Exporting

AND THE EXPORT CONTRACT

By

JamesR •Pinnells

PRODEC
PROGRAMME FOR DEVELOPMENT COOPERATION
AT THE HELSINKI SCHOOL OF ECONOMICS
2 EXPORTING AND THE EXPORT CONTRACT
INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK
1

EXPORTING ANTI TIIE EXPORT CONTRACT

This book is not intended as a commentary on any national

law. Extracts from laws, regulations and other documents are
cited only as illustrations of points made in the text. Nothing
said or implied in this book can be taken as an expression of
any opinion whatsoever on the part of PRODK concerning the
legal status of any country. territory. city or other area or of
its authorities, or concerning the delimitation of its frontiers
or boundaries. The views and opinions contessed in the book
are those of the author and should in no case be attributed to
PRODEC or to any of its allied agencies.

This book was prepared front camera-ready copy supplied

by the author using Apple® hardware and software from
Microoft® and Dencha®

IMPORTANT: Although every effort has been made to ensure the reliability of the
information and advice published in this book. neither PRODEC nor the author accepts any
responsibility whatsoever for costs, expenditures, damages or other losses resulting from the
use of this book or of specimen contract clauses contained in it. Before signing any agreement,
the person or persons concluding the agreement should take appropriate
legal advice.

COPYRIGIT NOTICE: The copyright on these materials is registered by James R.

Piturells with the Library of Congress in Washington D.C. No part of these materials may he
reproduced or translated for publication. sale, or non-profit distribution without the express
written permission of either the copyright holder or of the publisher.

Cover Design: Inneli Ilmanen

Illustrations: Erkki Kukkoncn

ISBN: 951-702-232-8
Printed in Finland by Kyriiri Oy, Helsinki, 1994

Should you require a copy of this book, please contact:

PRODEC. Programme for Development Cooperation
Toolonkatu 11
FIN—(10100
Helsinki, Finland Fax: +358-0-409880
2 EXPORTING AND THE EXPORT CONTRACT

PREFACE. TABLE OF CONTENTS, ACKNOWLEOGEM S

Preface
This new publication, Exporting and the Export Contract, introduces the
reader to the export contract and its legal framework. In 1991, PRODEC
published a book entitled International Procurement Contracts: An Introduction:
the present book represents the "other side of the coin," concentrating on the
contract from an exporter's point of view. The emphasis of the book is largely
managerial, in that it focuses on contractual aspects of exporting; it is intended
for the use of non-lawyers entrusted with drafting and negotiating contracts in
export-oriented companies.

This book provides readers with a concise and easy-to-read guide to the main
features of international export contracts; consequently it will help them
avoid common pitfalls, minimize risks, and create profitable, long-term
business relationships with foreign customers. The reader requiring detailed
advice on a particular legal matter is referred to the specialized sources of
information mentioned in this book. In matters of great significance and high
risk, consulting a lawyer is strongly advisable.
The need for this type of publication is widely acknowledged. For many
exporting companies in developing countries, the legal aspects of commercial_
transactions are problematic. given the scarce information available to them.
The language of lawyers is often difficult for a business person to understand.
A situation where -there is no written contract at all or where the contract
fails to clarify key issues can be very costly for the exporter. the highest cost
often being the loss of a customer or a dent in the company's reputation.
For these reasons, PRODEC (Programme for Development Cooperation) at the
Helsinki School of Economics and Business Administration published this book.
The entire book has been written by Dr. James R. Pinnells, international
consultant, and author of International Procurement Contracts. Dr. Pinnells has
researched the subject-matter with the needs of developing countries particularly
in mind. Draft versions were tested in a number of PRODEC seminars in Africa
and Asia before the final version was written. The test period has added to the
practical value of the hook as many crucial problems in export transactions came
to light only during discussions with exporters.
The book is financed by the Government of Finland, through FINN1DA
(Finnish International Development Agency).
PRODEC wishes to express its appreciation and heartfelt thanks to the author as
well as to the persons who have contributed to this publication. This book will
mainly be used in PRODEC seminars on export marketing and business
management, to provide a useful new tool for company executives.

PRODEC
Saara Kehusmaa-Pekonen
Executive Director
INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK
1

EXPORTING AND THE EXPORT CONTRACT

Table of Contents
Introduction: Exporting and the Management of Risk
1. The Meeting of Minds 1
2. Exporting: Where are the Risks? 7
3. Risk, the Contract, and the Law 11
Chapter 1: Negotiating Delivery
1 . The Five Steps in Negotiating Deliver), 19
2. Timing 25
3. Place of Delivery 38
4. Transport 42
5. Risk, Title and Insurance 55
6. Terms of Trade: Incoterms 1990 65
Chapter 2: Negotiating Price and Payment
• I. Export Pricing Strategies. 73
2. The Five Steps in Negotiating Payment 77
3. Third-Party Security for Payment 82
4 , The Letter of Credit 87
Chapter 3: Negotiating Inspection and Defects Liability
I. Exporting and the Problem of Quality 115
2. Inspection, Acceptance and Rejection 121
3. Warranty and Guarantee: Terminology 126
4. The Defects Liability Period: A Chance to Put Things Right 128
5. Timing of the Defects Liability Period 134
6. Corrective Action 141
Chapter 4: The Legal Framework
1. The Big Picture 149
2. Choosing an Applicable Law 150
3. Contract or No Contract? 158
4. The Contract as the Entire Agreement 169
5. Provisions Concerning the Parties 176
6. Provisions Concerning the Status of the Contract 181
7. Settlement of Disputes 189
Chapter 5: The Export Contract
I. Making the Contract Safe 195
2. Using a Model Contract 203
Afterword 221
Answer Key 222
List of Works Cited 229
Index 232
2 EXPORTING AND THE EXPORT CONTRACT

V
PREFACE.TABLE OF CONTENT. ACKNOWLEDGEMENT

Acknowledgments
This book is the result of the cooperation of many people and organizations. .
The author and the publisher wish to thank, in particular, the following people
who gave up their _time to help the author with his research in Africa:
Keith Atkinson, D.G. Bid, Hiran Bid, Faraya Chamba, Victor Chando,
Edmund Chawira, Nicholas P. Gor, Charles Gwinji, David J. Hall, Rhett Hill,
Mike Humphrey, Trevor Ingrain, Farouk Janmohamed, Nizar Juma, Charles
Karanja, Owen Kaseke, James Kinyani, Riku Konstari, Virginia Matabele,
Matthias S. Nlbonela, David N. Meroka, Danny Meyer, Isaiah C. MItunbo,
Phil Munro Agrina Mussa, Lucy Ng'ethe, G.M. Ngundi, J. Njeru, Monica
Nzioka, Rem 0. Ogana, Raphael Omusi, Seth Amos Otieno, Dr A. Palley,
pirris Papaspirides, S. Sharma, Stanford Sibanda, Jim Torond, J.C. Trivedi,
C.P. van Niekerk, John Walachia, Tom Wells.
In addition, the participants at two PRODEC seminars contributed greatly to work
on a pilot version of the book. Because of their enthusiastic and far-ranging
criticism, little of the original text survived intact in these pages:
Miriam Abdelki, Sara Abera, Berhanii Aberra Alemu, Nathan Bicunda,
Hemantee Boodhoo, Isabel Dias dos Santos. Zemedkun Fantaye, Tracy
Gatawa, Paramasiven Govinden, Abubakar Matakar Hafidh, Halima 1-
latibu, Sam K. Kallungia, lvlikrod Karima, John Kawamba, Alfred B.
Kowo, Danwantee Luchmun, Joseph Luganga, Salome Wairimu Macharia,
Mathe Naomi Majara, Ionia Makene, Ruth Nlandala, Desideria K. Mhamilawa,
Stanislaus Franz Mwalongo, Beatrice Bondo Mwandila, Josephine Ayugi
Okot, Mandakini Patel, NIulenga D. Sitnwanza, Harriet Ssali, Aloys Joseph
Wanyama, Angelina Wapakahulo.

The author owes a particular debt of thanks to the staff of PRODEC. Their
support with pilot testing, field research, and the production of the book itself
has been tactful, helpful, and unfailing. The concept of the book originated with
Piiivi Saarikoski who also organized the field research. A team of three worked
through the book with the author, making suggestions and catching errors of
both commission and omission: Pirjo 1 -luida led the team and reviewed the
content in the light of her extensive experience as trainer in many parts of the
world—my special thanks to her. Tiina Vainio acted as a particularly astute
copy editor, and Kata Nuotio checked the book thoroughly for readability and
coherence. If this book achieves any of the goals it has set itself, it will be in
large measure due to their efforts.

Dr. James R. Pinnelis

Heidenfahrt, 1994
INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK
1

Conventions and Abbreviations

This book is based on research and many years of experience with sales and procurement
contracts involving at least one party from a developing country. To turn this
experience—some of it negative—into profitable examples for the reader, three
imaginary countries have been created: Verbena, Esperanza and Nonamia. These are
countries all too familiar with the day-to-day difficulties of exporting; the solutions they
adopt are sometimes clever, sometimes less than clever, but always—it is hoped—
instructive for the reader. The currency of all of these countries is the local "$"—which
you can pronounce dollar or (haler at your discretion. These currencies bear no relation
to any fixed exchange rate and are liable to float widely from chapter to chapter. Where
actual currencies are , intended. the ISO system is used: USD for US dollars, GBP for
pounds sterling, and so on.

One other convention is worth mentioning. Women are seriously under-represented in

the business life of many countries, developed and developing alike. That is not the case
in this book where women entrepreneurs play a roughly equal role in the scenarios and
examples. On the other hand, occasional use has been made of he, him, and his with the
traditional unisex meaning. The reason is that this book will he read by many people
whose first language is not English: in choosing between what is called "sexist"
language and the complex English sometimes necessary to avoid it, the author has
decided against complexity. The use of the word businesspeople rather than
businessmen is just one example of a marginal case where the author has made the
opposite decision.

Abbreviations are inevitable in modern business life, though the author has tried to keep
them to a minimum. Each abbreviation is expanded the first time it is used. Even so, a
list of the abbreviations in the book may be useful:

ASEAN Association of South-East Asian Nations

BGB Burgerliches Gesetzbuch (German Civil
Code)
BL Bill of lading
CFR Cost and Freight (Incoterm)
OF Cost, Insurance, Freight (Incoterm)
CIP Carriage and Insurance Paid (Incoterm)
COCO Coordinating Committee on Multilateral Export Controls
M Carriage Paid To (Incoterm)
CPT Delivered At Frontier (Incoterm)
DAF Delivered Duty Paid (Incoterm)
DDP Delivered Duty Unpaid (Incoterm)
DDU Deutsche mark
DEM Delivered Ex Quay (Incoterm)
DEQ Delivered Ex Ship (Incoterm)
DES Deutsche Industrie and Ilandelstag
DIIIT Deutsche Industrie Normen (German Industrial Norms)
DIN Ex Works (Incoterm)
EXW Free Alongside Ship (Incoterm)
FAS Free Carrier (Incoterm)
FCA
2 EXPORTING AND THE EXPORT CONTRACT

FOB Free on Board (Incoterm)

GBP Great Britain pound (sterling)
HGB Handelsgesetzbuch (German Commercial Code)
IATA International Air Transport Association
ICC International Chamber of Commerce, Paris
Incoterms International Commercial Terms (published by ICC)
ISO International Standards Organization
kW kilowatt
L/C Letter of credit
PC Personal computer
PTA Preferential Trade Area
SITPRO United Kingdom Simplification of International Trade Procedures
SGS Board Societe Generale de Surveillance
SoGA Sale of Goods Act (UK)
UCC Uniform Commercial Code (of United States)
UCP - Uniform Customs and Practice for Documentary Credits (published
UK by ICC) United Kingdom of Great Britain and Northern Ireland
UNCITRA United Nations Commission on International Trade
L Law United States dollar
USD
INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK 1

Introduction

Exporting and the Management

of Risk

1. The Meeting of Minds

THE PROBLEM

An exporter and a buyer negotiate together. At some point there is a

"meeting of minds" their discussion becomes an agreement — with
important legal consequences for both sides. This is a dangerous
moment for first-time exporters: they know their local market, but
exporting poses new problems in production, delivery and, above all,
pricing. A hasty agreement can cause heavy losses.

THE PRINCIPLE

Once scope (the goods to be delivered) and price (the price to be

paid) are agreed, the bare bones. of a legally enforceable agree-ment
are in place. Before reaching such agreements the exporter must be
sure that the goods can be delivered exactly as promised and that the
price cover the full cost of exporting.

IN MORE DEPTH
Let its start with a company and a product. Office Enterprises makes
office furniture its main lines are desks and filing cabinets. The
company is located in a country we can call Verbena, a small island
republic, some-where in the tropics. Office Enterprises was founded ten
years ago by Alec Patel. So far, Patel has sold products only on the
domestic market
At a seminar in 1995, Patel meets Juliana Gomez, owner of Esperanza
Trading. Esperanza Trading is an import-export company located in
Esperanza, a developing country, also in the tropics: Gomez sees a
potential market for Patel office furniture in Esperanza. A negotiation
begins: The two negotiators quickly reach an agreement, a meeting of
minds" as. lawyer call it Office Enterprises will supply 30 leather
covered executive chairs for which Esperanza Trading will pay $9,0001.
Everything else," they say “we can agree when the time comes"

1
Most of the deal in this book are denominated in “Verbena dollars” (VS). This imaginary currency has no steady
value and is liable to float from chapter to chapter. Where actual currencies are intented, the system originated by
ISO (International Standards Organization) is used, e.g. USD for United State dollar, DEM for Deutsche Mark, GBP for
pound sterling and so on
2 EXPORTING AND THE EXPORT CONTRACT

This agreement, although nothing is in writing and no details have been worked out, is
a contract: each side has commitments to the order – both have rights, and both have
duties. What are these rights and duties? Office Enterprise has the duty to deliver the
chairs and the right to collect payment. Esperanza Trading’s situation is exactly
complementary: it has the right to receive the chairs and the duty to pay for them. In
contract language: the scope of the contract is 30 chairs, and the price is $9,000. Scope
against price – that is the essence of the export contact

SCOPE PRICE

Let’s look more closely at scope, price, and the associated risks.

First scope: the product. An exportable product will normally be mature in other
words, the manufacturer should have experience in making the product and enough
production capacity to cope with the size of the order, quality assurance problems
should already be solved.

Closely related to scope is delivery. The exporter must have access to safe and timely
mean of delivery: for example, the export of cut flower will certainly lose money
unless the grower is certain of regular and reliable air shipment. Unfortunately,
exporter sometimes contract to supply goods but fail to think about the problems of
delivering their goods until after the contract is signed. By then it is to late: a bad
name in the trade or an expensive lawsuit are the common results of this lack of
foresight.

And finally price. Does the contract price cover the exporter’s costs and leave the
reasonable profit margin? Answering this question calls for carefull and
knowledgeable pricing. This is not the place for full discussion of export pricing, but
two pricing models are worth mentioning: the free-market and the load-market
model. First the “free-market” approach.

In a market that is free (and, for our present purposes, stable), a manufacturer
calculates export prices by adding:

a.The cost of making the goods in the factory;

b. An appropriate portion of the overhead costs of the factory (e.g., if the export
deal is worth 2% of annual sales, the export price should include roughly 2%
of annual overhead costs;
c.The extra costs associated with exporting (e.g., the cost of international faxes
and telephone calls, additional frieght costs, the administrative costs of
preparing ninety days for payment rather than the usual thirty, and so on);
d. A profit margin (high enough to make a fair profit, but low enough to make
the goods competitive in the intended market)

The resulting price is a fair reflection of the manufacturer’s costs, plus a reasonable
expectation of profit. Charging a lower price immediately crodes profit, an erosion
that quickly leads a losses.
INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK 3

Situation
Verbena Fan is successful producer in the domestic market. It is looking for
new markets and sees good potential sales in Esperanza
First Calculation
The wholesale price of the product is $3 cheaper in Verbena than the
wholesale price of a comparable product in Esperanza. Negotiations with an
importer in Esperanza begin. To secure the business. Verbena Fan
quotes an attractive price or $22, The contract is signed.

$23
$22
$20 Wholesale
Export price low
price of similar
Wholesale enough to beat
product in competition in
price of fan
Esperanza Esperanza
in Verbena

The Learning Process

During manufacture and shipping, additional costs continually arise. When

payment is later than expected, Verbena Fan must borrow from the bank,
further increasing costs. Warranty claims are more expensive
internationally than they are locally—more costs.
$26
$23 $25
When payment
When the extra
is made later After warranty
costs of export
than expected, claims are met,
prodution
the cost of cap- the true
emerge, the real
ital drives up the wholesale price
wholesale price
wholesale price emerges
is higher
still further

The Outcome
An expected profit of up to $2 per fan turns into a actual loss of $4
$4
Loss per fan THE ANATOMY
OF AN EXPORT LOSS

The arithmetic of exporting is often sobering: the

manufacturer's export price is likely to be appreciably higher
than the price he charges locally— and it may well be more
The arithmetic of exporting is buyer
than any oftenissobering: thepay.
prepared to manufacturer’s
But why? export price is
What are the extra costs that drive export prices
likely to be appreciably higher than the price he charges locally – and it may well
uneconomically high?
be more than any buyer is prepared to pay. But why? Whatare the extra costs
These
costs `fall into three
that drive export prices uneconomically categories:
high? These costs fall into three
categories
4 EXPORTING AND THE EXPORT CONTRACT

 Direct additional costs;

 Intangible management costs;
 The cost of capital.

Direct Additional Costs

Some additional costs are easily identified. Some examples: interna-tional
telephone calls are clearly 'more expensive than local ones; costly foreign
travel is necessary for face-to-face negotiation; pack-aging must often be
upgraded to withstand a sea journey or rough handling. Extremely
important are the extra costs of meeting warranty claims: a warranty repair
that costs a few dollars to make in Verbena will cost far more when the full
international costs are added in2

Intangible Management Costs

Other costs are less tangible: for example, misunderstandings can arise
if foreign languages, are involved-, management time must be
invested in completing export formalities: obtaining the certificate of
origin or the export license, negotiating the transport contract,
collecting a letter of credit—all are time-consuming activities.

The Cost of Capital

The cost of capital must also be considered: let's take an example. Patel
is charging $9,000 for 30 chairs. Perhaps $1,000 of this is expected
profit—the remaining $8,000 are his costs. In his own country, Patel is
paid within thirty days, so, assuming he pays his own suppliers and his
workforce on time, he has a debt of $8,000 for about a month. At 15%
annual interest, that will cost him about $100. If he his to wait three
months for payment, his debt will cost him $300. Higher interest rates
(in some countries banks charge 45% ) and longer waiting periods will
quickly Wipe out his expected profit.
Precise calculations are often difficult correct allocation of overhead or in
accurate allowance for the cost of delay in payment depend on reliable
business data and considerable management expertise. Let's assume, though,
that reliable data is available to the exporter. A sober review of the facts then
indicates whether exporting is likely to be profitable or not If not, then—like
all bad deals—exporting should be avoided.
What then is the "loaded" market? In practice very few markets offer the free
and stable conditions we have just discussed—in most markets factors
beyond supply and demand, cost and profit influence price. These distortions
are of two main types: promotional and macroeconomic.

Promotional Loading
In order to promote a product in, a new market exporters often slash
prices: to gain a foothold in the market, the exporter decides to trade -

2
See Chapter 3, Section 1 for a detailed example
INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK 5

for a short while—at a loss. The exporter assesses first what price will
be attractive in the export market and then offers the goods at that
price—whether it creates a profit or not?3

Macroeconomic Loading
In developing countries, pricing is sometimes distorted by an urgent
need to earn foreign currency: if the price is to be pal in oreigit -
currency, the exporter offers goods at unrealistically low price& Export
incentive schemes also influence pricing: exporters sometimes decide
to sell at cost price (or below) and to take the incentive paid by their
own government as their "profit." Such distorted pricing is dictated
more by economic than by purely commercial considerations
Many factors influence export pricing. To keep things simple, however,
when this book speaks of "price," it means the free-market price.
The major problem of export pricing is now apparent: the additional costs, if
correctly calculated, often increase the exporter's price until he is not
competitive in any foreign market. For many would-be exporters the crucial
question is always—will I make a profit from exporting? Only
careful:calculation can answer that question—and the manufacturer must be
wary of entering a legally binding azreement until the answer is clear.
Let us return, then, to Office Enterprises and the export of the chairs.
Assume that Patel is conducting his business wisely, in other words:

 He can produce the chairs without problems of quality or quantity;

 He has access to effective transportation;
 He is calculating his price on the "free and stable" model.
Will he make a profit? It seems likely. Now he must consider the risks of
doing export business and find a means of coping with them

3
The practice of quoting uneconomically low prices always brings complaints about "dumping" from local
manufacturers, as happened in the case of the low priced Japanese photocopiers that flooded the European market
in the late 1980's. If dumping can be proved, import of the goods is often stopped.
6 EXPORTING AND THE EXPORT CONTRACT

A Good Deal?
Study the scenario below, and then answer the questions. If your answer is "No," give
your reasons.

In July 1992, Joe Anderson started a company in Verbena to manufacture footballs.

His workshop has the capacity to make 500 footballs a week working one eight-hour
shift a week. At present (May 1995) he is selling 1,200 football a week on the
Verbena market. Because of the overtime shift necessary, and because of problems
with the supply of leather, quality is unreliable: about 100 balls a week are returned to
the factory. Anderson replaces these returned balls, immediately and without
question. Ariderson's price structure (in Verbena dollars) is:
•

Cost of labor and materials per ball $3.00

Cosiof running the business per week $1,200.00
Selling price per ball (no discounts) $4.23

Anderson is now approached by Juliana Gomez of Esperanza Trading. She wants to

buy 500 footballs a week for six months; she offers a price per ball $4.20 —take it
or leave it.
Assume that the government of Verbena offers no export incentives and that there
are no foreign exchange probleins.
1. Is Anderson making profit at present YES NO

2. Does he have the manufacturing capacity to handle this order YES NO

3. Is his product “mature” YES NO

4. If he accepts the deal, wiil he make money on it YES NO

What You Should Know

1. A contract comes into existence when there is a "meeting of minds." Minimally, this is an
agreement about scope (what will be sold) and price (what will be paid).

2. Export price calculations normally take into account all the additional costs of doing business
abroad.

3. The high costs of exporting often make otherwise attractive business unfrftifitable. Careful
calculation is essential.
INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK 7

2. Exporting: Where are the Risks?

THE PROBLEM
What risks face the exporter beyond the risks of doing normal, local
business? And what safeguards exist to protect the exporter's interests?

THE PRINCIPLE
Exporting creates risks for everyone involved: governments, exporters
and buyers alike. For the exporter, non-payment is the major risk;
insurance, a bank guarantee or, most beneficially, a letter of credit offer
protection. Problems in making delivery are best tackled by agreements
tailored to the exporter's needs.

IN MORE DEPTH
In every export deal, there are four principal parties: the exporter, the
importer, and the governments of the two countries involved. Each party
faces a series of risks and should take protective measures.

Government -
A government represents the interests of its people. These interests do
not always coincide with the interests of an exporter who wants to
maximize profit. All countries take measures to protect what they see
as their best interests. One obvious example is the trade in weapons:
countries such as Germany strictly control the export of weapons to
areas of potential conflict; international arms embargoes against
countries perceived as aggressive are common4 .In such a case, the
threat to the national interest is obvious. Similarly, in time of famine, a
government normally prohibits the export of food—regardless of the
potential profits of an exporter. Foreign exchange is another area where
shortages often occur and where governments act to protect the
interests of the country at large. Where a government sees a risk, it has
little choice but take action to protect the country. The export license,
phytosanitary certificate, certificate of origin, and many similar
documents are the direct result. And governments not only restrict; they
also promote—with direct incentives, tax credits, retention schemes,
and so on In practice, the individual exporter can do little to influence
government policy or to alter public law, the instrument that the
government uses to express its will. In regulating the relations 'between
themselves, however, the exporter and the importer have a great deal of
freedom; profitable use of this freedom is, in effect, the subject of this
book.

4
Until early 1994, the countries in the “westen alliance” used the COCOM ( Coordinating Committee on
Multilateral Export Controls) riles to control the export of weapons oe strategie eqiupment such ascomputers to
the Warsaw Pact countries
6 EXPORTING AND THE EXPORT CONTRACT

The Exporter
For the exporter, every deal poses risks. The most obvious risk is the risk of
non-payment—what happens if the goods are delivered but the buyer fails to
pay? This is a risk in every kind of business, but it is particularly acute in
exporting: the buyer is a long way off; he can make excuses that are difficult
to check. Some typical examples:

 The goods never arrived;

 The goods at-rived damaged;
 The central bank has no foreign exchange to make payment,
 A government regulation makes payment impossible.
Or he can simply disappear. Almost as damaging as non-payment is late payment:
if, as sometimes happens, the exporter hopes for payment within thirty days but is
not paid for eighteen months, then money must be borrowed from the bank: an
expected profit can vanish in a matter of weeks.
And there are other problems too. The crucial moment for the exporter in any
deal is the moment of delivery: as soon as delivery has successfully taken
place, the exporter's main duties are discharged and the right to collect
payment takes effect. But many things can delay delivery. For an example,
let's go back to the Office Enterprises deal: Alec Patel is selling chairs made
in. Verbena to a company in Esperanza. Verbena is an island, so the chairs
must go by sea. Who is responsible for organizing transport? If we assume
that Patel and Gomez agreed FOB delivery5, then the buyer, Gomez must
nominate a ship and Patel must load the goods on board. But what if the
expected ship fails to arrive? The chairs will stand at the docks, rotting and
rusting, earning nothing, even though Patel must pay to his suppliers the
money he spent in manufacturing the chairs. A long delay will hurt him
financially.

How can the exporter protect himself? The most obvious course is to deal
only with trading partners who are known to be trustworthy—and solvent.
Unfortunately this strategy is not always practicable. In particular, the first
business with a new partner is always risky. Two valuable mechanisms,
however, protect the exporter against the risk of non-payment third party
security and the leuer of credit. (The details of these mechanisms are the
subject of Chapter 2 of this book.)

Third: Party Security

The exporter can often secure a promise from a third party that if the buyer
fails to pay, the invoice will be paid anyway. Such 'a promise may be given
by an insurance company—in this case the exporter takes out an export
credit insurance policy to cover the greater part of the risk. Unfortunately,
however, this kind of insurance is not available in all countries.
Alternatively, the promise is given by a bank in the form of a bank

5
FOB- free on Board—delivery means delivery takes place when the goods "cross the ship's rail." For
full details of FOB and oilier terms of trade; see Chapter 1. Section 6 below.
INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK 9

guarantee—the buyer's bank guarantees that if the buyer fails to pay, the
bank will pay instead. The disadvantages here are that such guarantees are
expensive and that buyers are reluctant to establish them.

Letter of Credit
A letter of credit, if the terms are properly negotiated, ensures payment on
delivery of the goods. As soon as the goods are shipped, the exporter takes the
shipping documents to an agreed bank, often in his neighborhood. If the
shipping documents are in order, the bank pays the agreed sum immediately.
The letter of credit is obviously an ideal arrangement for the exporter, and it is
the basis of most export trade around the world.

But what about the other risks, the failure of the ship to arrive which we mentioned
earlier, or unreasonable complaints made by the buyer when he finally receives the
goods? Before asking how exporters protect themselves in such cases, let us look at
the risks faced by the buyer—the importer.

The Importer

Caveat emptor is art old principle of law: buyer hetvare. This is enough in a
vegetable market or when one is buying a used car, but internationally it is difficult
for the buyer to be sufficiently wary. The dangers are obvious: late delivery of the
goods, delivery of goods that are inadequate in quantity or in quality, failure by the
exporter to make necessary repairs or to supply spare parts when things go wrong.
How is the buyer to limit such risks when his best weapon—refusal to pay—is taken
out of his hands, in credit?

In some cases, in particular when purchasing capital equipment, the buyer asks for a
performance guarantee. Like the payment guarantee, this is a promise made by a
bank—in this case though, it is a promise to compensate the buyer if equipment fails
to function as specified. Another safeguard is retention. If goods are delivered
subject to a warranty period of, say, six months, many buyers ask for a retention:
they retain perhaps 5% of the contract price until the goods are no longer, under
warranty; they finally pay this 5% but only if no warranty claims are in the pipeline.
However, neither the guarantee nor the retention is common in simple agreements
for the export of goods. There has to be something more. The answer lies, as we
shall see in the next section, in the contract and in the law—the private law that
supplements the agreement between the panics.
12 EXPORTING AND THE EXPORT CONTRACT

A Risky Business
Verbena Knits exports sweaters and other traditional knitwear made of synthetic
fibers. - An importer from Esperanza contracts with. Verbena Knits for a
consignment of pull-overs. The order is large: about 12% of Verbena Knits annual
turnover. Terms:
 Payment by confirmed, irrevocable, at-sight letter of credit
 Letter of credit to be opened four weeks before delivery due
 Delivery: FOB Port Verbena
 Delivery date: 8 weeks after signing contract (Manufacture takes 4 weeks.)
 Defects liability period (warranty): 6 months from acceptance by buyer

Before is a schedule of events during contract performance. At each stage there is some
risk to Verbena Knits. State the risk and then evaluate its seriousness in each case.
- -
Step 1: Ordering Raw Materials
Immediately on signing the contract, Verbena Knits orders necessary raw materials.

THE RISK:………………………………………………………………………..

SERIOUS  MODERATE  NEGLIGIBLE 

Step 2: Manufacture and Delivery

Verbena Knits manufactures the goods and delivers them to the ship.

THE RISK:………………………………………………………………………..

SERIOUS  MODERATE  NEGLIGIBLE 

Step 3: Collection or the Letter of Credit

Verbena knits presents the shipping documents to the bank and asks for payment.
THE RISK:………………………………………………………………………..

SERIOUS  MODERATE  NEGLIGIBLE 

Step 4: Open Package Inspection and Warranty Period
The buyer inspects the goods on their arrival in Esperanza. Then the defects
liability period begins.

THE RISK:………………………………………………………………………..

SERIOUS  MODERATE  NEGLIGIBLE 

INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK 11

What You Should Know

1. Exporting creates risks for all parties: exporter, buyer, and government
alike.
2. Governments protect the interests of the country by passing laws over
which the exporter has, in effect, no influence.
3. The relationship between the exporter and the buyer is on the other hand,
largely at the discretion of the parties concerned.
4. Exporters protect themselves against the risk of non-payment by
insurance, by a guarantee, or, most favorably, by a letter of credit.
5. For the buyer, some protection against poor quality is offered by
performance guarantees and retentions.
6. For both exporter and buyer, their contract and law which supplements it
are their main protection.

3. Risk, the Contract, and the Law

THE PROBLEM

The law offers protection to both exporter and importer. What is

this "law"? And how can the two parties ensure that they achieve the
best possible protection?

THE PRINCIPLE
Law exists in two forms, public and private. Public law regulates the
relationship between the citizen and the state:, Private law regulates
the relationship between private citizens (or companies.) Most
provisions of the private law are disposive—the parties to a
contracture free to change or ignore them. A well written contract
clarifies exactly what the parties have agreed and, supplementary to
their agreement, which law they have chosen to fill in any gaps.
A negotiated, written contract is a key safeguard against the risks of
exporting.

IN MORE DEPTH

Successful trade depends on peaceful and orderly movement of goods

and money between communities. In the modern world, the main
safeguard of peace and order is probably the law. Within most
societies, two forms, public and private. The public law is imposed by
a government within a specific territory: the citizen or foreigner within
this territory is obliged to obey, prime law regulates the rights of
individual
12 EXPORTING AND THE EXPORT CONTRACT

citizens among them-

selves, (Not all legal
systems make this
absolute distinction, but
it helps our present
purpose.) The public-
law of a country
controls, for example,
tax-ation, immigration,
crime, use of foreign
exchange, and such
matters. Private law
controls, typically,
contracts of sale,
employ-ment contracts,
contracts to lend
money, and so on. One
branch of private law particularly concerns us here, contract law, which
looks at the agreements citizens or companies make with each other.
When Patel agreed to sell Gomez chairs for $9,000, the two of them entered
a contract. A contract is an agreement enforceable at law: both sides can
ask a court to enforce their rights, and it will do so. (Not all agreements are
contracts: if a teenager agrees-with his parents to come home before
midnight and is late, he is not in breach of contract; his agreement is not a -
contract, because it is not, for various reasons, legally enforceable.) The
essence of an enforceable agreement is that the parties, when they made it,
intended to be legally bound by their promises. Since Patel and Gomez
clearly intended this, they have a contract.
A contract is an exchange of rights and duties within the framework of the
private law. These rights and duties are specially created by the two sides
and apply only to them This is clear if we look at the $9,000 Gomez agrees
to pay until she reached her agreement with Patel, he had no claim against
her for any sum of money—and, of course, she had no right to claim
delivery of thirty chairs. So we can say that, in reaching a deal, each side
surrenders to the other certain clearly specified rights--for example, the
right of Gomez to keep her $9,000. Each party retains, of course, all rights
not expressly given up. Any right that we, can legally waive is called a
disposive right—we are free to dispose of it. Most of the rights of an
exporter under the private law are disposive, although we shall come to
some exceptions later, rights that cannot be given away. In principle,
though, the parties are free to agree anything as long as it affects only the
two of them. This principle is known as freedom of contract and it is well
established in most legal systems
Men of full age and competent understanding shall have the utmost liberty of
contracting, and...their contracts... shall be held sacred and shall be enforced by
the Courts of Justice6

So one way of understanding a contract is to say that it is ; n agreement

two parties to rewrite a part of the private law as it applies between the

6
Sir George Jessel in Printing and Numerical Registering Co.v.Samson (1875) LR 10 Eq 452 to 456
INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK 13

two of them. Or, put in another way, to redefine a number of the rights
and duties that they have toward each other under the private law.
And what is the relationship between the contract and the public law?
Let's say, for example, that public law in both Verbena and in Esperanza
forbids the use of certain paints in the manufacture office equipment. Can
Patel agree with Gomez that this law does not apply to their contract?
Obviously not. Public law is never disposive—the parties to a contract
can never set it aside.
A fish tank illustrates these relationships for us. First, the fish tank has a
stand—the constitution which supports the rest. The glass tank we can
say is the public law, and the water in the tank is the private law. The
contract is a fish that swims in the water. Naturally, the fish displaces
some of the water, but it can displace neither the glass (the public law)
nor the stand (the constitution). Most important, however; is the
relationship between the fish and the water: the total agreement between
the two sides (the panics to the contract) is the stun of the water and the
fish.

Let's look at this idea in more detail. Patel and Gomez agreed to
exchange chairs for cash. That is already a contract—but a very small
one. Many hundreds of questions about this deal are apparently
unanswered: What is the date of delivery? What is the date of payment?
How-long is the warranty period on the chairs? What will happen if Patel
delivers twenty chairs instead of the agreed thirty? The list is endless.
But the questions are not, in fact, unanswered: the total agreement
between Patel and Gomez is their fish (the small contract) plus the water
(the whole body of private law that deals with the sale of goods). To
answer the questions, the lawyer simply turns to the relevant laws or
court decisions: any questions not resolved in the contract are resolved in
the law.

In practice, of course, businesspeople seldom leave so many answers in

the hands of the law – it is too risky. What are the risks? Firstly igno-
rance: businesspeople often do not know what the law says about quite
important issues—a full contract leaves fewer gray areas. Second, for the
14 EXPORTING AND THE EXPORT CONTRACT

the sake of clarity and

a harmonious work-
ing relationship, the
parties should regulate
the many issues that
trouble the export
trade. They should
write a "big fish." A
big fish, displacing
almost all the water,
is a powerful security
if disputes arise.

But there is another

problem. Patel comes
fromVerbena;
Gomez from
Esperanza—so
which law are they
talking about? The law of Verbena or the law of Esperanza? The matter
is disposive: exporter and buyer are free in most countries to decide for
themselves which law is to fill the gaps in their contract. The problem of
choosing an applicable law is complex, and we will return to it in
Chapter 4. For the moment, it is enough to say that the parties to a
contract for the international sale of goods may, in principle, choose any
law they wish—any type of water—to fill in the blanks in their contract.

W
e

h
a
v
e
We have already said that the minimum contract (scope in exchange for price)
is enforceable but contains too many uncertainties. In practice, how do
businesspeople regulate things more effectively? There are three basic
INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK 15

approaches: reliance on trade practices; use of general conditions; and the

conclusion of .a negotiated, written contract.

Trade Practices

Some trades—for example, the diamond trade in Antwerp—have well

established rules familiar to everyone in need agree nothing more than
scope and price. Similarly, rice merchants in Southeast Asia seldom enter
elaborate agreements—the rules are too well known to both sides.

General Conditions.

More common is the second approach: the use of general conditions of sale
or of purchase. General conditions work in this way: a buyer sends an order
to an exporter. Somewhere on the order are the words: "This order is
subject to our General Conditions of Purchase as printed on the back of this
Order Form" When the exporter sends the order confirmation (or the
invoice) it, in turn bears the Words: "All goods are supplied : subject to our
General Conditions of Sale as printed on the back of this order
Confirmation." You have probably seen such general conditions; they are
usually in very small print and regulate every foreseeable problem in favor
of the party who drafted them7. The problem here is obvious: each side
says, "My conditions apply." But neither side has agreed to the other's
conditions. In such a situation, he two sides have very different
expectations, and disputes are inevitable. If a dispute goes before, a court,
the judge must give one set of conditions preference. But which? The
answer is unpredictable: and unpredictability is another name for Exporting
on the basis of general conditions;—especially if the buyer does not agree
to them in advance----is unnecessarily risky for the exporter.

The Negotiated, Written Contract

The third approach to export agreements is the most professional and the
safest: negotiating the terms of the agreement and putting them in writing—
the negotiated written contract. The advantages are obvious
First, clarity: all the crucial issues are resolved during negotiation, making
disputes unlikely. Then workability: both sides know what they have to do
and are confident that they can do it: this creates a good. working
relationship. And finally enforceability: if a disputed arises, both sides can
reread the contract and find a clear statement of their Mutual rights- and
duties. Usually the dispute can be resolved without the help (and expense)
of the courts—people seldom go to law when the case is clear.

The mention of lawyers brings us to the main problem with contracts because they
are normally drafted by a lawyer, they are expensive and sometimes difficult to
understand. These problems are not insoluble: in the following chapters you will
find advice on many common provisions

7
The problem of conflicting sets of general conditions, the so-called “Battle of the Forms” is discussed in more
detail in Chapter 4, Section 3
16 EXPORTING AND THE EXPORT CONTRACT

; •

found in export contracts. That will

help you with most of the "jargon." You
will also find a "model sales contract."
Using a model contract for your own
WORK-
advantages: by completing the various CLEAR
clauses, you ensure that you have ABLE
negotiated all the essentials; by using the
options in the Model contract, you gain
flexibility during negotiations; and by
establishing a sound legal relationship,
you help things runs smoothly in future. ENFORCEABLE
(If you are in doubt, you should ask a
lawyer to check the final version of your
contract)
The best safeguard against the risks of exporting is a contract that is clear,
workable and enforceable.

.A Tax-Free Contract
Alec Patel's company, Office Enterprises, in Verbena is selling office furniture to an
importer in Esperanza. The parties agree that The law of Verbena applies." Patel,
however, wants to ensure that he is not liable for tax under the tax law of Esperanza;
_therefore, Patel's lawyer tries to put this clause in the export contract:

All income taxes or other tax obligations created as a result of this

contract shall be assessed and regulated exclusively according to the
Verbenan tax law in force at the time of assessment.
•
1. Is office Enterprises now free of Esperanzan income taxes?

YES
NO—because tax law is public law and the parties cannot set it aside
NO–because the clause is worded too weakly

2. Does the clause below create a "tax-free contract" for Office Enterprises?

The Buyer shall compensate and save harmless the Seller from all
taxes assessed against the Seller by the government of the Buyer’s
country

 YES  NO  YES, UNLESS…

INTRODUCTION: EXPORTING AND THE MANAGEMENT OF RISK 17

What You Should Know

1. Law has two branches, public and private.
2. A contract operates within the sphere of private law.
3. Most rights and duties under the private law are disposive; the parties can agree
to set them aside.
4. The parties to a contract create new, legally enforceable rights and duties that
exist only between the two of them.
5. The parties cannot set aside rights or duties under the public law.
6. In principle, the parties are free to choose which national private law applies to
their contract.
7. If a particular trade has strong, well understood conventions, the parties oft6n
agree only the minimum contract: scope and price.
8. Trade is often conducted on the basis of general conditions of sale or purchase;
this often leads to conflict between sets of conditions.
9. The safest and most satisfactory basis for concluding an export agreement is
the negotiated written contract. A model contract can offer useful guidance.
18 EXPORTING AND THE EXPORT CONTRACT
CHAPTER 1: NEGOTIATION DELIVERY 19

Chapter 1

Negotiating Delivery

1. The Five Steps in Negotiating Delivery

THE PROBLEM

In many export negotiations, the two sides fail to discuss impor-tant

aspects of delivery. This creates a risky and uncertain situation if
there is a delay or if delivery does not go according to plan. How cart
the exporter be sure that all the necessary delivery provisions are in
the contract?

THE PRINCIPLE

The exporter and the buyer should negotiate delivery systemati-

cally,-making all necessary decisions and discussing how they will
solve any problems that might arise. A step-by-step overview of the
delivery procedure k an important aid to planning.

IN MORE DEPTH
When an exporter and a buyer negotiate delivery, certain questions always
arise: What is the date of delivery? Where must the goods be sent? Who
pays for transportation? But other questions are often overlooked. One
example: the transfer of risk. When exactly does the risk of owning the
goods—the risk of losing them, the risk of injury to an innocent passer-
by—when do such risks pass from the exporter to the buyer? Let's say a
buyer in Harare orders a car from a European supplier. Somewhere
between the factory in Europe and the railhead in. Harare, the car is
stripped of the wheel trims, the windscreen wipers, and the radio antenna.
Who bears this risk? If the contract says nothing about risk, the buyer and
the manufacturer may be heading for a long and expensive dispute.
Negotiating terms of delivery means working systematically, making
sure that all foreseeable problems are discussed and that approaches to
solving such problems are agreed. The first section of this chapter looks
in brief at the questions underlying the five negotiating steps. To make
things clear, well use a case based on the following scenario:

Scenario: Ayshe Aziz owns Double-A Ltd: a company in Verbena

that manufactures hair treatment products. A buyer from Esperanza,
Tony Mino, visits Aziz to discuss the export of a trial consignment:
100 cartons of standard shampoo and 100 canons of shampoo for
dry hair. If the shampoo sells well, more orders will follow.
20 EXPORTING AND THE EXPORT CONTRACT

The idea of-working in "steps" looks simple, but it seldom works out in practice:
decision-making processes are nearly always recursive. (Recursive means that a
process constantly loops back, comparing and connecting, and then recomparing
and reconnecting various stages.) A logical, step-by-step sequence is suggested
here to simplify discussion of the ideas After an overview of the five negotiating
steps in this section, the following sections look at the issues in detail.

Step1:Ti
ming:- When Must Delivery Take Place?
The first question most negotiators tackle is when? I n our scenario,
Aziz and Mino are certain to discuss a delivery schedule:

 The date of dispatch from the factory;

 The date of loading onto a ship;
 The date when the goods should arrive Esperanza.
The date of delivery lies at the heart of a sales contract because it is the
key to many contract events—as we shall see in the next section.
Although most negotiators fix, this date, they often forget the "what-if?"
questions What if Aziz is late in sending the goods? What if there is delay
in loading the goods onto the ship? What if the ship arrives late? What if
the goods arrive late in Esperanza? These are questions of delay. Some
kinds of delay may be excusable: for example, delay of a day or two,
especially over a weekend, is often no problem for the buyer. A more
serious case if war breaks out, or if Aziz' factory is swept away by a
hurricane, then both sides must accept that delivery will be late (or may
not take place at all). Again, Aziz' failure to deliver is excusable. But if
delivery is late and there is no reasonable excuse, what then? Delay will
cost Mino money: can he reclaim part of his losses from Aziz? And, if
so, how much? All these questions arise from the fundamental question
when? And, as we saw in the Introduction, if the contract provides no
answers, then the answers are found in the applicable law—often to the
CHAPTER 1: NEGOTIATION DELIVERY 21

surprise of both panics. Accordingly, good negotiators regulate .such_ matters in

their agreement.8

Step 2: Location: What is the Place of Delivery?

The question of where delivery takes place is not as simple as it seems on the
surface. An easy case first: if I order a pizza from the local pizza-to-go, it is
"delivered" when it reaches my house. If I buy a piano and the music store asks a
specialist company to transport it, the piano is, again, delivered when it reaches my
address. Things are different, however, if I organize transport of the piano. In that
case, delivery takes place when my friends arrive with their van at the music shop to
pick up the piano. The shop will not accept liability for what my friends might do to
the piano once it has left the store. This is a fair principle: the exporter should
have no liability for the goods when they are beyond his control.
Most international trade works on that principle: control and responsibility go
together. One common pattern is for the exporter to transport the goods to the docks
in his own country and for the importer to organize transport on from there. (This is
the pattern of FOB delivery, as we shall see later9) Such an arrangement is usually
cheaper than if the exporter tries to organize door-to-door transportation. But, under
so-called FOB delivery, where does "delivery" take place? At Point A, B, C or D?

The answer is our case (FOB delivery) is B. But the parties are free to arrange
anything that suits them. The place of delivery is doubly important to the
exporter because the date of payment normally depends

8
See Chapter 1. Section 2 below for detailed information.
9
Sec Chapter I, Section 6 below for delivery under Incoterms.
22 EXPORTING AND THE EXPORT CONTRACT

on the place and time delivery. At this point, too, risk and ownership often
pass10

Step 3: Transport

The first question about transport is how? What mode of transport is most
appropriate? From an island like Verbena, two modes of transport are
available: ships and aircraft It is unlikely that Mino will ask Aziz to ship the
shampoo by, air: air transport is too expensive. Sea transport is, then, the more
appropriate. When goods travel by sea, they are often shipped by container.
The advantages of containers are well known (lower risk of pilferage, easy
traceability, smoother handling), but the economics of containerization depend
largely on the size of the consignment. In practice, each consignment should
be roughly one container load: a little more and two containers will be needed
at double the cost; somewhat less and the carrier is paid to transport thin air.
200 canons of shampoo are not a large enough order to justify a container; if
Aziz is a good negotiator, she will suggest that Mino increase the size of the
order to create a container-load, or that he order different products to fill up the
container.

Inland transport is made by road, by rail, by barge, by mail, or by a mixture:

the choices are familiar.

For the goods to arrive safely, correct packaging and shipping marks are
essential. Such matters are often made the subject of a separate clause in the
export contract because claims arising from delay or damage can be settled
only if it is clear who is responsible for packing and marking.

Transportation poses a third, altogether different kind of problem: docu-

mentation. Whatever means of transport is chosen, correct documentation is
essential. If payment is made by letter of credit—as is often the case— then the
bank must refuse to pay if the shipping documents are in any way incorrect.11

Step 4: Transfer of Risk, Transfer of Ownership, Insurance

At the point of delivery, risk generally passes from the exporter to the buyer.
What is the "risk" that passes? First, the risk of loss or damage. If the goods are
smashed by a fork-lift, stolen by a stevedore or damaged by a downpour—one
side must bear the loss. Similarly if the goods cause harm to a third party—for
example, a consignment of corrosives left in the sun explodes and severely
burns a passer-by-7who pays? Negotiators often decide, for the sake of
simplicity, that these risks are transferred at the point of delivery, and this, as
we shall see, is the standard arrangement under the so-called Incoterms.

Obviously the issues of risk and insurance go hand in hand. A prudent

businessman who faces a risk, arranges insurance.

10
For detailed information on risk and ownership, see Section 3 below.
11
For more information on these problems, see Section 4 of this chapter and Chapter 2 on payment
CHAPTER 1: NEGOTIATION DELIVERY 23

Transfer of ownership (or title as it is often called) can take place at any point
between the signature of the contract and final payment for the goods. In
international trade, these two points are often widely separate; the parties must
decide what they want. 12

Step 5: Terms of Trade

All the decisions that Aziz and Mino make about the delivery of their shampoo
have been made millions of times before. For this reason, the business
community has developed, a kind a shorthand for standard delivery situations.
Some of these shorthand expressions, FOB (free on board), for example, or CIF
(cost, insurance and freight) are familiar to most businesspeople. Others, such
as DDU or FCA are less well known. The advantages of using such terms are
obvious: if Aziz offers the sham-poo for $20 a carton then Mina knows that she
will transport the goods to the ship's rail at her own risk and cost. When the
goods cross the ship's rail, risk as well as the cost of freight and insurance pass
to him. He also knows that he is responsible for nominating the ship that will be
used And so on One term covers a great deal of decision-making.

With patterns of trade, means of transportation, and communications changing

so rapidly, usage of terms of trade naturally develops differently indifferent
parts of the world; international trade, however, needs agreed, standardized
terminology. These standards are provided by the inter-national Chamber of
Commerce in Paris in its set of 13 Incoterms (International Commercial Terms)
issued most recently in 1990.13

12
For detailed information, see Section 5 below
13
For detailed information, see Section 6 below
24 EXPORTING AND THE EXPORT CONTRACT

Agreed on Paper
Study the scenario, and then answer the questions.
Verbena Paper makes disposable paper plates, cups and napkins for. hot-dog and
hamburger stands. John Merrit, the factory manager, is negotiating for raw paper to be
delivered to his factory for manufacture into paper products. The supplier is Wendell
Paper Industries of Esperanza. 'Wendell and Verbena Paper have agreed in principle a
trial delivery of 40 tons of raw paper.
Which of the following decisions should the two parties make in negotiating the deliv-
ery clause? (If the issue raised is not an aspect of delivery as outlined above, the answer
is No.)
1. The quality of paper  YES  NO
2. The place of delivery  YES  NO
3. The transfer of risk  YES  NO
4. What to do if the ship named by buyer does not arrive  YES  NO
5. Whether or not to ship goods in a container  YES  NO
6. What delays in delivery will be excusable  YES  NO
7. When payment is due  YES  NO
8. Who must insure the goods up to what point  YES  NO
9. How disputes will be settled  YES  NO
10. An Incoterm  YES  NO
11. What means of transport will be used  YES  NO
12. The transfer of title  YES  NO

What You Should Know

1. A systematic approach to negotiating delivery avoids the danger of the

parties overlooking important issues.
2. Negotiating delivery is a five-step process based on live questions:
When'? Where'? By what means? I low will risk and title pass? What
Incoterm is most appropriate?
CHAPTER 1: NEGOTIATION DELIVERY 25

2.Timing

THE PROBLEM

Naming a delivery date is the first step in negotiating the timing of

an export deal. Complex issues concerning coming into force, delay
and compensation for delay must also be negotiated. What are the
main considerations in drafting provisions about timing and delay?

THE PRINCIPLES
Because exports are often subject to official approvals, the delivery
date in many contracts. depends on the receipt of the last approval.
If delivery, is late, the delay. is classified into one of two
categories, excusable and non-excusable. Excusable-delay often
involves a grace period and is nearly always subject to a force
majeure provision14. Any losses to the buyer caused by non-
excusable delay must be compensated. The amount of
compensation is usually set - in advance in a so-called "liquidated
damages" provision

IN MORE DEPTH

Getting the delivery date. right is a matter of managerial know-

how: the exporter must know how long it takes to obtain supplies,
manufacture the goods, package them, arrange pre-shipment
inspection and transport them to the agreed point Of delivery, First-
time exporters often set delivery dates, that are hopelessly
optimistic—and pay a heavy penalty for their mistake. The buyer,
for his part, must know exactly. where the goods are needed: too
early a date ties up money in unused goods in while delivery too
late may mean big losses, especially, if the goods are to be resold.
As far as the contract is concerned, the delivery date triggers many
contract events: at this time, the exporter fulfills his primary duties
under the contract; payment normally becomes due; risk, and often
title, pass to the buyer; delay—as well as any compensation to be
paid by the exporter—is reckoned from the planned date of
delivery. What should the exporter know about this key date?

Naming the Date

The simplest way to fix delivery is to use a straightforward
calendar date: 13th. August 1995, for example. Export contracts
are not always so simple, however. For example, let's .say Aziz and
Mino Meet in Verbena in December and agree that Aziz will sell
shampoo to Mino., Already it is clear to them both that a certain
amount of government red-tape is unavoidable: an export license, a
foreign exchange permit, and a

14
The terms "grace period" and "force majeure" are explained in the following pages
26 EXPORTING AND THE EXPORT CONTRACT

certificate of origin are necessary. Because shampoo is a health-care

product, special certification is necessary in the buyer's country. How
long will it take to obtain the necessary documentation? Because
nobody is sure, the parties often plan for the contract to come into
existence in two steps; step one is on signature (the signature date):
the preconditions for the sale have been met (the date of coming into
force).
The date of coming into force is not usually a calendar date, but the
date on which the last precondition is Met. Common preconditions are
 Receipt of import and/of export approval;
 Receipt of foreign exchange approval from a central bank;
 Issuance of a letter of credit or bank guarantee;
 Making of a down-payment by the buyer
 Issuance of an insurance policy:
 Issuance of a certificate of origin;
 Delivery by the buyer of plans; drawings or other documentation.

Ne
goti
ator
s
ofte
n
agr
ee a
cut-
off
dat
e: if
the
contract has not come into force within a certain time, for example
three months from signature, then it becomes null and void.
CHAPTER 1: NEGOTIATION DELIVERY 27

A cut-off date is common in fixed-price contracts: a long delay can make the
price unrealistic. A typical wording:
Coming Into Force

This agreement shall come into force after execution

by both parties On the date of the last necessary
approval by the competent authorities in the country
of the Seller and the Buyer.

If the contract ha; not come into force within ninety

days of execution, it shall become null and void.

How does the date of coming into force affect the delivery date? The delivery
date is normally fixed for a certain number of days after the contract has
come into force. Let's return to our example: the central bank in Mino's
country. Esperanza, often takes Months to allocate foreign exchange for
imports. Let's say it takes Aziz four weeks to schedule production,
manufacture and ship an order: (Let's also assume that Aziz cannot supply
Mino's shampoo from stock because he wants a special color.) Naturally Aziz
is reluctant to begin manufacturing Mino's shampoo until his order is definite.
Accordingly she fixes the date of delivery four weeks (her manufacturing
period) after the date of coining into force. That way, she knows exactly
where she stands. So Aziz contract reads:

The date of delivery shall be twenty-eight days after

the date of coming into force of the contract.

Timing and "Time is of the Essence" Clauses

How important is strict adherence to the agreed delivery date? Sometimes,

punctuality is essential. If you order a birthday cake to be delivered on your
birthday-28th June—and the cake arrives on the 29th, it is too late. You no
longer want the cake, and you can legitimately refuse to accept it In a contract-
requiring absolute punctuality, lawyers say that "time is of the essence of the
contract"—if the time is not kept, the buyer has the right to send back the goods
and a refuse payment.

Is time normally "of the essence" in commercial life? Most legal systems say
"No." Late, delivery is a nuisance, but it is rarely fatal to the buyer's purposes.
This is so, even if the contract contains a clause such as:
Time is and shall be of the essence of this contract.

Despite this clear wording, a judge may decide that time is nor of the essence
and that the buyer cannot terminate the contract. But late delivery still has
expensive results for the exporter, as we shall see in a moment.

One other point is worth making on the precise meaning of delivery dates. Let's
say a contract comes into force on 25th November, delivery is fixed
-
28 EXPORTING AND THE EXPORT CONTRACT

thirty days after coming into force—Christmas Day in many places!

Must the exporter deliver on a public holiday? Normally not Delivery
takes place, under most legal systems, on the next working day after the
agreed time. The parties can change this if they wish, but few contracts
do so.
In some contracts the exporter has the further duty to notify the buyer
that delivery has taken place. The exact form of this notification varies
from contract to contract, depending in part on the place of delivery, on
the method of payment, and on the needs of the buyer.

Excused Delay and the Grace Period

Aziz and Graham, a customer in Nonamia, have done business together
for some years. In their regular contracts is this clause15 on late delivery:
For each week of late delivery the Seller shall pay
the Buyer 0.1% of the contract price.

At present, Aziz and Graham are negotiating delivery of 400 cartons of

hair conditioner. Graham wants delivery on 20th May Aziz doubts that
she can achieve this date and offers 20th June. Aziz won't give an earlier
date because she risks paying the agreed "penalty" if she is late. Graham
is reluctant to accept the later date; he wants the earliest delivery possible.
As skillful negotiators, Aziz and Graham decide to fix the earlier date as
the delivery date, but to waive the payment of a penalty for a month—
creating a one-month grace period.

15
There is a full of explanation of such “penalty” clause below
CHAPTER 1: NEGOTIATION DELIVERY 29

There contract now reads:

If delivery is not effected within one month of

the agreed delivery date, then the Seller shall
pay the Buyer 0.1% of the contract price.

The effect of a one-month grace period is not at all the same as .a delivery
date set for one month later: the exporter has an early, good-faith target to
meet, and the buyer can exert considerable moral pressure before the
mechanism of the "penalty" takes over. And there are clear advantages to
both sides if early delivery is possible: the buyer gets the goods—and the
exporter receives payment—up to a month earlier than planned. These
advantages are achieved—unusually—without additional risks.

Excused Delay and Force Majeure

Good faith is essential in business life—but it does not always assure
success. If disaster strikes in the form of a hurricane or an earthquake, the
exporter may be unable to deliver on time, or at all. Such natural disasters
are sometimes called "acts of God" and, by long tradition, acts of God
excuse performance of a contract. In recent times, lawyers have argued that
other unavoidable events should also excuse performance: war, for example,
fire, or new government regulations. Most recently, some contracts have
added strikes, lockouts and labor unrest to the list Taken together, all such
unavoidable circumstances are called force majeure (a French expression
meaning a superior power). The principle behind force majeure is clear: if
the exporter shows absolute good faith but simply cannot deliver the goods,
then his duties under the contract can be suspended or perhaps terminated
altogether. A typical contract wording:

If either party is prevented from, or delayed in, per

his reasonable control, then this event shall be deemed
force Majeure, and this party shall not be considered in
default and no remedy, be it under this Contract or
otherwise, shall be available to the other party.
Force majeure events include, but are not limited to:
war (whether war is declared or not), riots,
insurrections, acts of sabotage, or similar occurrences;
strikes, or other labor unrest; newly introduced laws or
Government regulations: delay due, to Government.
action or inaction; fire, explosion, or other
unavoidable accident: flood storm, earthquake, or other
abnormal natural event

The force majeure clause; like other contract provisions, is negotiable; the
parties can decide what excuses and what does not excuse performance. in
monsoon countries, for example, contracts often include the statement:

Force majeure events do not include monsoon rains.

30 EXPORTING AND THE EXPORT CONTRACT

Any problems the two sides foresee can be mentioned in the contract as
excusing, or not excusing, performance.

If a force majeure condition continues for months, life becomes difficult

for both sides, so contracts often regulate the force majeure period, in
particular the right of one (or both) parties to terminate the contract.

If either party is prevented from, or delayed in,

per-forming any duty under this Contract, then this
party shall immediately notify the other party of
the event, of the duty affected, and of the expected
duration of the event.

If any force majeure event prevents or delays

performance of any duty under this Contract for more
than. sixty days, then either party may on due
notification to the other party terminate this contract.

The diagram below shows three possible outcomes of force majeure:

CHAPTER 1: NEGOTIATION DELIVERY 31

Two outcome here are satisfactory: resumption of delivery, and orderly

termination of the contract. But the situation is Unclear and risky for both
sides if they failed to regulate their rights in the event
Unexcused Delay and the Buyer's Remedies
We must now make some difficult, bin important, legal distinctions and see
how different legal systems cope with the problem of giving the buyer some
remedy for any - unexcused delay he suffers
First, the generally accepted principle: if one party to a contract causes harm
or loss to the other, then the law will find the way to redress this harm or
loss. When an exporter delivers late, this normally causes some loss or
"damage" to the buyer: maybe the buyer cannot use a piece of equipment as
soon as expected or must keep one of his own customers waiting. The law
provides two remedies for such damage:

 The court may order the exporter to fulfill his Obligations; this
means issuing a decree of specific performance requiring the
exporter to. make delivery as agreed; or
 The court may require the exporter to pay the buyer compensatory
damages—a sum of money that will fully and adequately
compensate the buyer for any measurable loss.

In addition, the court may allow the buyer to cancel the contract—though this
does nothing to enforce his rights.
32 EXPORTING AND THE EXPORT CONTRACT

Which choice is the court likely to make? In the introduction we saw that
no contract is complete in itself—every contract is subject to some
national law. National laws fall into two main families16 those that derive
from the English common law and those that derive from the Roman civil
law. One difference between these families is their choice of remedy:
common-law countries (England, the. United States, most of the British
Commonwealth and ex-Commonwealth) prefer to award damages, while
civil-law countries (most other countries) usually enforce performance.
The concept of enforced performance presents no problems: the judge
simply orders the party in default to perform as promised. Damages are a
more complex issue. Damages are sums of money paid to compensate an
injured party for some kind of "(furnace." In setting a figure for compen-
satory damages for late delivery, the courts usually ask three questions,
looking for the answer "Yes" in each case:

 Did the loss provably follow from the breach?

 Was the loss reasonably close to the breach in the chain of events?
 Was the loss "mitigated"—in other words, did the buyer take
reasonable steps to keep the loss as small as possible?
Let's look at a scenario to see the practical effect of the these questions:
Scenario: Aziz has agreed to deliver a consignment of shampoo to
Mino on 30th May. By 30th July, she has still not delivered. This
delay causes problems for Mina: he has a contract to deliver the
shampoo to 'a chain store in Esperanza in early June. The chain store
writes angrily to Mino demanding some explanation. Mino does not
reply. In mid-July the chain store writes to Mino again saying that his
failure to deliver the shampoo is the latest in a long chain of failures,
and that they want no more dealings with him. The loss of this
customer costs Mino $300,000 a year. Mino consults a lawyer about
claiming damages from Aziz. The lawyer explains that to' claim
damages from Aziz, Vino will have to show that the loss of the
$300,000 was due to Aziz' failure to deliver (which it was in small
part), that the loss of the customer was closely and immediately
connected with Aziz’s failure to deliver (which is arguable), and that
he did everything in his power to mitigate the loss (which he did not).
It is not likely that a court would order Aziz to pay a large sum in
compensatory damages.

Court proceedings to claim compensatory damages, especially internation-

ally, are expensive, the results are uncertain, and law suits destroy the
working relationship between the parties. Accordingly most international
contracts specify the Consequences of typical breaches such :it late deliv-
ery. The two sides simply negotiate a "lump-sum" that the exporter will
pay if delivery is late. This sum is sometimes called liquidated damages
and sometimes penalty. What is the difference between these terms?

16
For further information on the families of law, See Chapter 4, Section 2.
CHAPTER 1: NEGOTIATION DELIVERY 33

Liquidated Damages
Normally the exporter and the buyer agree a fair figure, a lump sum to
be paid per day (week or month) of late delivery. This "best guess" is
called liquidated damages.17If delivery is sixty days late, the exporter
pays sixty days damages—no questions asked. That is the principle
behind such clauses: payment of liquidated damages avoids expensive
discussion. Two what-if questions arise about lump-sums, however:
first, what if the buyer's losses are much lower than anticipated?
Nothing changes: the exporter must still pay. And what if the buyer's
losses are much higher? Again, in principle, nothing changes: the
exporter pays the agreed sum, and the matter is settled.

Sometimes courts raise or lower obviously unjust figures. For exam-

ple, the Chinese Foreign Economic Contract Law "empowers a court or
arbitral agency to reduce or increase in an appropriate amount the
amount of liquidated damages...if it is substantially more or less than
the resulting loss"; French law allows a change if the figure is "mani-
festly excessive or ridiculously low18

Penalties.
Damages are paid to compensate one party for a loss—a real loss in
the case of compensatory damages, a pre-estimated loss in the case of
liquidated damages. There is, in practice, a third possibility: some-
times a buyer tries to force the exporter to deliver punctually by
imposing an agreed penalty. A penalty clause simply says: "Deliver
on time, or you will be punished." Sometimes the figure fixed for the
penalty is very high. The distinction is clear. the purpose of a penalty
is not to compensate but to punish, or, more correctly, to use the
threat of punishment to achieve acceptable performance.

This distinction between a penalty and a provision for payment of

liquidated damages is important in common-law thinking. Most common-
law countries classify lump-sum clauses into one of three types according
to the motive behind them. How does this work? In reviewing a late
delivery clause, the judge asks if it is--(a) a fair pre-estimate (liquidated
damages); (b) an attempt to terrorize (a penalty); or (c) an attempt by the
exporter to fix: a compensation figure so low that, in effect, it relieves him
of responsibility for late delivery (the quasi-indemnity). If it is a penalty,
the common-law judge simply refuses to enforce it. If it is a liquidated
damages provision, the common-law judge (like his civil-law counterpart)
enforces the clause. If it is a quasi-indemnity, the common-law judge. uses
some discretion: a seller. who uses his power over the buyer (perhaps he is
monopoly supplier) to fix an outrageously low figure is behaving
immorally--or "unconscionably" as lawyers express it The courts will not
enforce a clause they consider to be "unconscionable." The three motives
in summary form:

17
In cases where a precise figure could be calculated (fur example. in the case of late payment of an invoice where
the exact loss suffered—in this case by the seller—is easy to calculate). many courts do not enforce "best
guess" (liquidated damages) provisions.

18
ICC, Penalty, p.28 and 31
34 EXPORTING AND THE EXPORT CONTRACT

LIQUIDATED QUASI -
PENALTY
DAMAGES INDEMNITY

MOTIVE: To compensate MOTIVE: To terrorize MOTIVE: To relieve

the buyer fairly for any the exporter into punctual the exporter of liability
delay in delivery delivery for delay in delivery
MOTIVE: To relieve the MOTIVE: To relieve
Enforceable everywhere exporter of liability
Not enforceable in for Enforceable
the everywhere
but subject to increase or delay in deliver
English law or other but open toofchallenge
exporter as
liability for
decrease in some legal “unconscionable"
common law systems delay in deliver
systems

11.

To be practical: how do you know, as an exporter, if a clause in your

contract with your customer is an enforceable liquidated damages provi-
sion or an unenforceable. penalty? Let's see how an English (or
common-law) judge might proceed in a specific case. First the clause:

Liquidated Damages

If the Seller fails to supply any of the goods within

the time period specified in the Contract, the Buyer
shall notify the Seller that a breach of contract has
occurred and shall deduct from the Contract Price per
week of delay, as liquidated damages, a sum equivalent
to one half percent of the delivered price of the
delayed Goods until actual delivery up to a maximum
deduction of 10% of the delivered price of the delayed
Goods.

To decide if this provision is a penalty or a liquidated damages clause,

the common-law judge first studies the wording. The heading is
"Liquidated Damages" and "liquidated damages" is mentioned in the
text, but this is not decisive. The judge then asks some questions: Was
the figure-0.5% per week up to a maximum of 10%—agreed as a fair
and reasonable estimate of the loss the buyer might suffer? How was the
figure calculated? Did the two sides discuss or debate it? If the figure is
fair; the judge enforces the clause; if it is unfairly high, the judge will
decide that its real purpose is to "terrorize" the exporter and refuse to
enforce the clause.
CHAPTER 1: NEGOTIATION DELIVERY 35

Main Force
Read this Coming Into Force provision; then answer the question.
This contract shall come into force after approval by the
governments of the Seller and the. Buyer, however at the
latest by 31st December 1995.

Does this provision mean:

A. That the contract will come into force on 31st December 1995 even if the two
governments have not approved it? Or
B. That the contract will become null and void if it has not come into force by 31st
December 1995?

A B

A Fine Contract
Study the contract clause below, and then answer questions,

1. Fine Payable
2.
3. If the Seller fails to deliver the Goods at the fixed
4. date, a fine shall be imposed upon him for the period of
5. delay delivery is completed. The fine shall be as
6. follows:
7.
8. 2% for the first week, or any part of it.
9. 4% for the second week, or any part of it.
6% for the third week, or any part of it.
10. 8% per week for the fourth week, or part of it, and for
11. all succeeding weeks..
12.The fine shall be calculated on the total contract value.
13.
14.
1. The clause uses the word "fine." Does that tell you for certain what kind of
clause you are looking at? (Penalty clause or liquidated damages clause?)
YES NO
2. After how long a delay does the exporter lose 100% of the contract price?
…….WEEKS
3. Do you think this clause is a penalty clause or a liquidated damages
clause?
PENALTY LIQUIDATED DAMAGES
4. If an English judge applying English law looks at this clause, will it be
enforceable?
YES  NO
36 EXPORTING AND THE EXPORT CONTRACT

Force Majeure
Verbena Jute Makes sacks, sackcloth, and other jute products. Its standard contract
includes this definition of a force majeure event:
If either party is prevented from; or delayed in, performing
any duty under this Contract by an event beyond his reasonable
control, then this event shall be deemed force majeure…

Which of the following events are "force majeure" events under this definition? (Note:
the wort "control" needs some thought. An event is beyond the control of the exporter
if (a) he could not have foreseen it, (b) if he could not have influenced it, and (c) if he
could not have taken reasonable steps to avoid the problems that were likely to arise.)

1. A Volcanic eruption buries the factory in ash.

YES QUESTIONABLE  NO

2. The annual flooding of the River Verb ruins some of the jute intended for use in
making sacks.
YES QUESTIONABLE  NO

3. A ban is issued on the export of jute products by a newly elected government.

YES QUESTIONABLE  NO

4. A ban is issued on the export of jute products by a government that has been
preparing legislation on this subject for five years.
YES QUESTIONABLE  NO

5. The workforce at the factory go on strike.

YES QUESTIONABLE  NO

6. The dock workers in Port Verbena go on strike.

YES QUESTIONABLE  NO

7. A lockout (Background: The workers have been striking for one day a week. The
management locks the workers out of the factory until they agree to end the strikes.)
YES QUESTIONABLE  NO

8. Shortage of supplies (Background: The exporter cannot get the raw jute he needs
from the supplier because of a shipping delay.)
YES QUESTIONABLE  NO

9. Shortage of Supplies (Background: The exporter cannot get the raw jute he needs
from-the supplier because the Central Bank will not give him foreign exchange to
pay the supplier.)
YES QUESTIONABLE  NO

10. A fire burns down the factory

YES QUESTIONABLE  NO
CHAPTER 1: NEGOTIATION DELIVERY 37

What You Should Know

1. Many export contracts cannot "come into force" (become
effective) until certain preconditions (for example, government
approvals) are met
2. If the parties must wait for the contract to become effective,
the deli-very date often depends on the date of coming into force.
3. Some contracts (especially fixed-price contracts) set a cut-off
date after which the contract cannot come into force.
4. A grace period is sometimes used to facilitate early delivery.
5. Sometimes delay in delivery is caused by a force majeure event,
i.e., an event beyond the control of the exporter. A force majeure clause
often-relieves the exporter of his duty to deliver until the force majeure
event is over.
6. If the force majeure event continues for too long, both
parties should have the right to terminate the contract,
7. Late delivery causes loss to the buyer—loss that must be
compensated. To avoid the cost and uncertainty of legal proceedings,
many contracts regulate in advance the compensation for late delivery.
8. A loss caused by late delivery is not easily quantified, so
lump-sum compensation is normal. The lump-sum may be set too
high (penalty), about right (liquidated damages), or too low (quasi-
indemnity). The motive behind the penalty is to force ("terrorize")
one party into full performance.
9. A penalty is not enforceable in Anglo-American courts,
though the quasi-indemnity is usually enforced.
38 EXPORTING AND THE EXPORT CONTRACT

3. Place of Delivery

THE PROBLEM
In normal speech, the word "delivery" means the arrival of goods at
their destination, but this is not the accepted meaning in contract
language. Considerable confusion can arise if the parties fail to clarify
what they mean by the place of delivery,

THE PRINCIPLE
The place of delivery is the point at which the exporter passes
responsibility for the goods to the buyer. This is usually in the country
of the exporter; if sea transport is used, delivery normally takes place at
the docks; it the case of land or container transport, delivery normally
takes place when the goods are handed over to the carrier. Delivery also
takes place in the country of the exporter in the case of CIF and CH'
contracts,19 even though the exporter must bear the costs of freight and
insurance through to the named destination.
IN MORE DEPTH

We saw the introduction tb this chapter that delivery can take: place at a
number- of places between the manufacturer’s factory and the buyer's
warehouse. If the buyer sends a. truck to collect the goods from the factory,
delivery take place at the factory: If the manufacturer puts the goods on his
own truck and drives them to the buyer's Warehouse, delivery takes place
at the warehouse... Both of these arrangements are however rare in
international trade. Normally delivery takes place
at some intermediate place along the line of
transportation. It is useful, in this context, to ask
What the law says if the parties • agree nothing
between themselves. Under most national laws; a
contract for the sale of goods abroad – assuming
transportation by ship is normally considered as an
FOB (Free on Board) contract: delivery takes
place when the goods cross the rail of the ship nominated by the buyer.
This is perfectly reasonable: from the buyer's point of view it is often
cheaper to arrange sea transportation with ..a carrier and an insurer in his
own country; from the exporter's viewpoint, he has no control over the
goods once they are on board- the ship chosen by the buyer, so he should
have no responsibility. It is also fair that the exporter, who has money tide
up the goods, should be paid when the goods leave his country. But the
Matter is disposive the parties can make any arrangement they wish: If an
FOB contract is agreed, then the contract contains wording such as:

19
The term FOB, CIF and so on – the thirteen Incoterms – are the subject of Section 6 below
CHAPTER 1: NEGOTIATION DELIVERY 39

Delivery of the Goods shall be made FOB (Mombasa).

The term FOB is always followed, as in this example, by the name of the
port where delivery will take place. (The name of the port is sometimes
generalized into, for example, "Kenyan port" or "English east-coat port.")
One common arrangement causes considerable confusion internation-
ally—the so-called CIF contract. CIF stands for Cost, 'Insurance and
Freight. In a CIF contract, the exporter must pay the full costs plus the
freight charges plus insurance up to the named place of destination, usually
a port. For example:

Delivery of the Goods shall be made CIF (Durban).

The exporter pays all the costs up to the port of arrival, Durban. But
where does delivery take place? Delivery takes place when the goods
cross the ship's rail in the port of shipment, exactly as in an FOB contract.
The point is forcefully made in the ICC handbook dealing with Incoterms:

Since. The point for the division of costs refers to the country of destination,
the "C"-terms are frequently mistakenly believed to be arrival contracts,
whereby the seller is not relieved from any risks or costs until the goods have
actually arrived at the agreed point. However, it must be stressed over and
over again that the "V"-terms arc of the tome nature as the "f"-terms in that
the seller fulfills the contract in the 'country of shipment or dispatch : Thus,
the contracts of sale under the "C"-terms., like the contracts under “F” terms,
fall under the category of shipment contracts.20

The issue is crucial—on delivery, risk (as well as ownership in many

cases) passes and payment usually falls due. The point is so often
misunderstood, that many contracts include additional wording on the
place of delivery. For example, the_ Model Contract suggested in this
book uses the following wording for CIF contracts:

Delivery of the Goods shall be made <INCOTERM>. The

scheduled date of Delivery shall be <DATE OF
DELIVERY>. Risk and title to the Goods shall pass
from the SELLER to the BUYER on Delivery.

The place of Delivery under this Contract is <PORT OF

SHIPMENT>.

One final consideration, on the subject of place. What happens if the

ship named by the buyer is late? The goods are ready, but the exporter,
through no fault of his own, cannot deliver. The careful exporter makes
a special provision to cover this problem.21 For example:

If the vessel named by the Buyer fails to arrive on or

before the agreed delivery date, then the Seller may at his
20
discretion deliver the goods to a bonded warehouse in the
incoterms 1990. p. 11. There is a full discussion of the Incoterms in. Section 6 below.
port of Mombasa, and shall, be deemed to have fulfilled his
21
delivery obligations under this contract.
If payment in such a case is made by Letter of Credit. it is very important for the exporter that the terms of the Letter . of Credit allow substitution
of the warehouse receipt for the hilt of lading.
40 EXPORTING AND THE EXPORT CONTRACT

Dead on Time

In preliminary talks, Bangladesh Steel Exporting agrees with All Africa Metal to
deliver goods to Lagos on or before 13th August 1995. When the contract is drafted,
it mentions the. date as agreed -13th August 1995. Because the Nigerian company
has no shipping agent in Bangladesh, it asks for a CIF contract under Incoterms
1990. The delivery terms are accordingly agreed in the contract as follows:

Delivery CIF (Lagos) on or before 13th August 1995.

Trouble is now almost -certain. Why?

………………………………………………………………………………………………
………………………………………………………………………………………………
CHAPTER 1: NEGOTIATION DELIVERY 41

What You Should Know

1. The place (and time) of delivery must be unambiguously agreed
because many contract events (including payment and transfer of risk
and title) are tied to delivery.
2. The place of delivery should not be confused with the destination of the
goods.
3. Delivery of goods under most export contracts takes place in the coun-
try of the exporter, at the docks in the case of sea transport, and when
the goods are handed over to the carrier in most other cases.
4. CIF and CIP contracts are especially confusing since they name the
point of destination, e.g., CIF (Lagos). Lagos, in this example, is the
point to which the exporter is responsible for costs, not the place of
delivery.
42 EXPORTING AND THE EXPORT CONTRACT

4. Transport

THE PROBLEM
For the exporter, transportation has two aspects: the physical safety of
the goods—which means appropriate packaging and correct marking—
and correct documentation. Unless the shipping documents are in
perfect order, prompt payment under a letter of credit is difficult or
impossible. What are the dangers?

THE PRINCIPLE
The parties should state in their contract what packaging is required and
what marks the packaging should bear. The exporter must follow the
agreement scrupulously or payment may be delayed. The exporter
should ensure that the shipping documents correspond exactly with the
conditions of the letter of credit and that the bill of lading is "clean,"
otherwise, again, payment can be seriously delayed.

IN MORE DEPTH
Full discussion of transportation would take us beyond the scope of a
book on export contracts. We shall limit discussion here to _aspects of
transport reflected in the main export contract, ignoring the
transportation contract as such.22 22In practice, once the mode of
transport (road, rail, air or ship) has been negotiated, three aspects of
transportation feature in the contract: packaging, shipping marks, and
shipping documents.

Packaging
One primary duty of the exporter is to ship the goods in suitable packag-
ing. The Vienna Sales Convention23 says, for example, that goods do not
conform to the contract unless they are "contained or packaged in the
manner usual for such goods" or, if there is no usual manner, unless they
are "adequately packaged." Most national laws say something equally
vague: but what is "usual" and what is "adequate"? Rather than rely on
the law, the exporter and the buyer usually specify in the contract what
pack-aging they consider adequate. A typical clause:

Goods are to be packed in new, strong, wooden case

suitable for long-distance ocean transport and are to
be well protected against dampness, shock, rust or
rough handling: The SELLER. shall be liable for-any
damage to or loss Of the 'Goods attributable to
improper or defective packaging.

22
lncreasingly carriers are asking exporters to sign a full Contract of Transportation rather than merely to sign
a consignment note with General Conditions printed on the back
23
Article. 35.2.d. Sec Chapter 4. Section 2, for information on this Convention.
CHAPTER 1: NEGOTIATION DELIVERY 43

This wording makes the requirements clear, and it puts the blame firmly
on the shoulders of the exporter if packaging is inadequate.
Three packaging problems are worth mentioning here even though they
are matters of public law and outside the direct scope of the contract:

 Packaging of dangerous goods is subject to special regulations

in all countries. The exporter should ask for instructions from
the buyer if dangerous goods are in question.
 Some national laws require fumigation of all containers entering
the country.
 Agriculture-based, developed economies (such as that of Aust-
ralia) tend to place severe restrictions on packaging materials. I
lay, straw and rice husks are often forbidden; wooden packaging
must often be fumigated. It in doubt, the exporter should consult
the buyer or the consulate of the importing country.

Shipping Marks
Shipping marks, like the address on an envelope, must be tightly
controlled. The two-sides should discuss exactly_ what is required.. A
typical list of marks in an export contract looks like this:

On the surface of each package delivered under this

Contract
S - shall he marked: the package number, the
measurements
o of. the package, gross weight, net
weight,
m the lifting position, the letter of credit
number, the words RIGHT SIDE DR, HANDLE WITH CARE,
e
KEEP DRY, and the mark: DNP/36/Q

Some of these marks are concerned with identifying the goods, some with
handling (e.g., weight and "Right Side Up"), and some with government
regulations (e.g., Indonesian practice requires that goods sold under a letter
of credit must bear the number of the credit on the packaging; payment
under the letter of credit may be difficult if this is not done.) Once
agreement has been reached, the exporter should be scrupulously careful
about printing all the necessary marks; otherwise, as we shall see in the
next section, the bank may refuse to pay under the letter of credit.

Shipping Documents
We must now glance ahead and discuss briefly payment by letter of
credit. The exporter has fulfilled his major duties under most export
contracts when he passes to the carrier correct contract goods. At this
point, he is entitled to payment. The' problem is, of course, that goods
are usually passed to a carrier in the exporter's own country weeks, or
months, before the importer has the chance to examine them. To allow
payment at this early stage; international commerce has developed the
letter of credit. How does the letter of credit work?24In brief, the buyer
arranges with a bank in the exporter's country to pay a certain sum of

24
Chapter 2, Section 4 cleats with the later of credit in detail.
44 EXPORTING AND THE EXPORT CONTRACT

money (usually the total invoice price) as soon as the goods are shipped.
Obviously the exporter must prove to the bank that shipment has taken
place* as agreed with the buyer. As proof the bank accepts the shipping
documents. The text of the letter of credit contains a list of shipping
documents; sometimes a very detailed list. After the bank is satisfied that
the shipping documents tendered by the exporter are exactly in order, it
pays the agreed sum. What, then, are these shipping documents?

The most important shipping document is issued by the carrier when the
exporter hands over the goods for transportation—it goes under many
names, but in general we can call it the waybill. Waybills fall into two'
groups with slightly different rules attached to them. The first type is the
traditional marine bill of lading which is used for transport by ship. The
second type includes shipping documents issued by airlines (the air
waybill), by railways (the rail consignment note), and by road hauliers
(the road consignment note). Since many goods today are. containerized,
and since containers move by road, rail, ship and air, a combined
transport bill of lading is used to cover multi-mode transport. On the next
pages you will see a blank example of each type of document mentioned
above.

A Marine Bill of Lading (p. 45)

Most marine bills of lading today use the dual purpose form
(marine/combined transport) shown below rather than the traditional
form reserved purely for ships. (For a completed marine bill of lading,
see the Concept Review: Barnacle Bill below.)
An Air Waybill (p.46)
The air waybill is issued 'by an airline when it takes over the goods
from the exporter.

Rail Consignment Note (p. 47)

If goods are shipped by rail, the railroad company issues a rail
consignment note. Although there is a standard international form (the
so-called CIM form), most rail consignment notes in developing
countries look more like the example shown.

A Road Consignment Note (p. 48)

A trucking company issues a road consignment note on taking over the

goods. Of all the shipping documents, the road consignment note is the
least standardized. The example below shows the typical entries.
A Combined Transport Bill of Lading (p. 49)
"Combined transport" is the most common term for shipment in a
container since trucks, trains, ships and planes can all handle containers.
CHAPTER 1: NEGOTIATION DELIVERY 45

A MARINE BILL OF LADING

46 EXPORTING AND THE EXPORT CONTRACT
CHAPTER 1: NEGOTIATION DELIVERY
47
48 EXPORTING AND THE EXPORT CONTRACT
CHAPTER 1: NEGOTIATION DELIVERY 49

A COMBINED TRANSPORT BILL OF LADING

50 EXPORTING AND THE EXPORT CONTRACT

The Marine Bill of Lading and Other Transport Document

The distinction between marine bills of lading and the other transport
documents is sometimes important, as we shall now see. The marine bill of
lading is the traditional document used for shipment by sea. A marine bill of
lading must indicate that the goods have been loaded on board a named
vessel, a stamp on the face of the bill of lading confirms this

The marine bill of lading is special: if the-parties so wish; it can be made a -

negotiable document; in other words it in be bought or sold. Why would
anyone buy a bill of lading? Simply because the person who holds a bill of
lading owns (or has title to) the goods described. This is an important aspect of
commodity trading: a cargo—for example, the cargo of an oil-tanker loaded in
the Gulf—may be sold several times during its voyage. If such a sale is
foreseen, the panics make the bill of lading negotiable; if, however, the
consignee (i.e., in most cases the buyer) intends to receive the goods
personally, there is no reason for a negotiable bill of lading.
In practice then, how do you make a bill of lading negotiable? And how can
you tell if a bill is negotiable or not? The answer lies in the first few lines of
the document First an example of a negotiable bill of lading:
CHAPTER 1: NEGOTIATION DELIVERY 51

Then the first few lines of a non-negotiable bill:

The difference lies simply in the use of the word "Order" in the Consignee
box. Typing the word- "Order" makes the bill of lading negotiable:
Incidentally, the use of the word "Order" means that the shipper must
endorse the bill (sign it on the back).

Clean Shipping Documents

Export goods are examined frequently on their journey from buyer to
seller. There is often a pre-shipment inspection;25 customs officers
examine the goods at (very border; and, what is important here, the
transportation company (usually called the "carrier") examines the goods.
A carrier, of course, examines not the goods themselves, but their
appearance. If anything is wrong, the carrier notes packaging and general
the deficiency on the face or the bill of lading or other shipping document.
The carrier might note, for example
Contents leaking
Packaging broken/holed/torn/damaged
Packaging contaminated
Goods damaged /scratched
Goods chafed/deformed
Packaging badly/dented
Packaging damaged contents exposed
Insufficient packing
What effect does such a note have? In 1989 the. International Chamber of
Commerce issued a pamphlet entitled Clean Transport Documents
(Publication No. 473) – This pamphlet distinguishes between clean docu-
ments and claused (or unclean) documents. The remarks in document make
it unacceptable to a bank: a letter of credit will not be paid against a
claused shipping document.

25
See Chapter 3, Section 1 and 2 for detailed information on inspection
52 EXPORTING AND THE EXPORT CONTRACT

Not all notes, however, are considered to be "clauses." For example:

Second-hand/reconditioned packaging materials used

Packaging repaired/mended/resewn/coopered
Unprotected
Unboxed

Such remarks are not enough make the bill of lading "unclean." To
avoid disputes, the two sides to the contract often agree that the letter
of credit will specify "clauses" that, in their particular line of business,
would unacceptable. For example, in shipping iron products, the
parties might agree that no rust at all is allowed; thus the clause "Some
rust spots" would result in an unclean transport document.
One situation that sometimes arises is dangerous for the exporter. The
carrier is taking over goods at the exporter's factory. The carrier
examines the packaging critically and decides to write the clause
"Insufficient pack-aging." An argument breaks out. To resolve the
argument, the exporter offers the carrier an "indemnity"--a sum of
money. (or a promise of such a sum) to cover any losses the carrier
might incur if the buyer complains about the condition of the goods
when they arrive. This is very close to a bribe. Clean Transport
Documents comments:
Courts in several countries have ruled that the carrier who accepts such an
indemnity...is an accomplice in deceit or fraud on the buyer and the indemnity
itself is illegal and void (p. 7).
The payment of an "indemnity" could result in prosecution for fraud.

Barnacle Bill
Study the Bill of Lading on the next page and then answer the questions below.
1. If a letter of credit required a "Marine Bill of Lading," would this 'document be
acceptable?
YES NO
2. If YES, how do you know?...........................................................................
3. A marine bill of lading is sometimes negotiable. If this is a marine bill of
lading, is it negotiable?

YES  NO IT IS NOT A MARINE BILL OF LADING

4. If YES or NO, how do you know?...............................................................

CHAPTER 1: NEGOTIATION DELIVERY 53
54 EXPORTING AND THE EXPORT CONTRACT

What You Should Know

1. The contract should specify the type of packaging and the shipping
marks agreed by the parties.
2. On delivery, the exporter receives from the carrier the most important of
all the shipping documents, the bill of lading (or consignment note).
3. Each mode of transport has a characteristic shipping document: the
marine bill of lading, the air waybill, the rail consignment note; and the
road consignment note are the most common. Combined transport
(container transport) uses a combined transport bill of lading.
4. Under certain circumstances, a marine bill of lading can be made into a
negotiable document.
5. The marine bill of lading, to be acceptable as a shipping document under
a letter of credit, must bear the notation that the goods have been
shipped on board a named vessel.
6. Payment under a letter of credit depends largely on the correctness of
the shipping documents.
7. Payment under a letter of credit may be delayed if the letter of credit
repeals exactly the contractual packaging requirements but the exporter
has failed to meet
8. The carrier will note any defects in the packaging, weight or general
appearance of the goods on accepting them from the exporter. (The
carrier does not inspect the goods themselves, only the packaging.) To
be acceptable under a letter of credit, all shipping documents must be
"clean,” i.e., free of notes about defects.
CHAPTER 1: NEGOTIATION DELIVERY 55

5. Risk Title and Insurance

THE PROBLEM
Risks to one's property must be insured, but insurance of exported goods
is a difficult field for the layman. The exporter must be able to decide
what kind of policy or insurance cover is necessary, and what risks must
be covered.

THE PRINCIPLE
Most exporters prefer an open cover arrangement, with the goods
valued_ and insured from point-to-point. The exporter should consult a
broker to ensure that all expected risks are covered.

IN MORE DEPTH
We have already said that risk usually passes on delivery. Two risks are
involved in the sale of goods: the risk of the goods injuring a third party,
and the more significant risk of loss or damage. These risks are normally
covered by insurance, as we shall see in a moment.

Transfer of Title
Ownership (title) is a complicated problem. National laws do not agree on
a point when ownership of goods passes from exporter to buyer. The
range is wide: from signature of contract to final payment. The matter is,
however, disposive. Many exporters like to keep legal ownership of goods
until full payment is made, seeing ownership as security for payment.
Many "hire purchase' agreements work like that the buyer pays in
installments, but on the goods only when the last installment is paid In
international trade, however, ownership is of doubtful value. If Aziz sends
shampoo to Esperanza and the invoice is not paid, ownership is of little
practical value: she is unlikely to recover the goods since they must pass
through two sets of customs on their trip home; if she sells the goods in
Esperanza, she will get little for them. In any case, her costs will probably
exceed the money she recovers. Accordingly, since ownership is of little
practical value, many contracts specify that:

Title to the goods passes with risk.

Insurance: Who Should Insure?

Marine insurance is first found in Italy in the 1300s. Originally it covered
only transport in ships (still called adventures by insurers). Today,
however, most marine insurance policies include the Transit Clause which
covers the goods from the exporter's warehouse to the buyer's warehouse—
often with a long stretch overland at each end of the journey. Since
merchandise is at risk at all times during its journey, it is advisable
56 EXPORTING AND THE EXPORT CONTRACT

to insure the goods at every stage. Two players are involved here:
exporter and buyer. Which is responsible for arranging insurance cover?
In deciding who should insure, there are two schools of thought. The first
sees the point of delivery as decisive; up to delivery the exporter insures:
after delivery the buyer. The second approach lies behind C-term (CIF,
CIP): a buyer often has problems insuring for goods that may not yet
exist and that, in any case, are located in a distant country. It is often
easier for the exporter to arrange insurance: first, many exporters have a
standing arrangement with an insurance company; secondly, they can
readily declare to an insurer the necessary details of their products.

T
h
e

c
h
The choices are clear—it is up to the two sides to reach agreement on
the terms that best meets their needs. One important note, however:
The buyer should note that under the CIF term the seller is only required to
obtain insurance on minimum coverage.26

"Minimum coverage" is the so-called Cargo Clause C discussed below.

Cargo Clause C is designed for insuring bulk cargo—not machinery,
textiles, paper or other high risk cargoes. A buyer who wants more than
minimum coverage must negotiate this with the exporter.
Normally insurance cover under CIF (and CI P) contracts is for the
value of the goods plus 10% (the extra 10% allows for the expected
profit of the buyer); cover is generally in the currency of the contract.

26
Incoterms 1990, p50
CHAPTER 1: NEGOTIATION DELIVERY 57

In a C1F (or CIP) contract, the goods are delivered to the buyer at the port
(or place) of shipment. On delivery, the goods enter the buyer's area of
risk. The insurance cover held by the exporter runs to the port or place of
arrival. This is a problem: how does an insurance policy held by the
exporter help the buyer if the goods are damaged or lost during shipment?
The answer is assignment. By endorsing the certificate of insurance, the
exporter can assign (transfer) the full rights to the buyer. If necessary, this
can be, done even after goods are lost.27

Policy, Certificate, or Letter of Insurance?

An insurance policy is a familiar document to most people: fire insurance,
vehicle insurance, life insurance—most of us have such policies. For
international trade, however, the full policy presents certain problems:

The preparation of a policy of insurance takes some little (= considerable .E.d)

time particularly if there are a number of underwriters or several insurance
companies, and when documents require to be tendered with promptness on
the arrival of a steamer in order that expense may not be incurred through
delay in unloading..., it is not always practicable to obtain actual policies of
insurance. In order to facilitate business in circumstances such as those.
buyers are accordingly in the habit or accepting brokers' cover notes and
certificates of insurance instead of insisting on policies28

What is a 'certificate of insurance"? Many exporters have an agreement

with an insurance company covering all their shipments over a period of
time Each individual shipment is covered by a certificate of insurance, not
by a full policy. (A full policy can normally be issued for an individual
consignment if the buyer wants this.) A certificate of insurance:

 States in outline the cover offered;

 Gives the details of the individual shipment.
Under English law at least, the effect of a certificate of insurance is
virtually identical with that of a full policy. In addition to the certificate
of insurance, there is also the so-called letter of insurance. This is simply
a letter from the exporter to the buyer stating that the goods are insured.
It has no legal force except as evidence in a law suit against the exporter.

Types of Insurance Policy: Floating Policy and Open Cover

Sometimes an export deal is unique—special equipment is built and
shipped in an unusual way to an unfamiliar destination. In such a situa-
tion, the exporter (usually with the help of a broker) negotiates a special
insurance policy. Normally, however, an exporter with many similar
contracts finds it time-consuming and expensive to arrange a new insur-
ance policy for each consignment. One answer to this problem is the
floating policy; another is the open cover.

27
In some countries. the policy bought by the exporter names the buyer as the insured party.
28
Judgment in Wilson, Ilolgate & Co. v. Belgian Grain and Produce Co. (1920) 2 KB 1,8.
60 EXPORTING AND THE EXPORT CONTRACT

Let's look first at what the floating policy and the open cover have in
common. Both offer the exporter insurance cover on all shipments over
a period of dm In both cases a ceiling is set on the overall figure—for
example $1 million. As each individual shipment is made, the exporter
declares the value of the shipment, and the ceiling is automatically
reduced by that amount. Thus 10 shipments worth $100,000 each would
reduce a $1 million cover to zero.

As each shipment is made, it is covered by a Certificate of Insurance.

Often the exporter has a pad of these certificates and simply fills out a
new one for each shipment.
Insurers have various ways of limiting claims under such cumulative
•
agreements. Generally claims are kept down by:

 A limit per bottom (A "bottom" is a ship);

 A limit per locality. (The exporter's warehouse is a "locality." A
warehouse may contain several consignments awaiting shipment. If
they are all destroyed, the locality limit will probably bite.)

Insurance companies also generally add the Institute Maintenance of

Class Clause; this requires that all ships used by the exporter are in a
certain class in the shipping register
In terms of the insurance cover offered, the floating policy and the open
cover are, in effect, identical. The logistical differences between the two
kinds of cover, however, have led the business community today to
prefer the open cover. The first disadvantage of the floating policy is that
it is set up for a particular time and automatically expires unless renewed;
the open cover is open-ended it does not expire, although there are
provisions for cancellation on due notice. Thus the open cover is
marginally more convenient. The second difference is more fundamental:
an open cover is not an insurance policy at all—it is an agreement by an
insurance company to issue an insurance policy if the insured asks for
one. Normally the insured does not ask for a full policy; he simply
creates a Certificate of Insurance with the knowledge that if he wants a
policy he can get one at any time—including, and this is very important,
after a loss. This arrangement is less formal and less time-consuming but
extremely reliable: that is its attraction for the exporter.

Types of Insurance Policy: Valued and Unvalued

When the exporter insures goods, does he declare their value to the
insurer or not? In practice, he may or he may not both alternatives are
possible. If the value is not stated (the unvalued policy), then the value
can be established after a loss; naturally, the exporter must prove his
figures precisely. As long as the figure does not exceed the total cover
under the policy, the insurer will pay. The alternative is the valued
policy: the exporter states the value of the goods on the insurance
document This has a decisive advantage: the pre-stated figure can include
not only the cost of the goods but also the profit the exporter hoped to
make on them. For this reason, valued policies are most in favor today.
CHAPTER 1: NEGOTIATION DELIVERY 59
60 EXPORTING AND THE EXPORT CONTRACT
CHAPTER 1: NEGOTIATION DELIVERY 61

Improper packaging. Damage resulting from improper packing or

preparation is not covered. To discover what is improper, the courts
usually refer to what is customary in a particular trade.

Inherent vice in the goods. Some goods are inherently dangerous. A cargo
of hay; for example, may catch fire because of spontaneous combustion.
That is an "inherent vice" and the loss of the hay is not covered.
Delay. In general, losses caused by delay are not covered.
Insolvency of the owners (etc.) of the vessel. If a journey ends prema-
turely because the shipping line goes bankrupt, extra costs (further
shipment for example) are not covered.
Use of Nuclear Weapons. if cargo is damaged through the use of nuclear
weapons, the insured will probably be worrying about more than his
cargo. Even so, this risk to the goods is not covered.

In addition, all three Cargo Clauses contain the. Unseaworthiness and

Unfitness Exclusion Clause. This clause says that goods shipped in an
unseaworthy vessel are not insured. Since few laymen can know if a ship -
is seaworthy or not, the clause is softened: cover is withdrawn only if the
insured knew about the unseaworthiness.

Losses resulting from war, from strikes or from terrorism are also
excluded, but here the difference between a reductive and a cumulative
approach is important. If the War Exclusion Clause (or the Strike
Exclusion) clause is deleted from Cargo Clause A, then these risks are
covered. For Cargo Clauses B or C it is necessary to add the so – called
Institute War Claus& or Institute Strikes Clauses to the policy if these
risks are to be covered. We should now look at Cargo Clauses 13 and C to
see what exactly they cover.

Cargo Clause B covers:

1.1. Loss of or damage to the subject-matter insured attributable to:
1.1.1. fire or explosion,
1.1.2. vessel or craft being stranded, ground, sunk or capsized,
1.1.3. overturning or derailment of land conveyance,
1.1.4. collision or contact of vessel craft or conveyance with any
external object other than water,
1.1.5. discharge of cargo at a port of distress,
1.1.6. earthquake; volcanic eruption or lightning.
1.2. Loss of or damage to the subject-matter insured caused by:
1.2.1. general average sacrifice29
1.2.2. jettison or washing overboard,

29
General average sacrifice refers to a situation in which a ship most make a "sacrifice" (e.g.. throwing part of the cargo in
the sea) in order to preserve the ship and the rest of the cargo. The cost of such shared by all the parties involved. (See
Schmitthoff, p. 520+.)
62 EXPORTING AND THE EXPORT CONTRACT

1.2.3. entry of sea-, lake-, or river-water into vessel, craft, hold,

conveyance, container, liftvan or place of storage.
1.3. Total loss of any package lost overboard or dropped whilst
loading on to, or unloading from, a vessel or craft.
Cargo Clause C covers:
1.1. Loss of or damage to the subject-matter insured attributable to:
1.1.1. fire or explosion,
1.1.2. vessel or craft being stranded, grounded, sunk or
capsized,
1.1.3. overturning or derailment of land conveyance,
1.1.4. collision or contact of vessel craft or conveyance with
any external object other than water,
1.1.5. discharge of cargo at a port of distress,
1.2. Loss of or damage to the subject-matter insured caused by:
1.2.1. general average sacrifice,
1.2.2. jettison.
Before- paying a claim for loss, insurers study the circumstances fully.
They_ examine the insurance document to check that the lost or damaged
goods were correctly described. If the description and the goods are
materially different, the insurer may refuse to pay. In one famous case, an
exporter bought leather flying jackets from the British government. The
jackets were twenty years old, but they had never been used. The exporter
described the goods as- "new men's clothing in bales." When the goods
were stolen, the insurer refused to pay because of material misdescription.
The court agreed: the description was inaccurate.30 In general, the insured
must disclose any fact "which would influence the judgment of a prudent -
insurer in fixing the premium or accepting the risk.31

Some policies allow for innocent misdescription with a "held covered"

clause: under given conditions, the goods are held (= considered) to be
covered. An example: an exporter bought second-hand machinery in order
to export. it. On the insurance document the goods were described simply
as "machinery." When the goods were lost, the insurer refused to pay,
pleading material misdescription. The policy_ contained, however, a "held
covered" clause: "held covered at premium to be arranged," The court
ordered the insurance company to pay, but allowed it an extra premium.32

In summary, always remember the cardinal principal of insurance:

A contract of marine insurance is a contract based upon the utmost good faith,
and. if the utmost good faith be not observed by either party, the contract may be
avoided by the other party.33

30
Anglo-African Merchants v. Bayley (1970) 1 QB 311. 319.320.
31
Schmithoff, p. 503
32
Greenock SS. Co. v. Maritime Insurance Co. (1903) 1 KB. 367
33
Marine Insurance Act. (UK) 1907. § 17
CHAPTER 1: NEGOTIATION DELIVERY 63
64 EXPORTING AND THE EXPORT CONTRACT

Take Cover
Pacific Exports is a new company founded in Verbena to export textiles. The
company anticipates sales of about $500,000 during its first year of operations, with
most orders between $1,000 and $30,000. Since Verbena is an island, consignments
of goods always travel by ship. The company wants advice on the best kind of
insurance for its CIF contracts. What would you recommend among the choices
below? In each case be ready to give your reasons.

1.  Tailor-made policies Floating policy Open cover

2.  Valued policy Unvalued policy
3.  Voyage policy Time policy  Time and voyage policy

4.  Cargo Clause A Cargo Clause B Cargo Clause C

5.  Institute War Clauses  YES  NO DEPENDS ON…………….

6.  Institute Strikes Clauses YES  NO DEPENDS ON……………

What You Should Know

1. In CIF and CIP contracts, the exporter must pay for insurance from the
point of delivery to the named point of arrival.
2. Unless otherwise agreed, this insurance is "minimum cover"—Cargo
Clause C.
3. In CIF and CIP contracts, the exporter normally assigns the insurance
agreement to the buyer.
4. The insured can make three kinds of arrangement with the insurer., the
tailor-made policy, the floating policy, and the open cover.
5. Open cover is not a policy: the insurer will write a policy if required.
6. The normal insurance document under' an open cover is the Certificate
of Insurance; the certificate is, in principle, the equivalent of a policy;
7. A marine insurance policy has three variant clauses: Cargo Clauses A,
B and C. Clause A covers anything not excluded; Clauses B and C
exclude anything not expressly covered.
8. Even an "all risks" policy (Cargo Clause A) excludes many risks.
9. Goods must be correctly and fully described on the insurance docu-
ment or cover may be withdrawn.
10. A "held covered" clause offers some protection against innocent
misdescription.
11. The main principle of insurance is "utmost good faith."
CHAPTER 1: NEGOTIATION DELIVERY 65

6. Terms of Trade Incoterms 1990

THE PROBLEM

Although the purpose of the ICC Incoterms is to standardize terms

of trade worldwide, may businesspeople do not know what these
terms mean or the nature of their rights and duties under an
Incoterm contract.

THE PRINCIPLE

The ICC publication, Incoterms 1990, gives full and clear informa-
tion about the rights and duties of buyer and exporter in Incoterm
contracts. Ignorance of these terms can be expensive.

IN MORE DEPTH

World trade depends to an increasing extent on standardization: interna-

tional weights and measures are mostly metric; many contracts are
priced in U.S dollars; letters of credit follow standard rules.
Misunderstandings can be expensive: anything that makes them less
likely is welcome.
The Thirteen Incoterms
One source of international confusion are delivery conditions; We
have already looked at a number of problems and seen how national
laws vary in their preferred solutions. To Clarify the situation, the
International Chamber of Commerce (ICC) issued as early as 1936
standardized terms—the so-called INternational COmmercial TERMS
or Incoterms,. Over the years, the ICC has updated the incoterms as
the nature of commerce has changed—increased use of aircraft, the
introduction of containers, electronic document transfer and so on .; all
have required new or revised terms. The latest issue of Incoterms is the
1990 revision.34
In establishing the 13 Incoterms, the ICC has looked at the most
common variations in arrangements for delivery and established for
each variation the exact duties of the exporter and the buyer. In setting
up the 13 terms, the ICC has taken into account three variables:
 Where along the transportation route delivery takes place;
 What means of transport is used;
 What costs the exporter might pay after the point of delivery.
The 13 terms are grouped in four categories: E-term, F-terms, C-terms
and D-terms. The E-term. deals with deliveries at the exporter's factory.
The F-terms all concern 'delivery within the exporter's country; The C-
terms involve delivery in the exporter's country, with extra costs for the

34
For full details see the booklet Incoterms 1990 or the much fuller Guide to Incoterms 1990. The address to
write to for your copy is: 38 Coors Albert 75008, Paris, France. Your local Chamber of Commerce
may also have copies
66 EXPORTING AND THE EXPORT CONTRACT

exporter after delivery. D-terms take care of delivery outside the

exporter's country. A table gives us an overview:

COSTS
TYPE SHORT TRANS
FULL FORM POINT OF DELIVERY AFTER
TERM FORM -PORT
DELIVERY
EWX Ex Works When exporter notifies buyer
E-
of availability of goods at None None
TERM
exporter’s premises
F- FCA Free Carrier When goods are handed over
Any None
TERM the carrier
FAS(…) Free Along When goods are alongside
Ship None
Ship Aside the ship, ready for loading
FOB(…) Free On Board When the goods pass the
Ship None
ship’s rail
C- CFP(…) Cost and When the goods pass the Freight to
Ship
TERM Freight ship’s rail destination
CIF(…) Cost, When the goods pass the Freight and
Insurance, ship’s rail Ship Insurance to
Freight destination
CPT(…) Carriage Paid When goods are handed over Freight to
Any
To the carrier destination
CIP(…) Carriage, When goods are handed over Freight and
Insurance Paid the carrier Any Insurance to
destination
D- DAF(…) Delivery at When the goods are
TERM Frontier cleared for export at a name Any None
frontier
DES(…) Delivery Ex When the ship carrying the
Ship goods arrives at the port of Ship None
destination
DEQ(…) Delivery Ex When goods are on the quay
Quay at the port of destination, and Ship None
cleared for import
DDU(…) Delivery Duty When the goods are available
Unpaid to the buyer at a named Any None
destination, duty unpaid
DDP(…) Delivery Duty When the goods are available
Paid to the buyer at a named Any None
destination, duty paid
CHAPTER 1: NEGOTIATION DELIVERY 67

Incoterms obviously save a great deal of work in contract drafting.

Compare the two versions of the delivery clause below:

The equipment listed in Annex 1 shall be delivered FOB

(Beira) (Incoterms 1590).

For the equipment listed in. Annex 1 the price is for

delivery free on board the carrying vessel designated by
the Buyer at the port of Beira including the cost of
packing, as well as expenses incurred the equipment on
board the carrying vessel.

The first wording: using an Incoterm--is more than simple shorthand: it

incorporates six pages of the ICC booklet Incoterms 1990 specifying
numerous duties of both buyer and exporter. The exporter, for
example, must "Deliver the goods on board the vessel named by the
buyer..." and "pay all costs relating to the goods until such time as
they have passed the ship's rail."36

A word of caution on Incoterm: the 1990 Incoterm are radically new.

Some old terms have disappeared; FOT and FOR (Free On Truck and
Free on Rail) have been replaced by FCA; C&F has been renamed CFR.
Further, some traditional terms now have very restricted meanings:
FOB, for example; applies for other means of transport, the correct
"FOB equivalent" is now FCA. Also remember that Incoterms apply
only to international trade; for trade within a country, Incoterms are not
appropriate.

Two questions often arise about Incoterms: first, is it necessary to state

in the contract that FOB, CIF, and so on are Incoterms? And secondly,'
what happens if the "small print" of 1ncoternts 1990 conflicts with a
provision of the contract? Let's look at these issues.
Specifying Incoterms
Is the specification, " Incoterm 1990," really needed? In fact, it is
necessary because. FOB and CIF are also common terms in many
countries with different commercial traditions, for example in the United
States.37 Unfortunately, American and ICC usage of the terms do not
agree: for example in the U.S.:
The term FOB or "free on board," may be used with reference to
the seller's city, the buyer's city, or an intermediate city. It may
also be used with reference to a named carrier, vessel,
68 EXPORTING AND THE EXPORT CONTRACT

On the other hand, in ICC usage, goods are "free on board" only at the
place of shipment. Further, the ICC term "can only be used for sea or
inland waterway transport," while UCC usage allows the use of FOB
for any means of transportation. By stating in the contract that the trade
terms are Incoterms, you avoid a major source of confusion.
Conflicts between Incoterms and the Contract
Some contracts regulate what happens if the Incoterm conflicts with the
contract—perhaps a good idea. An example from a careful contract:

"Incoterms 1990" as used in this contract means the

publication "Incoterms 1990," being the international
rules for the interpretation of their terms published
by the International Chamber of Commerce. When a term
from "Incoterms 1990 - is used in this Contract, the
rules and definitions applicable to that term in
"Incoterms 1990" shall be deemed to have been incorpo-
rated in the Contract except insofar as they may
conflict with any other provision of the Contract, in
which case the Contract provisions shall prevail.

How can conflicts arise? One common source of conflict is the

allocation of costs: the exporter and the buyer agree that some pre-
delivery shipping costs (special insurance, for example) will be to the
account of the buyer. No Incoterm allows for such an arrangement.
Which prevails, then? The contract or the Incoterm? Normally the
contract prevails—but careful contract drafting makes things clear to
both sides and beyond dispute. The solution is to study the regulations
of the Incoterms carefully, to vary them only when absolutely
necessary, and to clarify in the contract that your variations take
precedence over the Incoterms as defined by the ICC. .
CHAPTER 1: NEGOTIATION DELIVERY 69

Terms of Trade
Which of the following terms are correctly used according to Incoterms 1990? If
your answer is "No," give your reasons. (Note: There may be more than one
correct answer in each section.)

1. A contract requiring the exporter to send the contract goods by road from
Kenya to Zambia with freight paid by the exporter.
a. C&F Lusaka  YES  NO
b. CFR Lusaka  YES  NO
c. CPT Lusaka  YES  NO
d, CFR Nairobi  YES  NO
e. FOT Nairobi  YES  NO

2. A contract requiring an exporter in Mozambique to deliver the contract

goods. In Beira, Mozambique, for shipment• by sea to Dates Salaam,
Tanzania.
a. FAS Beira  YES  NO
b. FOB Beira  YES  NO
c. FCA Beira  YES  NO
d. FOB Dar es Salaam  YES  NO

3. A contract requiring an exporter in Ethiopia to send the contract goods by air

for delivery in Windhoek, Namibia.

a. CIF Windhoek  YES  NO

b. CIP Windhoek  YES  NO
e. DDU Windhoek  YES  NO
d. DES Windhoek  YES  NO

Delivery Where?
On the next page is a chart showing various delivery points. For each delivery
•
point, mark in the box provided the most appropriate Incoterm(s).
70 EXPORTING AND THE EXPORT CONTRACT

INCOTERMS: DELIVERY BY SEA

INCOTERMS: DELIVERY BY SEA

CHAPTER 1: NEGOTIATION DELIVERY 69
70 EXPORTING AND THE EXPORT CONTRACT

What You Should Know

1. The International Chamber of Commerce issues Incoterms to standard-
ize delivery procedures.
2. The Incoterms 1990 reserve certain traditional terms (notably CIF and
FOB) for transportation by ship only.
3. The point of delivery is much the same for all the .0-terms and F-terms when
the exporter hands the goods Over to the carrier.
4. The contract should always specify that terms such as FOB, CIF and so on are
Incoterms under the rules set out in
5. The contract should regulate what happens if Incoterms 1990 and the terms
of the contract conflict: normally the contract prevails
CHAPTER 1: NEGOTIATION DELIVERY 71
72 EXPORTING AND THE EXPORT CONTRACT

Chapter 2

Negotiating Price and Payment

1, Export Pricing Strategies

THE PROBLEM
In many negotiations, as soon as the exporter slates a price, the
buyer begins to demand concessions about delivery time,
method of payment, and ;So on, concessions that can quickly
make the deal unprofitable.: How can the exporter avoid the
"price , trap"?

THE PRINCIPLE
The exporter must perceive and preserve the interdependence of
every aspect of an export negotiation. A price quotation is based
on, a set of assumptions about delivery, payment and warranty
terms contract price must reflect any change in, or renegotia-
tion of; these assumptions.

IN MORE DEPTH
Exporting is not difficult: the problem is making money at it.
Sometimes first-time exporters fail to understand how the many
terms of a contract relate to each other: a longer warranty
period, for example, creates higher costs - the contract 'price.
should reflect these costs. An extension of the payment period
creates higher costs-again the contract price should reflect the
extension. In fact, virtually every problem that the two sides
normally negotiate has a bearing on price. Mostly the buyer's
suggestions tend to raise. the price, but a lowering of the. price
is possible too. Let's use an example to study this relationship
between price and other contract terms in more detail.

Scenario: Verbena Electric hopes to export its best-selling

product, small domestic electric fans, from Verbena to
Esperanza. A market study in Esperanza shows that fifteen
brands of fan are available in Esperanza, none of them made in
Esperanza itself. Models range from expensive, electronically
controlled fans imported from Europe to cheap plastic products
imported from Nonamia. In every case, the price strikes the
export manager of Verbena Electric, John Royalstone as high his
own fans will be competitive. Royalstone begins discussions
with the purchasing manager of Esperanza Electrical Importing,
Alice Smart. Smart is particularly interested in one of
Royalstone's products, a three-speed, 180 0 revolving fan with a
graceful, Modem design. Negotiation begins.
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT

73

Early on, Smart introduces the question of price: "What's the price of
a fan like that?" Royalstone is an old hand at negotiation: he knows
that when he states a price, it must be for precisely defined goods
delivered under precisely defined circumstances. He offers a unit
price of $22 and makes it clear that this price is based on the
following assumptions:

 The size of the order is 3,000 items;

 The specification of the fans is identical—except for color:
1,000 will be delivered in gold, 1,000 in black, 1,000 in red.
 No additional packing or safety warnings are required beyond
what is normal . in Verbena;
 Delivery is FOB (Part Verbena);
 Payment is by irrevocable, confirmed, at-sight letter of credit;
 Delivery takes place three weeks from the date that Royalstone
receives advice that the letter of credit has been opened;
 The warranty period on the fans is three months from the date
of delivery.

Smart sees that she is dealing with an experienced exporter. She

begins to discuss the items on Royalstone's list.

Order Size,

Smart is not sure she can handle 3,000 fans; she would prefer to
order fewer, test the market, and order more later if things go well.
Royal-stone makes two points: first Smart's transport costs will
increase on a smaller order, because 3,000 units is one container
load; second, the unit price will increase on a smaller order. An order
of 1,000 fans, for example, would cost $25 each—not $22,

Specifications

Smart likes the color range, but she wonders if the price would
be lower if she ordered only one colon Royalslone is ready to
cut his price by 500 per fan if the whole order is the same color.

Packaging

Unfortunately, Esperanza has strict rules about packaging and safety

labeling of electrical products. Smart shows Royalstone the regula-
tions. After a few phone calls, Royalstone calculates that meeting
Esperanzan standards will add at least 40v to the cost of each fan.

Incoterm

Smart says that she would prefer CIF delivery, Esperanza City.
Royalstone tells her that the cost of insurance and freight between
Port Verbena and Esperanza City is• $520 on an order of 3,000
items; somewhat less on an order of 1,000. Smart also wonders what
the effect would be of collecting the fans ex works_ The EXW price,
loaded in a container, is $21.75—a small saving.
74 EXPORTING AND THE EXPORT CONTRACT

Terms of Payment
Smart says that she dislikes letters of credit and prefers to trade on
open account-30 days net, with a 2% discount for payment within ten
days. Royalstone explains to her how trading on open account will
increase his costs: he will need export credit insurance, and he will
have to wait for Smart's check to clear. Based on experience, clear-
ance will take 45 days. His Price will rise to $26 per fan on an order
for 3,000, FOB Port Verbena.

Smart is unhappy both about the cost of the letter of credit and about
Royalstone's additional price if she refuses to open one. She suggests
that she pays 25% the remaining 75% on open account. Royalstone has
no ready answer to that proposal. He quickly recalculates his price: it
would be below $26, probably by $1.10.

Dale of Delivery
When Smart questions delivery three weeks after the opening of the
letter of credit--Royalstone again replies with figures: if she wants the _
goods_ sooner, he can arrange it—but only by working an extra shift
with extra costs involved. His price would have to higher.

Warranty Period
Royalstone is not worried about the quality of his fans, but he knows
from experience that a three-month warranty on an FOB delivery
produces very few claims for defects—about two claims per
thoudsand fans. A six-month warranty, however, is more
costly=about ten claims per thousand fans. His normal policy is to
mail a replacement fan in the event of a claim—which costs him
about $40 for the fan, the packing and the postage. If Smart asks for a
six-month warranty, it will add 30v per hit) to Royalstone's costs.

In this lengthy example, all negotiating decisions bear directly on the

price of the product. Naturally other points are open to negotiation:
this is just a sampling. But the general point is clear: a manager like
Royalstone who knows his product and who has thoroughly analyzed
his costs is unlikely to lose money on an export deal—unless, of
course, he decides to do so. If Royalstone is eager to win Smart as a
regular customer, he may be ready to sell to her at a loss first time
around. Or his factory may be so short of work, that he is prepared to
accept any job—even a loss-maker. Or the Verbenan government may
make exporting so attractive with export incentives that Royalstone
can trade at a loss but still show a profit at the end of the day.
The general point is this: a good manager knows that almost every deci-
sion made during a negotiation influences price—an excellent manager
can put a dollars-and-cents figure on this influence.
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT

75

In a Jam
Gorm Trading exports canned foods from Verbena. Gorm is negotiating
export of 600 cases of apricot jam by road to a neighboring country. Gorm's
price per case is $20. The price is based on delivery FCA with no special
packaging or labeling. The jam has a six-month expiry date stamped on the
label. Payment will be by irrevocable, confirmed, at-sight letter of credit.
Delivery date is two days after the opening of the credit. Decide what
influence each change listed below will have on the price per case.

1 Reduction of the order from 600

cases to 300 cases.
2. Delivery EXW (Exporter must have
the goods ready for collection in his
warehouse)
3. Replacement of single flavor (apri-
cot jam) by a range of 10 flavors,
some of which are "exotic."
4. Change of labeling to show exact
nutritional values and ingredients
(not normally supplied by Gann).
5. Change of payment from letter of
credit to open account, payment. due
45 days from date of invoice.
6. Replacement of a single delivery
with delivery in ten installments of
60 cases over a period of one year.
7. Increase of the expiry period from
six months from date of manu-
facture to two years.

What You Should Know

In negotiating price and payment, exporters should quote a price that
relates to the complete set of contract terms: size of order, terms of
delivery, terms of payment, warranty provisions and so on.
As items in the contract are negotiated, the exporter should assess the
influence of each factor on price, and adjust the price accordingly.
Sometimes the exporter improves his terms without adjusting the
price, but only in order to create goodwill for future deals, to ensure
that the exporter gets the order, or for some other business reason.
76 EXPORTING AND THE EXPORT CONTRACT

2. The Five Steps in Negotiating Payment

THE PROBLEM

For the exporter, the great fear is non-payment. Most developed

countries offer export insurance, to cover this and other risks, but
such insurance is rare in developing countries. How can the exporter
create payment terms that ensure payment?
THE PRINCIPLE

Payment is a more orderly process than delivery. Every successful

payment provision stipulates the How, When and Where of payment.
In addition it specifies what delay in payment, if any, is excusable,
and the consequences of unexcusable delay.

IN MORE DEPTH
In negotiating payment, the exporter should keep five steps in mind,
five issues that the export agreement must adequately cover.

Step 1: Mode of Payment

Most international trade is conducted on a cash basis—goods against
cash. Sometimes, however, goods are traded against goods (barter
trade), and sometimes the exporter gives the buyer a credit—the buyer
can pay by installments over a period–of time Barter and credit
transactions are a subject in themselves. [{ere we shall look only at cash
transactions.
Trade within a country is based on a mixture of trust and the close prox-
imity of courts of law. International business is not so blessed: trust is
rare, and courts are far away and unpredictable. Payment is, therefore,
tightly controlled. Four approaches to payment are common:
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 77

 Payment on open account with no security;

 Payment on open account secured by export credit insurance;
 Payment on open account secured by a payment guarantee; and
 Payment by letter of credit.
In private life, small purchases (in a supermarket, for example) are sold
cash on delivery. If you buy household furniture, you will usually receive
the invoice with a certain amount of time to cast against invoice. Cash
against invoice is the typical open account transaction. If, however, the
furniture store distrusts you, it will ask for a 100% prepayment as
security—cash they are completely safe.
All these transactions have exact equivalents in export trade. Obviously,
however, the word "cash" in the international context does not usually
mean coins and notes. (Occasionally, perhaps, a buyer pays for goods by
giving the exporter a briefcase full of money, but such payments generally
reflect a wish to escape scrutiny by the central bank or other authorities.)
To the exporter cash normally means checks (cheques) or bank transfers.

Exporters who are paid on open account are seriously at risk. The prob-
lem is obvious: if anything goes wrong—if the check is not honored by
the bank for example, or if the buyer files for bankruptcy or simply disap-
pears—the exporter is in a poor position to claim payment. One solution is
78 EXPORTING AND THE EXPORT CONTRACT

to ask foi 100% prepayment—as in the furniture store example above. The
buyer, however, is unlikely to agree to this arrangement.
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 79

There are two common approaches to providing the exporter with an

acceptable level of security: one approach is to persuade a third-party-
to-- pay the exporter if the buyer fails to do so. A typical third party is a
bank which may issue a bank guarantee, paid for by the buyer. An
alternative third party is an insurance company that issues an export
credit insurance policy covering the risk of non-payment; in this case,
the exporter pays the costs. The second approach is to position the
money with a bank in the country of the exporter by means of a letter of
credit, and to allow the exporter to collect the money when the goods
are delivered. The letter of and the letter of credit—each of these
approaches is complex enough to require a section in its own right.'"

Step 2: Timing
In negotiating any cash-against-invoice payment—whether secured or
not—it is important to consider the time/payment structure. Payment
against an invoice is rarely made immediately. Most buyers wait a while
before paying: the delay gives them use of what is, in fact, the exporter's
money. The exporter, of course, suffers from delay: he must borrow
money, perhaps at a high rate of interest, until he is paid. To speed up
payment, most exporters offer a discount for early payment, for example
a 1% discount if payment is made within 30 days of the date of invoice.
This discount is often attractive for both buyer and export the buyer
saves on the invoice price, while the exporter, substantially improves his
cash flow. If the parties say nothing at all then payment is due, in most
jurisdictions, on delivery''
The date of payment for a single sale is simply regulated. In an ongoing
contract—delivery involving partial shipments, periodic shipments, or a
spare parts supply contract, for example—the parties must negotiate a
chain of dates. These are either calendar dates (for example, 30th June)
or interval times (for example, within 30 days of the date of invoice).

Step 3: Place of Payment

When Tony Mino instructs his bank in Esperanza to pay Double-A Ltd.
in Verbena, he begins a chain of events that often takes months to
complete. Perhaps the National Bank of Esperanza has no funds to make
foreign transfers; perhaps inefficiency delays payment. To avoid the
dangers of slow payment, exporters try to protect themselves with a
clause like this:

Payment shall be deemed to have been made

only when the contract sum is paid into the
Seller's bank account and is at the Seller's
full disposal.

In fact, this is not unreasonable: under the Vienna Sales Convention, for
example, payment is normally deemed to be made only when the cash is
available at "the seller's place of business" (Article 57). Negotiators
must work this out carefully—the conflicts of interest are clear:
80 EXPORTING AND THE EXPORT CONTRACT

POINT AT WHICH MONEY IS DEEMED TO BE PAID

When the When the When the When funds

buyer buyer pays buyer's bank reach the
instructs the the money transfers seller's bank
bank to pay into his bank funds account

SELLER PREFERS
BUYER PREFERS

The decision is important because late payment, as we shall see in Step 5, is

subject to payment of interest; the cost of any delay along the payment route
properly belongs to the buyer.

Step 4: Delay
As with delivery, delay in payment might be excused during a grace period,
though, this is unusual. More commonly, a force majeure event excuses delay.
In fact, the force majeure excuse for delay seldom makes sense in the context
of payment; most exporters try to resist it. In principle, any payment made
after the agreed date of payment is in delay.

Step 5: Result of Delay

What happens when payment is late? It is generally agreed in most legal

systems that the exporter has a right to be compensated for losses due to late
payment. What happens in practice depends on the payment agreement
negotiated by the parties. Let's start with the worst case: payment on open
account, with no security and with no agreement on late payment. In this case,
the exporter tries to exert pressure on the buyer— but this is difficult. The
exporter writes letters, makes telephone calls, waits and hopes. Every day that
payment is late costs money—losses that the exporter can, in practice, do little
about—without beginning legal action. Considerably better is the situation of
the exporter whose contract with the buyer regulates late payment. A typical
contract clause:

Delayed Payment

If payment of any sum payable is delayed, the Buyer to

receive interest on the amount unpaid during the period
of delay. The interest shall beat at an annual rate points
above the discount rate: of the central bank in the
Seller's country.

When the exporter is finally paid, the interest payable is simply added to the
outstanding sum.
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 81

Even better for the exporter is an agreement with the buyer to strengthen the
payment provisions with a payment guarantee. This guarantee, as you will
see in Section 3 below, obliges a bank to pay if the buyer is more than a
given time, say two months, in delay.
The best solution, of course, is to create a payment regulation which makes
late payment impossible—the confirmed, irrevocable, at-sight letter of
credit. Nothing is better for the exporter.

Missing Terms
Study the price and payment clause below. It is taken from an export contract that
lost the exporter a great deal of money. What is missing?

The price payable for the Contract Goods as specified in

Annex A is $400,000.

1. Does the clause specify how payment will be made? ❑YES ❑ NO

2. Does the clause specify when payment is due? ❑YES ❑ NO
3. Does the clause say where the money must be before ❑YES ❑ NO
the buyer is deemed to have paid?

4. Does the clause define delay in payment? ❑YES ❑ NO

5. Does the clause mention the consequences of delay? ❑YES ❑ NO
6. When is payment due if the panics say nothing in their agreement?.................

What You Should Know

1. Payment should be negotiated so that the exporter secures prompt,
correct payment.
2. Payment on open account is often timed so that early payment secures
a discount for the buyer; this benefits the exporter by improving cash
flow.
3. The exporter prefers the place of payment to be his own bank account;
payment is not deemed to be made until the money is at his disposal.
4. In most contracts nothing, not even force majeure, excuses late
payment.
5. Late payment causes harm to the exporter—the bank interest he must
pay while waiting for his money. This interest should be compensated
to him by the buyer under the terms of the contract.
82 EXPORTING AND THE EXPORT CONTRACT

3. Third-Party Security for Payment

THE PROBLEM
Accepting a personal check or trading on open account—both are
dangerous for the exporter. What kind of third-party security
reduces the exporter's risk?

THE PRINCIPLE
Third-party security takes two forms: export credit insurance
allows the exporter to recover the major part of the contract price if
the buyer fails to pay after, say, six months. The buyer may also
approach a bank and ask for a bank guarantee—the bank will pay
the contract price if the buyer fails to do so.

IN MORE DEPTH

Risk and cost—they rise and fall together. Some risks are simply
too high ,10 be acceptable. For example, let's say Red Bean Exports
has an export order for 2,000 tons of red beans. If this represents
0.1% of annual turnover and the buyer fails to pay, Red Bean will
not go bankrupt. If however, 2,000 tons is 40% of turnover, failure
of the buyer to pay could destroy the company. Where risks are
significant, the exporter seeks ways to minimize them—even
though costs will rise. A classic strategy for reducing risk is to
spread it by means of a third party—an insurance company, for
example. Export credit insurance is one route to security; the bank
guarantee is another.

Export Credit Insurance

International trade is fiercely competitive. Exporters compete not only
on quality, price and delivery terms; they also compete in the area of
credit: "If you buy from me. I will allow you 180 days to pay." Such an
offer can make or break a deal. However, extending credit in this way is
risky. The buyer may go bankrupt, or he may sell the goods he receives
and disappear. Political difficulties too can block payment: civil war,
famine, lack of foreign exchange, and so on—the list is a long one.

To stimulate exports and protect the exporter against major risks, some
countries set up a special type of insurance: it does not insure goods, but
it insures the exporter against the risk of non-payment. Most traditional
exporting nations—the European countries, for example—offer such in-
surance. Zimbabwe is an example of a developing country that helps its
exporters in this way. (It is worth stressing that export credit insurance
is not a charity but a commercially viable proposition; export credit
insurance companies commonly report up to 15% profit on their
business.)
To buy such insurance, the exporter explains the details of the business
to an insurance company and receives a quotation. Sometimes the insurer
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 83

refuses to quote. This may mean that the insurer has used its network to run
some checks on the buyer and found the buyer uncreditworthy. This is a sign
to the exporter that the business is risky, (It might also mean that the insurer
has checked on the exporter and found some problems: a criminal record,
perhaps, or a history of unpaid insurance premiums.)
Export insurance premiums vary according to the type of goods exported, the
creditworthiness of the buyer, the political stability of the buyer's country,
and soon: Figures mentioned to the author by the Zimbabwe Credit Insurance
Corporation are attractive, however—a typical policy costs between 0.5% and
1% of the invoice price.
Attractive as it is, export credit insurance has certain clear limitations: there is
always a long wait between the time when the buyer fails to pay and the time
when insurance company compensates the exporter—six months is typical.
And when compensation is paid, it is unlikely to cover 100% of the original
invoice price. However, with export credit insurance, the exporter is covered
against the worst.
If your country offers export credit, insurance, you should certainly consider
using it for trade with customers you know only slightly and for single
transactions - that represent a high proportion of _your turnover. Further,
many buyers are reluctant to spend money on a payment guaran-tee or to tie
up money in a letter of credit—in a buyer's market, export credit insurance
may give the exporter a competitive edge.

Payment Guarantee
What is a "guarantee"? Let's say I promise to pay you $1,000. You are not
sure that 1 have the money, so you tell me to find a friend, a guarantor (in
the export trade normally a bank), to make a second promise: the guar-antor
will pay the beneficiary (you) if the principal (me) fails to keep the original
promise. If you do not get the $1,000 from me, you will get it from the bank.
The relationship is a triangle.
84 EXPORTING AND THE EXPORT CONTRACT

The terminology of guarantees is confused. A guarantee (in the present

sense) is sometimes called a bond or a surety. There are technical differ-
ences among the three terms, but you can normally ignore them. Another
problem, is that the word guarantee is commonly used to mean warranty or
defects liability—when you buy a watch it may come with a so-called
"guarantee." In general, try to avoid this confusion by using the word
guarantee only within the triangular relationship shown above.
Guarantees are commonly used in four business situations; in each case one
party is particularly at risk—he has performed but the other side has not yet
responded. Of particular interest here is the payment guarantee, but you will
often meet the other guarantees in export business.

Risk 1: Non-payment---Payment Guarantee

For the exporter there is one major risk: not being paid. A payment
guarantee simply commits the bank to pay if the buyer defaults. The
payment guarantee is usually for 100% of the contract price.

Risk 2: Revocation---Tender Guarantee

Procurement contracts, especially at government level, arc put up for
tender or bid. An-exporter may well bid on a contract goods or
materials to a government department or agency. Invariably this
department asks for a tender guarantee or bid bond). If the would-be
exporter withdraws his tender, then the tender guarantee is forfeit.
This guards the department against the risk of a project falling behind
because a tender is withdrawn." A normal figure for a tender
guarantee is between 1.5% and 5% of the contract price.

Risk.3: Non-Performance-----Performance Guarantee

If you are selling goods on an FOB basis, you are unlikely to meet the
performance guarantee. If, however, you offer services as well as
goods, the performance guarantee can be important. It simply says; all,
then the guarantor will pay, within that if you work badly or not at
stated limits, the costs Of your failure to perform. A normal figure for
a performance guarantee is between 5% and 10% of the contract price.

Risk 4: Losing Prepayment— Prepayment Guarantee

Manufacturers often ask for an advance payment, especially if items
are custom-made for the buyer. Making this prepayment is a risk for
the buyer until the items arrive in working order. The advance pay-
ment guarantee promises the buyer that the bank will return advance
payments if the exporter fails to deliver. The guarantee is normally for
100% of the prepayment, - decreasing as deliveries are made.
In most guarantees, the bank agrees to pay "on first demand" and "without
demur or objection" (or a similar wording). This promise can be
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 85

taken literally: the moment that the beneficiary demands payment under the
guarantee, the, bank will pay. (Naturally the bank will immediately
withdraw the money it has paid from the account of the principal.) Such
guarantees are called "demand guarantees": there are no serious, objective
conditions the beneficiary must, meet before claiming payment of the guar-
antee. This can quickly lead to abuse, and many court cases arise from
demand guarantees. Let's take a typical scenario.

Scenario: Esperanza Trading, the buyer, asks Big Bank to issue a payment
guarantee in favor of Office Enterprises, the exporter. The bank complies.
Two days after the agreed payment date, Esperanza Trading has not yet
paid. Office Enterprises accordingly asks the bank to pay the money. The
bank first notifies Esperanza Trading that it is about to pay. Esperanza says
that the goods were defective and tells the bank to withhold payment. The
bank looks again at the text of the guarantee: "We undertake to pay you on
your first written demand without cavil or demur...." The bank says it will
pay, regardless of the quality of the goods. Angrily, Verbena Trading asks a
judge for an injunction (an order forbidding something) to forbid the bank
from making payment. Judges normally refuse to grant such injunctions. A
demand guarantee is exactly that—a guarantee paid on demand.

The problem of a beneficiary falsely or improperly demanding payment

is also a serious one If the bank has agreed to pay, it will pay unless
there is evidence of blatant fraud. if demand guarantees are so risky,
perhaps a conditional guarantee would be preferable.
A conditional guarantee contains serious, objective conditions that must be
met before payment by the bank is possible. These conditions cannot refer to
the condition of delivered goods—the bank has no way of evaluating such
things. The ICC tried in two pamphlets, Uniform Rules for Contract
Guarantees (1978) and Model Forms for Issuing Contract Guarantees
(1982) to set up objective conditions that a bank might find workable. It
suggested three. The bank would pay if the claim were supported by:

 A decision of the court of first instance (a decision by a judge);

 An arbitral award (a decision by a court of arbitration);
 The approval of the Principal in writing to the claim.

It is not likely that any beneficiary would agree to objective conditions

as harsh as this—and so most bank guarantees are of the "demand" kind.
In fact, because guarantees run into trouble so often, and because they
are expensive to set up, few. exporters ask for them as security for
payment: the letter of credit is much preferred.
86 EXPORTING AND THE EXPORT CONTRACT

Stand and Deliver

Below is the first part of a payment guarantee issued in standard bank form. Study
it, and then answer the questions.

Payment Guarantee No. 76542/92

Reference is made to the order No. WEX 344 K placed with

you as suppliers by Multi-Import for the supply of
integrated circuits

According to the conditions of this order, the Buyer has to

furnish a payment guarantee in the amount of USD 600,000. By
order of the Buyer, we, Big Bank of Euroland, hereby establish
and undertake irrevocably to pay to you without demur or
objection any outstanding amount not exceeding USD 600,000 say
United States Dollar six hundred thousand only upon your first
written demand stating that the Buyer has failed to effect the
outstanding payment at under this guarantee will expire as soon
as this document is returned to us, latest however, by 31st
December 1996.

1. Who is the principal? ❑SELLER ❑BUYER ❑BANK

2. Who is the guarantor? ❑SELLER ❑BUYER ❑BANK
3. Who is the beneficiary? ❑SELLER ❑BUYER ❑BANK
4. Is this a "demand" guarantee? ❑YES ❑NO
5. If the buyer fails to pay, is payment secure? ❑YES ❑NO

What You Should Know

1. Export credit insurance covers the risk of non-payment.
2. Guarantees are designed to reduce contractual risks.
3. The payment guarantee reduces the risk of non-payment. The tender
guarantee reduces the risk of the revocation of an offer; the
performance guarantee reduces the risk of non-performance or
inadequate performance by the exporter, the advance payment
guarantee reduces the risk of losing prepayments.
4. If a bank issues a "demand guarantee," it 'must pay the guarantee sum
on first demand without question. Since most payment guarantees are of
this type, they are dangerous for the principal (the buyer) and are
seldom used; the letter of credit is far more common.
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 87

4. The Letter of Credit

THE PROBLEM .

Letters of credit are issued in many forms for many purposes. Some
offer first class security for the exporter; some are little better than a
personal check. What letter of credit terms should the exporter try to:
negotiate?

THE PRINCIPLE

Most letters of credit are irrevocable—they cannot be withdrawn.

Exporters prefer the letter of credit to be confirmed (i.e., payable by a
local bank on first presentation of correct shipping documents) and
payable at sight (i.e., payable immediately).

IN MORE DEPTH

The ideal type of payment from the exporter's point of view is the
irrevocable, confirmed at sight letter of credit. Letter of credit have a
long history. The first attempt to standardize, them was made in 1933
when the International Chamber of Commerce issued the Uniform
Customs and Practice for, Documentary Credits (UCP). The current
edition, the sixth dated 1 993, has achieved almost universal
acceptance. The United States has its Own rules, but even so, parties
to a contract can agree to' use the UCP rules, and many' do. Typically
a contract stipulates:

The Buyer, on receipt of the Confirmation of Order from

the Seller, shall at least 20 days prior to the date of
delivery Open a confirmed, irrevocable letter of credit.
This credit shall be subject to Uniform. Customs and
Practice for Documentary Credits, 1993 Revision, ICC
Publication No. 50'0. 20% of the credit shall be
available against the Seller's draft accompanied by
invoice; the remaining 80% shall be available against
the Seller's draft accompanied by the shipping
documents.

To understand a contract provision like the one above, we must now

look closely at the letter of credit.

Letters of Credit: The Ground Rules

A letter of credit is a binding agreed
In a supermarket purchase, goods are exchanged for money; in a
letter of credit situation documents are exchanged for money — that
is why letters of credit are formally called documentary credits. The
letter of credit is issued by an issuing bank at the request like buyer.
The issuing bank is in the country of the buyer, so is normally
instructs a bank in the country
88 EXPORTING AND THE EXPORT CONTRACT

of the exporter—the advising bank—to advise the exporter that the

letter of credit has been opened. The advising bank will also handle all
the necessary paperwork when the exporter tries to collect payment.

In the next step (diagram on the next page), the exporter ships the goods.
When the exporter passes the goods to the carrier, he receives shipping
document& Ile presents these documents to the bank as evidence that the
goods have been shipped. The bank checks the correctness of the docu-
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 89

ments and sets the payment procedure in motion. The payment procedure
depends on the type of credit: sometimes the advising bank merely sends the
documents to the issuing bank and acts as a channel for payment; in other cases,
the advising (or confirming) bank pays immediately "over the counter." (The
various cases are discussed below.)

Obviously such an arrangement must be foolproof or it becomes danger-

ous for both sides; two principles serve to make the letter of credit
watertight: (a) autonomy, and (b) strict compliance:
90 EXPORTING AND THE EXPORT CONTRACT

Autonomy
The letter of credit is an agreement by a bank to pay money against
documents: it is a separate agreement from the sales contract and is
unconnected with it The. ICC Uniform Custom and Practice for
Documentary Credits (UCP) makes this clear
Credits, by their nature; 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 whatsoever to such
contracts) is included in the credit… In credit operations all parties
concerned deal in documents, and not in goods, services and/or other
performances to which the documents may relate

This means that the bank is obliged to pay—whatever the disputes between
the buyer and the exporter. For example, in one leading case, Discount
Records bought phonograph records from an exporter. Payment was by
letter of credit issued by Barclays Bank. The exporter delivered a mix of
cassettes, eight-track cartridges and other non-contractual goods. Discount
Records tried to get an injunction to stop Barclays from paying under the
letter of credit. The court refused.
A letter of credit is like a bill of exchange given for the price of goods. It
ranks as cash and must be. honored. No set off or counterclaim is allowed to
detract from it

The exporter will be paid—although later action in the courts may oblige him
to make good any damage he has caused the buyer.

Strict Compliance
The buyer also has a safeguard: the bank will pay only if the shipping
documents are exactly in line with the buyer's instructions. For
example, let's. say an F013 sales contract agrees that the exporter can
deposit the goods in a warehouse if the ship arrives late and that this
counts as delivery. This agreement has no direct bearing on the letter
of credit: if the letter of credit requires a bill of lading and makes no
mention of a warehouse receipt, then the bank simply cannot pay
against a warehouse receipt.

Banks must follow their instructions- strictly, as is shown in another

landmark case.su Dawson bought vanilla beans from Indonesia.
Dawson instructed an American bank to open a letter of credit. One
of the required shipping documents was a certificate of quality issued
"by experts." The bank paid the exporter. The beans, when they
arrived, were rubbish. The certificate of quality was signed, however,
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 91

by only one "expert:" Thus, because the bank had not strictly
followed the instructions from Dawson, it could not collect from
Dawson the money it had paid to the exporter—an expensive
mistake for the bank.,
How often do banks refuse payment? According to Bradgate, "over
50%. of documents presented to banks under documentary credit
transactions are rejected on first presentation" (p. 554). Figures
quoted to the author by banks in some African countries go much
higher: some banks report rejecting 90% of first applications for
payment under letters of credit.
What happens when a bank refuses to pay under a letter of credit?
First the bank will cite a "discrepancy," some aspect of the doctumen-
tation di it is not in line with the terms of the credit. A check-list of
commonly cited discrepancies on the next page makes depressing
reading.
Once the bank, has indicated the discrepancies, the exporter can proceed in
one of three ways:

 Provide the missing paperwork or correct errors;

 Ask the buyer to instruct the bank to change the terms of the letter
to issue an amendment;
 Ask the bank. to process the letter of credit with the discrepancies
but to pay only when (and in the issuing bank permits payment.
If, as often happens, the letter of credit is near its expiry date, there may
be no time for the exporter to. provide the missing pieces. In this case, the
exporter (or the advising bank) must contact the buyer asking the buyer to
instruct the issuing bank to extend the date of the credit. Whenever an
amendment is necessary, the purpose of the letter of credit is largely
defeated—the buyer is now firmly in control of payment. Extra bank costs
are a further burden on the exporter. In general: the exporter is advised to
exercise scrupulous care in providing the documentation called for by the
letter of credit.
We have said that the exporter's interests are best served by a confirmed,
irrevocable, at-sight letter of credit. What do these terms mean?

Letter of Credit: Revocable and Irrevocable

In theory at least, letters of credit are either "revocable" or "irrevocable'.
A revocable letter of credit can be canceled at any time by the buyer or by
the issuing bank. Few exporters will accept such an arrangement, so the
plain expression "letter of credit" generally means the irrevocable kind.
Even so, the word "irrevocable" should always appear in the text of the
credit and of the contract: however, Article 6 of the 1993 edition of the
UCP states that, in the absence of a clear indication, letter of credit are
deemed to be irrevocable, thus reversing the 1CC's previous position.
92 EXPORTING AND THE EXPORT CONTRACT

Common Discrepancies Reported by Banks

Problems with the Letter of Credit

 Documents required by the credit are missing.
 Documents required to be signed are not signed.
 The credit amount is exceeded.
 The credit has expired.
 Documents are not presented within the required time.
 Shipment was short.
 Shipment was late.

Problems with the Bill of Lading

 The bill of lading is "unclean"—it has comments on it relating to damage to or other

deficiencies in the goods.
 A marine bill of lading is required, but the bill does not state that the good were
"shipped on board" a named vessel.
 The bill of lading shows shipment-between ports other than those specified in the
credit.
 The bill of lading shows that the goods were shipped on deck. This is normally
forbidden unless the credit expressly allows it.
 The bill of lading offers no evidence that freight was paid by the exporter (if this was
required).
 There is no endorsement (if endorsement is necessary).

Problems with Insurance

 The insurance document is not of the type specified in the credit (e.g., a
certificate of insurance is produced while the credit calls for a policy).
 The insurance risks are not those specified in the credit.
 Insurance cover is expressed in a currency other than that of the credit. This is
forbidden unless the credit expressly allows it.
 The sum insured is below the figure required.
 Insurance cover does not begin on or before the date of the transport document.

Inconsistencies among the Documents

 Description of the goods on the invoice and in the credit are different.
 Weights differ between two documents.
 Marks and numbers differ between two documents.
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 93

An irrevocable letter of credit sometimes looks like this:

94 EXPORTING AND THE EXPORT CONTRACT

This form shows the English text of the letter of credit suggested by the
ICC. In practice, however, most letters of credit are
"teletransmissions"— long telexes, often containing difficult
abbreviations and language peculiar to the issuing bank. For purposes of
simplicity, we will use the ICC form. The letter of credit above is
irrevocable: that is clear from the tide:
Irrevocable Documentary Credit.

Letter of Credit: Confirmed and Unconfirmed

More important in practice e distinction between revocable and irre-
vocable is the distinction between the "confirmed" and "unconfirmed"
letter of credit. The mechanism of the simplest letter of credit is this:

Issuing Letter of in favor SELLER

BUYER instructs
to issue
Bank a Credit of the

Because the issuing bank is normally in the buyer's country, the

exporter likes the issuing bank to instruct a so-called "advising bank" in
the exporter's own country to make actual payments under the letter of
credit:
to to pay in
instructs Issuing instructs Advising Letter of SELLER
BUYER under favor
an Bank an Bank a Credit of the

The advising bank does just that: it advises the exporter that the letter of
credit has been opened. Then, when the exporter tries to collect payment,
the advising bank forwards the paperwork to the issuing bank, asking for
funds to be transferred to pay the exporter. That can take some time.
If the advising bank knows the exporter well, it may pay all or part of the
value of the credit "over the counter." But such payments are always
made with recourse. With recourse? Let's say that the issuing bank finds
a problem with the documents and refuses to send funds to the advising
bank to cover payment; in that case, the advising bank has recourse to the
exporter. In plain words; the advising bank gets its money back from the
exporter. A confirming bank is in a different position. It is asked to
confirm the credit:
to
to in
instructs Issuing Confirming pay Letter of SELLER
BUYER instructs favor
Bank under Credit
an Bank an
a of
the

Under this arrangement, the bank in the exporter's country confirms the
credit. A confirming bank has an absolute obligation to pay the exporter
according to the terms of the credit. If the credit is payable at sight, the
bank must pay at sight without recourse. What happens, though, if the
bank pays the exporter, and the issuing bank finds something wrong with
the documents? Then the confirming bank—not the exporter—has a
problem:. it has paid the money to the exporter and has no way of recover-
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 95

ing ft. Exporters prefer this arrangement for obvious reasons; among the
traditional trading nations of the world, it is the norm.
Unfortunately, problems can arise when very small banks or banks in
countries with severe foreign currency shortages try to instruct a bank in the
exporter's country to confirm a letter of credit. Let's say the Fudge and Gurgle
Bank in Nonamia asks Superbank International in New-York to confirm a
letter of credit in favor of an American exporter of computers. If Superbank
advises the exporter that the letter of credit has been opened, and confirms the
credit, then Superbank, as we have seen, must pay the exporter as soon as the
computers leave New York bound for Nonamia.
96 EXPORTING AND THE EXPORT CONTRACT

What happens when Superbank forwards the documents to Fudge and

Gurgle and asks for funds to cover the payment? Perhaps nothing at all.
Or perhaps there is a delay of months or even years before the funds
arrive. For this reason, banks are sometimes reluctant to confirm letters
of credit, especially those from obscure banks. Or they may ask for
"reconfirmation": in our example, Fudge and Gurgle must find a well-
known bank to Confirm to Superbank that funds will be transferred—if
not by Fudge and Gurgle, then by the "reconfirming bank:: The costs of
such reconfirmation can be high.
How can the exporter be sure that the letter of credit is confirmed by the
bank in his own country? When the text of the letter of credit arrives, it
comes with a covering letter. The form of this letter varies; above is an
example of the form recommended by the ICC. This notification
confirms the letter of credit we looked at earlier. The sign to look for is
the cross in the "confirmation box."
The stand-by letter of credit should also be mentioned at this stage. This
originated in the :U.S. because banking law in some states forbids banks
to issue payment guarantees. Under a payment guarantee (see Section 3
above) a bank agrees to pay if the buyer fails to do so. The stand-by letter
of credit is set up exactly the same way: the buyer agrees to pay in the
normal way - if payment is not made, the exporter can be paid under the
stand-by letter of credit. This is an essentially American phenomenon:
"English banks, like those in other European countries, prefer to issue
demand guarantees and ordinary letters of credit" (Schmitthoff, p 430).

The At-sight Letter of Credit and the Alternatives

When a letter of credit is issued, the terms under which it can be paid
are stated. UCP offers four choices, the first of which is clearly
preferable for the exporter.

Settlement by Sight Payment

The first choice has already been mentioned: settlement by sight pay-
ment. In this variation, the exporter presents the necessary, documents to
the paying bank (normally a confirming bank); the bank checks the
documents. If they are in order, the bank pays the full face value of the
letter of credit. This is usually what the exporter wants.
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 97

Settlement by Deferred Payment

In settlement by deferred payment, the letter of credit is not payable until a

numbers of days (180 days perhaps) after delivery, Payment is safe, but it is
delayed. The letter of credit cannot be paid, but it has an obvious value; if
the exporter needs ready money, he can realize some part of this value—
probably most of it. The exact figure he can discuss with any bank. On the
face of it, this arrangement is less advantageous for the exporter than
settlement by payment, but circumstances may make such a deal necessary

Settlement by Deferred Payment

98 EXPORTING AND THE EXPORT CONTRACT

So far the bank has paid cash to the exporter against the documents.
Another approach is to use a bill of exchange. A bill of exchange is like a
check (cheque); it allows the beneficiary (the exporter) to make a draft for a
given sum of money on the buyer. In international trade, this bill of
exchange is usually a ante draft—h can be collected only after a certain
date. That is obviously a danger for the exporter. Accordingly the accepting
bank will the bill of exchange and agree to pay it at full face, value when it
falls clue. A bill of exchange that is accepted can be "negotiated," i.e., sold
at a discount to any bank if the exporter needs ready money.

Settlement by Negotiation

We
have
already mentioned negotiation---the selling of a financial instrument to a
bank for (usually) less than its face value. In this final method of
settlement, the bank with whom the exporter deals is called the
negotiating bank. In settlement by negotiation a bill of exchange again
allows the exporter to make a draft on the buyer, but this bill must be
negotiated—the advising (or other) bank has no authority to pay it at its
full face value. This kind of settlement is the least satisfactory for the
exporter, and in practice it is a rarity.

The Letter of Credit and Its Associated Documentation

There are no rules as to what documents a letter of credit may or may not
require. The bank must simply check that the documents specified in the
letter of credit are in perfect order—it does not question the necessity or
value of the documents—nor is it interested in the question of why the
buyer wanted a particular document presented in a particular form The
bank is scrupulous, however, in checking that the documents are correct:
this is the doctrine of strict compliance mentioned above.
The letter of credit contains a list of the documents that the exporter must-
present. Each document should be carefully and correctly named—
"Marine Bill of Lading" not simply "BL" or "Bill of Lading."

The number of originals and the number of copies required should be

stipulated: For example, "3/3 Marine Bill of Lading" means that the ex-
porter must produce three originals and three copies of the marine bill of
lading. Unless the letter of credit expressly states otherwise, the bank
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 99

expects all documents to be originals. (It is: sometimes difficult with

Modern documentation to decide what is an original and what is a copy.
Any document which is authenticated and which states that it is an
original is usually accepted)
The ICC suggests that documents are listed in a certain order:

 Commercial invoice;
 Transport document;
 Insurance document;
 Other 'documents such as certificate of origin, certificate of anal-
ysis, packing list, weight list, phytosanitary certificate, etc.
Let us now look at each of these documents in a little more detail to see what the
banks are looking for.

Commercial Invoice
A commercial invoice must be made out to the applicant for the letter of
credit (normally the buyer), unless otherwise stated in the credit. The
description of the goods on the invoice must conform with the description
in, the letter of credit To avoid conflicts in description, it is good practice
to keep the description in the letter of credit as short as reasonably
Possible. The amount shown on the invoice should not be more than the
amount permitted by the letter of credit; if it is, the bank may refuse to
accept the invoice. Sometimes the buyer requires that an invoice must be
certified or notarized; if so, the letter of credit should state exactly what is
meant, for example, what kind of certification made by whom. On the
next page there, is an example of a commercial invoice using the SITPRO
(United Kingdom Simplification of International Trade Procedures
Board) standard form.

Transport Document
We saw in Chapter I that when the exporter passes over the goods to the
carrier, the carrier issues a transport document appropriate for the particular
means of transport involved. The main types are:
 Sea transport: Marine bill of lading (or sea waybill)
 Air transport: Air waybill
 Rail transport: Railway consignment note
 Road transport: Road consignment note
 Combined transport: Combined transport bill of lading
The letter of credit should state the type of document required. If alter-
native means of transport or partial shipments are allowed perhaps by
different modes of transport, the letter of credit should have the words
"or" (or "and/or") between the names of the transport documents, e.g.:
"Marine Bill of Lading and/or Road Consignment Note."
Some special problems associated with particular transport documents can
be briefly highlighted here.
100 EXPORTING AND THE EXPORT CONTRACT

STANDARD FORM OF INVOICE

CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 101

r-

Shipment by Sea: Som types of sea transport are not allowable unless
the parties agree on them and letter of credit is worded accord-ingly.
In particular, transport on the deck of a ship or in a pure sailing ship
are not allowed. Thus, if the bank sees from a marine bill of lading
that transport will take place on deck, and if the letter of credit does
not allow this, the bank will reject the shipping document
Often a marine bill of lading—which as we saw in Chapter 1 is a
negotiable (sellable) document—is not necessary: usually buyer does
not plan to resell the goods during shipment. In this case, the carrier
often issues a sea waybill, which is similar to the familiar road or rail
consignment note.
Shipment by Air: The form of the air waybill (air consignment note)
has been standardized by IATA (International Air Transport
Association).53 The air waybill is issued in three originals and nine
copies. Only the second original goes to the consignee (the buyer).
Sometimes a letter of credit calls for "a full set of original air
waybills"; this is obviously a mistake—the exporter cannot provide
the complete set. The bank, however, will follow the wording of the
letter of credit exactly and refuse an "incomplete set" of waybills.
Another incorrect requirement is that the air waybill show the date of
the flight: a correctly completed waybill cannot show this informa-
tion—but again the bank must insist on strict compliance.
Shipment by Rail: As with the air waybill, letters of credit calling for
a rail consignment note occasionally make impossible demands. The
"original consignment note" does not come into the -possession of the
exporter, so a letter of credit demanding the original is certain to
cause delay in payment.

The Insurance Document

If shipment is made on CIF or CIP terms, the letter of credit will call
for an insurance policy or certificate. The exact risks to insured are
also normally stated.54 (If shipment is under Incoterms other than
CIF or CIP, the buyer may still ask the exporter to arrange some
aspects of the insurance for him. In such cases, the letter of credit
calls for documents to prove that the exporter has taken the agreed
steps.) Unless the letter of credit states otherwise, insurance coverage
on a CIF or CIP shipment must be for 1 10% of the CIF (or CIP)
value of the goods; if it is not, banks often refuse the insurance
document.

Other Documents
Certificate of Origin: By far the most common of the "other docu-
ments" is the certificate of origin. This is required for imports into the
buyer's country under a preferential tariff or other agreement. Proce-
dures for obtaining certificates of origin vary from country to country.
A Chamber of Commerce or carrier can advise you.
102 EXPORTING AND THE EXPORT CONTRACT

Certificate of Inspection: Many countries, for example Indonesia,

have found that the passage of imported goods through their own
customs is easier if the goods are inspected and valued in the
country of the exporter. A number of international inspection
companies specialize in such work. The Societe Generale de
Surveillance (SGS) is one example. If SGS inspection is required,
the parties should make a note to this effect in their contract and
adjust the delivery schedule to allow time for inspection. Obviously
the details of the inspection certificate must correspond exactly with
the details in the transport document and the commercial invoice,
Discrepancies will almost certainly delay payment.
Special Requirements: Many countries require containers to be
fumigated before shipment; others have special requirements about
packaging materials; for certain kinds of products—foodstuffs in
particular—a health inspection is necessary; some African countries
place severe restrictions on the import or export of wildlife or
wildlife products. These are only examples—the list in endless. In
each case, the exporter and the buyer should agree exactly what the
certificate must show and who should issue it. The details must
appear in the letter of credit: vague requirements such as
"appropriate wildlife certificates" are likely to cause delay in
payment—the bank and the exporter may have different views on
what is "appropriate."

Summary
Prompt payment of the letter of credit depends on the exporter
presenting correct documentation. Remember—up to 90% of first
applications for payment are rejected because of discrepancies.

Negotiating the Terms of a Letter of Credit

It is one of the buyer's main duties to provide the letter of credit. In
fact, if an agreed letter of credit is not issued on time, the exporter often
has the right to cancel the contract because of a fundametual breach by
the buyer.

Unfortunately, many exporters pay little attention to the exact terms of

the letter of credit until it is too late. Usually exporters leave it to the
buyer to apply to his house bank for a letter of credit: the buyer provides
the bank with outline information about the deal, and leaves the bank to
draft the letter of credit as it sees fit. This procedure meets the interests
of the buyer and the bank, but it often leaves the exporter with serious
headaches. How can the exporter best protect his interests?
The first step is for exporter and buyer to agree exactly what documenta-
tion is required. Some items are discretionary, for instance the nature of
the transport document or the terms of insurance. Other items are a
matter of government regulation: the phytosanitary certificate or
certificate of origin, for example. The two parties may have to talk to
their Chambers of Commerce, to their banks or to the carrier to establish
the complete list.
The first step then is Agreement:
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 105

AGREEMENT INCORPORATION SPECIFICATION VERIFICATION COMPLIANCE

TThe exporter The list is The buyer The exporter The exporter
and the buyer incorporated applies for the checks the rigorously
discuss and into the letter of credit credit to see check
list all contract specifying the that required documentatio
required agreed documentation n and submits
documents documentation is as agreed it to the bank

STEPS IN NEGOTIATING A LETTER OF CREDIT

STEPS IN NEGOTIATING A LETTER OF CREDIT
Once the list of documents has been agreed, Step 2 is Incorporation of the list
into the contract. There are many ways of doing this, one of which is
particularly effective. The ICC has published a form that the buyer can use to
apply for a letter of credit. In addition to the form, the ICC has offered detailed
notes on how to complete it. The exporter and the buyer can complete this
application form during their negotiations and append a copy of the form to
their contract. This form can then be passed to the bank as. Specification of the
required letter of credit. 56 Thus, the credit when issued, should be exactly as
agreed by the parties with no nasty surprises for the exporter. We will discuss
the form in detail when we have mentioned the remaining two steps.

The Verification step is an obvious precaution: as soon as the exporter receives

advice that the letter of credit has been opened, he should check that it complies
with the agreement he negotiated with the buyer. The danger here is that when
the bank drafts the letter of credit, it lists documents or makes requirements that
the exporter either does not understand or has not agreed to. Immediate
discussion with the advising/confirming bank is essential since amendments are
always time consuming. If the problem is spotted early enough, however,
payment should not be delayed.

And finally Compliance. It cannot be said often' enough that timely payment
depends on exact compliance by the exporter with the terms of the credit.

Let us then turn to the form used to apply for a letter of credit. In practice, most
banks have a form of their own, but it seldom differs widely from the ICC
standard. You will see on the next page that each box is numbered, and that
instructions on how to complete each box are given on the following pages. If
you want more information, you should consult the ICC booklet on standard
documentary credit forms.
104 EXPORTING AND THE EXPORT CONTRACT

Documentary Credit Application

CHAPTER 2: NEGOTIATION PRICE AND PAYMENT
105

Segment 1: Applicant

Applicant

The full name and address of the applicant (buyer), including normally the
buyer’s account number with issuing bank.

Segment 2: Issuing Bank

Issuing Bank

The name of the issuing bank. This can be left blank. If you obtain an
application form from a bank, the name is often preprinted.
Segment 3: Application Date

Date of this application

The. date on which the application form is submitted to the bank. In

negotiating your contract, you can leave this blank.
Segment 4: Date and Place of Expiry
Date and place of expiry of the credit

All credits stipulate an expiry date: i.e., the last date for presentation of
documents to the bank. This should be carefully negotiated. The, buyer
will want an early date to save bank charges; the exporter will want
enough time after delivery to present the documents and to correct any
discrepancies that might be discovered by the bank. A "stale" (expired)
letter of credit will not be paid without an amendment.
This timing decision should obviously be coordinated with the other
timing decisions on the credit Segment 14, latest date for shipment, and
Segment 18, the period allowed after shipment for presentation of
documents to the bank.

The place of expiry is often "At the counters of the confirming bank."

Segment 5: - Beneficiary
Beneficiary

The full name and address of the beneficiary—the exporter in most cases.
(The buyer is normally suspicious of anyone other than the exporter being
106 EXPORTING AND THE EXPORT CONTRACT

named as beneficiary.) In addition to the postal address, telephone, telex

and fax numbers are sometimes included, especially if Segment 6
requests teletransmission.

Segment 6: Method of Issue:

 Issue by (air) mail  With brief advice by

teletransmission
 Issue by teletransmission (which shall be
the operative credit Instrument

This segment deals with the method of issuing the letter of credit. In
effect there are two choices: issue by mail and issue by teletransmission
(normally telex). The choice depends on the time available to the
panics: issue by mail is likely to be much slower than issue by telex. If
the exporter wants the best of both worlds, he can cross two boxes: mail
and Brief advice by teletransmission. The "brief advice" is a notification
by telex that the credit has been issued and is on its, way by mail. On
this advice, the exporter might, perhaps, begin preparations for delivery.

Segment 7: Transfer of the Credit

 Transferable credit

A transferable credit is one which allows the first beneficiary (the

exporter) to request the confirming bank to pay a third party. The effect
is that the buyer will not necessarily know who is the actual supplier of
the goods—will it be the exporter or the as yet unknown third party?
(See UCP 1993, Article 48.) In principle a letter of credit is not
"transferable", but it can be made so by crossing the appropriate box.

Segment 8: Confirmation

Confirmation of credit to the beneficiary

 not requested  requested

This is a crucial issue for the exporter. Will the bank in his own country
merely handle the paperwork, or will it make payment itself and recover
the funds from the buyer's bank? Exporters greatly prefer confirmation.
Segment 9: Amount

Amount

The amount of the credit should be expressed both in figures and in

words. The currency of the credit should be stated using the ISO
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 107

(International Standards Organization) currency code, e.g. USD for

United States dollars, GBP for pounds sterling, or DEM for deutsche
mark.

It is sometimes difficult to know exactly what the final invoice figure

will be Accordingly, many credits use words such as "about" or 'approx-
imately." In this case actual payment can be 10% more or 10% less than
the stated amount_ (See UCP Article 39.) Another common phrase is "up
to" or "not exceeding." This is useful when partial shipment (and
therefore partial payment) is not allowed, but when the final invoice may
be for considerably less than the stated amount of the credit.
It is sometimes the case that some part of the contract price is to be paid
by letter of credit and the rest by some other means—prepayment perhaps,
or perhaps the buyer will retain a part of the price until the warranty
period is over. In this case, the application should state (in Segment 19)
what percentage of the invoice price is covered by the credit.
Segment10: Partial Shipment

Partial shipments
allowed not allowed

In principle, partial shipments are allowed unless the "not allowed" box is
crossed.

You should distinguish carefully between partial shipments and-shipment-

- in installments. Shipment in installments means that an agreed schedule
has been set up (e.g., three equal shipments in March, August and Octo-
ber 1995.) This schedule should be noted in "Additional Instructions"
(Segment 19). A partial shipment is simply an incomplete shipment with
some part of the goods to follow later. Unless the buyer has some clear
reason for wishing all the goods to arrive together, partial shipment should
be "allowed."

Segment 11: Transshipment

Transshipments
allowed not allowed

Transshipment means moving the goods from one conveyance to another.

Container transport ("combined transport") obviously presumes trans-
shipment. It is only when goods travel by sea under a sea waybill or
marine bill of lading that it makes sense to forbid transshipment—and
even then there would have to be special reasons for the prohibition:
extreme fragility of the goods would be one example. Normally trans-
shipment is allowed.
„.
108 EXPORTING AND THE EXPORT CONTRACT

Segment 12: Availability

Credit available with
 by sight  by acceptance  by
payment negotiation

 by deferred payment against

the documents detailed herein
 and beneficiary’s draft at
on

"Credit available with..."—this is sometimes followed by the name of

the advising bank chosen by the exporter. More often it is left blank. In
this case, the issuing bank is free to decide which bank will act for it in
the exporter's country.
The various types of payment are discussed above. For the exporter, "by
sight payment" is most advantageous: as soon as the bank has "sight" of
the documents, i.e., as soon as the exporter presents them, it pays.
Sometimes, though not often, the beneficiary (exporter) must make a draft
on the bank to collect the money. In this case the box "and beneficiary's
draft" is crossed, the word "at" is followed by "sight" (or possibly some
number of days); the word "on" is followed by "nominated bank."

Segment 13: Insurance Covered by the Buyer

 Insurance will be covered by us

This box is "for information only"—it simply clarifies that insurance is
taken care of "by us," i.e., by the buyer. The box is normally checked
when the delivery term is FOB, CFR or some other term where the
exporter is not required to present an insurance document.

Segment 14: Transport Information

Loading on board/dispatch/taking in charge at/from

not later than for transportation to:

This segment includes the "dispatch from...for transportation to..."

information and the latest date of shipment.

In stating where the goods will travel from and where they will travel
to, the parties should agree precise places—harbors, airports, and so
on. Generalized references such as "US East Coast Port" are
sometimes used.
 CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 111

Getting Paid
In each situation below, decide the most appropriate method of payment.

1. Sale of a bale (roll) of cloth costing $200 to a nearby tailors shop with
whom you have done business for 20 years.
2. A new small customer in a Pacific island republic much given to political
disturbances. The order is for $10,000 worth of assorted textiles.
3. A contract for supply of cloth worth $5,000 per month to the government
of Oceanea- a prosperous country. Duration of the contract: two years,
but renewable. Contract represents 25% of turnover
4. The same deal as (3) except that the contract represents:: only 0.5% of
your turnover.

Credit Terms
Study the letter of credit on the next page, and then answer the questions below.
1. Who is the exporter?.................
2. Who is the buyer?.....................
3. Is the credit irrevocable? ❑ YES ❑ NO ❑ NOT STATED
4. Is the credit confirmed? ❑ YES ❑ NO ❑ NOT STATED
5. Is the credit payable.at sight? ❑ YES ❑ NO ❑ NOT STATED
6. Will the bank par
a. If the final invoice is for USD 19,500? ❑ YES ❑ NO
b. If the final invoice is for USE) 25,000? ❑ YES ❑ NO
c. If the bill of lading does not specify a particular ship? ❑ YES ❑ NO
d. If the insurance policy does not cover war risks? ❑ YES ❑ NO
7. Is the bill of lading intended to be negotiable? ❑ YES ❑ NO
8. If the exporter presents correct documents, will be be paid immediately?
❑ YES ❑ NO ❑ NOT CLARIFIED
105 EXPORTING AND THE EXPORT CONTRACT
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 113

What You Should Know

1. A letter of credit allows an exporter to collect payment when the goods are
delivered—normally at the time of shipment
2. Credits are of many types. For the exporter, the most advantageous type is
the irrevocable, confirmed, at-sight letter of credit.
3. Letters of credit are made safe for exporter and buyer by two principles:
autonomy and strict compliance.
4. Autonomy means that the letter of credit is a contract in its own right,
entirely separate from the contract for the sale of goods.
5. Strict compliance means that the exporter must present to the bank
shipping documents that comply in all respects with the terms of the credit.
Small deviations will result in refusal by the bank to pay.
6. If the credit requires documents that the exporter cannot furnish, or if
compliance is impossible for some other reason, then the letter of credit
must be amended- a process that requires the cooperation of the buyer.
7. If the exporter and the buyer complete the ICC Application for the Issue of
a Documentary Credit on agreed terms, and if the buyer then uses this
application when requesting his bank to issue the letter of credit, many
problems are avoided.
114 EXPORTING AND THE EXPORT CONTRACT
CHAPTER 2: NEGOTIATION PRICE AND PAYMENT 115

Chapter 3

Negotiating Inspection and

Defects Liability

1. Exporting and the Problem of Quality

THE PROBLEM .

Export markets are often far away. When things go wrong with
products, repair and replacement can be ruinously expensive. What
special steps can the exporter take to minimize the risk of the goods
being rejected or of heavy defects liability claims'?

THE PRINCIPLE
The first steps an exporter should take are to ensure that all
exported goods meet or exceed the quality specified, that marking
and packaging are correct, and that delivery is on time Secondly,
the agreement between the parties should contain specific quality
specifications; detailed specification reduces the chance of a
dispute because it provides a clear and objective standard that the
goods must meet.

IN MORE DEPTH
No manufacturer produces perfect products every time. Even so,
quality is a key issue, and customer satisfaction is essential to
successful business. Many companies have quality assurance
programs to ensure that customers get what they pay for Until
things are going well in the local market, it makes little sense to
export, because quality assurance and customer satisfaction are
much tougher issues when the customer is in another country, and
when distance makes communication, transport, inspection,
payment, and verification of claims expensive and time
consuming. Before looking in detail at inspection, defects liability,
and the other issues, let's trace the course of an exported product
from manufacture through to the end of the defects liability period,
and see where the exporter is at risk.

Scenario: Verbena Electric is selling lightweight headphones with a

built-in AM/FM radio. The equipment runs on a single AAA battery.
The customer is Euroeast Impex, a purchasing house in an East
European country with a huge market for modern, high quality
equipment—provided the price is right. The two sides have agreed
an FOB (Port Verbena) price of $2.78 per unit, excluding battery.
114 EXPORTING AND THE EXPORT CONTRACT