Archives For Incoterms

icc-2020

Who would have guessed that a collection of three-letter acronyms would have had such an impact on the development of international (and domestic) commercial transactions? A group of industrialists, financiers and traders whose determination to bring economic prosperity to a post-World War I era eventually led to the founding of the International Chamber of Commerce (ICC). With no global system of rules to govern trade, it was these businessmen who saw the opportunity to create an industry standard that would become known as the Incoterms rules.

To keep pace with the ever evolving global trade landscape, the latest update to the trade terms is currently in progress and is set to be unveiled in 2020. The Incoterms 2020 Drafting Group includes lawyers, traders and company representatives from around the world. The overall process will take two years as practical input on what works and what could possibly be improved will be collected from a range of Incoterms rules users worldwide and studied. For more information visit the ICC websiteSource: ICC 

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contractLaw firm Shepstone and Wylie cautions traders to be well aware of the legal considerations to be taken into account when negotiating an international trade transaction.

When importing or exporting goods, a trader is inclined to conclude a transaction on terms that place the least possible obligations on the trader concerned.

There are a number of separate (albeit related) agreements which form part of an international trade transaction e.g.:

  • Agreement of sale
  • Agreement of carriage
  • Insurance contract
  • Letter of credit or some payment agreement

Under the contract of sale, the main obligations are the effecting of payment on the part of the importer, and delivery of the agreed thing on the part of the exporter. The manner of delivery, passing of risk, obligation of insurance and carriage depend on the terms to which the parties have agreed.

Sale agreements usually deal with the rights and obligations of the parties by reference to Incoterms. Devised and published by the International Chamber of Commerce, Incoterms are at the heart of world trade. Incoterms are standard trade definitions most commonly used in international sales contracts.

The “E” & “F” terms are most onerous for the buyer. Such terms, however, allow the buyer to control the carriage and insurance and should reflect in a lower purchase price for the goods.

The “C” and “D” terms are less onerous for the buyer, but result in a higher purchase price and the seller arranges the carriage, and in most instances, the insurance.

While it is tempting to look for the least onerous incoterm, it may not always be a wise choice if it leaves the party exposed either under the other agreements, or due to consequence that were not considered.

A few commercial benefits to concluding a sale agreement based on Incoterms that obligate a party to bear the cost of insurance and carriage are:

  • An ability to negotiate a lower price or higher purchase price for the goods, depending on whether the party is a seller or a buyer; and
  • If the party has a good relationship with or a preference for a certain service provider, the party is able to obtain insurance or carriage services on terms and conditions more acceptable to it.

A vital consideration when negotiating an international trade transaction access to legal redress if things go wrong (and they often do in trade).

It is important to ensure that a party has a proper understanding of the agreed terms, including both the legal and commercial considerations. A party’s risk must also be considered against the full suit of contractual obligations in order to ensure:

  • The rights and obligations under the different agreements are compatible; and
  • Obvious benefits under one agreement do not pose risks under another.

Legal advice is always desirable in circumstances where a trader feels he does not have a full appreciation of the legal implications of the international trade transactions he is seeking to enter in to. Source: Shepstone & Wylie Attorneys – Quintus van der Merwe

BIMCO E-Bill of LadingPaper bills of lading have been used throughout the world to document and effect international trade for centuries. Yet whilst the world has become increasingly digitalised the paper bill of lading has, on the whole, remained a constant feature of global trade. Its continued use is mainly due to its combination of three legal characteristics that it has developed over time: (i) it is a receipt of the goods carried; (ii) it provides evidence of the terms of the contract of carriage; and (iii) it is a document of title to the goods. It is these characteristics that have, until relatively recently, foiled attempts to replace the paper bill of lading with an electronic equivalent. However, with the inclusion of an electronic bills of lading clause in BIMCO’s NYPE 2015 time charter form, as well as the International Group of P&I Clubs’ approval of the coverage of three electronic trading systems, the dominance of the paper bill of lading may well be coming to an end.

Reed Smith LLP Ship Law blog posts an interesting article in regard to change in law and the impact of e-commerce on bills of lading.

Issues with the paper system
Whilst the paper bill of lading has been used for centuries it is not without its faults, the principal problems being that:

  • Carriers are obliged to discharge the goods carried on production of an original bill of lading: this is particularly problematic today given both the speed of transport and the fact that the cargo may be sold multiple times during carriage. As a result of this the bill of lading is often not delivered to the consignee in time, and the carrier is often required to accept a letter of indemnity. This indemnity does not, however, remove the carriers’ liability under the bill of lading and creates an additional administrative burden and cost to the trade.
  • The paper system is hugely expensive (such cost is estimated to be between 5 – 10% of the value of the goods carried each year).
  • A paper bill of lading may be forged with relative ease and carriers are liable for misdelivery against a forged bill of lading.

Benefits of an electric bill
The electronic bill of lading or e-bill, in theory, addresses many of the flaws of the paper system, bringing with it a number of advantages:

  • It can be sent around the world instantaneously, hugely lowering the administrative burden of trade (especially where cargo is subject to multiple transfers of ownership during carriage).
  • Any amendments or corrections required can be made far more efficiently and cost effectively.
  • Electronic payment systems, and related advances in security, make an electronic system considerably more secure than its paper equivalent. This is obviously subject to cyber issues.

These benefits will cut the administrative costs of trade significantly and reduce, if not eradicate, situations where carriers discharge their cargo against letters of indemnity.

So why so slow on the uptake?
One of the main reasons the widespread use of the e-bill has been slow to proliferate stems from the fact that it is not treated in the same manner, legally, as its paper equivalent. Significantly:

  • A paper bill of lading is a document of title, enabling it to be negotiated and transferred as possession of the bill is evidence of title to the goods. This is not automatically the case at law with an e-bill.
  • The Hague Rules / Hague Visby Rules (HR / HVR) apply to a contract of carriage by reference to the bill of lading, or similar document of title, and it has been less clear whether they would apply to any electronic trading system used. The solution developed to these legal obstacles is essentially a multiparty contract. This takes the form of a set of rules to which users of an electronic trading system are all required to subscribe to use that system. Such rules then set out the specific form of electronic trading documentation to be used and that the consequences of using such documentation shall mirror the position at law as if they were paper bills of lading.

This, however, means that electronic trading systems such as BOLERO, which has been in existence since the 1990s, are only able to function between their members (i.e. those that have agreed to the uniform set of rules and systems that will govern their transactions). Where a member of an electronic trading system enters into a transaction with a non-member, the electronic system cannot be utilised and a paper bill of lading is issued. This feature has limited their growth, as electronic trading systems are only really effective once they have a large number of members, but are not cost-effective for traders to join until they have a large number of members.

The present situation
The benefits of electronic trading systems are particularly tangible to container carriers (as there is often a separate bill of lading for each container carried) and as such have been utilised by liner companies before wider adoption in the industry. However, the efficiencies of electronic trading systems are not confined to the container industry alone and with members of the largest trading companies, trade finance banks, mining companies and oil majors using such systems, it is clear that they are becoming increasingly prevalent in the shipping industry as a whole.

The growth of the use of electronic trading systems in the wider shipping industry is something that BIMCO, by including an e-bills clause in its latest iteration of the NYPE form, has also recognised. In sum the new clause provides that:

  • use of an electronic trading system is at charterers’ option;
  • owners shall subscribe to the system elected by charterers, provided such a system is approved by the International Group of P&I Clubs;
  • charterers shall pay any fees incurred by owners in subscribing to such elected system; and
  • charterers shall indemnify owners for any liabilities incurred arising from the use of the elected system, so long as such liability does not arise from owners’ negligence.

The International Group of P&I Clubs have now ‘approved’ three electronic trading systems (BOLERO, essDOCS and E-title). An ‘approved’ system is one that is found to replicate the legal characteristics of a paper bill (namely (i) as a receipt; (ii) a document of title; and (iii) a contract of carriage which incorporates the HR / HVR). This means that the International Group of P&I Clubs will provide cover for any liabilities arising under carriage covered by these three electronic trading systems (or any such other subsequently ‘approved’ system), provided that such liability would also have arisen under a paper bill. However, members should be advised that risks connected with the use of a non-approved electronic trading system will not be covered.

The use of an electronic trading system does, however, lead to other risks from things such as hacking, systems collapse, e-theft and viruses, none of which are traditionally covered by P&I clubs and would need to be insured separately. In this regard, essDOCS (which is now used throughout 71 countries by over 3,300 companies) has insurance cover of up to USD $20 million per electronic bill of lading for “eRisks” resulting from an electronic crime or electronic system failure.

With the rise in usage of electronic trading systems, the recent judgment in Glencore v MSC (albeit currently under appeal) provides a timely reminder that the release of cargo should only be made in accordance with the contract evidenced by the bill of lading, even where an electronic release system for cargo is being operated. In this instance cargo was released on presentation of a PIN, despite no provisions for this in the bill of lading, two of the released consignments of cargo were misappropriated and the carrier was held liable.

The future?
With the International Group of P&I Clubs’ approval of three electronic systems, the inclusion of an electronic bills of lading clause in BIMCO’s latest NYPE form and the proliferation of the use of electronic trading systems throughout the wider shipping industry, it is clear that the use of electronic trading systems is increasing. Whilst there is no doubt that we can expect teething problems as the industry continues to adapt to such electronic trading systems, and the cyber risks they may bring, it seems that the efficiencies are too great to be ignore. Source: Ship Law log / ReedSmith

Trade policy - a balancing actThe Federal Government of Nigeria is set to change its trade policy from the present Free on Board (FOB) to Cost, Insurance and Freight (CIF) which most countries across the world use because of its economic benefits, before the end of the year. FOB makes it mandatory for the buyer to determine who ships and insures the goods to his port of destination while the CIF ensures that the seller determines who ships and who insures the goods brought from him. Presently, goods bought from Nigeria are on FOB basis while Nigerian trade with other nations is on a CIF basis.

Disclosing the position of the federal government to Vanguard in Houston, Texas at the ongoing Offshore Technology Conference (OTC), Leke Oyewole, Special Adviser to President Goodluck Jonathan, said work has been completed on the document for a change in policy so as to help indigenous operators. (?)

The Economic Management Team (EMT) is to take a final look at the policy before returning it to the President for it to be signed into law.

Asked whether the policy would be reversed before the end of the year, the Special Adviser to the President said, ” I am hopeful, am very hopeful, but you also know that if today the President signs the policy into law, Nigerians would not begin by tomorrow. We need to give time sufficient enough for Nigerians to acquire vessels to begin to carry.”

He noted that the country presently “operates on FOB, in which case, as soon as we put cargo onboard the ship, foreign funds are released to Nigeria. When we go on CIF, it will mean waiting until delivery of cargo, before the money will come into Nigeria. There will be a gap, that gap most not be too wide otherwise it will hamper the national funding because we get most of our revenue from these products (petroleum products). Source: Vanguard, Lagos.

incoterms2The lack of knowledge to interpret international terms of trade (INCOTERMS) is to blame for the high cost of doing businesses among importers and exporters, the secretary general of the Uganda Shippers Council. Many importers do not understand international terms of trade such as Cost and Freight, Free on Board and Cost Insurance and Freight (CIF), yet in Uganda, taxation is done based on CIF.

“This means that a Ugandan trader who is importing or exporting goods has to pay freight costs in the East African region, whose headquarters are based at Mombasa, in addition to cost of goods, insurance and freight charges for the goods,” explained Kankunda, Secretary General of the local shipper’s council..

“If a Ugandan trader is able to understand these terms, then they will be in position to secure a local shipping line and pay a slightly lower cost compared to paying from the country where the goods are coming from.”

Kankunda was speaking at a three-day workshop on INCOTERMS for importers and exporters from the East Africa region. The training was aimed educating international traders best practices in handling INCOTERMs and other international freight transactions. It is expected to contribute to reducing the cost of cargo handling and shipment along East African corridors by enabling importers and exporters to efficiently apply proper commercial terms and practices.

Kankunda said the application of inappropriate commercial terms, insurance policies and inefficient processing of various trade transactions when importing or exporting goods are some of the causes of the high cost of doing business in the region. It is estimated that transport costs make up 30% to 40% of CIF value of imported goods in East Africa, compared to about 5% to 10% in other regions. Source: AllAfrica.com

For those of you using Apple iPhones or iPads, you can now purchase 2 useful applications to help ease your decision- making and hopefully your workload too!  A company by the name of Slig Logic has developed these applications which are available on iTunes store at a nominal charge.

HS Code The HS Code Handbook provides the HS nomenclature which is expandable up to 6-digits with full HS descriptions. Although a search function exists, the app still requires the user to have a general understanding of the HS system structure in order to navigate properly.

International Trade DictionaryAnother application called International Trade Dictionary is particularly useful for supply chain operators who need to understand trade terminology better. It includes over 1000 terms and has been updated to reflect compatibility with Incoterms 2010. These are not just gimmicks, but very handy.

Incoterms 2010A fundamental aspect of any sale of goods transaction is costing the product accurately. I found this website which I believe is useful for any would be importer/exporter or trade practitioner in the understanding of INCOTERMS. Who is responsible for those charges under the new Incoterms 2010?  See: Incoterms® 2010 Freight and Associated Charges—Part 1: Just who is Responsible?

I received another useful tool from Bill Paul of Freight Match Services, Inc., Roselle, Illinois 60172, USA, who has kindly allowed the publication of his Incoterms 2010 Quick Reference Chart for followers and visitors to this blog.