Incoterms - ICC

International Chamber of Commerce

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We write to confirm our commitment to the use of Incoterms (International Commercial Terms) in all our international trade transactions. We recognize the importance of Incoterms as a globally recognized standard for defining responsibilities, risks, and costs associated with the delivery of goods between sellers and buyers.

Our company is dedicated to ensuring clear and transparent communication with our trade partners. Adhering to Incoterms provides a framework for smooth transactions, minimizes the potential for misunderstandings, and enhances the overall efficiency of our international operations.

We will clearly specify the applicable Incoterm within all sales contracts and related documentation. We value building strong, collaborative relationships with our clients and believe that working within the standardized Incoterms system demonstrates our professionalism and reliability.

Should you have any questions or require clarification on specific Incoterms, please do not hesitate to contact us.

What are Incoterms?

Incoterms (International Commercial Terms) are a set of standardized three-letter trade terms published by the International Chamber of Commerce (ICC). They are used in international sales contracts to clearly define the responsibilities, costs, and risks associated with the delivery of goods between a seller (exporter) and a buyer (importer).

The Goal: Incoterms provide a common language and framework in international trade. This mitigates misunderstandings due to differing interpretations of trade terms from country to country.

Why are Incoterms so important for international trade?

Clarity and Predictability:

Division of Responsibilities: Incoterms pinpoint exactly where the seller’s responsibilities end and the buyer’s begin. This covers aspects such as transportation arrangements, export/import paperwork, and insurance.

Cost allocation: They clearly determine who pays for what, including freight, insurance, loading/unloading, and customs fees.

Risk Transfer: The precise point at which the risk of loss or damage to goods transfers from seller to buyer is set, minimizing disputes.

Smoother Transactions:

Common Understanding: Both seller and buyer operate from the same playbook, leading to fewer misunderstandings and potential delays.

Streamlined Operations: The agreed-upon Incoterm guides the logistics process, including knowing who arranges documents, bears insurance costs, etc. This speeds up processes

Legal Safety:

Recognized Standard: Incoterms are recognized globally in courts and arbitration. If a dispute arises, the chosen Incoterm helps provide a legal framework for resolution.

Detailed Info: Understanding Incoterms

11 Current Incoterms: The ICC periodically updates Incoterms. The current version, Incoterms 2020, contains the following 11 terms:

Rules for any mode 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 only:

      • FAS (Free Alongside Ship)
      • FOB (Free on Board)
      • CFR (Cost and Freight)
      • CIF (Cost, Insurance, and Freight)

How to choose the right Incoterm: Factors to consider include:

    • Capabilities of buyer and seller (experience, logistical resources)
    • The relative bargaining power of each party
    • Nature of the goods (perishable, hazardous, etc.)
    • Desired level of control over various stages of the transaction
  • Regular Updates: The ICC revises Incoterms about once a decade (i.e., Incoterms 2010, Incoterms 2020). Stay updated on the latest version.
  • Specify the Edition: It’s crucial to clarify which edition of Incoterms you’re using within contracts (e.g., “DAP Rotterdam Incoterms 2020”).

     

 

Foreign Trade Banking Instruments

These are financial tools designed to facilitate secure and efficient transactions in international trade. Here are the core instruments:

Letters of Credit (L/Cs):

Perhaps the most widely used instrument, a letter of credit is a bank’s guarantee of payment to a seller (exporter) provided they meet specific conditions detailed in the LC. This reduces risk for both buyer and seller. We’ll cover LC variations next.

Documentary Collections:

The bank acts as an intermediary. The exporter ships goods and presents shipping documents to their bank. The bank forwards them to the importer’s bank, and payment is released only upon presenting those documents.

Bank Guarantees:

Issued by a bank, assuring a third party they’ll cover financial obligations if a buyer defaults on a contract. Often used as “bid bonds” or “performance guarantees” to back up commitments in tender processes.

Forfaiting:

An exporter sells their medium/long-term receivables to a “forfaiter” (financial institution) at a discount. The exporter gets immediate cash flow, while the forfaiter takes on the collection risk.

Types of Letters of Credit (Accreditations) and Their Purposes

Irrevocable LC: Once issued, cannot be amended or canceled without all parties’ consent. Provides the highest security for the seller.

Revocable LC: Can be amended or canceled by the issuing bank without the seller’s consent. Offers less security for the seller.

Confirmed LC: A second bank (usually in the seller’s country) adds its guarantee to the LC, further reducing risk for the seller.

Transferable LC: The beneficiary (seller) can transfer all or part of the LC to other suppliers, if their contract involves supply chain elements.

Back-to-Back LC: Used when an intermediary buys goods from a seller and resells to a final buyer. They get an LC in their favor based on the LC from their buyer.

Standby LC: Mostly acts as a payment guarantee. It comes into effect if the buyer/importer defaults on the original contract.

 

Key Purposes of Using These Instruments

Risk Mitigation: LCs and guarantees shift financial risk away from buyer or seller, making transactions more secure.

Payment Assurance: For exporters, they assure payment if required conditions are met. Buyers trust that goods will be shipped as intended.

Financial Flexibility: Instruments like forfaiting allow exporters to convert future receivables into immediate cash.

Competitive Advantage: Demonstrating the use of proper trade instruments enhances professionalism and credibility in international deals.

 

What is a Letter of Credit?

Essential Tool: A Letter of Credit is a written commitment issued by a bank (usually the buyer’s bank) directly to the seller (beneficiary). It guarantees that the bank will pay the seller a specified amount upon the presentation of documents that comply with the terms and conditions stipulated in the LC.

Win-Win for Buyer and Seller:
Seller (Exporter): Gets assurance of payment as long as they meet the LC’s requirements, reducing the risk of non-payment.
Buyer (Importer): Has reassurance that the goods will be shipped and the required documents will be presented before payment is made.

Key Components of a Letter of Credit

  • Applicant: The buyer who requests the opening of the LC.
  • Issuing Bank: The buyer’s bank that issues the LC, guaranteeing payment.
  • Beneficiary: The seller who will receive the payment.
  • Amount: The maximum amount payable under the LC.
  • Expiry Date: The deadline for submitting the required documents.
  • Required Documents: Typically include bill of lading, commercial invoice, packing lists, inspection certificates, insurance documents, etc.
  • Shipment Details: Dates, ports of loading/unloading, etc.

How a Letter of Credit Works (Typical Process)

  1. Agreement: Buyer and seller agree on a sale contract specifying the use of an LC.
  2. Application: Buyer applies to their bank for an LC issuance.
  3. Issuance: The buyer’s bank issues the LC to the seller’s bank.
  4. Notification: The seller’s bank informs the seller about the LC.
  5. Shipment: Seller ships the goods and prepares the required documents.
  6. Document Presentation: Seller presents the documents to their bank.
  7. Scrutiny: Seller’s bank verifies documents against the LC conditions.
  8. Payment to Seller: If documents comply, the seller’s bank pays the seller.
  9. Documents to Buyer’s Bank: Seller’s bank sends documents to the buyer’s bank.
  10. Reimbursement: Buyer’s bank reimburses the seller’s bank (or debits the buyer’s account).
  11. Goods Release: Buyer claims the goods using the documents.

Important Considerations

  • Cost: Fees are associated with issuing and confirming LCs.
  • Strict Compliance: Documents must exactly match the LC terms for payment to trigger.
  • Choice of LC Type: Irrevocable, confirmed, or other types are selected based on risk profiles and the relationship between buyer and seller.

Absolutely! Let’s break down the differences between Transferable and Non-transferable Standby Letters of Credit (SBLCs):


What is a Standby Letter of Credit (SBLC)?

A Guarantee, not Primary Payment: An SBLC functions mainly as a payment guarantee from a bank. It’s triggered only if the buyer (applicant) fails to fulfill their contractual obligations to the seller (beneficiary).

Common Uses:

Bid Bonds on tenders
Performance guarantees
Backing up financial obligations

Transferable SBLC

  • Flexibility for the Beneficiary: The original beneficiary (usually the seller) can transfer all or part of the SBLC to other parties, typically their suppliers or sub-contractors.
  • Supply Chain Benefits: If the initial seller involves other parties in fulfilling the contract, they can transfer portions of the SBLC protection down the supply chain.
  • Conditions: The original SBLC must specifically state it’s transferable. Terms will dictate how many times it can be transferred and any partial transfer limits.

Non-Transferable SBLC

  • Standard Type: Most SBLCs are non-transferable by default. The guarantee is tied solely to the original beneficiary.
  • Direct Protection: The issuing bank only assumes the obligation to pay the named beneficiary upon default by the applicant.
  • No Further Assignments: The beneficiary cannot transfer their rights or any proceeds from the SBLC to any other party.

Which is Better?

The choice depends heavily on the specific scenario:

  • Simple Contract: Where the main seller directly fulfills the entire obligation, a non-transferable SBLC is likely fine.
  • Complex Supply Chain: In scenarios where supply chain elements introduce multiple suppliers, a transferable SBLC allows greater flexibility in assuring payment in case of issues along the chain.

Important Notes

  • Clear Specification: The term “transferable” or “non-transferable” needs to be explicitly included in the SBLC wording.
  • Increased Cost: Transferable SBLCs may carry a slightly higher cost, as banks assume potentially more complex risks.
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