8 April 2008

Making payment terms work

This article is excerpted from Frank Reynolds’ 8 April 2008 column in “The Journal of Commerce”.

In March we covered the terms of payment commonly used in international trade. There’s more to this than meets the eye, so let’s look behind the scenes at the mechanics of how transactions work. We will assume that the exporter and importer have negotiated a mutually acceptable sales/purchase contract….

Documents move goods in international trade…. Commercial documents such as the invoice and packing list are normally prepared by exporters and should present no problem. Country-specific documents like certificates of origin, phytosanitary certificates, inspection reports and consular documentation address requirements of the importer’s country. These pose a greater challenge as they usually require certification by an outside party (chamber of commerce, inspection company, government agency, etc.). Insurance documents are normally provided by the policy owner (seller, forwarder or buyer). Some air carriers also offer insurance.  

Transportation documents are the most important commonly used documents and are typically issued by carriers or forwarders for carrier signatures. They indicate the party making the shipment, the goods shipped, to whom the goods are to be made available on arrival, and which party is responsible for freight and associated charges. They also serve as contracts of carriage between the carrier and the party engaging them, and can even convey ownership for shipments by vessel.

Since transport documents are created by forwarders and carriers, it is important to consider from whom these service providers take their instructions. The quick answer is the party with which they have contracted. This would be the seller for “freight prepaid” shipments or the buyer for those made on a “freight collect” basis. Unfortunately, this fact often goes unnoticed because we typically refer to the party providing the goods for transport as the “shipper.” This is correct only when that party is contracting for transportation (i.e., freight prepaid). For freight collect shipments, the buyer contracts for transportation, and is therefore actually the shipper…..

Commercial letters of credit require strict documentary compliance. Discrepant presentations are not honored until or unless the bank that issued the credit gives its approval. This usually means getting the buyer’s OK as well. The governing rules, UCP600, go to great lengths to explain what constitutes a discrepancy, and devote eight articles (19 through 27) to transport documents.