Nomination Without Obligation

The word ‘available’ as used in LC operations, ranks high on the list of terms that confuse exporters. An LC should clearly specify how it is available; by sight payment, deferred payment, acceptance or negotiation [article 6(b), UCP 600]. It is preferable for exporters that LCs be advised available with a local bank, or at least with a bank in the exporter’s own country. For instance, if the LC is available at the counters of a local advising bank by sight payment, deferred payment, acceptance, where confirmation is added, then the exporter will, in the normal course of events, receive payment or have a bank acceptance or a deferred payment commitment a few days after presenting documents complying with the terms of the LC. Such commitments are definitive and without recourse to the exporter. However, if LC is not confirmed, such advising bank may decide not to pay, accept or issue a deferred payment commitment at the time documents are presented, even if they are presented in order [article 12, UCP 600]. There can be many reasons for this, but the most common is that the advising bank where the LC is available is not satisfied with the bank risk or country risk.

If on the other hand, the LC was confirmed, such advising/confirming bank would have no option but to take up documents which comply with the terms and conditions of the LC and honour its commitment to the exporter.

Negotiation deserves a special mention. Negotiation is a term which regularly confuses exporters and perhaps even some bankers. If an LC is available by negotiation with an advising bank and not confirmed, that bank has the option to pay to the exporter, remit the documents and claim payment from the issuing bank. The exporter must realize that the final decision as to whether or not documents meet the terms and conditions of the LC, and consequently as regards payment, rests with the issuing bank. The negotiating bank will request repayment from the beneficiary (with interest) if payment is not received from the issuing bank. Negotiation without confirmation is with recourse.

An LC available by negotiation and confirmed by the negotiating bank means that the negotiating bank has no option but to negotiate documents presented complying with the terms and conditions of the LC. Such negotiation under a confirmed LC is without recourse. Where an LC is only available by negotiation and not confirmed, many banks which have been nominated as negotiating banks are not prepared to take the risk of paying the exporter for fear they may not get reimbursed. Exporter should appreciate the service provided by a bank when it negotiates documents, and also understand why a bank is not always prepared to negotiate.

Transport Document

Most of the discrepancies discovered in LC operations are associated with the transport document. It is largely because LC stipulates a type of document which is not appropriate to the mode or modes of carriage which will be used. Some traders, particularly new traders, are not well versed with what transport document to follow with which trade term. Terms such as FOB, CFR and CIF are only meant for carriage by sea or waterway only where Bill of Lading or Non-Negotiable Seaway Bill should be stipulated in the LC. Terms such as Ex-work, FAS, CIP, CPT and etc where one mode of transport are used should be followed with a multimodal transport document.

Generally, the details on the transport document should include the following information:
1. An indication that it has been issued by a ‘named carrier or his agent’
2. A description of the goods in general terms not conflicting with description in the LC
3. Identifying marks and numbers
4. The name of the carrying vessel in the case of a Marne Bill of Lading, or the name of the intended carrying vessel in the case of a multimodal transport document including sea transport
5. An indication of dispatch or taking in charge of the goods or loading on board, as the case may be
6. An indication of the place of such dispatch or taking in charge or loading on board and the place of final destination
7. The name of shipper, consignee (if not made out ‘to order’) and the name and address of any ‘notify’ party
8. Whether freight has been paid or still to be paid
9. The number of originals issued to the consignor if issued in more than one original
10. Date of issuance of the transport document

The date of issuance of the transport document is very important and critical, firstly, to show whether the goods have been shipped in time, if the LC stipulates a latest date for shipment.

Secondly, it is important to meet the requirement that the documents must be presented for payment, acceptance or negotiation, as the case may be, within the validity of the LC and within 21 days from the date of issuance of the transport document unless the LC stipulates some other period of time.

Another importance is to determine the acceptability of the insurance document which, unless otherwise stipulated in the LC, or unless it appears it appears from the insurance document that the cover is effective at the latest from the date of shipment of the goods, must be dated not later than such date of shipment (loading on board or dispatch or taking in charge).

Traders are also to scrutinize and ensure that if a transport document bears a superimposed clause or notation which expressly declares a defective condition of the goods and/or the packaging, it will not be acceptable unless acceptance of such clause is authorized in the LC. A transport document specifically stating that the goods are or will be loaded on deck is also not acceptable unless expressly authorized in the LC.

Scope of Cargo Insurance Coverage

The type of coverage that the insured can obtain ranges from the minimum cover provided by the basic policy commonly termed as S.G. Policy (Ships and Goods Policy) to the maximum protection of “All risks whatsoever”. The S.G. Policy covers the loss or damage to goods (total or partial) arising from the perils of the sea. As the goods in transit are exposed to other extraneous perils such as theft, pilferage, leakage, shortages, etc, the scope of the cover provided under the S.G. policy has to be enlarged by introducing a number of Institute Cargo Clauses (ICC) such as Free from Particular Average (FPA), With Average (WA) and All Risks (AR). Furthermore, certain types of cargo require special clauses, commonly termed as trade clauses e.g., Rubber Clause, Raw Sugar Clause and Timber Trade Federation Clause.

The All Risks Clause provides coverage for all perils, excluding losses or expenses proximately caused by delay, inherent vice or nature of the cargo. The coverage for shipments by air is as per the Institute Air Cargo Clauses (All Risks) (excluding sendings by post), which differs from the other clauses to cater for the particular need by the mode of transport. The important things to note is that these clauses are so designed as to provide cover supplemental to the basic cargo insurance policy (S.G. Policy).

It should be pointed out that due to difficulties encountered by the commerce and trade in the interpretation of the archaic wordings of the S.G. Policy, the Lloyd’s Underwriters Association, in consultation with the Institute of London Underwriters and other interested parties, has replaced the S.G. policy with a simple document and a corresponding set of a new Institute Cargo Clauses – ‘A’, ‘B’ and ‘C’ in place of ‘All Risks’, W.A. and F.P.A. Clauses.

Clause A covers all risks of loss or damage to the assured matter subject to the following exclusion:

Willful misconduct of the Assured; ordinary leakage, loss in weight or volume, wear and tear; unsuitable packing; inherent vice; delay; insolvency or financial default of owners, managers, charterers or operators of vessel; atomic weapons of war and radioactivity.

Clause B covers loss or damage to the assured matter reasonably attributable to the following risks:

Fire; explosion; stranding; sinking; grounding; overturning; derailment of land conveyance; collision or contact of vessel with any external object other than water; discharge of cargo a t pot of distress; general average sacrifice; jettison; washing overboard; entry of sea, lake or river water into vessel, craft, hold, conveyance, lift van or place of storage; total loss of package lost overboard or dropped during loading or unloading; and earthquake, volcanic eruption or lightning.

The exclusions under B clause are similar to those of Clause A with the addition of deliberate damage to or destruction of assured matter.

Clause C covers loss or damage to the assured matter reasonably attributable to the following risks:

Fire; explosion; stranding; grounding; capsizing of vessel; overturning; derailment of land conveyance; collision or contact of vessel with any object other than water; discharge of cargo at port of distress; general average sacrifice; and jettison.

The exclusions under C clause are identical to those of Clause B. In addition, the losses arising from the following risks are not covered:

1. Earthquake, volcanic eruption or lightning
2. Washing overboard
3. Sea, lake or river water damage
4. Total loss of any package lost overboard or dropped whilst loading on to or unloading from vessel.

The loss or damage caused by war and strikes, riots and civil commotion (SRCC) is also excluded under all the three clauses mentioned above. However, traders can obtain cover against losses arising from war and SRCC risks on payment of an additional premium.

It is important to remember that war risks are covered only when the cargo is water-borne that is it is not in force whilst the cargo is on land. The cover starts only when the cargo is loaded on board the vessel and ceases as soon as it is discharged from the vessel at the final port or after the expiry of 15 days counting from the midnight of the day of arrival of the vessel at the final port of discharge, whichever is earlier.

Basic Principle of Cargo Insurance

Cargo insurance plays an important part in facilitating trade transactions. Through cargo insurance, the financial losses suffered by traders on account of damage to goods in transit resulting from various hazards such as fire, storm, collision, stranding, theft, sinking, explosions etc, are transferred to insurance underwriters. By providing protection cargo insurance enables all those engaged in overseas trade to expand their operations.

There are five basic principles governing cargo insurance:
1. Insurable interest. Two conditions should be fulfilled to establish insurable interest, namely:
a. The person should have a legally enforceable financial interest in the property being insured.
b. He should be exposed to suffer a financial loss if the insured property is lost, damaged or destroyed.

2. Indemnity. This principle states that the assured should be restored as nearly to the same position after the loss, as he occupied immediately preceding it. However, in cargo insurance, it is a common practice to issue “agreed value” policies, e.g. 10 cases of milk powder valued at $5,000.00. This implies that all losses are settled on the basis of agreed value irrespective of market value. However, claims for repairs or partial replacements are paid on the basis of actual cost of repair or replacement subject to the limit of the sum assured.

3. Utmost Good Faith. Utmost good faith is the cardinal principle of all types of insurance. The assured must disclose and truly represent all material facts regarding the subject-matter of insurance, which he knows or should know in the ordinary course of business.

4. Subrogation Rights. This is the right of the insurer to take over the privileges of the insured to recover the loss from those who are wholly or partly responsible for it. For example, if the loss is caused by the negligence of the carrier, the insurer, under subrogation rights, is entitled to recover the loss from the carrier in the name of the insured.

5. Contribution. Where an insurable interest of property is insured by two or more underwriters covering the same risks, each has to contribute in the same proportion as the sum insured under his respective policy to the total amount of the loss. The insured may claim the total loss from any one of the insurers and the insurer, who pays more than his ratable proportion, can claim a contribution from the other insurers.

Common Misinterpretation of C-Terms

C-terms or ‘Main carriage paid by the seller’ are terms frequently used by traders in trade. There are two groups of C-terms, one is intended to be used when the goods are carried by sea; CFR and CIF, the other group can be used for any mode of transport, including sea and multimodal transport; CPT and CIP.

Unlike F-Terms, the place mentioned after the abbreviations under C-terms is an indication of a place at destination instead of place of origin or shipment. For instance, “CIF Port Klang” or “CFR Busan” is an indication that Port Klang and Busan Port are respectively the ports of discharge at destination. It is not to be read as ports of shipment or port of loading. This is the opposite of F-terms where “FOB Port Klang” or “FOB Busan” indicates that Port Klang and Busan Port are respectively the ports of shipment or port of loading.

There are two “critical points” that traders need to understand when applying C-terms in a trade, one is the point of shipment and the other one is the point of destination. C-terms are normally used in the event where contracting and arranging for the main carriage in the country of the seller is not possible for the buyer where it would be much faster and convenient if it is left to the seller to arrange. Therefore, to ensure the goods reached the buyer, the seller has two main obligations to be discharged under C-terms:

1. to make a delivery which is to take place in his country either by placing the goods on board the vessel nominated by him at the port of shipment or by handing over to a carrier nominated by him at any place on land and;

2. to undertake to arrange and pay for the main carriage with the addition of insurance under CIF and CIP up to a named point determined by the buyer in the country of the buyer.

It is for the second reason why the ‘destination’ point is required to be determined by the buyer and to be indicated after the abbreviations. The buyer must first determine a named place for the goods to be discharged in his country. The seller than, contracts and pays for the main carriage on behalf of the buyer in his country up to that named point determined by the buyer.

Secondly, the insurable interest to the goods while in transit under C-terms lies on the buyer. The risks are transferred from the seller to the buyer at the point of delivery in the country of the seller. Therefore, buyer is the party who is responsible to procure for insurance in his country to cover the risks from point of delivery up to point of discharge under CFR and CPT. However, under CIF and CIP, the seller is to procure for the insurance for the benefit of the buyer.

So, under C-terms, seller is responsible to contract and pay for the main carriage similar to those in D-terms and buyer has to bear the risks similar to those in E-term and F-terms.

Other duties and responsibilities of buyer and seller are explained in the LC guidelines & checklists.

Trade terms: Point of delivery in the country of the buyer

As mentioned in the earlier post, there are various methods and ways of making a delivery. Besides making a delivery in the country of the seller, it can also be made in the country of the buyer. Generally speaking, the responsibility and obligation of the seller increased when delivery is to be made in the country of the buyer. The seller is not only obligated to arrange and contract for the carriage but also to ensure safety of the goods while in transit. The points of delivery vary in accordance with the trade terms agreed upon by the contracting parties.

Similar to the delivery that take place in the country of the seller, the delivery in the country of the buyer may take place either at the seaport, airport, country border or at any named place where goods are customarily being loaded and unloaded. When this is done, buyer is said to haven taken the delivery and the obligation of the seller in making a delivery is completed.

The responsibility and obligation of the buyer becoming lesser if delivery is agreed to take place in the country of the buyer. To accommodate this advantage to the buyer, the appropriate term to be incorporated in the sales contract is either DAF, DES, DEQ, DDU or DDP.

Under these terms delivery is made by placing the goods at the buyer’s disposal on the arriving vehicle.

Trade Terms: Points of delivery in the country of the seller

One of the most important aspects of trade terms is point of delivery, that is the moment when the goods are either handed over to a carrier or place on board the collecting vehicle for onwards shipment to the buyer. As of this moment, the seller is said to have completed his obligation with regards to the delivery and the buyer is said to have taken the delivery of the said goods.

Whatever risks the goods may be exposed to or costs incurred from this point onwards are to be borne by the buyer. The trade terms are therefore be the important factor in determining the point of delivery. The point of delivery can either be in the country of the seller or in the country of the buyer. It may take place at the seller’s premises; at the factory, workplace or warehouse. It may also take place at the seaport, airport, country border or at any place where goods are customarily being loaded and unloaded.

When delivery is to be made in the country of the buyer, the goods may be collected at the seaport, airport, country border or at any named place.

Terms such as Ex-work, FCA, FAS, FOB, CFR, CIF, CPT and CIP are terms where the point of delivery is to take place in the country of the seller. There are three different methods of making a delivery by the seller when the delivery is to take place in the country of the seller.

Firstly, by having the goods ready at the buyer’s disposal by placing the goods at the seller’s premises as mentioned above. Under this condition, buyer is therefore responsible to arrange and to contract for the carriage to the final destination. This type of arrangement is represented by Ex-work term.

Secondly, by handing over to the carrier where the forwarding agent will come and collect the goods at the seller’s premises or at any named place. This type of arrangement is represented by terms such as FCA, FAS, CPT and CIP. There are two conditions apply under FCA; if the goods are to be handed over to a carrier at a named place other than the seller’s premises, buyer is responsible to unload the goods. On the other hand, if the handing over of the goods is taking place at the seller’s premises, the seller is responsible to load the goods onto the collecting vehicle. The term FCA requires the buyer to arrange and to contract for the carriage. Whereas the arrangement for transport under CPT and CIP is the obligation of the seller.

Finally, by placing the goods on board the vessel at the port of shipment. The seller must ensure that the goods are actually on board the vessel. This is where the terms FOB, CFR and CIF are used. Under the term FOB, the buyer is the party who is responsible to arrange and to contract for the transport. On the other hand, such obligation is transferred to the seller under the terms CFR and CIF.

INCOTERMS

Once the LC is issued and received by the seller, the next event to take place is the movement of the goods. The seller is liable and responsible to ensure that the goods ordered by the buyer are delivered and received by the buyer at the agreed place and within the agreed time. The delivery process requires engagement of a third party where risks and costs are inherent.

Firstly, transport. Goods can be moved using variety modes of transport such as vessel, truck, barge, airplane and train. Regardless of the modes of transport, the inherent factor here is cost.

Secondly, safety of the goods or cargo. The goods, while waiting to be loaded on the carrying vehicle or while in transit may be exposed to the risks of damage or loss to the goods.

In some cases, the goods are required by the regulations of the exporting or importing country where pre-inspection must be carried out to ensure compliance and conformity. Besides, it is customary that custom clearance must be obtained by both, importer as well as exporter. That means custom duty is to be incurred.

All these duties, obligations and costs may form ground for disputes between buyer and seller of different countries as there bound to be trade practice differences, political policies differences, restriction on foreign currencies and other uncontrollable trade limitations.

Therefore, it is imperative that a uniform understanding should be established to enhance the process of trade between trading parties of different countries. This understanding should be able to be applied internationally regardless of geographical locations. Finally, it should form a rule where it is binding on all parties involved in international trade, particularly buyer and seller. Henceforth, International Commercial Terms or INCOTERM comes into picture.

INCOTERMS expressly spells out clear guidelines on the distributions of risks and costs between buyer and seller. The obligations of each party are also expressly stated as to how the delivery should be made by the seller, who should arrange for transportation, who should bear the costs of insurance, transportation, import and export duties and so on. This rule is specifically applicable to the sales contract between the buyer and the seller. The current INCOTERMS applied worldwide which is published by the International Chamber of Commerce (ICC) is known as INCOTERM 2000.