Unit 9. Terms of delivery and payment

 

Pay what you owe and what you’re worth you’ll know.

Proverb

Start up. Think and discuss the following questions.

1. What are the most common ways of transportation of goods?

2. What factors determine the choice of the delivery terms?

3. What factors determine the choice of the payment terms?

4. What is usually guaranteed in the delivery of goods?

5. What problems can emerge while delivering the goods?

 

 

Information to study

After completion items get sent from the factory to the warehouse where they are stored before selling and delivering to the client. The transaction of sale is performed with the corresponding contract of sale which stipulates apart from the object of the agreement (the goods) the price and the terms of payment, the terms of delivery, packing and insurance. Payment in foreign trade may be made in cash and on credit. There are different methods of cash payment:

1. By cheque (but it is not practicable as a cheque is payable in the country of origin and its' use is tune-wasting to say the least. That's why cheques are mostly used for payment in home trade).

2. By telegraphic or telex transfers or post (mail) remittance which is made from the Buyers' bank account to the Sellers' in accordance with the Buyers' letter of instruction. Actually this method of cash payment may sometimes take several months, which is naturally very disadvantageous to the Sellers. The transfer is carried out at current rates of exchange.

3. By letter of credit (or just by credit) – L/C – (In our commercial practice the following types of letters of credit are usually used: irrevocable, confirmed and revolving. An irrevocable L/C is one which can neither be modified nor cancelled without the consent of the party in whose favour it has been opened. A confirmed L/C is an irrevocable L/C, payment under which is guaranteed by a first class bank in case the opener of the L/C (i.e. the Buyers) or the bank effecting payment defaults, or is unable to make payment. A revolving L/C is one under which its value is constantly made up to a given limit after payment for each shipment, which saves the charges on multiple letters of credit).

The Letter of Credit is the most frequently used method of cash payment because it is advantageous and secure both to the Exporter and to the Importer though it is more expensive than payment by transfer. It overcomes the gap between delivery and payment and gives protection to the Sellers by making the money available for them on the fulfilment of the transaction and to the Buyers because they know that payment will only be made against shipping documents ' giving them the title for the goods. This method of payment is often used in dealings with developing countries.

4. For collection (Payment for collection does not give any advantages to the Exporter because it does not give any guarantee that he will receive payment in time or at all. That's why the Exporter usually requires that the Importer presents a guarantee of a first class bank that payment will be effected in due time. Also, there is a long period of time between the delivery of the goods and actual payment. But it is advantageous to the Importer because there is no need to withdraw from circulation big sums of money before actually receiving the goods).

Payment for collection against documents (with subsequent acceptance or very often telegraphic collection with subsequent acceptance) is mostly used in trade with East European countries. The costs involved in effecting payment for collection are twice or three times lower than those by letter of credit. Most modern business is done on a credit basis which may be:

1) by drafts (by Bills of Exchange – B/E) – the Exporter credits the Importer which is advantageous to the latter. A draft (a bill of exchange) is an order in writing from a Creditor to a Debtor to pay on demand or on a named date a certain sum of money to a company named on the Bill, or to their order. It is drawn by the Sellers on the Buyers and is sent through a bank to the Buyers for acceptance (i.e. for acknowledging the debt). The draft becomes legally binding when signed and dated by the Buyers on its face (front) and is to be met when due, i.e. 30, 60 or 90 days after presentation. The draft, may be negotiable, i.e. it may be used by the Sellers to pay their own debts, but in this case the Sellers are to endorse it by signing it on its back, then they can pass it on to the new holders. If the exporter wants immediate payment, he can discount the draft in return for a cash advance with a bank for a commission, i.e. sell it to a bank for its face value less interest, and by supplying a document (a letter of hypothecation) giving the bank the legal right to claim the foods if necessary. Besides, he may leave it with a bank as security for i loan. All this makes the Draft a very practical method of payment in foreign trade. To sum up its advantages one should say that it simplifies the financing of export and import foreign trade and cuts down innumerable movements of currency. There may be two main types of drafts:

- sights drafts, which are payable on presentation (at sight) or on acceptance;

- term drafts, which are drawn at various periods (terms) and are payable at a future date and not immediately they are accepted. Term drafts may pass through several hands before maturity and require endorsement by the Sellers;

2) in advance (the Importer credits the Exporter, for example, the contract may stipulate a 10 or 15 % advance payment, which is advantageous to the Sellers). This method is used when the Buyers are unknown to the Sellers or in the case of a single isolated transaction or as part of combination of methods in a large-scale (transaction) contract;

3) on an open account. Open account terms are usually granted by the Sellers to the' regular Buyers' or customers in whom the Sellers have complete confidence, but sometimes they are granted when the Sellers want to attract new Buyers then they risk their money for that end. Actual payment is made monthly, quarterly or annually as agreed upon. This method Is disadvantageous to the Exporter, but may be good to gain new markets.

The two methods of payment (in cash and on credit) are very often combined in a contract. Drafts, for example, may be presented under a letter of credit and there may be other, sometimes very complicated combinations of various methods of payment stipulated in a contract.

The form of payment to be used, i.e. in dollars, pounds sterling or other currency, is a matter for arrangement, between the counterparts.

As for the terms of delivery the most frequently used ones are CIF and FOB.

A c.i.f. price includes the cost of the goods, insurance and freight which an f.o.b. price does not, that means the latter must be lower than the former price since it only includes the value of the goods, transportation and other expenses until the goods are on board vessel. On fob and cif terms the sellers bear the risk of actidendal loss of or damage to the goods until the goods pass the ship's rail.

Other terms of delivery that may be used in foreign trade are:

1) EXW – free on works (ex works, ex mill, ex factory), which means delivery of the goods from the factory gates of the Sellers, with all charges thereafter to be paid by the Buyers and the risk of accidental damage to or loss of the goods to be borne by them. Similar terms are ex mine – free on mine and free on plantation. Also ex warehouse – free on Sellers' warehouse. The above terms are applied in our foreign trade practice very seldom.

2) FOR – free on rail (FOC – free on car, FOT – free on truck), which means that the Sellers pay all charges up to and including the placing of the goods on a railway train (in cars or on trucks). The risk of accidental damage to or loss of the goods passes when the goods have been entrusted to the carrier.

3) FAS – free alongside ship, which means that the Sellers pay for all i the charges up to and including the placing of the goods alongside ship (on the quay where the ship is docked), but does not pay for loading. The risk passes when the goods have been effectively placed alongside the vessel in the named port of shipment.

4) CAP – cost and freight (C& F), which means that the Sellers undertake to pay for the cost of transport of the goods to a specified destination having allowed for this in their sales price. The risk passes when the goods have crossed the ship's rail at the port of loading. If the goods are carried by liners, the Sellers have to unload them at the port of destination for their account. If not by liners, the counterparts may agree to this effect, then it is indicated "C& F landed"

5) Ex ship with port of destination indicated, which means that the Sellers pay for all charges up to and including the placing of the goods at the disposal of the Buyers on board the vessel at the port of destination. The risk passes accordingly.

6) Ex quay with port of destination indicated, which means that as compared with the previous terms, the Sellers pay for unloading the goods and the risk does not pass until the goods are placed on the quay in the port of destination.

7) In the revised Incoterms, 1980 some new clauses have been introduced: "Free carrier (named point)". The clause has been designed with regard being given to modern forms of carriage, such as multimodal transports with containers, or roll-on, roll-off traffic with trailers. The new. clause is based on the same principles as the old FOB clause, but there is an important distinction in that the ' risk passes from the Sellers to the Buyers at the place where the goods have 'been delivered to the contracting carrier.

The choice of the terms of delivery and the terms of payment as a rule remains with the Buyers, so they can insist, while negotiating a contract.

 

Answer the questions.

1. What methods of cash payment can you name?

2. Why is payment by cheque very frequent foreign trade?

3. Is payment by transfer used in foreign trade?

4. What types of letter of credit are used in commercial practice?

5. When are payment for collection terms used?

6. What are the methods of payment on credit?

7. What is a draft?

8. What are the types of drafts?

9. In what cases is advanced payment used?

10. When is payment on an open account practical?

11. What are the most frequently used terms of delivery?

12. Who bears responsibility for the goods in transit on CIF and FOB terms?

13. What are other terms of delivery that can be used in trade? Describe them.

15. Which counterpart does the choice of the terms of delivery remain with?