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Chapter 5 Trade Terms and Price

Chapter 5 Trade Terms and Price. Aims and Requirements 5.1 Trade Terms 5.2 Pricing and Quotation. Aims and Requirements. Aims: To grasp trade terms in INCOTERMS 2000; To analyze trade cases by grasping trade terms. Teaching Methods:

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Chapter 5 Trade Terms and Price

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  1. Chapter 5 Trade Terms and Price • Aims and Requirements • 5.1 Trade Terms • 5.2 Pricing and Quotation

  2. Aims and Requirements Aims: To grasp trade terms in INCOTERMS 2000; To analyze trade cases by grasping trade terms. Teaching Methods: Discussion, Case Study, Team Study, English Teaching Key Points: INCOTERMS 2000, FOB, CIF, CFR, Price Calculation and Quotation

  3. 5.1 Trade Terms  5.1.1 Role of International Trade Terms 5.1.2 International Trade Conventions  5.1.3 Six Main International Trade Terms in INCOTERMS 2000 5.1.4 Brief Introduction to the Rest 7 Terms 5.1.5 The Choice of Trade Terms

  4. 5.1.1 Role of International Trade Terms • In international trade practice, the Buyers and the sellers take their own rights and obligations, and in their long way transactions, they need to find the exact point at which the risks, responsibilities and expenses are transferred from the seller to the buyer. • Trade Terms (Price Terms/Delivery Terms) are an important component of a unit price in international trade, which have the important function of naming the exact point at which the ownership of the merchandise is transferred from the seller to the buyer. They can greatly simplify the contract negotiations, and thus saves time and cost.

  5. 5.1.2 International Trade Conventions • Warsaw-Oxford Rules 1932 -- W.O. 1932 -- Set down by International Law Association, interpreted uniform rules of CIF contract. • Revised American Foreign Trade Definitions 1941 -- Set down by U.S Chamber of Commerce, which interpreted six trade terms: Ex Point of Origin, FOB, FAS, CFR, CIF and Ex Dock -- When dealing with the Inter-American countries should pay special attention!

  6. INCOTERMS 2000 -- International Rules for the Interpretation of Trade Terms -- Established by International Chamber of Commerce in1936, were revised in 1953, 1982, 1990 and the full and authoritative definition of each trade term was published in 2000.

  7. In this convention, the terms were grouped in four basically different categories: • Group E: Only makes the goods available to the buyer at the seller’s own premises. • Group F: The seller is called upon to deliver the goods to a carrier appointed by the buyer. • Group C: The seller has to contract for carriage on usual terms at his own expense, but without assuming the risk of loss of or damage to the goods or additional costs due to events occurring after shipment and dispatch. • Group D: The seller has to bear all costs and risks needed to bring the goods to the place of destination. To the exporter, the liability and responsibility is creasing from E to D, vice versa to the importer.

  8. INCOTERMS 2000

  9. 5.1.3 Six Main International Trade Terms in INCOTERMS 2000 • Free on Board FOB named port of shipment • Free Carrier FCA named place • Cost and Freight CFR named port of destination • Carriage Paid To CPT named place of destination • Cost, Insurance, and Freight CFR named port of destination • Carriage and Insurance Paid To CIP named place of destination Traditional Term New Term

  10. FOB: Free On Board (… named port of shipment) -- FOB means that the seller delivers when the goods pass the ship’s rail at the named port of shipment and the buyer has to bear all costs and risks of loss of or damage to the goods from that point.

  11. Risk: pass the ship’s rail Seller Buyer Delivery on board Bysea Port of Destination Port of Shipment Exportformalities and duties Shipment, freight, insurance and import formalities Works FOB

  12. The seller’s obligations: • The seller must deliver the goods on the date or within the agreed period at the named port of shipment and in the manner customary at the port on board the vessel nominated by the buyer and give the buyer sufficient notice. • The seller must provide the goods and the commercial invoice, or its equivalent electronic message, in conformity with the contract of sale and any other evidence of conformity which may required by the contract. • The seller must obtain at his own risk and expense any export licenses or other official authorization and carry out, where applicable, all customs formalities necessary for the export of the goods. • The seller must bear all risks of loss of or damage and costs relating to the goods until such time as they have passed the ship’s rail at the named port of shipment.

  13. The buyer’s obligations: • The buyer must take delivery of the goods when they have been delivered and pay the price as provided in the contract of sale. • The buyer must contract at his own expense for the carriage and insurance of the goods from the named port of shipment and give the seller sufficient notice of the vessel name, loading point and required delivery time. • The buyer must bear all risks of loss or damage and costs relating to the goods from the time they have passed the ship’s rail at the named port of shipment. • The buyer must obtain at his own risk and expense any import license or other official authorization and carry out all customs formalities for the import of the goods and where necessary, for their transit through any country. • The buyer must pay the costs of any pre-shipment inspection except when such inspection is mandated by the authorities of the country of export.

  14. Points for Attention in Using FOB Term • Point of division of risks：“Pass the ship’s rail” • Notice in time • Variants of FOB-- Who bears the loading expenses: • FOB Liner Terms (FOB 班轮条件） • FOB Under Tackle (FOB吊钩下交货） • FOB Stowed (FOB含理舱费） • FOB Trimmed (FOB含平舱费） • FOB in “Revised American Foreign Trade Definitions 1941”: • FOB Vessel • Transfer of risks is “on board” not “pass the ship’s rail” in 1941. • The costs of customs formalities necessary for export as well as all duties , taxes and other charges payable upon export should be borne by the buyer in 1941.

  15. Case Study 1 • Company A signed a sales contract with a foreign buyer for exporting Tea Sets, under FOB term. At the buyer’s request, the seller agreed to charter a vessel at buyer’s account. When the date of shipment became due, the seller was still unable to get a vessel for shipment. The buyer not only disagreed to modify the date of shipment, but also cancelled the contract and claimed for loss, because the seller failed to effect shipment within the time stipulated in the contract. • Is the seller responsible for failure to effect shipment for his inability to charter a ship?

  16. Case Study 2 • On FOB term basis, Seller A prepared the goods at the stipulated time, meanwhile , Buyer B informed A of the name of vessel and the date of shipment ,when the goods is lifted to the ship, it fell down on the deck ,so now who shall take responsibility? Seller or Buyer?

  17. CIF: Cost, Insurance and Freight (... named port of destination) -- CIF means that the seller delivers when the goods pass the ship’s rail at the port of shipment. -- The seller must pay the cost and freight necessary to bring the goods to the named port of destination BUT the risk of loss or damage to the goods, as well as any additional costs occurring after the time of delivery, are transferred from the seller to the buyer. However, in CIF the seller also has to procure marine insurance.

  18. Risk: pass the ship’s rail The seller pay for the carriage and insurance Seller Buyer Delivery on board Bysea Port of Destination Port of Shipment Import formalities and duties Undertake shipment responsibility, insurance and exportformalities and duties Works CIF

  19. The seller’s obligations（1）: • The seller must provide the goods, the commercial invoice, or its equivalent electronic message, and other documentation as required by the contract. • The seller must obtain at his own risk and expense any export licenses or other official authorization and carry out, where applicable, all customs formalities necessary for the export of the goods. • The seller must contract on usual terms at his own expense for the carriage by sea or inland waterway and cargo insurance for 110 percent of the value of the contract to the named port of destination. The seller must provide the buyer with the insurance policy or other evidence of insurance cover which allow the buyer could make claim directly from the insurer. • The seller must deliver the goods on board the vessel at the port of shipment on the date or within the agreed period and give the buyer sufficient notice.

  20. The seller’s obligations（2）: • The seller must pay all costs of carriage and insurance until the goods have been delivered to the named port of shipment and passed over the ship’s rail, plus costs of loading, carriage to the port of destination and normal unloading. The seller also pays all costs relating to export including duties, taxes and customs formalities. • The seller must provide the buyer without delay with the usual transport document that will enable the buyer to claim the goods from the carrier at the port of destination and unless otherwise agreed) enables the buyer to sell the goods in transit by the transfer of the document to a subsequent buyer( the negotiable bill of lading) or by notification to the carrier. • The seller must pay the costs of those checking operations which are necessary for the purpose of delivering the goods . The seller must provide at his own expense packaging (unless it is usual for the particular trade to ship the goods of the contract description unpacked) which is required for the transport of the goods. Packaging is to be marked appropriately.

  21. The buyer’s obligations: • The buyer must take delivery of the goods when they have been delivered and pay the price as provided in the contract of sale. • The buyer must obtain at his own risk and expense any import license or other official authorization and carry out , where applicable, all customs formalities necessary for the import of the goods and for their transit through any country. • The buyer must bear all risks of loss of or damage to the goods from the time they have passed the ship’s rail at the port of shipment. • The buyer must pay all supplemental costs for the goods once they have passed over the ship’s rail at the port of shipment, including unloading, lighterage and wharfage at the port of destination and pays all costs relating to import formalities including duties, taxes and other charges including transshipment. • The buyer must accept the transport document and pay all the costs of any pre-shipment inspection except when such inspection is mandated by the authorities of the country of export.

  22. The Characteristics of CIF Term • Cost and risk points separated and CIF contract is “Shipment Contract” • Carriage and Insurance • Variants of CIF -- Who bears the discharging charges: • CIF Liner Terms (CIF 班轮条件) • CIF ex Ship’s hold (CIF 舱底交货) • CIF ex tackle (CIF 吊钩交货) • CIF Landed (CIF 卸到岸上) • Symbolic Delivery c.f. Physical Delivery

  23. Case Study 3 • A firm imported a shipment of bed sheets under CIF term. On receiving the goods, the importer found that some of bed sheets were damp during transport. Meanwhile, the seller had negotiated documents, and the importer was requested to make payment for the imports. Whether the buyer should make payment, if the goods are damaged during transport?

  24. Case Study 4 • A Chinese import and export company concluded a Sale Contract with a German firm on October 5, 2006, selling a batch of certain commodity. The contract was based on CIF Hamburg at USD 2500 per metric ton; The Chinese company delivered the goods in compliance with the contract and obtained a clean on board B/L. During transportation, however, 100 metric tons of the goods got lost because of rough sea. Upon arrival of the goods, the price of the contracted goods went down quickly. The buyer refused to take delivery of the goods and effect payment and claimed damages from the seller. • Question: (1) Is the buyer’s refusal reasonable? Why? (2)How should the buyer to deal with the loss?

  25. Case Study 5 • 有一批货物以 CIF 伦敦价格条件出口，由卖方投保一切险及战争险加罢工险。船未到伦敦前，船方获悉伦敦港正在罢工，不能靠岸卸货，乃将应卸伦敦货物卸至下一个港口。后来伦敦罢工结束，货物又从该港运往伦敦，增加运费 2200 英镑，这笔费用由谁负责？并说明理由。

  26. CFR: Cost and Freight (... named port of destination) -- CFR means that the seller delivers when the goods pass the ship’s rail at the port of shipment. The seller must pay the cost and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods , as well as any additional costs due to events occurring after the time of delivery , are transferred from the seller to the buyer.

  27. Risk: pass the ship’s rail The seller pay for the carriage Seller Buyer Delivery on board Bysea Port of Destination Port of Shipment Insurance, import formalities and duties Undertake shipment responsibility and exportformalities and duties Works CFR

  28. The seller’s obligations: • The same as CIF except that the seller do not need to pay all costs of insurance when the goods passed over the ship’s rail and also do not need to deliver the insurance documents to the buyer. The buyer’s obligations: • The buyer mustpay all costs of insurance when the goods passed over the ship’s rail. • Other obligations are the same as CIF buyers’.

  29. Points for Attention in Using CFR Term • It is emphasized that under CFR term the seller must provide the buyer with sufficient notice on shipment of goods, so that the buyer is able to arrange insurance in time. • Variants of CFR – Only limited to the loading and unloading charges, which make no deference to other liability and responsibility under CFR term: • CFR Liner Terms (CFR 班轮条件) • CFR ex Ship’s hold (CFR 舱底交货) • CFR ex tackle (CFR 吊钩交货) • CFR Landed (CFR 卸到岸上)

  30. Case Study 6 • A merchant in South America placed an order with a Chinese export company for a certain commodity on CFR Asuncion terms .With a view to develop new markets, the export company immediately made an offer abroad on the basis of CFR Asuncion, and the transaction was soon concluded. When shipping the goods, however, this company came to realize that Asuncion is an inland city. As was the case, if the company had the goods transported to Asuncion, it had to , first of all, have the goods transported by sea to a seaport in Argentina or some other South American neighboring country. After that, the goods might be transport to Asuncion through river transportation or inland transportation. As a result, this company had to pay a considerable sum of freight charges. What can we learn from this case?

  31. Case Study 7 • 1993年，美国出口商 A 与韩国进口商 B 签订了一份 CFR 合同，规定 A 出售 1000公吨小麦给 B。小麦在装运港装船时是混装的，当时在 A 装运的 3000吨散装 （in bulk）小麦中，有 1000吨是卖给 B 的，货物运抵目的港后，将由船公司负责分拨 1000公吨给 B。但受载船只在途中遇到高温天气而使小麦发生变质，而使该批货物损失 1200吨，其余 1800吨安全运抵目的港。但 A 在货到目的港时声称，出售给 B 的 1000 吨小麦已在运输途中全部损失，并且认为按 CFR 合同，A 对此项风险不负任何责任。买方则要求卖方履行合同，双方争执不下，遂根据合同中的仲裁条款请求仲裁解决。仲裁机构经过取证，最后裁决卖方不应推卸自己交货的责任，对货物在途中发生的损失不能转嫁给买方。

  32. FCA: Free Carrier (... named place) -- FCA means that the seller delivers the goods , cleared for export, to the carrier nominated by the buyer at the named place. -- If the buyer nominates a person other than a carrier to receive the goods , the seller is deemed to have fulfilled his obligation to deliver the goods when they are delivered to that person.

  33. Points for Attention 1. The Definition of “Carrier” “Carrier” means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail , road, air, sea, inland waterway or by a combination of such modes. If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier. 2. Chosen Place of Delivery • If delivery occurs at the seller’s premises, the seller is responsible for loading. • If delivery occurs at any other places, the seller is not responsible for unloading. Usually, the seller has right to choose the place of delivery. 3. Division Point of Risks: Delivered to the Carrier

  34. CPT: Carriage Paid To (... named place of destination) -- CPT means that the seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This means that the buyer bears all risks and any other costs occurring after the goods have been so delivered. The CPT term requires the seller to clear the goods for export. This term may be used irrespective of the mode of transport including multi-modal transport.

  35. CIP：Carriage and Insurance Paid to (... named place of destination) -- CIP means that the seller delivers the goods to the carrier nominated by him but the seller must in addition pay the costs of carriage necessary to bring the goods to the named destination. This means that the buyer bears all risks and any additional costs occurring after the goods have been so delivered. However, in CIP the seller also has to procure insurance against the buyer’s risk of loss of or damage to the goods during the carriage.

  36. Comparison of These Six Trade Terms • Similarity: Shipment contract • Deference:

  37. 5.1.4 Brief Introduction to the Rest 7 Terms • EXW: EX Works (... named place) --This term means that the seller delivers when he places the goods at the disposal of the buyer at the seller’s premises or another named place (i. e . Works, factory, warehouse, etc.) not cleared for export and not loaded on any collecting vehicle. -- This term thus represents the minimum obligation for the seller, and the buyer has to bear all costs and risks involved in taking the goods from the seller’s premises. -- The exporter always supply common export packing or no packing. This term should not be used when the buyer cannot carry out the export formalities directly or indirectly.

  38. FAS: Free Alongside Ship(...named port of shipment) --This term means that the seller delivers when the goods are placed alongside the vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment. The FAS term requires the seller to clear the goods for export. -- FAS in 1941: Free alongside inland carrier “Alongside the vessel” means: Place where the cargoes can come into contact with the hook.

  39. DAF：Delivered at Frontier (... named place) --This term means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport at the named point and place at the frontier, but before the customs border of the adjoining country. -- The term “frontier” may be used for any frontier including that of the country of export. Therefore, it is of vital importance that the frontier in question be defined precisely by always naming the point and place in the term.

  40. DES: Delivered Ex Ship(... named port of destination) --This term means that the seller delivers when the goods are placed at the disposal of the buyer on board the ship not cleared for import at the named port of destination. The seller has to bear all the costs and risks involved in bringing the goods to the named port of destination before discharging. -- This term can be used only when the goods are to be delivered by sea or inland waterway or multi-modal transport on a vessel in the port of destination.

  41. -- DES (Real Arrival Price) c.f. CIF

  42. DEQ: Delivered Ex Quay(... named port of destination) --This term means that the seller delivers when the goods are placed at the disposal of the buyer not cleared for import on the quay at the named port of destination. The seller has to bear costs and risks involved in bringing the goods to the named port of destination and discharging the goods on the quay. -- The DEQ term requires the buyer to clear the goods for import and to pay for all formalities, duties , taxes and other charges upon import.

  43. DDU: Delivered Duty Unpaid(... named place of destination) -- This term means that the seller delivers the goods to the buyer, not cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller has to bear the costs and risks involved in bringing the goods thereto, other than, where applicable, any “duty”“which term includes the responsibility for and the risks of the carrying out of customs formalities, and the payment of formalities, customs duties, taxes and other charges) for import in the country of destination. Such “duty” has to be borne by the buyer as well as any costs and risks caused by his failure to clear the goods for import in time.

  44. DDP: Delivered Duty Paid(... named place of destination) -- This term means that the seller delivers when the seller delivers the goods to the buyer , cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller has to bear all the costs and risks involved in bringing the goods thereto including , where applicable, any “duty” (which term includes the responsibility for and the risks of the carrying out of customs formalities and the payment of formalities , customs duties, taxes and other charges) for import in the country of destination. -- While the EXW term represents the minimum obligation for the seller, DDP represents the maximum obligation. -- This term should not be used if the seller is unable directly or indirectly to obtain the import license.

  45. Case Study 8 • Company B in Shantou signed a contract with Company A in Hong Kong selling 3,000 dozen of nylon upper garments，US$ 15/dozen EXW Shantou. On June 10, Company A’s representative went to the manufacturer in Shantou (party C) for inspection. After going through acceptance inspection, the goods were packed and marked under the supervision of the representative. On June 12, company B received US$ 45,000 remitted by company A and delivered the documents to the representative who wished to temporarily deposit the goods in party C’s warehouse before he contacted some shipping agent in Shantou for container chartering and export clearance. Company B communicated this to party C who said the goods had been stored separately for delivery at any time. In June 14, party C caught fire and the premises and materials were consumed. Who bears this damage?

  46. 5.1.5 The Choice of Trade Terms • Export: CIF or CFR • Import: FOB • Inland Areas: FCA/CIP/CPT

  47. Selected Trade Terms FCACPT CIP FOBCFR CIF EXW FAS Origin(Factory, Mine, Plantation, Warehouse) Vessel Inland Carrier CY CFS Dock at Port of Shipment Export Country

  48. SelectedTradeTerms DAF DAF DEQ DDP DES DDU Vessel Destination DockatPortofDestination InlandCarrier Import Country Frontier

  49. 5.2 Pricing and Quotation  5.2.1 Ways to Stipulate Price  5.2.2 Price Clause  5.2.3 Commission and Discount  5.2.4 Price Calculation

  50. 5.2.1 Ways to Stipulate Price • Fixed price e.g. “ No price increase shall be allowed after conclusion of this contract.” “No price adjustment shall be allowed after conclusion of this contract.” • Without Fixed Price For the Moment • Provisional price e.g. HK$5000 per bale(400 lbs.) CIF Hong Kong Remarks: The above is a provisional price, which shall be determined through negotiation between the buyer and the seller 15 days before the month of shipment. • Adjustable price

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