INTERNATIONAL TRADE LAW

TOPIC : INCOTERM -2010

Payment Method In International Trade
Most Common Terms of Sale derived from Common
Law , International Trade Terms

Anusha
IV Sem L.L.M
JKP 19001
INTRODUCTION

▪ Trade between two or more countries is called foreign trade or international trade . This involves the exchange
of goods and services between the citizens of two countries . When citizens of one country exchange goods
and services with the citizens of another country , is called foreign trade .

▪ The aim of international trade is to increase production and to raise the standard of living of the people .
International trade helps citizens of one nation to consume and enjoy the possession of goods produced in
some other nation .
INCOTERMS

❖ Background
▪ first published in 1936 by International Chamber of Commerce .
▪ Revised 6 times before 2010
▪ Incoterms -2010 to become effective January 2011
INCOTERMS

❖ Meaning
▪ Incoterms are the standard terms of trade that define the rights and obligations of the parties involved in trade.
▪ Incoterms are a set of rules which defined the responsibilities of seller and buyer for delivery of goods under
sales contracts .
▪ The terms of shipment and delivery , as well as the transfer of risk , between the buyer and seller .
▪ Incoterm were created by the International Chamber of Commerce(ICC) and are a registered trademark of the
ICC.
▪ The body responsible for publishing them ( since 1930) is international chamber of commerce (ICC) .
▪ Where they are drafted by a committee of experts . They are always updated every 10 years .

▪ The INCOTERMS established in the year 2010 are currently in force . And the next incoterms will come into
effect in 2020 .
❖ RULES FOR ANY MODE OR MODES OF TRANSPORT

• EXW | Ex Works

• FCA | Free Carrier

• CPT | Carriage Paid To

• CIP | Carriage and Insurance Paid To

• DAP | Delivered at Place

• DPU | Delivered at Place Unloaded

• DDP | Delivered Duty Paid

❖ RULES FOR SEA AND INLAND WATERWAY TRANSPORT

• FAS | Free Alongside Ship

• FOB | Free On Board

• CFR | Cost and Freight

• CIF | Cost Insurance and Freight

 Work Carrier alongsi board ge freight insuranc insuranc d at at place duty
de ship paid e, e paid place paid
to freight unloade
d
Loading at Buyer Seller S S S S S S S S S
origin
Export B S S S S S S S S S S
customs
declaration
Carriage to B S S S S S S S S S S
port of
export
Unloading of B B S S S S B S S S S
truck In port
of export
Loading of B B B S S S S S S S S
vessel
Carriage to B B B B S S S S S S S
port in
import
Unloading in B B B B B/S B B B/S S S S
port of
EXW , Ex Works

• In Ex Works , the seller / exporter / manufacturer merely makes the goods available to the buyer at the seller’s
named place of business .
• This trade term places the greatest responsibility on the buyer and minimum obligation on the seller .
• The seller does not clear the goods for export and does not load the goods onto a truck or other transport
vehicle at the named place of departure .
SELLER’S RESPONSIBILITIES

1. Goods – provide the goods , commercial invoice or electronic message and other documentation as required
by the sales contract .
2. Licenses and Customs Formalities – Provide the Buyer at buyer’s request , risk and cost , every assistance
in obtaining any license , authorization or documentation required for export of the goods .
3. Carriage and Insurance – the seller has no obligation to provide carriage of goods or Insurance .
4. Delivery- make the goods available to the buyer , unloaded , at the named place and on the date stipulated in
the sales contract .
5. Notice to the buyer – Provide sufficient notice to the buyer of the location and time of the availability of
the goods .
6. Proof of delivery , Transport Documents –The seller has no obligation to provide the buyer with a proof of
delivery or a transport document .
BUYER’S RESPONSIBILITIES

1. Payment : Pay for the goods as provided in the sales contract .

2. Licenses and Customs Formalities –obtain at own risk and cost all import and export licenses and
authorizations .
3. Carriage and Insurance – The buyer has no obligation to the seller to provide contract of carriage or
Insurance .
4. Taking Delivery- Take delivery of the goods when they have been made available by the seller in
accordance with the terms of the sales contract .
5. Risk transfer – Assume all risks from the time the goods have been made available by the seller in
accordance with the terms of the contract .
6. Proof of delivery – Provide the seller with evidence of having taken delivery .
 FREE ALONGSIDE SHIP
Rights and responsibilities of the seller and buyer

BUYER SELLER

Payment 1. Pay for the goods as provided in the sales Goods 1.Provide the goods , commercial invoice or
contract . electronic message , and other documentation
as required by the sales contract
Licenses and 2. Obtain at own risk and cost any import
customs licenses and authorizations and carry out all Licence and 2. Obtain at own risk and cost any export
formalities import formalities . customs licenses and authorizations and carry out all
formalities export formalities .
Carriage and 3. Provide for contract of carriage from the
Insurance named port of shipment . No obligation for Carriage and 3. The seller has no obligation to the buyer to
insurance . insurance provide carriage of goods or insurance

Delivery 4. Take delivery of the goods as provided in Delivery 4. Deliver the goods on the quay alongside the
the sales contract named vessel at the named place and at the
time stipulated in the sales contract .
Risk transfer 5.Assume all risk of loss or damage from the
Risk transfer 5. Assume all risk of loss or damage to the
time the goods have been delivered alongside
goods until they have been delivered to the
the ship as provided in the sales contract .
port at the named place and time as provided
in the sales contract .
 FCA – FREE CARRIER

BUYER SELLER

1 Payment Pay for the goods as provided in the sales contract. 1 Goods provide the goods ,commercial invoice or
other documentation as required by the sales
contract .
2 Licenses and Obtain all import licenses , documentations and
customs carry out all import formalities . 2 Licenses and Obtain at own risk and cost all required
formalities customs export licenses, documentation and
formalities authorizations & carry out all export
3 Carriage and Provide for contract of carriage from the named formalities .
insurance place . No obligation to seller for Insurance .
3 Carriage and The seller has no obligation to provide
4 Taking Take delivery of the goods as provided in the sales insurance carriage of goods or insurance .
delivery contract .
4 Delivery Deliver the goods to the named carrier or
5 Risk transfer Assume all risk of loss or damage from the time person at the named place and at the time
the goods have been delivered to the carrier as stipulated in the sales contract .
provided in the sales contract . 5 Risk transfer Assume all risk to the goods until they have
6 Cost Pay all costs for carriage and insurance from the been delivered to the carrier .
time the goods have been delivered to the carrier as 6 Cost pay all cost until the goods have been
provided in the sales contract . delivered to the carrier .
 FOB – FREE ON BOARD

Seller’s responsibility Buyer’s Responsibility

1 Goods Provide the goods , commercial invoice 1 Payment Pay for the goods as provided in the sales
or electronic message and other contract
documentation.
2 Licenses Obtain at own risk and cost any import licenses
2 Licenses Obtain at own risk and cost any export and and authorization and carry out all import
and customs licenses and authorization and carry out customs formalities .
formalities all export formalities . formalities
3 Carriage Provide for contract of carriage from the
3 Carriage The seller has no obligation to the buyer
and to provide carriage of goods or and named port of shipment . No obligation for
insurance insurance . Insurance insurance.

4 Delivery Deliver the goods on board the named 4 Taking Take delivery of the goods as provided in the
vessel at the named port delivery sales contract .
5 Risk Assume all risks of loss or damage to 5 Costs Pay all costs for carriage and insurance from the time
transfer the goods until they have passed the the goods have passed the ship’s rail at the port of
ship’s rail on the named vessel as shipment .
provided in the sales contract.
6 Notice to Give sufficient notice to the seller of the name of the
6 Notice to Provide sufficient notice to the buyer seller vessel , the time or period for delivery and the place
the buyer that the goods have been have been of delivery .
delivered on board the named vessel .
 DELIVERED DUTY PAID
Seller’s Responsibilities Buyer’s Responsibilities

1 Goods Provide the goods , commercial 1 Payment Pay for the goods as provided in the sales
invoice or electronic message contract .
2 Licenses and Obtain at own risk and cost any 2 License & Provide the seller at the seller’s request ,
Customs export and import licenses and customs risk and cost any and all assistance in
formalities authorization formalities securing licenses necessary to import the
goods .

3 Carriage and Contract for and pay all costs of 3 Carriage and No obligation to the seller for either
insurance carriage trans shipment to the insurance carriage or Insurance .
named port of destination .
4 Delivery Make the goods available to the 4 Taking Take delivery of the goods once they are
buyer not unloaded delivery made available at the named destination

5 Risk transfer Assume all risks of loss or damage to

5 Risk transfer Assume all risk of loss or damage
the goods
6 Notice to the Provide sufficient notice of dispatch 6 Costs Pay all cost of the goods once they have
buyer been made available at named place .
7 Proof of Provide the buyer with the delivery 7 Notice to To give the seller sufficient notice
delivery order . seller
 COST AND FREIGHT
SELLER’S RESPONSIBILITY BUYER’S RESPONSIBILITY
1 Goods Provide the goods , electronic message 1 Payment Pay for the goods

2 Licenses Obtain at own risk and cost any export

2 Licenses Obtain and pay cost of all import licenses
licenses .
3 Carriage Contract for and pay all cost of carriage
and by sea vessel to the named port of 3 Carriage No obligation to the seller .
insurance destination . and
insurance
4 Delivery Delivered the goods on board the
named vessel at the named port 4 Taking Take delivery of the goods at the port of
delivery destination .
5 Cost Pay all cost until the goods have been
delivered to the named port of 5 Risk Assume all risk of loss or damage from the
shipment . transfer time the goods have been passed over the
6 Notice to Provide sufficient notice to the buyer ship’s rail at the port of shipment .
the buyer that the goods have been delivered on 6 Cost Pay all additional costs for the goods once
board. they have passed over the ship’s rail at the
7 Risk Assume all risk of loss or damage . port of shipment .
COST , INSURANCE AND FREIGHT

Seller’s responsibility Buyer’s responsibility

1 Goods Provide goods , commercial 1 Payment Pay for the goods

invoice or electronic message
2 Licenses obtain at own risk and cost 2 Licenses Obtain and pay costs of all
any export licenses import licenses

3 Carriage Contract for and pay cost of 3 Carriage and No obligation to the seller to
and carriage by sea or inland insurance pay for carriage or insurance .
insurance waterway
4 Taking delivery Take delivery of the goods at
4 Delivery Deliver the goods on board
the port of destination .
the named vessel at the
named port and at the date . 5 Risk transfer Assume all risks of loss
5 Risk Assume all risks of loss or 6 Costs Pay all supplemental costs for
transfer damage to the goods the goods once they have
6 Cost Pay all cost of carriage and been passed over the ship’s
insurance rail

7 Proof of Provide the buyer with a 7 Notice to seller Buyer is able to specify a time
delivery transport document for shipping .
 CARRIAGE PAID TO

Seller’s responsibility Buyer’s responsibility

1 Goods Provide the goods

1 Payment Pay for the goods

2 Licenses Obtain at own risk and cost 2 Licenses Obtain and pay cost of all import
licenses
3 Insurance No obligation to provide 3 Carriage No obligation to the seller for either
insurance and carriage or insurance .
4 Delivery Deliver the goods to the carrier insurance
4 Taking Take delivery of the goods from the
5 Risk transfer Assume all risk of loss or damage delivery carrier at the port of destination .
5 Risk Assume all risk of loss or damage
6 Costs Pay all costs until the goods have transfer
been delivered
6 Costs Pay all additional cost for thew
7 Notice to buyer Provide sufficient notice to the goods
buyer that the goods have been
delivered to the carrier 7 Notice to Buyer is able to specify a time for
seller shipping
 CARRIAGE AND INSURANCE PAID TO

Seller’s responsibility

1 Goods Provide the goods 1 Payment Pay for the gpay oods
2 Licenses Obtain and pay costs of all import
2 Licenses Obtain at own risk and cost any licenses
export licenses
3 Carriage and No obligation to the seller for either
3 Carriage and Contract for and pay all cost of insurance carriage or insurance .
insurance carriage
4 Taking Take deliver of the goods from the carrier
4 Delivery Deliver the goods to the carrier delivery at the port of destination .
5 Risk transfer Assume all risk of loss or damage from
5 Risk transfer Assume all risk of loss the time the goods have been delivered
to the carrier by the seller .
6 Costs Pay all costs until the goods have 6 Costs Pay all additional cost
been delivered to the carrier
7 Notice to the Provide sufficient notice to the 7 Notice to To give the seller sufficient notice
buyer buyer seller
 Delivered at terminal

Seller’s responsibility Buyers responsibility

1 Goods Provide the goods 1 Payment Pay for the goods

2 Licenses Obtain at own risk and cost any 2 Licenses Obtain and pay cost of all import licenses .
export licenses
3 insurance No obligation to provide insurance 3 Carriage and No obligation to the seller for either
insurance carriage or insurance .
4 Delivery Make the goods available to the
4 Risk transfer Assume all risk of loss or damage .
buyer at the named destination
5 Risk transfer Assume risk of loss or damage
5 Taking Take delivery of the goods once they are
delivery made available at the named destination .
6 Costs Pay all costs until the goods have
been delivered to the named 6 Costs Pay all costs for the goods
destination .
7 Notice to the Provide sufficient notice of 7 Notice to the To give the seller sufficient notice .
 DELIVERED AT PLACE

SELLER’S RESPONSIBILITY BUYER’S RESPONSIBILITY

1 goods Provide the goods , commercial 1 Payment pay for the goods
invoice or electronic message
2 licenses Obtain at own risk and cost any 2 Licenses Obtain and pay costs of all import
export licenses licenses
3 Carriage and Contract for pay all cost of carriage 3 Insurance No obligation to the seller for
insurance and trans shipment to the named either carriage or insurance
destination .
4 Taking Take delivery of the goods
4 Delivery Make the goods available to the delivery
buyer at the named destination
5 Risk transfer Assume all risk of loss or damage
5 Cost Pay all cost

6 Costs Pay all costs for the goods

6 Risk transfer Assume all risk of loss or damage
to the goods
7 Notice to To give the seller sufficient notice .
7 Proof of Provide sufficient notice of seller
PAYMENT METHOD IN INTERNATIONAL TRADE

1. Cash-in-Advance
2. Letters of Credit
3. Documentary Collections
4. Open Account
5. Consignment
CASH-IN-ADVANCE

• With cash-in-advance payment terms, the exporter can avoid credit risk because payment is received before
the ownership of the goods is transferred .
• Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters .
• However requiring payment in advance is the least attractive option for the buyer , because it creates cash-
flow problems .
• Foreign buyers are also concerned that the goods may not be sent if payment is made in advance .
• Thus , exporters who insist on this payment method as their sole manner of doing business may lose to
competitors who offer more attractive payment terms .
Cash-in-advance methods

▪ Wire Transfer ( SWIFT-Society for Worldwide Interbank Financial Telecommunication)

▪ Credit Cards
▪ Payment by Check
When to Use Cash-in-Advance Terms

▪ The importer is a new customer and/ or has a less established operating history .
▪ The importer’s creditworthiness is doubtful , unsatisfactory or unverifiable .
▪ The political and commercial risks of the importer’s home country are very high .
▪ The exporter’s product is unique , not available elsewhere , or in heavy demand .
▪ The exporter operates an Internet – based business where the acceptance of credit card payment is a must to
remain competitive .
 Cash in advance / advance payment

Applicability Recommended for use in high risk trade relationships or export

markets , and appropriate for small export transactions .

Risk Exporters is exposed to virtually no risk as the burden of risk is

placed almost completely on the importer .

Pros ▪ Payment before shipment

▪ Eliminates risk of non-payment

Cons ▪ May lose customers to competitors over payment terms

▪ No additional earning through financing operations.
Letters of Credit

• Letters of Credit , also referred to as a documentary credit , is a contractual agreement whereby the issuing
bank (importer’s bank), acting on behalf of its customer ( the buyer or importer ) , authorizes the nominated
bank (exporter’s bank), to make payment to the beneficiary or exporter against the receipt of stipulated
documents .

• The LC is a separate contract from the sales contract on which it is based ;therefore , the bank is not
concerned whether each party fulfils the terms of the sales contract .

• The bank’s obligation to pay is solely conditioned upon the seller’s compliance with the terms and conditions
of the LC . In LC transactions , banks deal in documents only , not goods .
• LCs can be arranged easily for one-time deals .
• Unless the conditions of the LC state otherwise , it is always irrevocable , which means the document may
not be changed or cancelled unless the seller agrees .
 Continued…………..

• Letters of credit (LCs) are one of the most secure instruments available to international traders .
• An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter ,
provided that the terms and conditions stated in the LC have been met , as verified through the presentation of
all required documents .
• An LC is useful when reliable credit information about a foreign buyer is difficult to obtain , but the exporter
is satisfied with the creditworthiness of the buyer’s foreign bank .
• An LC also protects the buyer because no payment obligation arises until the goods have been shipped or
delivered as promised .
Letter of Credit Advising

• When a letter of Credit issued , the LC issuing bank ( importer’s bank ) sends the LC either to its branch
office or corresponding bank , which is normally located in the seller’s (beneficiary ) country .

• The branch office or corresponding bank that receives the LC is known as the Advising Bank .
• The roles of the Advising Bank are :
- To authenticate the LC to ensure that the LC comes from a genuine source . Authentication is either in the
form of signature verification (for hardcopy LC) or via SWIFT authentication ; and
- To inform the seller on the arrival of LC in his favour once the LC is ready for collection
LETTER OF CREDIT CONFIRMATION

• When an LC is issued , the issuing bank may request the Advising Bank to add its confirmation on the LC .
• By agreeing to add the confirmation , the Advising Bank will become the confirming bank and undertakes to
pay the beneficiary (seller) if all the terms and conditions of the LC are complied with .
• Such undertaking from the confirming bank is separate and in addition to the undertaking given by the issi
❖ DIFFERENT TYPES OF LETTERS OF CREDIT

• Commercial Letter of Credit

• Standby Letter of Credit
• Confirmed & unconfirmed LOCs
• Back-to-back Letters of Credit
• Revolving Letters of Credit
• Sight Letter of Credit
• Deferred payment LOCs
• Red Clause Letter of credit
Letters of credit

Applicability Recommended for use in higher-risk situations or new or less –established trade
relationships when the exporter is satisfied with the creditworthiness of the buyer’s bank

Risk Risk is spread between exporter and importer , that all terms and conditions as specified in
the LC are adhered to

Pros • Payment made after shipment

• A variety of payment , financing and risk mitigation options available

Cons • Labor intensive process

• Relatively expensive method in terms of transaction costs
OPEN ACCOUNT

• An open account transaction is a sale where the goods are shipped and delivered before payment is due,
• Which in international sales is typically in 30 , 60, or 90 days.
• It is one of the most advantageous options to the importer in terms of cash flows and cost , but it is
consequently one of the highest risk options for an exporter .
Open account

Applicability Recommended for use in a low –risk trading relationships or markets

and in competitive markets to win customers with use of one or more
appropriate trade finance techniques .
Risk Substantial risk to the exporter because the buyer could default on
payment obligation after shipment of the goods .

Pros ▪ Boost competitiveness in the global market

▪ Help establish and maintain a successful trade relationship .

Cons ▪ Significant exposure to the risk of non-payment

▪ Additional costs associated with risk mitigation measures .
Documentary Collection

• A documentary collection is a transaction where by the exporter entrusts the collection of a payment to the
remitting bank (exporter’s bank) which sends documents to a collecting bank (importer’s bank) along with the
Instructions for payment.
• Under a D/C transactions , the importer is not obligated to pay for goods before shipment .
• D/Cs are less complicated and less expensive than LC .
• Funds are received from the importer and remitted to the exporter through the banks involved in the collection
in exchange for those documents .
• D/Cs involve using a draft that requires the importer to pay the face amount either at sight ( document against
payment) or on a specified date ( document against acceptance).
• The draft gives instructions that specify the documents required for the transfer of title to the goods. Although
banks do act as facilitators for their clients , D/Cs offer no verification process and limited recourse in the
event of non-payment .
Document against payment

▪ In this method of payment –

▪ the exporter ships the goods to his buyer and sends his draft ( bill of exchange ) with the necessary export
documents through his bank .
▪ The exporter bank then sends the documents to the corresponding bank in buyer’s country .

▪ The bank of importer asks the importer to pay the draft and release the documents .

▪ If buyer pays the amount then bank handover the document to buyer and
▪ If buyer does not make the payment , then bank will not handover the document to buyer and exporter will
suffer loss .
Documents Against Acceptance

• This is the most unsecured method of trade in export trade .

• In this method of payment exporter sends the documents to his buyer through his bank .
• The buyer’s bank handover the documents to the buyer only upon , acceptance which implies that he agrees to
pay the amount of draft (bill of exchange ) after expiry of the period of credit .
• The maximum usance period is for 180 days .
• It allows buyer to take delivery of the goods before making the payment .
Documentary Collection

Applicability Recommended for use in established trade relationships and in stable export
markets .

Risk Riskier for the exporter , through D/C terms are more convenient and cheaper than
an LC to the importer .

Pros ▪ Bank assistance in obtaining payment

▪ The process is simple , fast and less costly than LCs

Cons ▪ Bank’s role is limited and they do not guarantee payment

▪ Banks do not verify the accuracy of the documents .
COMPARISON

CASH IN ADVANCE LETTER OF CREDIT DOCUMENTARY OPEN ACCOUNT

COLLECTION

Time of payment Before payment When shipment is On presentation of As agreed upon

made draft

Goods available to After payment After payment After payment Before payment
the buyer

Risk to exporter None Very little –none Disposal of unpaid Relies on buyer to
goods pay as agreed upon

Risk to importer Relies on exporter to Assured shipment Relies on exporter to None

ship goods as but relies on ship goods as
ordered exporter to ship described in the
goods as described documents
in the documents .
CONSIGNMENT

• Consignment is an arrangement in which the goods are left with a third party to sell .
• The party that sells the goods on consignment receives a portion of the profits , either as a flat rate
fee or commission .
 CONSIGNMENT PAYMENT

importer exporter

PROS Eliminates the cost of procuring goods, Potentially helps supply goods quicker , leading
there by minimizing operating cost , to competition gains , Enables ready access to
Does not bear the risk of the goods new markets ;Eliminates the holding inventory,
since ownership does not pass . potentially allowing space to offer a more
competitive price .
CONS If goods do not sell , will have taken a Bears all costs of production , shipping and
loss on the costs of inventory . delivery to the importer , may not recoup the
costs if goods do not sell as expected ;continue to
retain ownership of goods , even after delivery ,
and will bear the cost of loss , theft or damage .
TERMS OF SALE

▪ Terms of sale refer to the conditions and basis of trade transactions .the basic terms of sale are
decided in advance between the buyer and seller in the part of sales contract .

▪ In export trade , the pricing decision is very important , settled between the parties of the sales
contract .
Different types of quotations in International Trade

• Loco price
• On the Spot price
• At Station Price
• Free on rail
• Free Alongside Ship (FAS) Price
• Free on Board Price
• Cost and freight price
• Cost , insurance and freight Price
• Ex-Ship Price
• Franco Price
CONCLUSION