the vessel, is transferred from
the seller to the buyer when the goods pass the ship's rail in the port of
shipment.
CFR requires the seller to clear the goods for export.
This term can only be used for sea and inland waterway transport. When
the ship's rail serves no practical purpose, such as in the case or roll-on/roll-off
or container traffic, the CPT term is more appropriate to use.
6) Cost, Insurance And Freight ... named port of destination
CIF means that the seller has the same obligations as under CFR but with
the addition that he has to procure marine insurance against the buyer's risk
of loss or damage to the goods during the carriage. The seller contracts for
insurance and pays the insurance premium.
The buyer should note that under the CIF term the seller is only required
to obtain insurance on the minimum coverage.
This term requires the seller to clear the goods for export.
CIF can only be used for. sea and inland waterway transport. When the
ship's rail serves no practical purposes such as in the case or ro-on/ ro-off or
container traffic, the CIP term is more appropriate to use.
According to Incoterms, the unloading cost should be borne by the buyer.
But if a liner is used, the unloading cost has been paid by the seller who is
responsible for procuring a contract of carriage including the cost of
discharge. To stipulate clearly the responsibility and cost of unloading, some
derived terms can be used.
CFR/CIF Liner Terms
The ship is responsible for the unloading of goods.
CFR/CIF Landed
The goods must be unloaded onto the dock.
Under these two terms, the seller is responsible for unloading and pays
the cost, including wharf age charges, since he contracts for carriage.
CFR/CIF FO
FO means that the ship is not responsible for unloading the goods carried.
CFR/CIF Ex-ship's hold
The seller fulfils his responsibilities when he has made the goods ready for
unloading.
The buyer pays the unloading cost under the above two terms as the cost
is not included in the freight paid by the seller.
However, CFR/CIF Free Out does not necessarily mean that the risk and
cost for the discharging operations would fall upon the buyer under the
contract of sale, since it might follow the stipulations of the sales contract or
the customs of the port that the contract of carriage procured by the seller
should have included the discharging operations.
7) Carriage Paid To ... named place of destination
CPT means that seller pays the freight for the carriage of the goods to the
named destination. The risk of loss of or damage to the goods, as well as any
additional costs due to the events occurring after the time the goods have
been delivered to the carrier, is transferred from the seller to the buyer when
the goods have been delivered into the custody of the carrier.
Carrier means any person who, in a contract of carriage, undertakes to
perform or to procure the performance of carriage, by rail, road, sea, air,
inland waterway or by a combination of such modes.
If subsequent carriers are used for the carriage to the agreed destination,
the risk passes when the goods have been delivered to the first carrier.
CPT requires the seller to clear the goods for export.
 This term may be used for any mode of transport including multimodal
transport.
8) Carriage And Insurance Paid To ... named place of destination
CIP means that the seller has the same obligations asunder CPT but with
the addition that the seller has to procure cargo insurance against the buyer's
risk of loss of or damage to the goods during the carriage. The seller contracts
for insurance and pays the insurance premium.
The buyer should note that under CIP the seller is only required to obtain
insurance on a minimum coverage.
This term requires the seller to clear the goods for export.
It may be used for any mode of transport including multimodal transport.
9) Delivered At Frontier ... named place
DAF means that the seller fulfils his obligation to deliver when the goods have
been made available, cleared for export, at the named point and place at the
frontier, but before the customs border of the adjoining country. The term
frontier may be used for any frontier including that of the country of export.
Therefore, it is of vital importance that frontier in question be defined
precisely by always naming the point and place in the term. The term is
primarily intended to be used when goods are to be carried by rail or road, but
it may be used for any mode of transport.
10) Delivered Ex Ship ... named port of destination
DES means that the seller fulfils his obligation to deliver when the goods have
been made available to the buyer onboard the ship uncleared for import at
the named port of destination. The seller has to bear all the costs and risks
involved in bringing the goods to the named port of destination.
This term can only be used for sea or inland waterway transport.
11) Delivered Ex Quay (Duty Paid) ... named port of destination
DEQ (duty paid) means that the seller fulfils his obligation to deliver when
he has made the goods available to the buyer on the quay (wharf) at the
named port of destination, cleared for import. The seller has to bear all risks
and costs including duties, taxes and other charges of delivering the goods
thereto.
This term should not be used if the seller is unable directly or indirectly to
obtain the import licence. When this term is used, the seller must assume any
risk of import prohibition and must ascertain that a customs clearance
performed by a party not domiciled in the importing country is accepted by
the authorities. If the seller does not want to assume the obligation to clear
the goods for importation and pay the duty, the words duty unpaid instead of
duty paid should be used after DEQ.
If the parties wish to exclude from the seller's obligations some of the
costs payable upon the import of the goods (such as value added tax), this
should be made clear by adding words to this effect: Delivered ex quay, VAT
unpaid ... named port of destination.
This term can only be used for sea or inland waterway transport.
12) Delivered Duty Unpaid ... named place of destination
DDU means that the seller fulfils his obligation to deliver when the goods
have been made available at the named place in the country of import. The
seller has to bear the costs and risks involved in bringing the goods
thereto(excluding duties, taxes and other official charges payable upon
importation) as well as the costs and risks of carrying out customs formalities
for export and transit through another country. The buyer has to pay any
additional costs and to bear any risks caused by his failure to clear the goods
for import in time.
Particular problems arise when the seller undertakes to deliver the goods
into the buyer's country in places which cannot be reached until the goods
have been cleared for import(beyond the customs clearance point) but where
his ability to reach that place is adversely affected by the buyer's failure to
fulfill his obligation of clearing the goods for import.
If the parties wish the seller to carry out the customs formalities and bear
the costs and risks resulting there from, this has to be made clear by adding
words to this effect.
If the parties wish to include in the seller's obligations some of the costs
payable upon importation of the goods (such as VAT), this should be made
clear by adding words to this effect: Delivered duty unpaid, VAT paid ... named
place of destination.
This term m~)y be used irrespective of the mode of transport.
13) Delivered Duty Paid ... named place of destination
DDP means that the seller fulfils his obligation to deliver when the goods have
been made available at the named place in the country of importation. The
seller has to bear the risks and costs, including duties, taxes and other
charges of delivering the goods thereto, cleared for import. This term
represents the maximum obligation.
Similar to DEQ, the seller must assume any risk of import prohibition and
must ascertain that a customs clearance performed by a party not domiciled
in the importing country is accepted by the authorities.
DDP should not be used if the seller is unable directly or indirectly to
obtain the import license.
If the parties wish the buyer to clear the goods for import and to pay the
duty, the term DDU should be used.
If the parties wish to exclude from the seller's obligations some of the costs
payable upon importation of the goods (such as VAT), this should be made
clear by adding words to this effect: Delivered duty paid, VAT unpaid ... named
place of destination. This term may be used irrespective of the mode of
transport.

5. POINTS OF CONSIDERATION FOR CHOOSING TERMS OF DELIVERY

1) Transport capacity
The party who wishes to contract for carriage of the goods must make
sure that there is enough transport capacity available to deliver the goods in
time. Attention should be paid to the possibility that transport capacity might
be limited during a specific period of time. The general availability of the
capacity does not necessarily mean the capacity will be available at any time.
Furthermore, different types of commodities would need different types of
transport capacity. Then the shipper has to make sure that there is enough
special capacity for the type of commodity he is going to ship, for instance,
capacity of refrigerated ship or container vessel, etc.
2) Customer's location
Sometimes it is difficult to arrange the transport of the goods by the
seller's or the buyer's own fleet because of the location of the buyer or the
seller. For example, when a HongKong customer is buying from mainland and
selling to Taiwan, the mainland seller can't use his own ship for the shipment
of the goods because Taiwanese authority does not permit a mainland ship to
enter any port there.
3) Freight rate
Freight rate fluctuates due to the change in supply and demand. Exporters
and importers should first look at the direction of the fluctuation and then
decide if they want to be responsible for carriage.
An exporter might want to avoid the terms that include transport cost
when the freight is increasing and if it is hard to predict the rate of the
increase. When the increase can be estimated and added to the price, it is
possible that the price does not look as competitive as the price without
transport cost, especially when the offeree differs with the offerer about the
freight changes.
An importer might want to compare the terms with and without transport
and then compare the cost of transport in the price offered by the exporter
and the shipping cost the importer must pay elsewhere so that he knows
whether he should use the exporter's shipping service or contract for
shipment with another carrier.
4) Loading/unloading facilities and local port custom
In export, if unloading facilities are inadequate and unloading costs are high
or when they are unknown, the seller might want to avoid landed terms.
In import, if the buyer wishes to pick up goods with his own ship, he
should consider the loading facilities and charges at the port of shipment.
5) Risks in transit
Risks in transit must be considered depending on where the transport
starts and ends. For example, many commercial vessels avoided the Persian
Gulf during Iran-Iraq war.
5. The Price Clause in the S/C
1) Types of the pricing
(1) Fix Price
eg. USD100 per M/T FOB Dalian No price increase (adjustment) shall be
allowed after conclusion of this contract.
(2) Non-fix Price
only define the methods and time of stipulating price
Provisional Price
Sliding Scale Price
eg1. HK$5000 per bale(400lbs.) CIF HongKong
remarks: The above is a provisional price, which shall be determined through
negotiation btwn. The buyer and the seller 15 days before the month of
shipment.
eg2. The above basic price will be adjusted according to the
following formula based on the wage and price indexes
published by the (organization) as of (month)20
Adjustment Formula: P1= Po(a+bM1/Mo+cW1/wo)
P1= final price after adjustment
Po= basic price at the time of conclusion of contract
a: administration overheads, fixed portion
b: materials cost, changeable portion
c: labor cost, changeable portion
M1: materials wholesale price indexs at the time of delivery
Mo: materials wholesale price indexs at the basic time
W1: wage index at the time of delivery
Wo: wage index at the basic time
Transport
The Price Clause in the S/C
Transport is essential for the exploitation or development of economic
resources because it allows articles or materials to be conveyed from areas of
Iow utility to areas of high utility. Without transport, international trade would
not be possible.
1. OCEAN TRANSPORT
Ocean transport has been the most important mode of transport in
international trade. Two-thirds of the world total volume and over 80%
of China's imports and exports now are transported by sea.
1) Advantages and disadvantages
Ocean transport has many advantages. The first advantage is the easy
passage since about 70% of the earth is covered by water. Secondly, ocean
transport has a large capacity. For example, the deadweight (loaded weight --
fuel plus cargo) of the largest oil tanker can be up to 500 000 tons.
Thirdly, because of such large capacity, the unit distribution cost is
reduced. And finally, ocean transport has good adaptability to cargoes of
different size, weight, shape, etc.
Of course, there are also disadvantages, one of which is the slow passage
of ocean transport. In addition, ocean transport is also vulnerable to bad
weather and less punctual if compared with road or air transport.
2) Major types of cargo vessels
There are different types of cargo vessels designed and built to suit the
needs of shipping different cargoes.
A general/packed cargo vessel is built to carry various types of cargoes.
An OBO (ore/bulk/oil) carrier is a multipurpose vessel for large volume of
bull cargoes.
A refrigerated ship is built with refrigerating facilities inside the ship for
carrying perishable cargoes.
A timber ship has spacious holds and heavy lifts for carrying timber or
wood logs.
An oil tanker is specially designed to carry crude oil or fuel oil. Oil tankers
account for about 5o% of the world merchant fleet in deadweight capacity
terms. They can be as large as over 500 000 deadweight tons.
A container vessel is designed to carry from 200 to over 4000 standard
containers. (A standard container refers to a container of 2o feet in length,
which is more often called a twenty-foot equivalent unit [TEU]).
A Roll On-Roll Off (Ro-Ro) ship is specially designed for loaded trailers and
any equipment (eg, containers) on wheels to be driven onto the vessel to
enable faster loading and unloading.
A LASH (Lighter Aboard Ship) is a vessel designed to carry lighters on
which cargoes are loaded. A LASH can carry from 7o to 100 lighters, totaling
35000 to 45000 tons and it does not need a pier for loading and unloading.
Lighters are towed away after they are unloaded. It offers high efficiency and
is ideal on shallow inland waterways.
3) Division of merchant vessels
Merchant vessels are operated in two ways. The first type of merchant
vessels is liners. A liner is a passenger or cargo vessel that operates over a
regular route according to an advertised time-table. It has the following
characteristics.
fixed route, ports, schedule and relatively fixed freight
loading and unloading charges included in freight
good service;
simple procedures, and
ideal for cargo of small quantity
The other type of merchant vessels is tramps. A tramp is a freight carrier
that does not operate regularly, but can pickup cargoes for almost any port.
The characteristics of a tramp are as follows:
no fixed route, ports or schedule but direct trip;
freight determined by market to be competitive, and
ideal for cargo of a complete shipload2, such as cargo of Iow value and huge
quantity.
Tramps can be divided into voyage charter and time charter.
A voyage charter is the hire of a ship for a particular trip that can be
further divided into:
single voyage charter;
round voyage charter;
 consecutive voyage charter;
voyage charter on time basis (a voyage charter, but the fees are collected
according to the days used);
contract of affreightment.
The contract of affreightment is signed without specification of the
number of trips. It is used for huge quantity of cargo to be shipped within a
time limit. The carrier can use one ship for consecutive trips or more ships for
fewer trips.
A voyage charter party should include the following main clauses.
shipper, carrier, name of vessel, flag of vessel;
cargo type, packaging, quantity;
ports and alternatives;
laydays date and canceling date (the earliest and the latest date the
charterer can accept for loading the cargo by which the carrier must have the
vessel ready and charterer must have the cargo ready);
how (by freight ton or a lump-sum), when and where("prepaid" or "to be
paid ) the freight is paid;
loading and unloading fees (FIFO, FI, FO, Liner Terms); and
laytime / laydays, demurrage and despatch money
Laytime is the total time (number of days) allowed for loading/unloading the
cargo. There are different ways to calculate the days.
running or consecutive days (24- hours);
working days (Sundays and holidays excluded), and
weather working days--a good weather day and a working day
Demurrage and dispatch money are stipulated in order to reduce the
operating cost of the vessel.
A time charter is the hire of a ship for a definite period of time from a few
months up to 20 years. A time charter party should include the following main
clauses.
description of ship;
trade limit (cargo, area);
charter period;
delivery of vessel;
charter hire;
suspension of hire;
redelivery of vessel, and
sublet;
4) General procedures of ocean transport by liners
A large number of exporters and importers do not have a large enough traffic
to justify the use of a tramp. Liners have proved to be a very economical
means of international cargo distribution. To use liners, the following
procedures are generally practical:
Find out freight rates.
Select a shipping line and a particular vessel for reliable service and
reasonable cost.
Book shipping space.
Register cargo on a shipping note (S/N), which describes the details of
cargo, and send the shipping note to the shipping line.
Register details on the customs forms.
Arrange adequate packing, including shipping marks.
Receive calling forward notice (when to send in the cargo) from shipping line.
Send cargo to the port of shipment with consignment note, which has the
details of the shipment.
Pay freight bill.
Receive from the shipping line a bill of lading (B/L).
Send B/L via shipping line or directly to consignee or to a bank acting as
intermediary.
5) Shipping and forwarding agents
Large exporters are able to afford their own export shipping staff and try
to handle all shipping themselves. But it is more economical for small
exporters to use forwarding agents.
Forwarding agents are experts on the availability of different modes of
transport for different kinds of markets, on the cost of transport and on the
suitability of each mode.
A forwarding agent should act as export traffic department in general. An
agent's jobs are:
booking space;
arranging documentation;
collecting cargo;
dealing with customs entries and other formalities;
arranging payment and insurance;
grouping a number of consignments;
giving advice on markets, import/export regulations and export packing.
6) Freight rates
Like prices of any other commodities and services sold and bought in the
market, freight rate is also determined by supply and demand of ocean
transport.
The demand for a particular mode of international transport service is
basically derived from the demand for the commodities carried and is affected
by the elasticity of demand4for the commodities.
For ocean or air transport, the demand is determined by the competition
between carriers and the competition of substitutes or alternatives for the
commodity carried.
On any particular route, the demand is determined by the competition
from carriers of the same mode on the same route, the competition from
other modes of transport on the same route, and the competition from
carriers operating from alternative supply areas which may be competitive
with similar commodities.
 In normal times, an important factor affecting elasticity of demand for
ocean or air transport is the cost of transport in relation to the market price of
the goods carried.
(1) Factors contributing to formulation of freight rates
Generally speaking, the following factors are important in fixing freight rates:
competition between various modes of transport;
nature of commodity in terms of quantity to be shipped, period of
shipment, measurement and value of cargo;
origin and destination of cargo that represent distance, risk and
convenience of transport;
overall transport cost including fuel, wages for the crew, port dues, etc;
nature of packing and convenience of handling;
susceptibility of cargo to damage and pilferage;
general Ioadability of transport unit;
additional facilities such as heavy lifts or livestock facilities required to
complete the transport;
mode(s) of transport, and
actual routings when two or more routes are available.
(2) Freight rates for liners
Freight is collected in different ways. Shippers should be familiar with
them in order to estimate and reduce, if possible, the cost of transport.
For most types of cargo, freight is charged by weight, by volume, or by
weight or volume ("per freight ton W/M ships option").
A freight is a special unit used in calculating charges that must be paid for
shipping the cargo. It can be calculated according to weight (weight ton) or
volume (measurement ton). A weight ton is the actual weight of the cargo,
and a measurement ton is every 40 cubic feet or one cubic meter.
For valuable cargoes, ad Val Orem freight rate is charged in proportion to
the estimated value of the cargo.
For certain cargoes, freight rate might be charged by "W/M or Ad Val
Orem" or "W/M plus Ad Val Orem".
For cargoes such as trucks and animals, freight is charged for each unit of
trucks or each head of animals.
For each shipment, there is a minimum charge regardless of the size of
the shipment.
There are also possible "extras" such as:
port congestion surcharge;
alteration of destination surcharge;
deviation surcharge;
heavy lift additional;
over-length additional;
hold and tank cleaning charge for liquid cargo.
For huge quantity of cargo such as grain, coal and ore, etc, freight rate is
open to negotiation. That is called an open rate.
 A rebate can be offered for substantial quantity of traffic or a long-term
customer.
7) Bill of Lading
(1) Functions of the documents
A bill of lading is a shipping document that serves as a receipt from the
shipping company for shipper's goods, a title document to the goods shipped,
and an evidence of the contract of carriage between the shipping company
and the shipper.
The B/L is the most important document when shipping goods by ocean
freight.
(2) Types of B/L
Shipped/On Board B/L
This B/L is issued only when the cargo has been shipped or loaded on
board the carrying vessel. It has the name of the vessel and the date of the
shipment. Such a B/L is obligatory for Group C contracts? It is also safe for
buyers as it proves that the goods have been loaded or shipped.
Received for shipment B/L
When the cargo has been received by the shipping company but not yet
loaded on board a vessel, such a B/L is issued. It proves only the receipt but
not the loading or shipment of the cargo. It therefore has no date of shipment
and generally no name of a vessel.
A received for shipment B/L becomes a shipped B/L with an "On Board"
notation. This notation should be duly signed and dated.
This type of B/L is often used for the shipper to negotiate the B/L at an
earliest possible date when making up container loads.
Clean B/L
This is a B/L which bears no superimposed clauses expressly declaring a
defective condition of the goods or packaging such as "insufficiently packed",
"one case leaking" ,etc. It shows that the cargo has been delivered to the
carrier in apparent good condition.
Dirty/Foul/Unclean B/L
Such a B/L contains a clause of disagreement on the printed statement of
the B/L such as "in apparent good order and condition". It shows that the
cargo has been delivered to the carrier in dubious condition.
However, the following clauses do not convert a clean B/L into an unclean
B/L.
Clauses which do not expressly state that the goods or the packaging are
unsatisfactory (eg, "second-hand cases", "used drum");
Clauses which emphasize carrier's non-liability for risks arising through
the nature of the goods or the packaging, and
Clauses which disclaim on the part of the carrier knowledge of contents,
weight, measurement, quality or technical specification of the goods
Straight B/L
Such a B/L has a designated consignee, and it is usually not transferable
by the shipper. This type of B/L is often used for high value shipment for
security or for cargo with a special purpose such as exhibition where a
transfer is not needed.
Open/Bearer/Blank B/L ;
This type of B/L makes the consignee "to bearer" or leave it blank. No
endorsement is needed to transfer the document and the cargo is delivered to
any bearer of the B/L.
It is not much in use now due to the risk involved.
Order B/L
An order B/L makes the consignee "to order". Shipper's endorsement is
required in order to transfer the B/L.
"To order" means "to order of shipper". To transfer the document, the
shipper must make an endorsement. There are three ways of endorsement.
Blank/General endorsement has the shipper's signature only. The B/L
becomes a bearer instrument after a blank endorsement.
Special/Direct endorsement has the endorsee named by the shipper. The
B/L then becomes an order instrument.
Restrictive/Qualified/Conditional endorsement has special conditions that
must be observed during the transfer.
A blank endorsement is usually required for a "to order "B/L if no other
stipulations exist in the sales contract or the letter of credit.
Direct B/L
This type of B/L means that the cargo on the B/L must be shipped from
the port of loading directly to the port of discharge on the same vessel.
Transshipment B/L
Transshipment B/L means the cargo on the B/L changes ships during
transit. Such a B/L has the phrase "to be transshipped at xxx".
Since transshipment means higher risk for the cargo, buyers usually do
not allow transshipment. However, when payment is to be made by a bank, it
will accept a transshipment B/L if certain conditions have been met.
Through B/L
When a shipment needs two or more carriers of different modes such as
sea-land or sea-river, a through B/L is issued. It has a growing popularity with
the development of containerization.
But, in such an arrangement, each carrier is responsible only for its own
distance although he contracts for further carriage as agent of the shipper
with next carrier.
The consignee will get the first B/L through a bank, exchange it for the B/L
issued by the last carrier at destination, and take delivery of the cargo.
Combined transport document (CTD)
By issuing a CTD, a Combined Transport Operator will be responsible for
the complete distance of shipment. This is the major difference between a
CTD and a Through B/L.
Long Form B/L
A long form B/L has shipping contract clauses on the back page. In case of
need, parties involved can refer to those clauses to find out the rights and
obligations of the carrier.
Short Form B/L
This type of B/L is often issued under a charter party that stipulates the
rights and obligations of the carrier. It has no clauses on the back page and is
usually not accepted by banks.
On Deck B/L
An on deck B/L is issued when the cargo is not loaded into the ship's hold
but placed on the deck of the ship. It represents higher risks for the cargo and
is not accepted unless expressly permitted by the consignee.
Stale B/L
A stale B/L is one that is negotiated when the L/C has expired or one that
will reach the consignee after the arrival of the cargo. It is up to the
negotiating bank to decide if a B/L is stale.
A stale B/L will often incur storage cost and damage to the cargo and thus
is not allowed. If it is unavoidable, it should be expressly permitted. With a
bank guarantee, the consignee can get the shipment first.
Ante-dated B/L
A B/L is ante-dated when the actual date of loading is later than the date
set in the contract or the L/C. It is used by some shippers in order to negotiate
payment when they have not been able to effect shipment in time.
Advanced B/L
Looked the same as a shipped B/L, an advanced B/L is in fact issued
before loading the cargo on board the ship in order to negotiate payment
before L/C expires or to negotiate payment at an earliest possible date.
Freight Prepaid B/L
This type of B/L is issued only after the freight has been paid.
Freight at Destination B/L
Sometimes freight will be paid at destination. For example, under a FOB
contract, the seller can arrange the shipment on behalf of the buyer but has
no obligation to pay the freight. Thus, the buyer will pay the freight at
destination before he takes delivery of the goods.
The above types of B/L are not mutually exclusive.
One B/L, for example, can at the same time .be shipped, clean, order,
transshipment, long form and freight prepaid B/L. The importer and the
exporter must reach an agreement on the type of B/L to be presented by the
exporter.
(3) Common discrepancies found in B/L
Bill of lading is a very important, if not the most important, document in
an international trade transaction. Because it represents the title to the goods,
bill of lading must be handled carefully. Any discrepancy in this document
might result in non-payment by either the bank or the buyer. In general, the
following discrepancies are most common and special attention should be
paid to avoid them:
document not presented in full set as requested;
alterations not authenticated by shipping company or its agent;
unacceptable type of B/L, eg, on deck, dirty, etc;
not endorsed "On Board" when so required, "On Board" not signed and
dated or dated after the latest shipment date on credit;
B/L not blank endorsed;
failure to indicate if freight prepaid or freight collected;
inconsistency between B/L and other documents (eg, L/C, invoice, etc) in
port of shipment, port of destination, description of goods, weight,
measurement, shipping mark, etc;
document dated later than the shipping date in L/C, and
late presentation for negotiation--beyond the earlier date of the L/C date of
expiry and the L/C date of presentation (maximum 21 days after B/L issuance)
8) Clause of shipment
The clause of shipment specifies all the details regarding the shipment of
the goods. The details include time of shipment, port of shipment and port of
destination, advice of shipment, partial shipment and transshipment, etc.
(1) Time of shipment
Time of shipment is the time period or the deadline by which the seller
must effect the shipment of the contract goods.
In negotiating this clause, considerations in relation to the time should be
made in the following areas:
availability of goods and shipping space if the seller is responsible for
transport;
clarity of stipulation and absence of ambiguity such as "immediate/prompt
shipment";
some flexibility to allow reasonable length of time for loading the cargo;
nature of the cargo because some goods like tobacco should be loaded in
good weather and more days should be allowed if shipment is to be made in
raining season.
There are basically two ways to set the time of shipment:
One is to clearly specify a period of time. The other is to create a link
between the time of shipment and the deadline by which the relevant L/C
must reach the seller. For example, shipment is to be made xx days after the
seller receives the L/C. The first method is straightforward and easy to
understand. The second provides more security for the transaction as
shipment will not be made until payment is guaranteed.
Generally speaking, the L/C should arrive at least 15 days before the time
of shipment to allow sufficient time to check and amend, if necessary, the L/C
and to arrange shipment.
And the L/C should expire 7-15 days after the deadline for shipment to
allow sufficient time to prepare documents before negotiation.
(2) Port of shipment and port of destination
Port of shipment and port of destination can be specified when the contract is
signed. In case a decision cannot be made by that time, several alternatives
can be listed and a time limit be set by which the seller or the buyer must
notify the other party which port is to be the port of shipment or destination.
For example, in a CIF contract, the port of shipment can be made
"China port" and the port of destination can be specified as:
One port out of ABC/DEF/GHI is to be declared by the buyer on or before the
opening of the L/C; or
One port out of ABC/DEF/GHI at the buyer's option, the buyer must declare the
definite port of destination to the carrier xx days before the vessel's expected
time of arrival at the first discharging port and bear the optional fees thus
incurred.
In choosing port of shipment and port of destination, several
considerations must be made.
Firstly, try to make the port of shipment and the port of destination clear if
it is possible. That gives convenience to the transaction.
Secondly, allow some flexibility by allowing optional ports because
sometimes when the contract of sale is concluded, it might not be possible to
decide precisely on the exact point or even the place where the goods should
be delivered by the seller for carriage or at the final destination. It is then
usually stipulated that the buyer has the right or duty to name later on the
more precise point. If the buyer fails to do so, he must bear the risks and
additional costs resulting from such failure.
The seller then has the right to select the point which best suits his
purpose.
Thirdly, political considerations should be made. For instance, when a
country is under an international sanction or when a country is an enemy of
some other countries, sellers might want to avoid going to the port of that
country.
Fourthly, port regulations, facilities and charges should be considered.
Ports with unfamiliar regulations, poor facilities and high charges should be
avoided; otherwise, efficiency might be reduced and costs increased.
For example, some ports do not allow certain dangerous cargoes to enter,
to be loaded or unloaded; some ports need special permit or documents if
dangerous cargoes are to be loaded or unloaded; some ports require special
type of packing when dangerous cargoes are loaded or unloaded; and some
ports permit unloading only if the consignee will immediately take delivery of
the dangerous cargo alongside the carrying vessel. Otherwise, the party that
has violated the regulations will be fined, sued or imprisoned.
Lastly, there is a possibility that different ports have the same name and
that inland cities might be used as loading or unloading ports. Therefore, it
might be wise to specify the area where the intended port is located and to
find out if an inland city has been used as the port of shipment or the port of
discharge.
(3) Advice of shipment
Advice of shipment is required to coordinate the responsibilities of the
exporter and the importer.
For example, when FOB is used, the exporter needs to know when the
ship will arrive to pick up the goods so that he can get the goods ready in time
for delivery. And the importer needs to know 'when the goods will be ready in
order to arrange transport. Besides, the importer needs to know when the
goods are delivered in order to arrange insurance and when he should be
ready to receive the goods.
The advice often includes information such as contract number, name of
commodity, name of the carrying vessel, loading date, invoice value, and
quantity, etc.
(4) Partial shipment and transshipment
Partial shipment means shipping the commodity under one contract by
more than one shipment. The clause of shipment must specify whether partial
shipment is allowed by using a phrase such as "Partial shipment (not) to be
allowed".
Transshipment means the cargo being shipped will change ships before
reaching the port of destination. The clause must also specify whether
transshipment is allowed by using a phrase such as "To be transshipped at
xxx" or "Transshipment not to be allowed".
If transshipment is carried out in order to reach the agreed destination,
the seller would have to pay the cost of transshipment. If, however, the carrier
exercised his rights under a transshipment or similar clause in order to avoid
unexpected hindrances (such as ice, congestion, labor disturbances,
government orders, war or warlike operations), then any additional cost would
be on the buyer's account.
9) More or less clause
It is sometimes difficult to ship the exact quantity of the commodity, then
a "more or less clause" can be used to allow some tolerance in the quantity.
The wording of such a clause might be' "xxx with x% more or less at
Seller's/Ship's option".
If the word "about" or "approximately" is used, it means a difference not
exceeding 10% more or 10% less is allowed.
Unless there is a stipulation that the quantity of the goods must not be
exceeded or reduced, a tolerance of 5% more or5% less will be permissible.
This clause is normally used for bulk goods and not applicable to the
number of packed units or individual items.
It is also important to allow the same tolerance in the total sum of
payment if the quantity has a tolerance so that the seller will be paid when he
has shipped more goods.
2. AIR TRANSPORT
In the world today there are over 1 000 airlines, over30 000 civil airports
(1 000 of them suitable for international flight), and over 7 000 jet aircrafts.
 Air transport ships 1% of the total world trade in volume,20%-30% in
value and it is increasing at a rate of 7%-8% per year.
Air transport services are divided into three categories: scheduled airlines,
chartered carriers, and consolidated consignments by freight forwarders.
1) Advantages and disadvantages of air transport
(1)Advantages
High speed and quick transit
This is particularly important for perishables and seasonal goods.
Low risk of damage and pilferage
Air transport offers tighter security than other modes of transport for the
goods carried. Insurance underwriters consequently offer favorable insurance
rates.
Common code of liability conditions to all IATA accredited airlines
All IATA members observe the same code of liability conditions. This
makes transactions easier with all IATA airlines.
Low packing cost
Air transport makes the goods less subject to damage and pilferage;
because of this, packing cost can be reduced.
The savings on packing cost can offset the higher freight compared with
surface transport.
Smaller amount of capital tied up in transit and interest savings
Sometimes the buyer is allowed to pay after the goods arrive at
destination. Then, if the transportation of goods is completed faster and in
better condition, financial settlement is usually faster. This improves the cash
flow situation of the seller.
Reduced need for extensive warehouse accommodation and less risk of
stock piling
The high speed of air transport enables buyers to get quick supplies, so
buyers do not need a big stock and extensive warehousing facilities. On one
hand, it reduces costs; on the other hand, it reduces the risk of stockpiling.
Ideal for palletized and a wide variety of high-value, small-volume
consumer cargoes
Air transport is most suitable for high-value, small-volume cargoes
between 1 500 to 2 000 kilograms. Almost 100% of computers, electronic
goods, medicine are shipped by air.
Expanding trade and new markets
Because of the high speed, goods like flowers and some food can be sold
to new markets that would not have existed without air transport. For goods
that need regular maintenance, the development of market depends heavily
on the quality of after-sale services. Buyers will be willing to purchase some
goods only when they are certain that air transport can provide timely support
to the services.
Parity on rates and better service quality
In order to get more business, airlines compete on service quality since all
IATA members must follow IATA guidelines insetting prices.
(2) Disadvantages
limited capacity, dimension and weight restrictions
very high operating expenses and high transport cost
vulnerable to disruption when weather is bad
expensive handling cost because of consignments tend not to be consolidated
sparsely located facilities
2) General procedures
shipper to complete consignment note, attach copy of sales contract and
other documents
forwarder to collect cargo, clear customs and arrange transport with
carrier
exporter to settle payment with air waybill
3) Air waybill
There are two types of air waybills: Master Air Waybill that is issued by
airlines and House Air Waybill that is issued by freight forwarders.
A set of air waybill should have three originals and at least six copies. The
first original is "for carrier" and is signed by shipper. The second is "for
consignee" and is signed by both shipper and carrier. The original is carried
with consignment and delivered to customer at destination. The third original
is "for shipper" and is signed by carrier. The number of copies required for
each shipment varies.
An air waybill is a receipt, an evidence of contract, but not a title
document. It is therefore not transferable or negotiable and a shipper does
not lose his ownership of the cargo by handing the air waybill to the airline.
A shipper can present his copy to exercise his "right of disposal" to stop
the goods at any point of journey, to have the goods delivered to a different
consignee, or to have the shipment returned, provided that the shipper does
not exercise this right in such a way as to prejudice the carrier or other
consignors and repays any expenses occasioned by the exercise of this right.
An air waybill is also used for the purposes of instruction to the airline,
customs declaration, bill for freight, and certificate of insurance (Red Air
Waybill) if carrier is requested to arrange insurance.
4) Freight
In order to stimulate traffic, different types of air freight rates are
designed. For a particular type of cargo and on a particular route (either in
one direction or in both directions),one of the rates is applicable. For instance,
General Cargo Rates are the basic rates. Specific Commodity Rates are
reduced rates applicable to a wide range of commodities specified in the tariff
of the carrier. If no commodity rate is available for cargoes like live animals,
human remains or valuable cargoes, Classification Rates apply.
Air freight is collected according to actual weight for heavy cargo or
measurement weight for large volume cargo. The rates are normally quoted
per kilogram -- gross weight or volume equivalent. If the volume of a 1
-kilogram cargo is smaller than 7 000 cubic centimeters or 427 cubic inches,
then actual weight will be used; otherwise, measurement weight is used and
each unit of 7 000cubic centimeters or 427 cubic inches is charged as one
kilogram. For example, if the actual gross weight of a cargo is 250 kilograms
and the measurement is 1 908 900 cubic centimeters, the total measurement
should be divided by 1 kilogram/7 000 cubic centimeters and the quotient is
272.70 kilograms. Then the freight should be charged according to the
measurement weight (273 kilograms) since the measurement weight is larger
than the actual gross weight.
The characteristics of air freight are: the freight is charged for airport to
airport (single trip) only, and it is the freight only, excluding other charges
such as customs fees and storage fees.
3. RAIL TRANSPORT
Rail transport is a major mode of transport in terms of volume, second
only to ocean transport that itself relies heavily on rail transport in collecting
and distributing cargoes.
1) Advantages of rail transport
The modern railway system is a high capacity form of transport operating
on a disciplined, controlled and reliable way. It is capable of attaining
relatively high speeds and is most economical when complete train load is
used. Besides, compared with most other modes of transport, it is less prone
to interruption by poor weather. Rail transport is most convenient between
countries connected by railway.
2) Types of freight cars
Different types of freight cars have been designed to suit the needs of
different types of cargoes. A shed car is closed and provides complete
protection for the cargo. An open car is an open-top wagon usually used for
cargoes with water-proof packing or cargoes that will not be damaged in wet
weather. A flat car does not have top and sides and is used for carrying
cargoes with heavy weight and/or large measurement such as automobiles,
timber, containers, etc. There are also special-purpose cars for carrying a
specific type of cargo such as refrigerated cars, tank cars, ventilation cars,
and live stockcars.
3) Consignment note
The consignment note used in rail transport contains the name of the
destination station, the name and address of the consignee, a description of
the goods, the weight or comparable information, the number of packages
and a description of the packing in the case of consignments in less than
wagon load, a detailed list of the documents required by customs and other
administrative authorities and the name and address of the sender. Other
information such as the method of delivery, the tariffs, etc might also be
included if necessary. The sender shall be responsible for the correctness of
the information in the consignment note. The railway always has the right to
verify if the consignment corresponds with the information in the consignment
note and if certain conditions have been satisfied in order to send the goods
by rail.
Once the forwarding railway station has accepted the goods for carriage
together with the consignment note, the contract of carriage comes into
existence. When it has been stamped by the railway, the consignment note
becomes the evidence of the contract of carriage, but not a bill of lading. The
consignment note will be delivered to the consignee at the destination station
against receipt and payment of the amounts chargeable to the consignee.
Besides, the railway will also certify receipt of the goods and the date of
acceptance for carriage by affixing the date stamp on the duplicate of the
consignment note before returning the duplicate to the sender. The duplicate
of the consignment note is the document for settlement of payment between
the consignor and the consignee.
4. ROAD TRANSPORT
The road vehicle is a Low capacity but very versatile unit of transport
which is most flexible in operation. Road transport is used and has become
increasingly dominant between countries connected by roads and plays a very
important role in shipping international cargoes to and from sea ports and
airports.
1) Advantages and disadvantages of road transport
One of the most significant advantages is the distributive ability of road
vehicles. Overall road transport can offer a door to door service without
intermediate handling. If the hauler is affiliated to Transport International
Router, no customs examination arises in transit countries. Further, it is very
flexible in operation which is particularly useful when circumstances demand
a change in routing through road works/blockage or disrupted shipping
services. Compared with some other modes of transport, it is very competitive
within certain distance bands both in terms of transit times and rates.
However, road transport has limited capacity and relatively high operating
cost. The risk of pilferage and damage is also higher although the driver
accompanies the vehicle throughout the road transit.
Road transport is ideal for general merchandise and selected bulk cargo in
small quantities conveyed in a specialized road vehicle.
2) Consignment note
The consignment note used in road transport is the evidence of the
making of the contract of carriage, the conditions of the contract and the
receipt of the goods by the carrier. The consignment note is made out in three
originals signed by the sender and the carrier. The first original is handed to
the sender, the second accompanies the goods and the third is retained by
the carrier.
With his copy of the consignment note, the sender has the right to dispose
the goods. For instance, he can ask the carrier to stop the goods in transit, to
change the place at which delivery is to take place or to deliver the goods to a
consignee other than the one indicated in the consignment note. However,
this right of the sender ceases to exist when the second copy of the
consignment note is handed to the consignee. In fact, the consignee has the
right to require the carrier to deliver to him, against a receipt, the second
copy of the consignment note and the goods after arrival of the goods at the
place designated for delivery. The consignee might also have the right of
disposal from the time when the consignment note is drawn up, if the sender
makes an entry to that effect in the consignment note.
5. CONTAINERIZATION
Containerization is a method of distributing merchandise in a unitized
form. It is the best known kind of cargo unitization.
About two-thirds of the general cargo in world trade are shipped by this
method.
1) Features of containerization
(1) Permit door-to-door service or, in case of need, services from door to
container freight station (CFS)/container yard(CY), from CFS/CY to door, and
from CFS/CY to CFS/CY.
There is less or no need to reload or check the cargo during transit.
(2) Usually use only one carrier in conjunction with multimodal transport
When there is only one carrier throughout the transport, higher efficiency
and security are achieved.
(3) Use special equipment
Special equipment offers higher efficiency in loading and unloading (about
10 times as fast as that of general cargo vessel) and enables quick transit and
better quality. There is low risk of damage and pilferage and thus more
favorable premium is offered by insurance companies.
(4) Save labor and handling expense by close to 90%compared with those of a
general cargo vessel
(5) Reduce packing
This is an area of savings from the use of containers.
(6) Provide better service
Goods will arrive in better condition.
(7) Get paid for the export invoice sooner due to quicker transit and better
service.
2) Sizes and types of ISO containers
(1) Sizes
The majority of containers used are built to ISO specifications. The basic
container is most commonly built of steel or aluminum.
Cross section: 2.60 m x 2.45 m
2.45 m x 2.45 m
Length: 3.05 m (10 ft)
6.10 m (20 ft)
9.15 m (30 ft)
10.70 m (35 ft)
12.20 m (40 ft)
Capacity Volume Weight

2.45 x 2.60 x 6.10 31.0 cum 18 720 kg

2.45 x 2.60 x 12.20 68.1 cum 27 580 kg
2.45 x 2.45 x 6.10 30.0 cum 1 8 000 kg

2.45 x 2.45 x 12.20 66.5 cum 27 070 kq

The 20-foot and 40-foot containers are most popular. Containers of other
sizes and capacities are also available but not widely used.
(2) Types
Air/Water-tight Container:
for general cargo
Air Ventilation Container:
for vegetables and fruits
Constant Temperature Container:
for cargoes not to be shipped in Iow temperature to avoid freezing
Refrigerator Container:
for frozen food, chemicals, etc
Open Top Container/Top Loader:
for over-length, over-weight cargoes
Fluid Container:
for liquid cargoes
Frame Container/Skeleton Type Container:
for animals
Half Height Container:
for over-weight, small volume cargoes
Special Container, eg, Dress Hanger Container
3) Procedures of export shipment by containerization
Book shipping space
Receive/pick up empty containers (for FCL)
A shipper must pay a detention charge if he uses the container for more
than the number of days allowed by the carrier. The dunnage material is
provided and the expense is paid by the shipper for FCL. For LCL, it is either
the CFS or the carrier who provides the material and pays the expense.
Deliver loaded containers to the carrier/deliver cargo to CFS
Receive dock receipt
Receive B/L with dock receipt and negotiate payment
4) Freight
(1) Structure of freight
The freight charged for containerized cargoes consists off our parts: inland
haulage charges, terminal handling charges, ocean transport freight, and less-
than-container-load service charges. Inland haulage charges are collected for
the trucking service provided by the carrier. Terminal handling charges are
paid for the handling of the container at dock. Less-than- container-load
service charges represent the cost of stuffing and unstuffing at container
bases when the quantity of the cargo being shipped is small and cannot fill a
whole container.
Depending on the services used, carriers calculate the total freight
payable by the shipper. There can be the following possibilities.
Full Container Load (FCL)-FCL:
inland haulage charges + terminal handling charges +
freight + terminal handling charges + inland haulage charges
FCL-Less than Container Load (LCL):
inland haulage charges + terminal handling charges +freight + LCL
service charges
LCL-LCL:
LCL service charges + freight + LCL service charges
LCL-FCL:
LCL service charges + freight + terminal handling charges+ inland
haulage charges
(2) Collection of freight
Minimum freight
This is the lowest charge the shipper has to pay. It is collected by freight
ton, eg, a number of tons/cubic meters or a percentage of the maximum
capacity in weight/volume.
Maximum freight
Maximum freight is collected for FCL within the weight limit. The shipper can
enjoy a discount of about 20%
5) Transfer of risks
For full container load, if a shipper loads the container without the
carrier's supervision, the carrier has no responsibility regarding the cargo. The
shipper should seal the container with the carrier's seal and deliver the
container to the carrier. The risk transfers to the consignee when the
consignee takes delivery of the container after inspecting the seal.
The loading can also be supervised by a notary public appointed by the
carrier and then the carrier will be responsible for the cargo, but the shipper
must pay the charges of supervision.
After taking delivery of the container, the consignee must open the
container in his warehouse and declare shortage within hours. The carrier will
then appoint a notary public to inspect the cargo. If the cargo has been
moved out of the warehouse the carrier will no longer be responsible for the
cargo.
For less-than-container-load cargo, risks transfer at CFS.
The cargo is weighed or counted and a receipt is issued or the B/L is
presented by the consignee.
6. PALLETIZATION
Palletization is a simplified version of containerization by which goods are
carried on flat wood or metal base or frames.
Typical pallet size: 1 000 mm x 1 200 mm (or 800 mm x1 000/1 200 mm)
Maximum capacity: 2 tons
1) Advantages
aid cargo handling
increase efficiency by using fork lift trucks
reduce packing and handling
facilitate counting and stowage
lower transport cost by 5%-11%
2) Points for attention when palletization is used
packing to be strong enough and waterproof
cargo to be squarely stowed on pallets
cargo on the same pallet to have the same consignee
cargo on the same pallet to be the same
each pallet to have the same quantity and weight of cargo
each pallet to be properly marked
no need to pay freight for pallets--Shippers should separate the
weight/volume of cargo and that of pallets to avoid paying freight for pallets.
7. PIPELINES
Pipeline networks are mainly used for the distribution of oil and gas. One
advantage of the network is the Iow cost of distribution as very little labor is
needed in the network, although the cost of installing such a system may be
moderately high. Another advantage is the 24-hour availability of the network.
Besides, the network needs little maintenance during operation. From an
environmental point of view, pipeline networks cause little disruption to the
environment during installation and create no noise or fumes during
distribution of cargo.
The disadvantage of pipeline networks is limited capacity. Until a new
pipeline is installed, the market growth is somewhat inhibited.
8. INTERNATIONAL MULTIMODAL TRANSPORT
International multimodal transport is the carriage of goods by at least two
different modes of transport on the basis of a multimodal transport contract
from a place in one country at which the goods are taken in charge by the
multimodal transport operator to a place designated for delivery situated in a
different country.
Advantages of international multimodal transport
Although different modes of transport are used, a multimodal transport
operator is solely responsible for the goods from his taking in charge of the
goods from the consignor to his delivery of the goods to the consignee. A
multimodal transport operator (MTO) concludes a multimodal transport
contract as a principal and assumes responsibility for the performance of the
contract, no matter how many carriers participate in the multimodal transport
operations. This adds simplicity to the transport.
Because of the simplicity and the use of containers in multimodal
transport, higher efficiency and better quality of transport are also realized. As
multimodal transport uses only one document, multimodal transport
document, the documentation process can also be more efficient and
economical.
2) Multimodal transport document
Multimodal transport document is a document that evidences a
multimodal transport contract, the taking in charge of the goods by the
multimodal transport operator, and an undertaking by him to deliver the
goods in accordance with the terms of that contract.
When the goods are taken in charge by the multimodal transport
operator, he shall issue a multimodal transport document which, at the option
of the consignor, shall be in either negotiable or non-negotiable form. A
negotiable multimodal transport document is made out to order or to bearer.
A non-negotiable multimodal transport shall indicate a named consignee.
9. GENERAL CONSIDERATIONS IN CARGO TRANSPORT
1) Reliability
Reliability is the most essential requirement. Shippers must ascertain that
goods will arrive before the import license expires and that goods will arrive in
good condition.
2) Speed and frequency
Speed and frequency are important to shippers, manufacturers and
importers alike. It is important for shippers to market the goods by an
accurate arrival date, (eg, Christmas goods for the holiday season) and to
eliminate or reduce costs and banking charges. Manufacturers need to avoid
the risk and expense of obsolescence, especially for consumer goods.
Importers want to reduce stocks, warehouse expenses and the amount of
capital to reduce cost. And finally, consumers want to get the right
commodities such as fresh fruits, and fashionable clothing, etc.
3) Cost
Shipping costs are different in different times and directions with different
carriers. It is worthwhile to study the market carefully to obtain the lowest
possible transport cost to be more competitive in the world market.
Other considerations include the customer's choice and needs, the nature
of the commodity to be shipped, the total time available, the urgency of the
consignment and the suitability of available transport services.
Ocean Marine Insurance

Insurance is a contract whereby one party, inconsideration of a premium

paid, undertakes to indemnify the other party against loss from certain perils
or risks to which the subject matter insured may be exposed to. It is an
extensive subject and ocean marine insurance is only a small part of private
insurance.

Ocean marine insurance covers ships and their cargoes, both on the high
seas and on inland waterways.
1. NEED FOR INSURANCE

Exporters and importers face all the time uncertainties of loss of their
goods. Insurance is used to protect their financial interests against such risks
and actual lossesTrade and insurance can and do exist independently, but in
proper context, insurance is an indispensable adjunct. Without adequate
insurance and protection of the interests of those with goods in transit,
international trade would be negatively affected.

2. COVERAGE OF OCEAN MARINE INSURANCE

By purchasing insurance, the assured protects his financial interests against

three things: the risk of loss, the actual loss and the expenses incurred to
avoid or reduce loss.

1Risks
Two types of risks are covered by ocean marine insurance. The first type is
the perils of the sea that include both natural calamities and fortuitous
accidents. Natural calamities refer to earthquake, heavy weather such as
hurricane and thunderstorm, etc. These events should be exceptional to some
extent and the ordinary action of the wind and waves are not considered
natural calamities. Fortuitous accidents include fire, smoking, stranding,
sinking, collision, etc. However, fire caused by inherent vice or nature of the
cargo is excluded.
All the perils must occur at sea and must be because of sea, otherwise the
insurance will not cover them A vessel intentionally sunk by its owner, for
example, is not an accident because of sea and therefore will not be covered
by ocean marine insurance. Similarly, natural deterioration and wear and tear
are not perils of sea either.
The second type of risks covered is extraneous risks. These risks include
ordinary risks such as theft, pilferage, rain damage, shortage, breakage, etc
and special risks such as strike, war, failure to deliver, etc.

2) Losses
Ocean marine insurance covers two types of losses, partial loss and total
loss.
Partial loss means the total loss of part of the insured cargo (eg, the loss of
one case out of a shipment of ten) or the damage to all or part of the insured
cargo.
Total loss can be classified into actual total loss or constructive total loss.
Actual total loss means the non-existence of the insured cargo in value.
Constructive total loss, however, means the subject matter insured is
reasonably abandoned on account of its actual total loss appearing to be
unavoidable or because it would not be preserved from actual total loss
without tan expenditure greater than its recovered value. In other words, it is
unlikely to recover the subject matter or the cost of recovery will exceed the
value of the subject matter.
3) Expenses
Ocean marine insurance also covers some expenses incurred in reducing
the loss of the subject matter insured either by the assured himself or a party
other than the insurer and/or the assured. This encourages efforts to save the
subject matter insured.

3. MAIN CATEGORIES OF GENERAL CARGO INSURANCE

1) Free from Particular Average FPA) of China Insurance Clauses (CIC,

effective January 1, 1981)
Before going to FPA, average terms need to be explained. The word
average has a special meaning in cargo insurance. It means partial loss or
non-total loss to a ship or cargo, and partial loss in turn means 1) total loss of
part of the insured cargo or 2) damage to all or part of the insured cargo.
Particular average means a loss that is borne solely by the owner of the lost
property (ship or cargo) and general average means a sacrifice made for the
common safety of both the cargo and the ship. Partial damage of cargo by sea
water is, for instance, a particular average, while partial damage of cargo by
water that has been used to put out a fire is a general average since the
damage has been made in order to save both the ship and the cargo on board
the ship of all the cargo owners. (Of course, the damage caused by the fire is
still a particular average).
Particular average is recoverable from the insurance underwriter, if it has
been covered; but general average is spread among the interests affected
and all including owners whose property does not sustain a loss must make
proportionate contributions, which are then recovered from the insurance
underwriter.
A general average must be a partial, deliberate and reasonable sacrifice of
the ship, freight, or goods, undertaken for the common safety of the
adventure, in time of peril and/or extraordinary expenditure with the like
object such as the charges for towing a stranded ship.
Free from Particular Average then means no partial loss or damage is
recoverable. It provides coverage only for total loss of cargo together with
ship or aircraft and general average.
FPA is the minimum coverage and offers limited protection. However, there
are two exceptions in which partial loss or damage is recoverable. First, if the
lost object is a separate package in a shipment such as one case out of a ten-
case shipment, partial loss or damage is recoverable. And if the vessel or craft
is stranded, Sunk or burnt, partial loss or damage is also recoverable.
Therefore FPA actually covers part of partial loss.
China Insurance Clauses are very similar to Institute Cargo Clauses (ICC,
effective January 1, 1982) made by the Institute of London Underwriters and
widely used around the world. ICC (C), for example, has the same coverage as
CIC FPA except for damage of package during loading and/or unloading.

2) With Average/With Particular Average (WA/WPA) of CIC

WA provides cover against all loss or damage due to marine perils or perils
of the sea including partial loss or damage throughout the duration of the
policy. This coverage provides protection against damage from sea water
caused by "heavy weather".
ICC (B) has the same coverage plus damage of package during loading
and/or unloading.
ICC (B) and (C) provide cover against specified risks only.

3) All Risks (AR) of CIC

Besides the risks covered by FPA and WA, All Risks also provides cover
against some extraneous risks of loss or damage (eg, theft, pilferage and non-
delivery, fresh water rain damage, risk of shortage, risk of intermixture and
contamination, leakage risk, clashing and breakage risk, hook damage, loss
and/or damage by breakage of packing, rusting risk). However, risks of war,
strike and loss or damage or expense proximately caused by delay or inherent
vice or nature of the subject matter insured are not covered.
ICC (A) provides cover against all risks that are not specifically excluded
and is similar to AR of CIC.

4) Special additional coverage

Besides the above categories of coverage, both CIC and ICC have some
additional coverages. For example, CIC has coverage against failure to deliver
risk, import duty risk, on deck risk, war risks, and strikes and so on. These
additional coverages must be taken out together with FPA, WA or AR. ICC also
provides coverage against war risks, strike and other risks, but war risks and
strikes can be taken out independently.

5) Exclusions of insurance policy

Insurance policies have excluded the coverage against some risks. These
exclusions are the loss or damage by risks such as inherent vice or
deterioration, insufficient or unsuitable packing, delay and loss of market, etc.

4. CARGO INSURANCE CLAIMS

1) Procedures
Cargo insurance claim includes a few steps as listed below.
 The assured should not give clean receipts when goods are in dubious
condition.
The assured should give immediate notice to the nearest branch or agency
in the event of damage giving rise to a claim. This notice means that a claim
has been filed. A delay in giving the notice, on the other hand, might result in
the underwriter's refusal to process the claim.
Insurance company will appoint a suitable surveyor to inspect the goods and
report on the nature and extent of the damage, usually a report or certificate
of loss is issued to the assured who pays a fee for it.
The assured should send claim paper to the insurance company with the
certificate. The inspection fee is refunded if the loss is recoverable.
It is of vital importance that the assured must be able to prove a loss by a
peril against which he was insured.

2) Documents required
The following documents are usually required in processing a claim for
compensation.
Original insurance certificate or policy
Original B/L, AW (3 or other contract of carriage)
Export invoice
Survey report or other documentary evidence detailing the loss or damage
Any exchange of correspondence with carriers and other parties regarding
their liability for the loss or damage
Any landing account or weight notes at final destination

Payment Terms
Compared with payment arrangements for domestic transactions, payment
arrangements for international transactions are more complicated and difficult
for a number of reasons. First, the arrangements are international; as a result,
longer distance and more procedures are involved Second, longer time is
needed in settling an international payment. Third, different regulations and
systems of law that are applied further complicate the arrangementsFourth,
the monetary and financial matters are different in different countries and
different methods are used Because of the above reasons, international
payment arrangements involve more risks and must be handled with special
care.

1. PAYMENT INSTRUMENTS OF INTERNATIONAL TRADE

In international trade, payment can be made by various means: drafts,
promissory notes checks, money orders, credit cards, and cash, etc. Cash is
rarely used except for some small transactions. Credit cards are riot widely
used either, especially for large transactions, because verification with and
approval from the credit card company can be inconvenient and time-
consuming when a card's credit limit is exceeded. So far drafts have been
used as the most common instrument of payment in international trade,
although promissory notes and checks are also sometimes used.

1) Draft/Bill of Exchange
(1) Definition
A draft or bill of exchange is an unconditional order in writing signed by one
party (drawer) requesting a second party(drawee/payer) to make payment in
lawful money immediately or at a determinable future time to a third party
(payee).
In the context of international trade, the drawer and payee is usually the
seller and the drawee and payer is usually the buyer.
(2) Basic contents of a draft
The forms of draft might be different, but the contents are basically the
same as listed below.
Date and place of issue
Time of payment
Name of payee
Currency and amount Credit reference
Name of drawee/payer
Drawer's name and signature
(3) Types of draft
Commercial draft. A commercial draft is one that is drawn by a firm or an
exporter. The drawee can be a firm, an exporter or a bank. A commercial draft
is commonly used in international trade in settlement of payment.
Banker's draft. A banker's draft is drawn by one bank on another bank. It is
used in settling payment obligations between banks.
Sight draft. A sight draft is one that is payable on presentation, i.e., the
drawee should immediately pay the amount on the draft drawn on him
Time/usance draft. A time or usance draft is one that is payable in a
specified number of days after 1) its date of issue;2) its date of acceptance; 3)
the date of B/L or at a fixed future date. The specified number of days is called
the "usance period"
Clean draft. A clean draft is one that is paid without the presentation of any
other documents attached. A banker's draft is usually clean
Documentary draft. A documentary draft is one that should be paid only
when certain documents have been attached to and presented together with
the draft. Commercial drafts are usually documentary: The most important
document is bill of lading that represents the title to the goods.
These types of draft are not mutually exclusiveFor instance; one draft can
be documentary, commercial, and usance at the same time.
(4) Use of drafts
Issuance
This is the process in which a drawer completes the items in a draft, for
example, drawee, amount, payee, date and place of payment, etc.
 Payee can be restricted to a specified party only (eg, "Pay ABC Company
only"), and such a draft will not be negotiable.
A draft can also be made a "to order" instrument. For example, under
payee, the phrase "Pay to the order of ABC Company" can be used. Such a
draft will be transferable with the endorsement of the payee.
If the payee is made "to bearer"no endorsement is needed for transfer.
Presentation
Presentation means the holder of the draft lets the drawee sight the draft
for payment or acceptance, depending on whether a sight draft or a time draft
is presented
Acceptance
If a usance draft is presented, the drawee takes up the obligation of payment
when the draft becomes due by putting the word "accepted", his signature
and the date of acceptance on the face of the draft.' The accepted draft will
be returned to the holder who will re-present it for payment when it is due.
Payment
For a sight draft, the drawee will pay the amount on the draft immediately
when it is presentedFor a usance draft, the drawee will pay when it is due.
(5) Dishonored bills and protests
Sometimes the drawee refuses or is unable to pay or accept a draft, and
then this draft is called a "dishonored bill".
If a draft is dishonored, the holder of the draft can exercise his right of
recourse and ask the drawer or the endorser to pay the draft amount.
However, the holder must obtain a "certificate of protest" from a notary
public, a law court or other institutions that have been authorized by law to
issue such a certificate to certify the dishonor of the draft. The certificate
includes the date and place of the first presentation, and the statement that
the drawee refuses to pay or accept. This is a legal procedure to register
officially that the draft presented for payment or acceptance has been
dishonored by the drawee.
After he has obtained the certificate of protest, the holder can present the
draft the second time. If the drawee still refuses to pay, the certificate can be
published in trade journals in some countries. The possibility of publishing the
certificate of protest gives the drawee some pressure to pay; otherwise; his
commercial creditability will be damaged in the business community.
However, the exporter should remember that protest does not ensure
payment and further legal action might be needed. Besides, protesting is
expensive and it might affect an ongoing relationship with an importer.
2) Promissory note
A promissory note is an unconditional promise in writing made by one
person (the maker) to another (the payee/the holder) signed by the maker
engaging to pay on demand or at a fixed or determinable future time a sum of
money to or to the order of a specified person or to bearer.
A promissory note can be issued by a person, a firm, or a bank. But
promissory notes issued by individuals and firms are not widely used in trade
today.
3) Check
A check is an unconditional order in writing addressed by the customer
(drawer) to a bank (drawee) signed by the customer authorizing the bank to
pay on demanding a specified sum of money to or to the order of a named
person or to bearer (payee).
A check is a special kind of draft in that the drawee is always a bank with
which the drawer has an account. Besides, a check is always paid upon
presentation. If the drawer wants to write a check now but does not want the
payee to collect the money immediately, the drawer can postdate the check.
A check can be made to order, to bearer, crossed with two parallel lines for
account deposit only, or certified by a bank that is going to pay.2 if a check is
issued by a bank; it is called a banker's demand draft.

2. Method of payment
Exporters and importers in international transactions have different
concerns. While the importer is concerned if he can get the goods as ordered,
the exporter wants the security of payment. Terms of payment reflect the
extent to which the seller requires a guarantee of payment before he loses
control of the goods. The more trustworthy the importer is, the less the
exporter needs to have payment guaranteed before he loses control of the
goods. Four methods of payment will be discussed here with increasing
uncertainties in payment for exporters.

1Cash in advance
Under this arrangement, the exporter is paid when the importer places his
order or when the goods are ready for shipment to the buyer.
(1) Cash with order
If cash with order is used, the importer pays for the goods when he places
the order with the exporter. Thus, the exporter does not use his own funds in
manufacturing or preparing the goods to be sold and faces no risk in
payment. This is particularly important to the exporter when he needs money
to finance the manufacture or preparation of the shipment.
The importer sometimes also uses this arrangement in order to attract
sales for some reasons, eg, bad political conditions in the importer's country
or poor credit rating of the importer. But this arrangement represents a high
risk of loss to the importer as it is possible that the exporter does not ship the
goods at all or does not ship the goods as ordered
Cash with order is used when goods are in heavy demand or goods are
custom-made.
(2) Cash payment before shipment
With this arrangement, the importer pays when the exporter has got the
goods ready for shipment. Although the exporter cannot use the importer's
money to finance the preparation of the shipment, he will nevertheless be
paid before he ships the goods and thus faces little risk. But if the importer
refuses to pay when the goods are ready, the exporter will suffer some loss,
especially when the goods are made for a particularly importer.
Although the importer does not have to tie up his capital for along time as
he uses cash with order, he must depend on the exporter's credit, to
manufacture and to ship the goods. The risk is still very high.
In either of the above two cases, the exporter must ascertain that the
payment has been actually received A banker's demand draft, for example,
does not mean real payment before it is paid. The importer, for instance, can
inform the bank that the demand draft has been lost and request the bank to
issue a stop-payment order. Therefore, the exporter should effect the
shipment only after the draft has been paid.
(3) Remittance
Remittance means the transfer of money from one party to another party
through banks. For example, when cash in advance is used, the importer
remits the payment to the exporter. (Of course, remittance is not restricted to
cash in advance.) Remittance can be affected in several ways.
First, telegraphic transfer (TT) is a method of transferring funds by
telecommunication system such as telex or cable. The advantage of TT is the
fast speed. A payment can be made within two or three banking days. The
disadvantage is the relatively high cost. However, SWIFT (Society for
Worldwide Interbank Financial Telecommunication) members are able to
transfer funds within their own telecommunication network at a much lower
cost. This has made TT very popular as most international banks are SWIFT
members.
Second, the transfer can be made by a check that is sold to its customer by
a bank instructing another branch/bank to pay upon demand a certain amount
to the payee as specified on the check. This check is called a banker's
demand draft (DD). It is a cheaper but slower method of transferring funds
since the purchaser of the check must mail it to the beneficiary for him to get
the funds from a local bank.
Third, the transfer can be made between banks by mail It is slow and has
more paper work than DD. So it has almost been replaced by demand draft or
telegraphic transfer.

2) Documentary credit
While distrust does exist between exporters and importers as to whether
the other party will carry out his obligations, the problem can nevertheless be
resolved by the involvement of a third party that guarantees payment to the
exporter and goods to the importer. Banks have been chosen as that party
since banks are much better trusted in the business world.
With a bank's involvement, the exporter look; to the bank for payment
instead of relying upon the ability or willingness of the importer to pay, but
the exporter cannot obtain payment unless he complies with all the terms in a
document issued by the bank. At the same time, the bank pays on behalf of
the importer against documents which represent the goods and give the
importer rights to the goods. Therefore, banks assist in the settlement of
international commercial transactions by providing safeguard for parties
involved and ensuring payment to the exporter if he complies with the terms
in the document. These objectives are accomplished by the use of a
document called documentary letter of credit.
(1) Definition
In simple terms, a documentary credit is a conditional bank undertaking or
guarantee of payment.
Expressed more fully, it is a written undertaking by a bank given to the
seller at the request, and in accordance with the instructions, of the buyer to
effect payment up to a stated sum of money, within a prescribed time limit
and against stipulated documents.
(2) Parties to a credit
Applicant: This is the party at whose request a bank is to issue a credit. It is
usually the importer. The applicant is also called the opener.
Beneficiary: This is the party in whose favor the credit is to be issued and
who must comply with the terms and conditions of the credit in order to be
entitled to receive its proceeds. This is normally the exporter.
Issuing bank: This is the bank that opens the credit at the request of the
applicant.
Advising bank: This is the bank in the exporter's location which is requested
by the issuing bank to notify the credit to the beneficiary.
Confirming bank: This is the bank which adds its own undertaking to that of
the issuing bank. It is normally in the beneficiary's location and very often the
advising bank itself.
Paying bank: This is the bank that makes payment to the beneficiary
against presentation of stipulated documents.
Accepting bank: This is the bank nominated in the credit to accept a usance
bill of exchange drawn on it.
Negotiating bank: This is the bank that negotiates or discounts the
beneficiary's bill of exchange.
Remitting bank: This is the bank which sends the documents to the issuing
bank.
A single documentary credit transaction does not necessarily include all the
above parties. However, a transaction must have at least three parties: the
applicant, the issuing bank and the beneficiary. The following simple diagram
shows how the relationships are governed between the applicant (importer),
the issuing bank, and the beneficiary (exporter).
It must be remembered that credits are separate transactions from the
sales or other contract(s) on which they may be based and banks are in no
way concerned with or bound by such contract(s), even if any reference to
such contract(s) is included in the credits.4 In credit operations all parties
concerned deal with documents, and not with goods, services and/or other
performances to which the documents may relate.
(3) Basic items of L/C
Letters of credit can be opened by mail, by cable, by telex or by special
electronic communication systems such as SWIFT. Although their forms look
different, the items contained are almost the same.
Issuing bank and branch
Place and date of issue
Applicant's name and address
Beneficiary's name and address
Type of L/C
Advising bank
Negotiating bank
Date and place of expiry
Currency and sum
Terms (the same as contract terms)
Engagement clause
Conditions and instructions to advising/negotiating bank
Authorized signatures
Examination request
(4) General procedure of using an LIC
The buyer and the seller conclude a sales contract providing for payment
by documentary credit.
The buyer instructs his bank, the issuing bank, to issue a credit in favor of
the seller.
The issuing bank asks another bank, usually in the country of the seller, to
advise or confirm the credit.0 The advising or confirming bank informs the
seller that the credit has been issued.
As soon as the seller receives the credit and is satisfied with the terms and
conditions, he is in a position to load the goods and dispatch them.
The seller then sends the documents evidencing the shipment to the bank
where the credit is available.
The bank checks the documents against the credit. If the documents meet
the requirements of the credit, the bank will pay, accept, or negotiate,
according to the terms of the credit.
The bank, if other than the issuing bank, sends the documents to the
issuing bank.
The issuing bank checks the documents and, if they meet the credit
requirements, effects payment in accordance with the terms of the credit.
The issuing bank releases the documents to the buyer upon payment of the
amount due, or upon other terms agreed between the buyer and the issuing
bank.
The buyer sends the transport documents to the carrier who will then proceed
to deliver the goods.
(5) Types of L/C
1) Revocable L/C & Irrevocable L/C
A revocable L/C is one that "may be amended or cancelled by the issuing'
bank at any moment and without prior notice to the beneficiary" before the
documents have been paid, accepted, or negotiated.
Since the issuing bank will in most cases cancel or amend the credit on the
instruction of the buyer, it follows that the seller must rely fully on the buyer
for the guarantee.
Thus, a revocable L/C represents little protection to the seller before
negotiation It is rare in use now and suitable only when there is complete
trust in the buyer.
An irrevocable L/C cannot be amended or cancelled without express
permission of all parties, i.e., the beneficiary, the applicant and the bank(s). It
is widely used because of bank involvement and commitment. Although an
irrevocable L/C is a definite undertaking to effect payment, the seller remains
dependent on an undertaking of a bank. Therefore, the seller must be fully
satisfied with the undertaking of the issuing bank.
According to UCP 400 Article 7-c, if an L/C does not say it is irrevocable, it is
then revocable. However, UCP 500 Article6-c stipulates that in the absence of
indication, the credit shall be deemed to be irrevocable. Then if he receives an
L/C that does not clearly indicate whether it is revocable or irrevocable, the
beneficiary should find out first whether the L/C is subject to the interpretation
of UCP 400 or that of UCP 500.

2)Unconfirmed UCConfirmed UC
An unconfirmed L/C contains the commitment of the issuing bank only.
There is no undertaking on the part of advising bank or other bank.
It is possible that the issuing bank might not be able to honor its
commitment to pay because of political conditions, foreign exchange controls,
and block of funds or external difficulties in the buyer's country. Sometimes
the issuing bank's credit standing is unknown or questionable; then a
confirmed L/C should be used.
A confirmed L/C has the commitment of the confirming bank besides that of
the issuing bank's commitment. The confirming bank guarantees payment if
the issuing bank cannot pay. The seller has double assurance of payment and
is better protected
An advising bank will not confirm a credit unless it is requested to do so.
Even if an advising bank is requested to confirm an L/C, it does not have the
obligation to add its confirmation, but it must so inform the issuing bank
without delay.

3) Deferred payment credits

A documentary credit available by deferred payment will specifically
nominate a paying bank and indicate a fixed or determinable date on which
payment is to be effected.
By nominating a bank in the credit as the paying bank, the issuing bank
authorizes such bank to effect payment under the credit at the fixed or
determinable date indicated in the credit and undertakes to reimburse that
bank on the due date. In such cases the beneficiary will present documents to
the paying bank and such bank will settle at the stipulated date. The
documents will, however, be passed by the paying bank to the issuing bank
immediately.
If the credit is confirmed by the advising bank, the beneficiary will receive
an undertaking from that bank that will effect settlement at the agreed future
date. If on the other hand the credit has not been confirmed by the advising
bank, the beneficiary will merely receive an acknowledgement for documents
which conform to the credit terms and conditions, and an indication to the
effect that the advising bank has been authorized to settle at the future date.
This will not however be a commitment on the part of the advising bank to
make such settlement. In both cases the beneficiary will have rights against
the issuing bank.
A deferred payment credit is used to extend the normal 180-day payment
term of a trade L/C when banker's acceptances over 180 days cannot be
discounted in the market. Under such an arrangement, the seller ships the
goods, presents shipping documents promptly after shipment and gives
permission to release the documents to the buyer. He will be paid in a
specified period of time counted from the date of issue or presentation of
shipping documents. A draft would not normally be called for although a sight
draft could be drawn and presented.
The seller has to wait for funds under a deferred payment credit since
discounting is not available; nevertheless, he can use the credit as collateral
to borrow.

4)Transferable L/C Untransferable L/C

A transferable credit is one that can be transferred (only once) by the
original (first) beneficiary to another (second) beneficiary. If partial shipments
are permitted, different portions of such a credit not exceeding the total
amount of the credit can be transferred to different beneficiaries.
It is normally used when the first beneficiary does not supply some or all
the merchandise himself, but is only a middleman and thus wishes to transfer
part, or all, of his right sand obligations to the actual supplier(s) as second
beneficiary.
For example, when an importer is buying through his agent from the
exporter, the importer can open a TLC in favor of the agent for transfer to the
exporter. If an exporter is selling to the importer through his subsidiary in the
importing country, the exporter can ask the importer to open a TLC in favor of
the subsidiary for transfer to the exporter.
5) Back-to-back UC
A back-to-back L/C is one that is opened at the request of an exporter who
is the beneficiary of an export L/C which is offered as the security for the
back-to-back L/C. The concept involves the issue of a second credit applied by
the exporter in favor of his supplier. As applicant for this second credit, the
exporter is responsible for reimbursing the bank for payments made under it,
regardless of whether or not he himself is paid under the first credit. There is,
however, no compulsion for the bank to issue the second credit, and, in fact,
many banks will not do so.
The second credit must be so worded as to produce the documents (apart
from the commercial invoice) required by the first credit-and to produce them
within the time limits set by the first credit-in order that the exporter, as the
beneficiary under the first credit, may be entitled to be paid within those
limits.
There is a risk to banks that makes them unwilling to open a back-to-back
L/C. For example, if the exporter cannot perform at step 11 when the issuing
bank of the back-to-back L/C has fulfilled its obligation to pay for the
documents, then the issuing bank will face a loss because, on one hand, it
cannot get paid from the exporter and, on the other hand. It cannot get paid
from the issuing bank of the first L/C as it is unable to provide the documents
required by the first L/C.
Therefore, banks often insist that the back-to-back L/C be fully secured by
the exporter or the first L/C to be opened in favor of the issuing bank of the
back-to-back L/C so it can provide its own documents to be paid. In all cases,
banks will want to make sure that there is a good coordination between the
terms of the original L/C and those of the back-to-back L/C in order to
eliminate the risks they might otherwise face.
6) Revolving L/C
A revolving L/C is one that is issued for a specific amount which renews
itself for the same amount over a given period.
It is usually used by an importer who anticipates a regular flow of
merchandise from a particular foreign supplier when there are a series of
shipments at regular intervals and the parties involved wish the program to
proceed without interruption.
In using a revolving L/C, the exporter will ship the goods, present
documents to the bank and get paid. Then the credit will become available
again in the original form to the exporter and another shipment can be made.
There are different ways of revolving First, the renewal can be automatic.
It means the credit will be renewed without a further examination of the
opener's credit rating But there is a risk for the bank since it would be
obliged to pay even if the opener is no longer able to take up the documents.
Another way of revolving is non-automatic. The beneficiary needs a notice
from the bank if the bank agrees to renew the credit after its review of the
opener's credit rating. This is safe for the bank but less convenient for all
parties concerned. Semiautomatic revolving is something in betweenWith
this arrangement, if the bank does not notify the beneficiary that the credit is
not renewed, then the credit becomes re-available.
When a revolving L/C's amount is not fully used, sometimes the unused
portion of the credit can be added to the credit amount and carried onto next
negotiation. In other words, it is a cumulative revolving L/C. Sometimes a
revolving L/C is non-cumulative. Then no carryover is allowed.
7) Standby L/C
A standby L/C possesses all the elements of a documentary credit. It is
intended to cover a non-performance (default) situation. It stipulates that a
sum will be paid to the beneficiary on demand in the event the beneficiary
submits a signed statement (default claim) setting forth that there has been
default. The use of standby L/C is not restricted to merchandise trade. Such
an L/C can be used for some other purposes such as a bid bond and a
guarantee for debt repayment.
(6) Disadvantages of L/C
The first disadvantage of using a documentary credit is the high cost. There
are quite a number of commissions and fees that banks will charge in L/C
opening, advising, amendment, negotiation, etc. Besides, the security
arrangement can be complicated, time-consuming and costly. This has
discouraged many importers from using L/Cs.
The second disadvantage is the amount of time that has to be spent in
using L/Cs because accuracy of documentation is a must. Theoretically, even
a misplaced apostrophe can cause delay in payment although banks usually
will not reject payment for documentary discrepancies that will not materially
affect the transaction
(7) How to decide if the L/C should be used
Documentary credits offer security of payment to exporters, but they also
require more work and higher cost for importers. Naturally, importers often
prefer not to use L/Cs due to their disadvantages. Then exporters should
consider the following points to decide if the L/C should be used.
Corporate credit policy and the company's ability to absorb risks
Credit standing of the importer
Political environment in the importing country
Current market conditions and payment terms offered by competition
Type of merchandise to be shipped and the value of the shipment
Type of exchange controls in the importing country and the buyer's ability
to get foreign exchange

3) Documentary collection
(1) Definition
Documentary collection is a means of ensuring that goods (title documents)
are only handed over to the buyer (by a bank) when the amount shown on a
bill of exchange is paid or when the customer accepts the bill as a contract to
pay by a specified date.
Collection is the process wherein a bank, in accordance with the seller's
instruction, handles documents in order to deliver them to the buyer against
payment, acceptance, or on other terms and conditions.
(2) Parties to a documentary collection
Principal: This party is also called drawer. It is usually the seller, the creditor
of the buyer.
Payer: This party is also called drawee. It is usually the buyer, the debtor of
the seller. .
Remitting bank: This is the bank in the seller's country working as agent of
the seller.
Collecting bank: This is the bank in the buyer's country presenting the
documents to the buyer. It is often the remitting bank's overseas branch or
correspondent bank.
(3) General procedures of using documentary collection
The seller (principal/drawer) ships the merchandise and obtains B/L from the
shipping line, then draws a draft on the buyer (drawee) demanding payment
for the documents.
The seller forwards the draft and documents to his bank (remitting bank),
along with a collection order containing the terms and conditions for the
release of documents to the buyer.
The remitting bank completes its own collection order addressed to the
buyer's bank (presenting/collecting bank). This collection order will contain
the same instructions as the seller's collection order. The remitting bank's
collection order is then sent to the buyer's bank, along with other documents.
When the draft is paid, the collecting bank sends the funds to the remitting
bank for credit to the principal's account.
It is important to understand that the banks involved in collection have no
obligation to examine the documents beyond verification that they appear to
be as listed in the collection order. However, the banks do have responsibility
to release the documents in accordance with the instructions, and to advise
payment, acceptance, or non-payment, non-acceptance.
(4) Types of collection
Documents against payment at sight (D/P Sight)
Documents against payment means documents can only be released to the
buyer when he has paid the amount on the draft. At sight means that
payment of the draft amount should be made as soon as the buyer is
presented the draft. Thus, D/P at sight enables the seller to obtain the
payment before he loses control, of the documents that represent the title to
the goods or it ensures that the seller will not lose the documents and
payment at the same time.
Documents against payment after sight (D/P after Sight)
After sight means the buyer will pay the draft amount a specified number
days after the draft is presented and accepted. However, this arrangement
still requires the collecting bank to release the documents upon payment. It is
equally safe for the seller as D/P at sight, but the seller has to wait for a
period of time to get the payment.
Documents against acceptance (D/A)
Documents against acceptance is different from D/P in that the documents
representing the title to the goods will be released to the buyer once the
buyer has accepted the draft. Payment will be made when the usance period
is due. Whether the buyer would pay the draft depends on his credit and
integrity. It is therefore not as secure as D/P since the seller might not be paid
at all.
(5) Risks of documentary collection for sellers
Documentary collection has more risks than documentary credit since there
is no bank guarantee and the seller has to rely on the buyer to pay. The
common risks are listed below.
Buyer cannot pay in some cases such as bankruptcy.
When price decreases, buyer might refuse, with excuses perhaps, to pay or to
pay a lower price or even claim for compensation.
If import license and/or foreign exchange have not yet been obtained by
buyer when the goods arrive at port of destination, it is then possible that the
goods will not be allowed to be imported, that the goods are subject to
confiscation or a fine, or that payment for the shipment might be made in
domestic currency of the importing country.
Buyer might take advantage of seller's ignorance of the local commercial
custom, regulation or law and cheat at transactions. For example, there can
be a customs clearance time limit after which the good swill be confiscated or
a penalty will be imposed. And in some countries such as Peru and Bolivia, D/P
after sight will be interpreted the same way as D/A. If a buyer wants to cheat,
he can sign a contract with D/P after sight but never pays after he gets the
documents.
The authorities of some importing countries might not be very trustworthy.
They might confiscate the import shipment with an excuse and then sell the
shipment to the original buyer.
(6) Measures for sellers to avoid risks
As collection gives sellers higher risks than documentary credit, sellers
themselves should take due care in using collection. There are a few
measures they can take to avoid the risks.
Check buyer's credit standing, then decide the term and amount to be
usedFor instance, D/A should be used only with very trustworthy buyers.
Study the importing country's market such assize and development, then
decide the size of shipment A seller should make his own judgment if the
market can absorb the quantity of the goods that the buyer is purchasing
Get to know importing country's import licensing and foreign exchange
controls. Sellers should in particular find out when an import license will be
needed, whether foreign exchange approval is automatic once the import
license is issued what types of commodities cannot be imported with
collection, etc.
Get to know the local regulations and commercial customs.
Appoint an agent in the importing country who has the full authority to
dispose the goods on behalf of the seller so that the goods will not be left
unattended.
Get familiar with warehousing facility at destination. In case of refusal of
payment, the goods can be stored to avoid damage.
Make good arrangement of payment such as a down payment for a
percentage of the total value of the shipment or part of the shipment to be
paid by L/C and the remaining part by collection
Seller arranges insurance himself to hold all the documents of the transaction
and to keep the shipment covered.

Inspection,claim, Force Majeure & Arbitration

1. COMMODITY INSPECTION
It is not difficult at all to understand why a buyer wants to inspect the
goods he is purchasing A buyer wants to make certain that the goods
delivered to him are exactly the goods described by the contract he has
signed with the seller. In simple words, he wants to get his money's worth
according to the contract. The buyer's right of inspection has been widely
recognized by either national laws or international conventions, although a
buyer can choose to waive this right.
On the other hand, a seller also wants to inspect the goods he is selling for
two reasons. First, a seller wants to control the quality of the goods so that his
image will not be damaged and the market will be developed Second, a
seller wants to prove with an inspection document that the goods delivered
have met the relevant contract terms so that he will not be responsible for
any problems in the goods after delivery.
Commodity inspection, therefore, is an indispensable part of international
trade and inspection clause is an indispensable clause of a contract to protect
the interests of both the buyer and the seller.

1) Place and time of Inspection

The place and time of inspection is the first item in an inspection clause. It
stipulates where and when the inspection should be conducted and is
associated with the terms of delivery used the nature of the commodity and
packaging, and the laws or regulations of different countries.
When the departure term (EXW) is used, it is clear that the commodity
should be inspected at the factory or warehouse where the delivery is made. If
arrival terms such as DDU or DDP are used, the inspection should be
conducted at the named place in the country of importation where the goods
are made available to the buyer. However, for some terms such as FOB, CFR
or CIF, it could be difficult or impossible to carry out the inspection right at the
place of delivery of the commodity, especially for some commodities and
types of packaging when the facilities or personnel of inspection are not
available.
Besides delivery terms, commodity and packaging, laws and regulations
must be observed. Some countries, for example, require all imports to be
inspected before loading at the exporting country by a nominated inspection
agency.
In general, there are three ways to stipulate the place and time of
inspection.
(1) Shipping quality and weight
With this method, inspectors from both sides conduct a joint inspection at
the seller's factory. The buyer will bear all the risks once the goods leave the
factory. Such an arrangement will ensure that the seller ships qualified goods.
The goods can also be inspected at the port of shipment and, in this case,
the certificate from the inspection agency at the port of shipment will be final.
Theoretically, buyers can reinsert at the port of destination but cannot
claim for compensation unless there is a big discrepancy in quality.
This arrangement is favorable to the seller.
(2) Landed quality and weight
This method means that the inspection carried out at the port of
destination is to be final. It is favorable to the buyer.
(3) Inspection at the port of shipment and reinsertion at the port of
destination
With this method of inspection, the certificate from the port of shipment will
be used as one of the documents for payment, but the buyer retains the right
to claim for compensation if the merchandise is not in conformity with the
contract.
While this arrangement looks better than the previous two, it also has a
problem-if the quality or weight of the goods changes during transit, and then
inspection results at ports of shipment and destination would be different.
Sellers and buyers might have different arguments about the difference. A
seller would argue that his responsibilities end where the goods are delivered.
For example, for FOB, he is responsible only for loading the goods according
to the contract and once the goods pass over the ship's rail; all risks pass over
to the buyer. A buyer can argue that the seller is responsible for the goods to
be marketable when they arrive at the port of destination.
In practice, for small differences (eg, 0.5 of weight), inspection result at
the port of shipment is considered final or the difference is divided between
the buyer and the seller. When the difference is big, it needs to be settled
neither by negotiation nor by arbitration.
Before making a claim against the seller, the buyer should make sure that
the insurance company or the shipping company is not responsible for the
difference. For example, if the inconformity has been the result of natural
disasters or accidents that have been covered by insurance, the buyer should
ask for compensation from the insurance company. If the inconformity is the
result of the carrier's negligence, then the carrier should be responsible for
the loss or damage.

2) Inspection agency and certificate

(1)Agency
There are three types of inspection agencies.
State commodity inspection agency
Manufacturer and user
The type of agency chosen to carry out inspection should be permitted by
relevant laws that might require certain type of commodity to be inspected by
a particular type of agency. If there is no specific requirement of law, the
agency should be acceptable to both the buyer and the seller.
(2) Certificate
Certificate is a general name and it can be issued to include different items
of inspection such as weight, quality and packaging, etc.
Functions
Certificates are used to verify whether the goods are in conformity with the
terms of contract. If the verification is positive, the certificates are the
documents for payment. If not, they are the documents for refusal of the
goods and claim for compensation.
Types of certificate
Most frequently used certificates are: Inspection Certificate of Quality,
Weight, Quantity, Origin, Value, Damaged Cargo, and Health. For commodities
such as frozen meat or leather, Veterinary Inspection Certificate might be
required to prove that the commodity is free from diseases of animals. When
feather or human hair is traded, Sanitary or Disinfection Inspection Certificate
is required to prove that the commodity is free from harmful bacteria.
It should be clearly stated in the contract what certificates are needed
according to the nature of the goods and the laws of the importing country.

3) Time and place of reinspection

If reinspection is permitted by the contract, the time and place of
reinspection should be set clearly because they are closely related to the
interests of both the seller and the buyer. The choice of the time and place is
largely related to the nature of commodity.
(1) Ways to set the time limit of reinspection
xx days after the ship's arrival
This method starts to count the number of days allowed for reinspection
once the ship arrives at the port of destination regardless of whether the
goods have been discharged .4Apparently, it is unfavorable to the buyer in
case the port is congested and unloading cannot start soon after the ship's
arrival.
xx days after the discharge of goods
This method is favorable to the buyer since it starts to count the number of
days allowed for reinspection only when the goods have been discharged from
the carrying vessel.
(2) The length of the time limit
If reinspection is allowed in the contract, there must be a time limit for
reinspection, usually 30-180 days after discharge or ship's arrival, which
should be set according to the nature of commodity and the unloading
facilities at the port of destination.
If agricultural produces and perishables are to be reinspected, the time limit
should be short for obvious reasons. For commodities such as chemicals and
minerals, the time limit can be longer. For electric/electronic appliances and
complete plant, the time limit should be even longer because installation and
testing need more time. In such a case, a time limit for a preliminary
inspection should be set.
The unloading facilities at the port of destination are another consideration.
When the port is congested and unloading might be delayed The
reinspection time limit should be long enough, particularly when the time limit
starts as soon as the carrying vessel arrives at the port of destination.
(3) Place of reinspection
The place should be clearly stipulated. There are several alternatives:
On the dock;
In bond (before paying customs duty);
Final destination
Buyers business premises.
The choice of the place of reinsertion depends mainly on the nature of the
commodity. Some commodities can be reinserted right on the dock while
some other commodities can only be reinspected at the buyer's business
premises.

2. CLAIM

As to the main reasons which lead to disputes the lawsdifferent countries

and international practices have different explanations They can be
generalized as follows
1Whether the contract is tenable
2Stipulations of the contract are unclear
3During the performance of the contractforce majeure events arise which
result in non-performance and delay performance of the contract while as to
the legal consequence offence majeure the two parties may have different
explanations
4Non-performance or incomplete performance of the contract is touched off
by the seller in such cases as inferior quality or discrepancy in
quality deficient or poor packing insufficient quantity and delayed
deliveryetc
5Non-performance or incomplete performance of the contract is
caused by the buyer for instance the buyer does not dispatch a vessel to
carry the goods or does not name the carrier in timeor does not open an L/C
in time or rejects the goods unreasonably.
6The carrier is liable for damage to or shortage in weight of the goods.
7The insurer is liable for loss ofor damage to the goods

The most commonly used claim clauses are the discrepancy claim clause and
the penalty clause.
The discrepancy claim clause is stipulated in case the quality quantity or
packing of the goods delivered by the seller is not in conformity with the
contract. The discrepancyclaim clause mainly includes the claim foundation
and time limitation.
Penalty clauseThe penalty clause is stipulated in case of delayed delivery by
the sellers or delayed taking over the goods by the buyersIts feature is that
the two parties shall stipulate a certain percentage of penalties in advance in
the contract.

3. FORCE MAJEURE

1) Definition of force majeure

A force majeure event is one that can generally be neither anticipated nor
brought under control Certain natural disasters and social disturbances are
considered force majeure.
If possible, specific events should be clearly agreed upon and listed in
contract to avoid any dispute if a specific event should be considered force
majeure.
A force majeure event should have the following features:
It happens after the contract is signed;
It is not due to the negligence of the buyer or the seller;
Neither the buyer nor the seller can control the situation.
A force majeure clause is mainly a protection for the seller to enable him to
avoid his contractual obligations without paying a compensation or penalty,
although it protects the buyer as well.
2) Consequences of force majeure
(1) Termination of contract
In cases of natural disasters or other events that have made it impossible
to fulfill the contract, the contract can be terminated.
(2) Postponement of contract
In cases of events (such as transportation stoppage caused by an
earthquake) that will only delay the fulfillment of a contract, the contract can
be postponed but not terminated since it is still possible for the seller to carry
out his contract obligations.
3) Points to remember when drafting the clause
(1) Determine the scope
The kinds of events that are to be considered as force majeure should be
specified as clearly as possible. For instance, some people include social
disturbances or strikes as force majeure events, but some other people
disagree. If the scope of the events is not clearly defined, there might be
difficulties in using the clause.
There are basically three ways to set the scope:
general stipulation: "generally recognized force majeure causes";
specific listing: "war, flood, storm, heavy snow";
specific listing plus general stipulation: "war, flood, storm, heavy snow or
any other causes beyond their control/and other generally recognized force
majeure causes".
(2) Specify the consequences
Since there are different consequences of a force majeure, the clause
should specify when the contract can be terminated and when it can only be
postponed. For example, the contract can be canceled only if the force
majeure lasts over one month.
(3) Designate the agency to issue certificate
A force majeure should be verified by a certificate issued by government
authorities or a chamber of commerce at the location where the event takes
place. The clause should specify which agency is to be the issuer.
(4) Set the time limit of notice to the other contractor
In case of a force majeure event, the party who wants to quote the clause
should inform the other party of his decision within a reasonable time limit.

4) Points to remember when quoting the clause

(1) Decide if an accident is within the scope according to the contract terms
(2) Notify the other contractor as soon as possible (The other party should
reply quickly if he agrees or disagrees.)
(3) Supply the certificate issued by the correct agency

4. ARBITRATION

1) Definition of arbitration
Arbitration is the settling of a dispute by a person or persons chosen by the
parties in controversy.
Not all disputes can be settled by arbitration. Present or future differences
submitted to arbitration should be acceptable for settlement by arbitrationIn
other words, the law permits the differences to be settled by arbitration.
Criminal cases, for instance, cannot be settled by arbitration.
2) Function of the clause
Arbitration agreements can be made before or after disputes arise. Such an
agreement has the following functions.
(1) It embodies the agreement of both parties that, if any dispute arises
with regard to the obligations which one party has undertaken to the other,
such a dispute shall be settled by a tribunal of their own constitution.
(2) It excludes the court from having jurisdiction over the dispute.
(3) It gives jurisdiction to the arbitrator
It should be noted that, in some countries, an arbitration agreement cannot
exclude the court from having jurisdiction over the dispute.
Location is not only a matter of convenience. It is also related to the
application of the law system under which the dispute is settled. The location
can be anywhere in the seller's country, the buyer's country or a third country.
No matter where the arbitration takes place, the location must be politically
and professionally acceptable.
(2)Agency
Two types of arbitration agency are available:
permanent organization of arbitration that provides facilities and personnel;
temporary arbitration tribunal setup for a particular dispute.
(3) Procedures
Submit dispute to arbitration
If a dispute is to be submitted to a permanent organization, the application
is sent directly to the tribunal and to the defendant (also called respondent). If
the dispute is to be submitted to a temporary organization, the application is
sent directly to the defendant.
Appoint arbitrators
Two points must be considered in appointing arbitrators: number of
arbitrators and qualifications of arbitrators.
Usually, one or three arbitrators are appointed. The arbitration organization
can appoint one arbitrator. Or both the plaintiff (also called claimant) and the
defendant appoint one arbitrator each and a third arbitrator is appointed by
the arbitration organization. Another possibility is that a chief arbitrator is
appointed by the arbitration organization and the chief arbitrator appoints two
other arbitrators.
It is also important to consider the qualifications of the arbitrators,
particularly the nationality and the professional background, to ensure an
impartial and quality award.
In case that one party refuses to appoint an arbitrator; the other can either
ask the organization to appoint one for the former when there is an arbitration
organization or ask a law court to appoint one for the former if no organization
has been agreed upon
Hear a case
Case hearing can be carried out by face-to-face reply or correspondence.
In some countries, the tribunal can give the order of interim measures of
protection while the arbitration is going on. For example, the subject object
can be placed under a third party's control or perishable goods can be sold
and the proceeds are placed under the tribunal's control.
Issue an award
An award is the decision made by the arbitration tribunal. It must be in
written form with or without explanations or reasons.
(4) Effects
An award is "final and binding" in China and most of the other countries
provided that there are no illegal actions by any party involved in the
arbitration process. If one party refuses to obey the award, the other can ask
a court to enforce the implementation of the award.
According to the laws of some countries, a law suit against the award is
allowed. Then, there must be a time limit to file the suit.
(5) Fees
Fees can be borne by the losing party of the dispute, can be divided between
the two parties or can be paid according to the award.

Export Business Negotiation &Conclusion of Contract

The export business negotiation is one of the most important step in foreign
trade since it is the foundation of the contract, while the contract is the result
of the negotiation. The two parties shall negotiate amicably on the basis of
the principles of equality and mutual benefit~ and the contract shall be in
conformity with the regulations and requirements of relative laws and
international practices.

1. Making Preparation for Export Business

An enterprise which decides to go into export and try to canvass orders

from abroad will first engage in an exploration of the opportunities which its
products have in the markets to which it wishes to export. The exporter may
have in-house experts or he may consult other marketing experts on
marketing information, techniques, strategies, etc. However, it is very rare
that an exporter can sell his products directly to his remote overseas
customers. It is impossible for the exporter to go to every country to find out
whether his products can sell on a particular market. Therefore, market
research is very useful both for the newly established trading companies to
build up business relations with overseas customers, and for the early
established ones which have regular customers to expand their business.
First of all, the exporter should use various trade statistics and literature
published by most countries and world trade organization to narrow down the
scope of his research. Important information sources include: national trade
statistics which indicate a number of importing houses, wholesalers, retailers
and other kinds of marketing intermediaries (information classified according
to the types of products), trade journals and directories, banks, international
organizations such as the International Chamber of Commerce, and the China
Council for promotion of International Trade.
After carefully studying the information obtained from the above mentioned
sources, the exporters will find out what countries are now importing the
specific products and from what sources. He can judge the amount of
business and the rate of growth or decline. Then he may choose a number of
target markets which merit further study. The market research mainly includes
the analysis of marketing opportunities, investigations as to the needs of
customers or end-users for the products and market forecasting.
Secondly, the exporter must bear in mind the cultural and social
background of his target markets, such as the language, religion and the local
people's aesthetical viewpoints, etc. Since all these factors influence people's
consumption patterns, a deep understanding of them will help the exporter to
predict the changes in the market and follow the new market trend.
Thirdly, the exporter must know the relevant government policies: what
kind of product is limited or restricted in import activities? Are they restricted
because of shortage of foreign currency, tendency to protect national
industries or safety and sanitation requirements? What kind of goods does the
government levy tax against?
Fourthly, geographical factors may influence profoundly on the distribution
of goods and the development of marketing channels in a country. The
temperature, altitude and humidity extremes may affect the proper
functioning of some equipment. Products which function well in temperate
zones do not always perform well in the tropical area. With regard to products
like timber, food and paper, the amount of water absorption or evaporation in
transit can be very influential.
Finally, the exporter must take into account the political risks (whether there
are military clashes), the transportation infrastructure (whether there are
ports, railroads, highways, airports, etc. available), and the local legal systems
(since no single uniform international commercial law governing exporting
transactions exists).

2. General Procedure in Business Negotiation

Under normal circumstances, the business negotiation may be carried out

through correspondence, cables and telexes or be conducted orally or both. In
international practices, the business negotiation will usually go through 4
steps, i. e. , enquiry, offer, counteroffer and acceptance.

1) Enquiry
In foreign trade, enquiries are usually made by the buyers without
engagement to get information about the goods to be ordered, such as
quality, quantity, price, delivery date and other terms.
The enquiry made by the buyer is also called invitation to make an offer.
For example, a foreign customer may make an enquiry by cable to our Light
Industrial Products Import & Export Corporation.
"BOOKABLE MAXAM BRAND DENTAL CREAM LARGE SIZE MAX 10000
GROSS PLSCBL LOWEST PRICE EARLIEST DELIVERY TIME".
In some cases the enquiry can also be made by the seller, which is called
invitation to make a bid. For example, our Light Industrial Products Import
&Export Corporation may send a cable to a foreign customer.
"CANSUPPLY MAXAM DENTAL CREAM USDO. 50 PERPC MARSHPMT CBLREP
IF INTERESTED".
The points that the buyer should pay attention to when making an enquiry
are:
(1) Although an enquiry can be made to one or more suppliers
simultaneously, the buyer should not give away his real intentions otherwise
the suppliers will sense that he is in urgent demand for the goods.
(2) When making an enquiry, besides the prices of the goods, the buyer may
ask for more information, such as the specification, packing, delivery date and
other terms.
(3) Although making an enquiry is the first step in the business negotiation,
it is not an essential one and the enquiry will not bind upon both parties.
(4) Enquiries should be brief, specific, courteous and reasonable. In return, the
answers to enquiries should be prompt, definite and helpful.
(5) Although an enquiry is not binding upon both parties, if the contract is
concluded on the basis of it and in the performance of the contract any
disputes arise, the contents of the enquiry can be taken as an integral part of
the documents and be used as evidence to handle the disputes.

2) Offer

An offer is a promise conditioned on acceptance which, no matter whether

from an exporter or an importer, must be communicated to the offeree and
must clearly undertake a performance definite as to all essential terms.
In international trade practices, there are two kinds of offers, i.e., firm offer
and non-firm offer.
A firm offer is a promise to sell goods at a stated price, usually within a
stated period of time.
In making a firm offer, mention should be made of the time of shipment and
the mode of payment desired~ in addition, an exact description of the goods
should be given and, if possible, a pattern or sample should be sent to the
offeree for examination.
A firm offer, unlike a quotation, once it has been accepted within its
stipulated validity it can not be withdrawn.
A non-firm offer is an offer without engagement. In most eases, the contents
of a non-firm offer are not clear and definite, the main terms and conditions
are not complete. For example,
"OFFER NORTHEAST CHINA SOYBEAN 10000 M/T OUR REFERENCE PRICE
USD 300 PERM/T FOB DALIAN SUBJECT TO OUR FINAL CONFIRMATION".
The above example is a non-firm offer, because:
(1) The contents of the offer is not clear and definite, e.g.,
"OUR REFERENCE PRICE USD 300 PERM/T".
(2) The main terms and conditions are not complete, since this offer has not
stipulated the quality, crop year, packing, delivery time of the goods, terms of
payment, etc.
(3) There is a restrictive condition, i.e., "SUBJECT TO OUR FINAL
CONFIRMATION".
The party who makes an offer is called an offeror, the offer- or may be the
buyer or the seller, in the case of the seller, the offer is called a selling offer,
while in the case of the buyer, it is called a buying offer or bid. In import and
export trade, the importer may request the exporter to make an offer or the
importer himself may make a bid to the exporter to buy certain goods.
A satisfactory offer will include the following aspects:
(1) The goods mentioned in the offer should be described without any
ambiguity, including quality, specification, quantity, packing, unit price, origin,
etc.
(2) Terms of payment should be expressly stated.
(3) Terms of delivery, including the mode of transportation, shipment time,
place of shipment and destination, partial shipments and transshipment,
shipping documents, transport insurance, etc. , should be clearly stipulated,
(4) The period for which the offer is valid should be indicated.
Clause 1, article 14 of "the United Nations Convention on Contracts for the
International Sale of Goods" stipulates. "A proposal for concluding a contract
addressed to one or more specific persons constitutes offer if it is sufficiently
definite and indicates the intention of the offeror to be bound in case of
acceptance. A proposal is sufficiently definite if it indicates the goods and
expressly or implicitly fixes or makes provision for determining the quantity
and the price".
According to this stipulation, the formation of an offer shall possess the
following 4 basic conditions:
(1) The offer shall be made to one or more specific persons. The offer shall be
the definite representation in which the offeror expresses that he shall
conclude the transaction on the terms and conditions stipulated therein.
(2) The offer shall indicate the intention of the offeror to be bound in case of
acceptance. This intention may be indicated by terms as "firm" offer, "offer
with engagement", etc.
(3) Contents of the offer shall be definite, i. e., trade terms of the offer shall be
complete, clear and final.
In our foreign trade practice, a complete offer shall include the quality,
quantity, packing, price, terms of delivery of the goods and terms of payment.
But in some cases, while some offers are often made without listing all the
above-mentioned terms, they are in fact complete.
The two parties may arrive at an agreement on "general
terms and conditions" in advance, which have already included the main
trade terms .
In business negotiations, the offeror often quotes the main trade terms from
previous letters, cables, telexes, contracts etc. and declares that the major
terms in the offer are the same as the previous ones.
The two parties may have already formed certain trade practices which are
known to them.
A definite offer also requires that the terms be clear. For example, if the
offeror declares that "the price is only for your reference" or "delivery may be
made in August or in September", the offer will be unclear.
A firm offer shall be final, i.e. without any restrictive conditions, such as
"subject to our final confirmation", "subject to prior sale, "without
engagement".
(4) The offer shall be sent to the offeree and contain the term of validity.
An offer becomes effective when it reaches the offeree. For example, the
offeror makes an offer by letter or cable, if the letter or cable loses during the
transmission, the offer will not take effect.
An offer becomes effective when it reaches the offeree and is terminated
until the date of validity stipulated in the offer. If an offer doesn't clearly
stipulate the time of validity, it will be effective within a reasonable time. An
oral offer, unless otherwise agreed, must be accepted immediately unless the
circumstances indicate otherwise.
In our export business, the most commonly used methods to stipulate time
of validity are:
Stipulate the latest date for acceptance, for example:
OFFER SUBJECT TO REPLY HERE TENTH;
OFFER SUBJECT TO REPLY HERE ON OR BEFORE TENTH;
OFFER VALID TILL TENTH OUR TIME.
Stipulate a period of time for acceptance, for example.
OFFER VALID FOR THREE DAYS;
OFFER SUBJECT TO REPLY IN TEN DAYS.
As to this method, Article 20 in "the United Nations Convention on Contracts
for the International Sale of Goods" stipulates "A period of time for acceptance
fixed by the offeror in a telegram or a letter begins to run from the moment
the telegram is handed in for dispatch or from the date shown on the letter or,
if no such date is shown, from the date shown on the envelope. A period of
time for acceptance fixed by the offeror by telephone, telex or other means of
instantaneous communication, begins to run from the moment the offer
reaches the offeree." "Official holidays or non-business days occurring during
the period for acceptance are included in calculating the period. However, if a
notice of acceptance cannot be delivered at the address of the offeror on the
last day of the period because that day falls on an official holiday or a
nonbusiness day at the place of business of the offeror, the period is extended
until the firstbusiness day which follows."
Not stipulate clearly the time of validity, for example:
OFFERREPLY BY TELEX;
OFFERCABLE REPLY IMMEDIATELY;
OFFERREPLY PROMPTLY;
OFFERREPLY IMMEDIATELY;
OFFERREPLY BY URGENT TELEGRAM;
OFFERREPLY AS SOON AS POSSIBLE.
Withdrawal or Revocation of the Offer is another matter worthy of close
attention.
An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches
the offeree before or at the same time as the offer.
As to whether an offer can be revoked or not, different laws have different
explanations.
The British laws and the American laws stipulate that an offer can be
revoked at any time before acceptance, except the offer which is made with a
consideration or signed and sealed by the offeror.
The law of the Continental countries stipulate that the offer cannot be
revoke within the time of validity.
Article 16 of "the United Nations Convention on Contracts for the
International Sale of Goods" stipulate "Until a contract is concluded, an offer
may be revoked if the revocation reaches the offeree before he has
dispatched an acceptance.
However, an offer cannot be revoked a. if it indicates, whether by setting a
fixed time for acceptance or otherwise, that it is irrevocable~ or b. if it was
reasonable for the offeree to rely on the offer as being irrevocable and the
offeree has acted in reliance on the offer."
In the following cases, an offer is terminated:
The time validity stipulated in the offer becomes due;
The offeree rejects or makes a counter offer;
The offerer revokes the offer before acceptance.

3) Counter-Offer

After the offeree has received the firm offer, he may accept it and conclude
the business with the offeror, or he may not accept it, or may not accept it
wholly and put forward some additions, modificationscz41, limitations, etc. as
to the basic terms and conditions contained in the offer. Once a counter-offer
is made, the original offer made by the offeror loses its effectiveness.
In Article 19, "the United Nations Convention on Contracts for the
International Sale of Goods" stipulates: "(1) A reply to an offer which purports
to be an acceptance but contains additions, limitations or other modifications
is a rejection of the offer and constitutes a counter-offer. (2) However, a reply
to an offer which purports to be an acceptance but contains additional or
different terms which do not materially alter the terms of the offer constitutes
an acceptance, unless the offeror, without undue delay, objects orally to the
discrepancy or dispatches a notice to that effect. If he does not so object, the
terms of the contract are the terms of the offer with the modifications
contained in the acceptance. (3) Additional or different terms relating among
other things, to the price, payment, quality and quantity of the goods, place
and time of delivery, extent of one party's liability to the other or the
settlement of disputes are considered to alter the terms of the offer
materially".

4. Acceptance

Article 18 of "the United Nations Convention on Contracts for the

International Sale of Goods" stipulates: "A statement made by ... or other
conduct of the offeree indicating assent to an offer is an acceptance. Silence
or inactivityc26~ does not in itself amount to acceptance."
A valid acceptance shall possess the following 4 conditions:
1) Acceptance shall be made by a specific offeree. The acceptance made by
the third party will not be effective.
2) Acceptance shall be declared in certain ways, either orally or in a written
form, silence or inactivity does not in itself amount to acceptance.
3) Acceptance shall reach the offeror within the time of validity.
If the parties are in each other's presence, when the offeree says "I accept",
no problem arises. But when they deal with it at a distance from each other,
an exception will be created to the rule that acceptance takes effect only
when communicated. The exception is as follows: if the offeree in sending his
acceptance uses the means authorized by the offeror, the acceptance takes
effect at the moment it is placed in the process of communication by that
means. On the other hand, if the offeree varies the means the normal rule
applies and the acceptance becomes effective and the contract is concluded
only when it is actually communicated.
To illustrate, let us suppose the offeror sends an offer to the offeree by mail,
awaiting the latter's reply by mail and the offeree accepts by posting his letter
of acceptance. At the moment his letter is dropped in the mail box, the
contract is formed. Even though the letter may be lost in the mail
transmission, and the offeror is without knowledge that his offer has been
accepted until it is found out later, he is bound by the acceptance.
But, still in the above case, if the offeree, instead of replying by mail,
telegraphs his acceptance, it is in operation until received by the offeror. If the
telegram is delayed or lost,a revocation of offer sent by the offeror is received
by the offeree before the cable acceptance is delivered to the offeror, it
prevents the formation of the contract.
However, an offeror can, by expressly stipulating for receipt of the
acceptance, prevent the above exception from operating. All that is necessary
is to add in the offer such words as "if I do not hear from you on or before the
20th, I shall assume your answer is negative" or "subject to cable reply here
5th our time". In these cases, acceptance takes effect only at the time the
offerees letter or cable is received by the offeror.
Article 18 stipulates. "An acceptance of an offer becomes effective at the
moment the indication of assent reaches the offeror. An acceptance is not
effective if the indication of assent does not reach the offeror within the time
he has fixed or, if no time is fixed, within a reasonable time , due account
being taken of the circumstances of the transaction, including the rapidity of
the means of communication employed by the offeror."
4) Acceptance shall be in accordance with the offer.
The acceptance shall be unconditional and without any modified clause.
Additional or different terms relating, among other things, to the price,
payment, quality and quantity of the goods, place and time of delivery, extent
of one party's liability to the other or the settlement of disputes are
considered to alter the terms of the offer materially. However, additional or
different terms which do not materially alter the terms of the offer constitute
an acceptance, unless the offeror objects.
Late acceptance is generally considered invalid. However, a late
acceptance is nevertheless effective as an acceptance if without delay the
offeror orally so informs the offeree or dispatches a notice to that effect.
If a letter or other writing containing a late acceptance shows that it has
been sent in such circumstances, that if it transmission had been normal, it
would have reached the offeror in due time, the late acceptance is effective as
an acceptance unless, without delay, the offeror orally informs the offeree
that he considers his offer as having lapsedC292or dispatches a notice to that
effect.
An acceptance may be withdrawn if the withdrawal reaches the offeror
before or at the same time as the acceptance would have become effective.

3. Conclusion of the Contract

In the business negotiation, a contract is concluded after the offeree accepts
the offer.
1) Significance of Signing a Written Contract
According to different regulations and laws, the conclusion of a contract
depends on the procedure of making an offer by one party and making
acceptance by the other, signing a contract in writing is not an essential
condition for the effectiveness of the contract.
Article 11 of "the United Nations Convention on Contracts for the
International Sale of Goods" stipulates: "A contract of sale need not be
concluded in or evidenced by writing and is not subject to any other
requirement as to form. It may be proved by any means, including witnesses.'
But in international trade practices, after the two parties reach an agreement,
they usually sign a contract in writing because it is very important.
(1) The contract in writing can be used as evidence for the conclusion of the
contract.
(2) Sometimes the contract in writing is a necessary condition for the
effectiveness of the contract.
(3) The contract in writing may be used as a foundation for performance of
the contract.
2) Forms of the Contract in Writing
(1) Sales contract: The contents of a sales contract shall be complete and
detailed and shall include the main trade terms and conditions.
(2) Sales confirmation: A sales confirmation is usually a simplified contract,
but it has the same legal effect as a contract.
A formal contract embodying all terms of the agreement should be prepared
in duplicate, each copy should be signed by both parties, and each party
should retain one copy of the contract.
Where a contract is negotiated verbally or by correspondence, and later on
one party sends to the other party a contract (or sales confirmation) made in
duplicate, one copy of which duly signed has to be returned by the other
party.
A contract in writing generally includes 3 parts:
(1) Preamble: The preamble mainly includes the name, number, date and
place of signing the contract, the names and addresses of both parties, etc.
(2) Body: The body of a contract mainly includes the general and basic terms
and conditions, such as the name of the goods, quality, quantity, packing, unit
price, total value, date of delivery, port of shipment and port of destination,
terms of payment, insurance, inspection, claim, arbitration and force majeure,
etc. It may also include the hedging clause, more or less clause, governing
law, duration and termination, amendment, etc.
(3) Witness clause: The witness clause mainly includes the language validity,
copies of the contract, signatures, etc.
Performance of Export Contract
Outline of Import & Export Procedures
The performance of the export contract refers to the whole process from
exporters delivery of the goods to the collection of payment. A legal contract
shall bind upon both parties, so the interested parties shall fulfill the agreed
duties according to the contract. Any party cannot change or cancel the
contract unilaterally without sound reason. In case one party does not perform
the contract or the performance is not in conformity with the stipulations of
the contract, his act amounts to breach of the contract. The party who breaks
the contract shall undertake certain legal responsibilities according to
different cases and consequences.
Whether the performance of the export contract is good or not will
influence the credit standing and interest of our country, therefore, we should
pay close attention to the following points in the performance of the export
contract.
1) We should honor the contract and keep our promises, and make
performance strictly according to the stipulations of the contract.
2) We should strengthen the cooperation with relative parties, such as the
customs authority, inspection institution, bank, insurance company, shipping
company, etc.
3) We should prepare for the goods according to the L/C and the contract.
4) We should establish close relations with customers.
The main steps in the general process in performance of the export
contract are (under CIF terms, payment by L/C ) as follows:
1) At the request of the importer, the L/C is opened by the issuing bank and
sent to the advising bank. After receiving the L/C the advising bank examines
the L/C and transfers it to our import and export company.
2) If our company finds that the L/C is not in conformity with the contract it
requires the foreign importer to amend the L/C.
3) Our company prepares for the goods and applies for inspection.
4) The commodity inspection bureau examines the goods and issues the
inspection certificate.
5) Our import and export company fills in the consignment bill or cargo
shipping application, and entrusts the Foreign Trade Shipping Company with
the task of chartering a ship or booking shipping space. The China Ocean
Shipping Agency issues the shipping order.
6) Our import and export company takes out insurance.
7) The insurance company issues the insurance policy.
8) Our import and export company fills in the customs declaration and renders
the shipping order, inspection certificate, commercial invoice, packing list,
export permit, copies of the contract and L/C to the customs authority for
examination.
9) The customs authority examines the goods, L/C and documents and seals
on the inspection certificate, release permit, customs declaration or shipping
order.
10) According to the shipping order, the Foreign Trade Shipping
Company loads the shipment on board the vessel.
11) After the goods have been Prep loaded on board, the captain or mate
issues the mates receipt to our import and export company. The company
exchanges it for the bill of lading from the Ocean Shipping Agency.
12) Our import and export company presents the draft, bill of lading,
invoice, customs invoice, certificate of origin, packing list together with the
inspection certificate, insurance policy to the negotiating bank for negotiation.
13) The negotiating bank collects payment from the issuing bank and
transfers accounts to our import and export company.

1. Preparation of the Goods

1) We must prepare for the goods according to the time limit stipulated in
the contract.
2)The quality of the goods shall be in accordance with the stipulations of the
contract, we should examine the article number, specification and assortment
of the goods carefully before packing.
3) The quantity of the goods shall be in conformity with the stipu- lation of the
contract.
4) As to the packing of the goods, we should deal with it more carefully in
export trade than in home trade.

2. Applying for Inspection

"The China Commodity Inspection Law stipulates that all import and export
products shall be inspected. The Contents of inspection of the goods include
the quality, quantity, weight, packing, etc. of the goods.
If the contract stipulates clearly the inspection clause, the goods shall be
inspected according to the contract. If the contract does not stipulate the
inspection clause, the goods may be inspected according to the relative
standards commonly accepted in international trade.
3. Implementing Payment Terms
The major steps include urging the customer into establishing an L/C,
examining the L/C, sometimes involving the amendment to the L/C, as the
case may be.
When a contract is concluded, the buyer is usually under the obligation to
establish an L/C with his bank within the time limit stipulated in the sales
contract. However, since there are circumstances where the buyer fails to
establish the L/C, or it does not reach the seller in time, we can usually urge
him to expedite the establishment of the L/C
All letters of credit opened by foreign companies shall be examined by our
banks and our import and export companies respectively.
Our bank mainly examines whether the opening bank has business
relationship with us previously as well as its credit standing, political
background, liabilities and responsibilities of payment, and also the
genuineness of the signature in the L/C. If our bank finds no fault in the L/C, it
will seal on the original L/C and transmits it to our import and export company.
Our import and export company should examine the L/C again according to
the sales contract. The sales contract and the L/C are two different
documents. The sales contract is the legal document which binds upon both
the buyer and the seller, while the L/C is the document which binds upon the
opening bank and the beneficiary.
The examination of the L/C includes the type, number, date of issuing,
applicant, beneficiary, amount, expiration date[16], presentation period, place
of expiration, issuing bank, etc. in the L/C; the number of the contract; the
name, specification, unit price, packing, shipping mark, quantity of the cargo;
the time of shipment, port of shipment, port of destination, partial shipments
or transshipment to be allowed or not, etc.; the drawer, drawee, time of
payment, etc.; the commercial invoice, bill of lading, insurance policy,
inspection certificate, other documents, etc.; the undertaking of the issuing
bank, instructions to the negotiating bank, etc.; and other stipulations, such
as commission, discount, interest, etc. Our import and export company should
examine the L/C completely and carefully.
When we find that there are some discrepancies or some unforeseen
special clauses to which we do not agree in the L/C, we should send an advice
to the buyer, asking him to make the necessary amendment.
In practice, the expiration date of the L/C and the time of
shipment, owing to various causes, are often needed to make an
extension by the opener.
4. Chartering a Ship and Booking Space
In case the quantity of the goods is large, especially when bulk cargoes are
to be carried, it may be of a great advantage to have a whole ship at our
disposal, while as to the shipment whose quantity is not so large, we may
.entrust the Foreign Trade Shipping Company with the task of booking space.
The procedure for booking space is as follows:
1) The Foreign Trade Shipping Company publishes an export sailing schedule
every month and hands out to import and export companies.
2) As soon as the goods are ready and the L/C has been received, the import
and export company can entrust the Foreign Trade Shipping Company with
the work of handling booking space formalities. According to the relative
shipping clause in the L/C and the contract, the import and export company
fills in the name, package number, gross weight, measurement of the goods,
port of destination, time of shipment etc. on the consignment bill and sends it
to the Foreign Trade Shipping Company before the closing date of receiving as
a foundation for booking space.
3) The Foreign Trade Shipping Company, together with the China Ocean
Shipping Agency arranges the shipping space for the goods on the basis of
stowage principle, nature and quantity of the goods, port of shipment, port of
destination in accordance with the sailing schedule.
4) The Foreign Trade Shipping Company delivers the goods to the dock
warehouse on behalf of the import and export company.
5) After the scheduled ship arrives at the port, the Foreign Trade Shipping
Company delivers the goods from the dock warehouse to the side of the
vessel. After being checked out by the customs, the goods are loaded on
board against the shipping order.
6) After shipment, the master or mate issues the mates receipt which
indicates that the shipment has been received in apparent good order and
condition. This is a temporary receipt which must be exchanged for a regular
bill of lading before the vessel sails.
5. Taking out Insurance
Under CIF trade terms, our import and export company shall cover insurance
for the goods with the China Insurance Company. The insurance clauses,
coverage, insurance amounts and mark-up percentage shall be handled
according to the stipulation of the L/C.

6. Making Declaration to the Customs

Before shipment, our import and export company shall fill in the customs
declaration for export, and send it to the customs together with the shipping
order, copy of the contract, copy of the L/C, commercial invoice, packing list,
weight memo, inspection certificate, export license, etc. After the goods have
been inspected by the customs, if the goods are in conformity with the L/C
and other legal documents, the customs shall sign and seal on the shipping
order, and then the goods may be loaded on board the vessel.

7. Sending out the Shipping Advice

Immediately after shipment, our import and export company shall send out
again the shipping advice to the buyer by cable according to the stipulation of
the L/C. Sometimes the buyer may require our import and export company to
send out again the shipping advice by letter so that he can get the details of
the shipment. Especially under CFR trade terms, we must send out the
shipping advice in time so that the buyer may take out insurance on the
goods in time, otherwise if the goods suffer losses during the transport, we
shall be responsible for them. The shipping advice usually includes the
number of the L/C, number of the contract, name, quantity, measurement,
gross or net weight, total value of the goods, name of the vessel, date and
number of the bill of lading, etc.

8. Making out Documents for Settlement

After shipment, according to the stipulation of the L/C, our import and export
company shall draw up all kinds of documents required and shall present
them to the bank for negotiation and settlement.
The so-called negotiation means the bank at the exporter's
end purchases the bill of exchange and shipping documents drawn by the
exporter.
The settlement means the exporter sells foreign exchange proceeds to the
bank appointed by the country at the banker's current buying rate.
At present, we have three means to make settlement.
1) Make Settlement After the Payment Is Made
After the bank at the exporter's end checks out the shipping documents and
finds no fault, the bank will airmails the documents to the opening bank or the
appointed reimbursing bank to collect the purchase price. Then after the bank
at the exporter's end receives the credit note from abroad, the bank changes
the foreign exchange into RMB at the current buying rate and enters in the
exporter's account.
2) Make Time Settlement
The bank at the exporter's end determines a fixed date for settlement in
advance according to the mail distance the bank will go over for collecting the
purchase value from the paying bank abroad. If the bank at the exporter's end
finds no fault in the documents, it will usually change the purchase value into
RMB and transfer it to the exporter's account within 10--20 days after
checking out the documents, no matter whether the bank has collected the
purchase value.
3) Make Settlement Through Negotiation
In case of no fault in shipping documents, the bank at the exporter's end
buys the bill of exchange and shipping documents presented by the
beneficiary under the L/C and changes the denomination of the bill of
exchange into RMB at the current buying rate after deducting the interest
incurred from the date of negotiation to the actual date of collection.
According to international practices, the negotiating bank may take recourse
to the beneficiary. The Bank of China also keeps the right to take recourse. In
case the paying bank abroad finds any discrepancies and refuses to pay, the
negotiating bank has to take recourse to the beneficiary for recovering the
payment. So the beneficiary shall make out documents with more care to
make sure that the documents are in conformity with each other, with the L/C
and with the goods consigned.
The points that we shall pay attention to when making out the main
documents :

1. Draft or Bill of Exchange

1) It is the foundation for drawing a draft. The L/C usually stipulates that the
draft drawn under the credit shall be marked "Drawn under bank L/C No '"
dated ..."The words "drawn under" are usually printed on the draft, then we
may just type the contents of the draft according to the L/C. In case the L/C
does not include the above mentioned stipulation, we shall still type the name
and address of the opening bank, the number of the L/C as well as the date of
issuing the L/C. Under collection, we shall type the words "for collection",
serial number and D/P or D/A on the draft.
2) Drawer: i. e., the beneficiary is to be indicated in the right lower corner on
the draft.
3) Time limit of payment: It is usually indicated by "at sight", "at 30 days
sight", "D/Pat sight", "D/P at 45 days sight", etc.
4) Payer. Under the L/C, the payer shall be typed according to the stipulation
of the L/C. In case no payer is stipulated, we shall take the opening bank as
the payer. Under collection, the payer of the draft is the importer, while under
collection in connection with the L/C, the payer is the opener.
5) Draft amount: The sum of money written in words and in figures shall be in
conformity with each other. The sum of money on the draft shall be written
according to the stipulation of the L/C and in conformity with the invoice
value. If an interest clause is included, payable with interest % per annum
shall be indicated on the draft.
6) Dayee: No matter whether under the L/C or under collection, the
negotiating bank or remitting bank shall be typed on the draft, i. e., the Bank
of China.
2. Commercial Invoice
In international trade, correct invoicing is very important. The successful
performance of the sales contract will often rely on it.
A commercial invoice is a detailed list made out by the exporter in the name
of the importer which declares the details of the shipment so that the
importer may examine whether the goods delivered by the exporter are in
conformity with the contract.
A commercial invoice is a certificate of sale of the goods, it can also be used
as the foundation for keeping accounts and making declaration to the
customs. When payment under a letter of credit is agreed, it is normal that
the commercial invoice is one of the documents which have to be rendered to
the nominated bank.
The commercial invoice should always include the names and addresses of
the seller and the buyer, drawing date and running number, reference number
of the buyer's order, ports of shipment and destination, details of the goods,
exact marks and numbers on the packages, the invoice amount, and, if
possible, the details of transportation, such as the name of the ship and the
route.When drawing up a commercial invoice, the following points should be
noticed:
1) Drawer: The drawer must be in conformity with the stipulation in the L/C.
2) Number and date: The number of the invoice is usually decide- ed by the
drawer. The date shall be earlier than that of the B/L or insurance policy, but
not later than the expiration date of the L/C.
3) Consignee or importer: The consignee or importer on a com- mercial
invoice is usually the accountee or the applicant under the L/C.
There are several expressions which may be used to indicate the opener in
the L/C, e. g. , issuer, applicant, accountee, for account of -- by order of --, etc.
In case "For account of and "By order of" appear on the same L/C, the name
after "For account of "shall be taken as the consignee of the invoice. If a bank
opens an L/C on behalf of a certain importer, the consignee of the invoice
shall be the importer instead of the bank. If there are two importers, i.e. the
middleman and the real buyer, unless otherwise stipulated in the L/C, we shall
type the two buyers on the invoice.
4) Port of shipment and port of destination. The port of shipment and port of
destination shall be in conformity with the stipulations in the L/C and the
names given in the B/L.
5) Description of the goods. The description and specification of the goods
shall be typed on the invoice according to the L/C strictly. Unless the L/C
stipulates other terms as per contract No ..."the commercial invoice usually
does not give the specific description of the goods which is not stipulated in
the L/C. But in case the L/C only stipulates the general name of the goods, the
commercial invoice may list the specific name, varieties, or article numbers of
the goods. In case the L/C requires the description of the goods be written in
French, or Spanish, or other languages, we must comply with the requirement
according to the stipulation.
6) Quantity of the goods; The quantity of the goods typed on
the commercial invoice shall be in conformity with the L/C. In case the L/C
permits the quantity latitude but does not permit the amount latitude, then
the quantity of the goods in the commercial invoice usually can only be
reduced by 5%.
7) Invoice value, and commission. Unless otherwise stipulated, the bank may
reject the commercial invoice issued for the amount in excess of the amount
permitted by the credit. The currency employed in the commercial invoice
shall be in accordance with the stipulation of the L/C. The invoice price has to
be stated in line with the agreed terms of the contract as explained earlier, it
may be the F. O. B. price or C. I.F. price, etc. In case the trade terms stipulated
in the L/C are not in conformity with those of the contract, for example, the
trade terms in the L/C are "CIF C3% London" while the trade terms in the
contract are "CIF London" we should ask the opener to make an amendment
to the L/C.
There are various ways to indicate the commission in the commercial
invoice. In case the commission has already been de- ducted form the amount
in the L/C, the invoice value shall not include the commission either. In case
the L/C does not deduct the commission nor does the invoice, the commission
shall be paid after the seller has collected the purchase price.
In case the commission and discount appear in the commercial invoice
simultaneously, they shall be stated in the commercial invoice respectively.
In case the L/C stipulates that the commission shall be deducted by the bank,
the invoice shall be made out in gross value, the seller may recover exchange
on the basis of net value, i.e. after deducting the commission.
8) Shipping marks and packing of the goods: In case shipping marks are
stipulated in the L/C, the invoice shall be made out in conformity with the L/C,
in case shipping marks are not stipulated in the L/C but agreed in the
contract, the invoice shall be made out in conformity with the contract; in
case shipping marks are not stipulated in the L/C or in the contract, they may
be determined by the seller in conformity with the usage of a particular trade.
9) Signature and authentication. The invoice is usually signed and sealed
by the exporter. Sometimes the L/C only requires the invoice be sealed by the
China Council for the Promotion of International Trade; sometimes it also
requires the invoice be signed by the notary public. We must pay due
attention to these clauses in the L/C. In case of "issued by, "signed by" or
"drawn by, the invoice is all right when it is sealed by the appointed authority
on the right of the invoice; In case of "certified by", "attested by or
"approved by", the invoice shall also be sealed on the left of it in order to
certify it as correct and true. In case signature by hand is required, the invoice
shall be signed by hand by the appointed signatory.
3. Customs Invoice
The customs invoice is one of the documents required by the customs in some
import countries which has an unified form and shall be filled in according to
the stipulations of the L/C.
The customs invoices include the formal customs invoice, combined certificate
of value and origin, certified invoice in accordance with customs regulations.
The customs invoice is mainly used as a foundation for customs statistics,
customs valuation, taxation and certifying the origin of the goods, making
sure whether there is dumping tendency. When we fill in the customs invoice,
the following points shall be paid attention to:
1) Form of the customs invoice: Different countries and different regions
adopt different forms. The specific form is usually stipulated in the L/C.
2) Contents of the customs invoice: The contents of the customs invoice
shall be in conformity with those of the commercial in- voice.
3) Formation of customs invoice price: The customs invoice usually requires
that the detailed statement of the breakdown value be shown. In case under
the CIF price, the freight, insurance premium and FOB price shall be listed
respectively.
In addition, the packing expenses, baling charges, handling expenses, if
any, shall also be stated. The prevailing home market price shall be shown in
domestic currency, while it shall be 5--10% lower than the FOB price,
otherwise there is an risk of being considered pushing sales at an irregular low
price.

4. Bill of Lading
The bill of lading is the most important shipping document. We should take
care as to the following points when making out the bill of lading.
1) Kinds of the B/L: The L/C issued by the foreign bank usually requires that
the full set of clean "on board" B/L be provided.
2) Consignor in the B/L. In case of no specific stipulation, the beneficiary of
the L/C is the consignor.
3) Consignee in the B/L. According to different L/C, there are different ways
to indicate the consignee.
In case of no clear stipulation in the L/C, the box of consignee may be
completed by filling in "To order" and the B/ L shall be endorsed by the import
and export company.
In case the L/C stipulates "To order" or "To Order of Shipper" is typed in
the box of consignee, the B/L shall still be endorsed by the import and export
company.
In case the L/C stipulates the B/L shall be made out in the manner of "To
order, deliver to the order of bank", in the box of consignee "To order" shall
be typed and "deliver to the order of ... bank" shall be typed on the back of
the B/L, and then the B/L shall be endorsed by the consignor.
 In case the L/C stipulates the B/L shall be made out "To order of
negotiating bank", in the box of consignee in the B/L "To order of Bank of
China" may be typed and the B/L shall be endorsed by the bank.
In case the L/C stipulates the B/L shall be made out "Endorsed in
blank" the box of consignee shall remain blank and the B/L shall be blank
endorsed by the consignor. In case the L/C stipulates "Endorsed to", the
consignor shall make endorsement in full.
In case the L/C stipulates that a set of original documents shall be sent to the
buyer direct, the consignee shall be the opening bank,
4) Notify party. The notify party is usually the consignee or his agent at the
port of destination. The details of the name and address of the notify party
shall be stated on the copy of the B/L. In case the L/C does not stipulate the
notify party, the box on the original B/L may be blank, while on the copy of the
B/L, the name, address, telephone number and telex number of the consignee
or opening bank or middleman shall be clearly indicated so that the shipping
company agency may send the advice of arrival to the notify party.
5) Description of the goods, mark, number and date of the B/L. The general
description of the goods is usually required to be filled in the B/L.
The mark is usually filled in the B/L according to the stipulation of the L/C. As
to the bulk cargo, "N/M (no mark)"and "Cargo in Bulk" shall be typed on the
B/L.
In case a full set of Bs/L is required by the L/C, two originals shall be made
out. In case of the ocean transport, the date of B/L shall be the date on which
the goods are shipped on board.
6) Port of destination. Except under FOB trade terms, the port of destination in
the B/L, for example, under CIF or CFR trade terms, shall be clear and definite.
There are several cases in filling in ports of destination.
If the L/C requires "free zone" be added after the port of destination,
except Aden , Beirut, Colon, Aqaba, Port Said etc., the shipping company
usually does not allow "Free Zone" to be listed in this column.
If the L/C requires "In transit '" to' be added, it shall be typed on the free
space, instead of after the port of destination, because the seller is
responsible for shipping the goods to the port of destination only, while the
responsibility and charges due to the transshipment shall be borne by the
buyer.
Some American Ls/C require "OCP' be typed after the port of destination.
OCP (Overland Common Point) refers to the inland area on the east ofRocky
Mountains. All the goods transshipped from the west sea cost to the inland
area will enjoy the preferential freight rate.
7) Freight: Under CIF or CFR trade terms, the freight shall be borne by the
consignor. "Freight prepaid" or "Freight paid" shall be filled in the B/L under
FOB trade terms, the freight shall be borne by the consignee, so "Freight to
collect" or "Freight payable at destination" shall be filled in the B/L.
 5. Insurance Policy
1) Unless otherwise stipulated in the L/C or unless the insurance policy
shows that the insurance will be effective no later than the date of shipping
the goods on board or making delivery or delivering into the custody of the
carrier, the bank will reject the insurance policy whose issuing date is later
than the date of shipping the goods on board or making delivery or delivering
into the custody of the carrier stated in the shipping documents. So the date
of insurance policy shall be earlier than the date of the B/L.
2) As to the goods which have franchise, the franchise shall be stated in the
insurance policy, otherwise IOP (irrespective of percentage) shall be
stipulated in the L/C.
3) In case of no clear stipulation in the L/C, the insured shall be the
beneficiary of the L/C, who shall make blank endorsement so as to make it
negotiable in case the L/C requires it be made out "To order", the insurance
policy shall be endorsed by the beneficiary.
4) The insurance coverage and amount shall be in conformity with the
stipulation of the L/C. The mark, number of the packages, quantity,
description of the goods, name of vessel, date of shipment, port of shipment
and port of destination shall be in conformity with those in the B/L.

6. Packing List and Weight Memo

The packing list and weight memo are used for examining the goods when the
goods arrive at the port of destination. In some degree, they make up the
deficiency of the commercial invoice.
The packing list states the assortment of each individual lot; the weight
memo states the gross weight and net weight of each piece.

7. Certificate of Origin
Generally speaking, there are two kinds of certificates of origin:
1) Certificate of origin: Those countries which do not use the customs
invoice or consular invoice may determine the rate of duty according to the
certificate of origin and make sure where the goods come from.
2) Generalized system of preference certificate of origin form A:
This kind of certificate must be filled in by our import and export company and
be issued by the China Import and Export Commodity Inspection Bureau as a
basis for reducing or remitting the duty on import commodities.