Documentary Risk in Commodity Trade Part 2

The Role of the International Chamber of Commerce

The International Chamber of Commerce (ICC) is a non-governmental organization which was founded in 1919 with the aim of facilitating and helping the world’s businesses, by promoting trade, investment, and open markets for goods and services, as well as the free flow of capital.

The International Chamber of Commerce (ICC) has large international committees composed of top business, legal, and private sector experts. They provide policies for the world business community on taxation, banking, international investment, sea and air transport, marketing, intellectual property, the environment and all trade and management issues. In addition they harmonize trade practices and draw up voluntary codes for business which set ethical standards.

Among the most well-known ICC products in relation to international trade practices are the International Commerce Terms (Incoterms) and the Uniform Customs and Practice for Documentary Credit (UCP). Their objective is to facilitate trade, increase the efficiency and decrease the cost of international transactions by promoting the standardization of international banking and commercial practices and procedures.

International Commerce Terms

In order to facilitate communication and trading among companies, the ICC published in 1936 a set of rules specifying contract obligations and assigning the responsibilities of buyers and sellers involved in international trade. These so-called Incoterms (International Commerce Terms) have been updated regularly since, most recently in 1990 (with 13 standardized foreign sales terms) to reflect new techniques of international trade. Incoterms are uniform sales terms used in foreign trade and are accepted by the banks as legal terminology for letter of credit transactions. They provide clear explanations as to the terms of sales and obligations of parties to a letter of credit (in terms of who does what and who pays for what).

Incoterms are the international standard used in the sales transaction and shipping documentation. As mentioned earlier, Incoterms define the seller’s and buyer’s responsibilities in relation to the transport of the goods being traded. They also explain the division of costs and risks between the parties.

Incoterms provide generally three basic pieces of information:

• Information on the Transfer of Risk - it defines at which place the risks of cargo loss and damage is transferred from the seller to the buyer during transport operations.
   
• Information on the Division of Costs - it defines how costs resulting from the transport operation are shared between the buyer and seller (i.e. cost of dispatch, carriage and delivery; customs clearance for export and import; service or assistance rendered by one party to the other; and insurance). 
   
• Information on the Documents - it defines who will provide the required documents (i.e. transport document, proof of delivery, certificate of inspection, insurance, etc.).

Incoterms are generally letters or abbreviations that are global and have a universal meaning as to responsibility of the parties, terms of sale, point of origin, and destination. These terms are very common in international trade and have to be clearly understood. When parties decide on a given Incoterm, they are implicitly agreeing to a set of obligations; these obligations need not be referred to again in the sales contract.

The Incoterms are in synchronization with the Vienna Convention, the UN law on contracts covering the international sales of goods. Since Incoterms are not law, they must be written into a sales contract in order to be bound to a contract. It should be noted that Incoterms are flexible and can be further defined to suit the mutual interest of the buyer and seller.

The buyer and seller should not only be very careful in choosing the appropriate Incoterm but also be very careful in specifying how to implement it and the necessary information which is needed. Therefore, when using a particular Incoterm, the buyer and seller must be very precise in defining:

• The geographical point to which it applies;
• Transport mode intended to be used; and
• The handling conditions at origin and destination.

The Terminology of Incoterms

Incoterms distinguish between a “shipment contract” and an “arrival contract”. In a “shipment contract”, goods are carried on the main transport mode at buyer’s risk. In an “arrival contract” goods are carried on the main transport mode at seller’s risk. The 13 terms of Incoterms (abbreviated by three English-letter acronyms) are grouped into four different classes:

Group E: Departure Term

Where the seller makes the goods available to the buyer at his premises (Ex-Works - EXW). Compared to other Incoterms, with this clause the seller has the least obligations.

Group F: Shipment Terms - Main Carriage Unpaid

Where the seller is required to deliver the goods to a carrier for shipment (FCA - Free CArrier, FAS - Free Alongside Ship, and FOB - Free On Board). These refer to shipment contracts with the shipment point named and carriage unpaid by the seller. The seller here bears neither risks nor main transport costs.

Group C: Shipment Terms - Main Carriage Paid

These refer to shipment contracts under which the seller has to incur the costs for carriage, but without assuming the risks of loss or damage to the goods or any additional costs due to incidents occurring after shipment and dispatch (CFR - Cost and FReight, CIF - Cost, Insurance, and Freight, CPT - Carriage Paid To, and CIP - Cost and Insurance Paid To). In these cases, the seller bears the main transport costs but not the risks.

Group D: Arrival Terms

These refer to arrival contracts under which the seller bears all risks and costs needed to bring the goods to the country of destination (DAF - Delivered At Frontier Arrival, and DES - Delivered Ex Ship, DEQ - Delivered Ex Quay, DDU - Delivered Duty Unpaid, DDP - Delivered Duty Paid). For the last four, the seller bears costs and risks on the main transport. DDP attributes to the seller the maximum obligation of placing the goods in the buyer’s premises after discharging from the carrying vehicle. It is the opposite of EXW.

Uniform Customs and Practices for Documentary Credits

The International Chamber of Commerce has established a set of standard (bankers’) rules and practices called the “Uniform Customs and Practices for Documentary Credits (UCP)” to govern trade transactions. The UCP describes customary practices and standard performance for letters of credit and provides a comprehensive and practical aid to bankers, lawyers, and all businesses involved in international trade. The UCP lays down a code of practice for the issuing of documentary credits. For many years most documentary credit transactions have been carried out in accordance with the Uniform Customs and Practice for Documentary Credits. Letters of credit are reviewed by all banks according to these rules, and persons dealing in letters of credit should be well-aware of them.

The objective of the new UCP is to enhance international trade and facilitate the use of letters of credit by reducing the level of discrepancies and disputes. It should be noted that not all banks in the world conform to the UCP rules.