UNIVERSITY OF FINANCE – MARKETING

LECTURE

Subject: INTERNATIONAL COMMERCIAL TRANSACTIONS

Subject code: BGC - 01 - 07

Lecturer: NONG THI NHU MAI

Faculty: COMMERCE

Ho Chi Minh City - 2018

1
 UNIVERSITY OF FINANCE – MARKETING

LECTURE

Subject: INTERNATIONAL COMMERCIAL TRANSACTIONS

Subject code: BGC - 01 - 07

Lecturer: NONG THI NHU MAI

Ho Chi Minh City - 2018

2
 TABLE OF CONTENTS
Page
Cover page
List of abbreviation
List of boxes
List of figures
List of tables
List of charts
INTRODUCTION...................................................................................................................... 15
CHAPTER 1: INTRODUCTION TO INTERNATIONAL COMMERCIAL
TRANSACTIONS ...................................................................................................................... 17
1.1. International Commercial Transactions: Concepts and roles .................................... 17
1.1.1 Concepts: .......................................................................................................................... 17
1.1.2 Roles: ................................................................................................................................ 17
1.2. Main factors influencing International Commercial Transactions. ............................... 18
1.3 Functions of International Commercial Transactions ...................................................... 19
1.4. The governing laws for International Commercial Transactions. .................................. 20
1.4.1 International laws ............................................................................................................. 20
1.4.2 National laws .................................................................................................................... 21
CHAPTER 2: ESSENTIAL TYPES OF INTERNATIONAL COMMERCIAL
TRANSACTIONS ...................................................................................................................... 25
2.1. Direct transactions: ............................................................................................................. 25
2.1.1. Concepts. ......................................................................................................................... 25
2.1.1.1 Exports. ...................................................................................................................... 25
2.1.1.2 Imports. ...................................................................................................................... 25
2.1.1.3 Temporary Import for re – export. ............................................................................. 26
2.1.1.4 Temporary Export for re- import. .............................................................................. 26
2.1.1.5 Cross – Border Transshipment (Transfer of goods through border-gates) ............... 26
2.1.2. Current regulations of Vietnam in ordinary international sales. ..................................... 27
2.1.3. Characteristics of direct transactions. .............................................................................. 27
2.1.4. Pros and cons of direct transactions. ............................................................................... 28
2.2. Purchase of international goods through intermediaries ................................................ 29
2.2.1 Concepts ........................................................................................................................... 29
2.2.2 Types of purchase of international goods through intermediaries ................................... 29
2.2.3 Pros and cons of purchase of international goods through intermediaries ....................... 33
2.2.4 Current regulations of Vietnam in Purchase of international goods through intermediaries
................................................................................................................................................... 33
2.3 Counter Trade. ..................................................................................................................... 34
2.3.1 Concepts ........................................................................................................................... 34
2.3.2 Characteristics of countertrade. ........................................................................................ 34
2.3.3 Types of countertrade. ...................................................................................................... 35
2.3.4 Pros and cons of countertrade. .......................................................................................... 36
2.3.5 Measures to ensure the implementation of countertrade .................................................. 37
2.4 Processing of international commodities. .......................................................................... 38
2.4.1 Concept. ............................................................................................................................ 38
3
 2.4.2. Some current regulations of Vietnam on international processing. ................................. 39
2.4.3. Characteristics of international commodities processing. ............................................... 40
2.4.4. The main forms of international processing. ................................................................... 40
2.4.5. Pros and cons of international processing: ...................................................................... 41
2.5. International auction transactions .................................................................................... 42
2.5.1. Concept. ........................................................................................................................... 42
2.5.2. Some provisions of Vietnam on auctions. ....................................................................... 42
2.5.3. The types of international auction. .................................................................................. 49
2.5.4 Procedures of an auction................................................................................................... 49
2.6. International bidding .......................................................................................................... 50
2.6.1. Concept ............................................................................................................................ 50
2.6.2. Some provisions of Vietnam for international bidding. .................................................. 51
2.6.3. Types of international bidding. ........................................................................................ 55
2.7. Trading at international fairs and exhibitions ................................................................. 55
2.7.1. Concept ............................................................................................................................ 55
2.7.2. Some current regulations of Vietnam on trade in international fairs and exhibitions ..... 55
2.7.3. Forms of international fairs and exhibitions. ................................................................... 59
2.7.3.1 In terms of periodicity ................................................................................................ 59
2.7.3.2 In terms of industry .................................................................................................... 59
2.7.3.3 In terms of scope ........................................................................................................ 60
2.7.4. Procedure of joining international fairs and exhibitions ................................................. 60
2.8. Trading in Commodity Exchanges .................................................................................... 60
2.8.1. Concept. ........................................................................................................................... 60
2.8.2. Some current regulations of Vietnam for trading on an exchange of goods. .................. 61
CHAPTER 3: INTERNATIONAL COMMERCIAL TERMS (INCOTERMS).................. 66
3.1. Introduction to Incoterms. ................................................................................................. 66
3.1.1 Purpose of the Incoterms. ................................................................................................. 66
3.1.2. Some definitions or terms used in Incoterms .................................................................. 67
3.1.3 Development of Incoterms. .............................................................................................. 68
3.1.4. Structure of Incoterms 2010. ........................................................................................... 69
3.1.4.1 Classification of Incoterms 2010 ............................................................................... 69
3.1.4.2 Format of Incoterms 2010 .......................................................................................... 70
3.2. Contents of Incoterms 2010................................................................................................ 71
3.2.1 Four categories of Incoterms rules ................................................................................... 71
3.2.2 Contents of the 11 Incoterms rules ................................................................................... 72
3.3. Notes on use of Incoterms................................................................................................... 83
3.4. Some international trade practice variations from Incoterms. ...................................... 84
3.4.1 Additions to EXW ............................................................................................................ 84
3.4.2. Additions to FOB............................................................................................................. 85
3.4.3. Additions to FCA............................................................................................................. 85
3.4.4 Additions to the C-terms................................................................................................... 85
CHAPTER 4: THE INTERNATIONAL SALES CONTRACT ............................................ 89
4.1. An overview of contracts. ................................................................................................... 89
4.1.1. Concepts and features of a contract. ................................................................................ 89
4.1.2. Conditions of a valid contract. ......................................................................................... 90
4.1.3. Classifications of contracts. ............................................................................................. 92
4.1.3.1 In terms of period of time: .......................................................................................... 92
4.1.3.2 In terms of business relations in international sale of goods contracts ..................... 92
4
 4.1.3.3 In terms of form of contracts ...................................................................................... 93
4.1.4. Structure of a contract...................................................................................................... 93
4.2 Terms and conditions of the international commercial sale of goods contracts: ........... 94
4.2.1. Goods. .......................................................................................................................... 94
4.2.2 Delivery. ...................................................................................................................... 101
4.2.3. Prices .......................................................................................................................... 104
4.2.4. Payment. ..................................................................................................................... 106
4.2.6. Warranty..................................................................................................................... 108
4.2.7 Insurance. .................................................................................................................... 109
4.2.8 Penalties. ..................................................................................................................... 109
4.2.9 Force majeure. ............................................................................................................ 110
4.2.10 Claim ......................................................................................................................... 110
4.2.11 Arbitration. ................................................................................................................ 111
4.3. Some contract samples ..................................................................................................... 111
4.3.1 Purchase contract of rice................................................................................................. 111
4.3.2 Purchase contract of fertilizer ......................................................................................... 119
CHAPTER 5: INTERNATIONAL SETTLEMENTS .......................................................... 128
5.1 International Payment Instruments ................................................................................. 128
5.1.1 Drafts .............................................................................................................................. 128
5.1.1.1 Definition.................................................................................................................. 128
5.1.1.2 Features to a bill of exchange .................................................................................. 129
5.1.1.3 Legal bases ............................................................................................................... 129
5.1.1.4 Parties to a bill of exchange: ................................................................................... 130
5.1.1.5 Regulations on drawing Bills of exchange ............................................................... 132
5.1.1.6 Circulation of Bills of exchange ............................................................................... 136
5.1.1.7 Operations related to bills of exchange ................................................................... 138
5.1.2 Cheques .......................................................................................................................... 144
5.1.2.1 Definition.................................................................................................................. 144
5.1.2.2 Legal bases ............................................................................................................... 144
5.1.2.3 Parties to a cheque:.................................................................................................. 145
5.1.2.4 Requirements for the content and form of cheques .................................................. 145
5.1.2.5 Issuance conditions and validity time of cheques. ................................................... 148
5.1.2.8 Types of cheques: ..................................................................................................... 152
5.1.3 Promissory notes............................................................................................................. 155
5.1.3.1 Definition.................................................................................................................. 155
5.1.3.2 Parties to a promissory note: ................................................................................... 155
5.1.3.3 Requirements for the content and form of promissory notes ................................... 155
5.1.3.4 Circulation of Promissory notes .............................................................................. 156
5.1.4 Payment cards ................................................................................................................. 157
5.1.4.1 Definition.................................................................................................................. 157
5.1.4.3 Procedure of issue and basic payment ..................................................................... 158
5.2 International Payment methods ....................................................................................... 160
5.2.1 Remittance ...................................................................................................................... 160
5.2.1.1 Definition: ................................................................................................................ 160
5.2.1.2 Forms of remittance: ................................................................................................ 160
5.2.1.3 Payment process ....................................................................................................... 161
5.2.1.4 Strengths and drawbacks of remittance and scope of use........................................ 162
5.2.2 Open account .................................................................................................................. 163
5.2.2.1 Definition: ................................................................................................................ 163
5
 5.2.2.2 Principles of Open Account...................................................................................... 163
5.2.2.3 Payment process ....................................................................................................... 164
5.2.3 Cash against documents ............................................................................................... 165
5.2.3.1 Definition: ................................................................................................................ 165
5.2.3.2 Payment process ....................................................................................................... 165
5.2.4 Collections ...................................................................................................................... 166
5.2.4.1 Definition: ................................................................................................................ 166
5.2.4.2 Legal bases ............................................................................................................... 167
5.2.4.3 Parties to a Collection.............................................................................................. 167
5.2.4.4 Types of Collection ................................................................................................... 167
5.2.4.5 Payment process ....................................................................................................... 167
5.2.5 Documentary credits ....................................................................................................... 173
5.2.5.1 Definition.................................................................................................................. 173
5.2.5.2 Legal bases ............................................................................................................... 174
5.2.5.3 Parties to a Documentary credit .............................................................................. 175
5.2.5.4 Payment Process ...................................................................................................... 175
5.2.6 Bank Payment Obligation (BPO) ................................................................................ 179
5.2.6.1 Definition ................................................................................................................. 179
5.2.6.2 Parties involved........................................................................................................ 179
5.2.6.3 Payment process ...................................................................................................... 179
5.2.6.4 BPO – Comparison to Letter of Credit and Open Account...................................... 180
5.2.6.5 Advantages of BPO for importers and exporters ..................................................... 181
CHAPTER 6: INTERNATIONAL TRANSPORTATION AND INSURANCE ................. 184
6.1 International Transportation ............................................................................................ 184
6.1.1 Canals/ inland waterway................................................................................................. 185
6.1.2 International air transport ............................................................................................... 187
6.1.3 International road transport ............................................................................................ 190
6.1.4 International rail transport .............................................................................................. 191
6.2 Cargo insurance ................................................................................................................. 195
6.2.1 Cargo insurance market .................................................................................................. 195
6.2.2 Fundamental principles of insurance .............................................................................. 196
6.2.2.1 Insurable interest...................................................................................................... 196
6.2.2.2 Utmost Good Faith ................................................................................................... 198
6.2.2.3 Indemnity .................................................................................................................. 198
6.2.2.4 Subrogation .............................................................................................................. 199
6.2.3 Cargo insurance policy form and clauses ....................................................................... 200
6.2.3.1 Risks covered (ICC, 2009) ....................................................................................... 200
6.2.3.2 Exclusions................................................................................................................. 201
6.2.3.3 Duration ................................................................................................................... 203
6.2.4 Cargo insurance claims ................................................................................................... 205
6.2.5 Cargo claims prevention ................................................................................................. 208
CHAPTER 7: LOGISTICS MANAGEMENT ..................................................................... 211
7.1. Transport in Supply Chains ............................................................................................. 211
7.1.1 Characteristics of the different transport modes ............................................................. 211
7.1.2 Transport operations, distribution centres and the role of factory gate pricing .............. 213
7.1.3 Efficiency of transport services ...................................................................................... 214
7.2 Transport security .............................................................................................................. 215
7.2.1 The need for transport security ....................................................................................... 215
7.2.2 Global transport security initiatives ................................................................................ 215
6
 7.2.2.1 IMO international ship and port facility security (ISPS) code ................................ 215
7.2.2.2 US Customs-Trade partnership against terrorism (C-TPAT) .................................. 217
7.2.2.3 US container security initiative (CSI) ...................................................................... 218
7.2.2.4 European Union Authorized Economic Operator. ................................................... 218
7.2.2.5 ISO 28000 – Supply chain security .......................................................................... 219
7.2.3 Transport security technology ........................................................................................ 219
7.2.3.1 Access control .......................................................................................................... 219
7.2.3.2 Biometrics................................................................................................................. 219
7.2.3.3 Detection systems ..................................................................................................... 220
7.3 Logistics service providers ................................................................................................ 220
7.3.1 Classifying logistics companies (Branch, 2009) ............................................................ 220
7.3.2 Fourth-party logistics (4PL) ........................................................................................... 222
7.3.3 Carrier responsibilities .................................................................................................... 223
7.3.4 Selecting logistics service providers and services .......................................................... 223
7.4 Procurement ....................................................................................................................... 224
7.4.1 Procurement as a strategic activity ................................................................................. 224
7.4.2 The difference between public and private sector procurement ..................................... 224
7.4.3 Procurement and markets ............................................................................................... 225
7.4.3.1 Sourcing strategies ................................................................................................... 225
7.4.3.2 Aggregation and consolidation ................................................................................ 226
7.4.4 Managing value and risk................................................................................................. 226
7.4.5 The procurement process ................................................................................................ 227
7.4.6 Procurement performance............................................................................................... 229
7.4.7 Ethical sourcing .............................................................................................................. 230
7.4.8 Procurement and supply chain management .................................................................. 231
7.5 Inventory management ...................................................................................................... 232
7.5.1 The importance of inventory management ..................................................................... 232
7.5.2 Supply chain inventory management ............................................................................. 233
7.5.3 Matching inventory policy with inventory type ............................................................. 234
7.5.4 Inventory reduction principles ........................................................................................ 235
7.6 Warehousing and materials handling .............................................................................. 236
7.6.1 Warehousing in global supply chains ............................................................................. 236
7.6.2 Materials handling and storage ....................................................................................... 237
7.6.3 Work organization and job design .................................................................................. 239
7.7 Information flows and technology .................................................................................... 239
7.7.1 The role of information in global supply chains............................................................. 239
7.7.2 Information visibility and transparency .......................................................................... 240
7.7.3 Information technology applications .............................................................................. 243
7.7.3.1 E-Business ................................................................................................................ 243
7.7.3.2 Electronic data interchange (EDI) ........................................................................... 243
7.7.3.3 Enterprise resource planning (ERP) ........................................................................ 243
7.7.3.4 Collaborative planning, forecasting and replenishment (CPFR) ............................ 244
7.7.3.5 Vendor managed inventory (VMI)............................................................................ 244
7.7.3.6 Warehouse management systems (WMS) ................................................................. 245
7.7.4 Radio frequency identification (RFID)........................................................................... 245
7.7.5 Global standards ............................................................................................................. 247
7.7.6 Supply chain knowledge management ........................................................................... 248
7.8 Logistics and financial management ................................................................................ 248
7.8.1 Financial accounting ....................................................................................................... 248
7
 7.8.2 Financial management .................................................................................................... 249
7.8.3 Management accounting ................................................................................................. 250
7.9 Measuring and managing logistics performance ............................................................ 250
7.9.1 Basic measurement ......................................................................................................... 250
7.9.2 Driving forces for performance measurement ................................................................ 251
7.9.3 Commonly used metrics ................................................................................................. 253
7.9.4 Inventory/ warehouse related metrics ............................................................................. 254
7.9.5 Logistics costs performance ........................................................................................... 255
7.9.5.1 Total landed costs .................................................................................................... 255
7.9.5.2 3PL cost models ....................................................................................................... 256
CHAPTER 8: PERFORMANCE OF THE IMPORT - EXPORT CONTRACT .............. 262
8.1. Performance of the export contract ................................................................................ 262
8.1.1. Export license application ............................................................................................. 262
8.1.2. Initial work related to payment ...................................................................................... 263
8.1.3. Goods preparation (production or procurement of goods). ........................................... 264
8.1.4. Pre-shipment inspection ................................................................................................ 265
8.1.5. Customs clearance ......................................................................................................... 266
8.1.6. Arranging carriage ......................................................................................................... 268
8.1.6.1 By sea ....................................................................................................................... 268
8.1.6.2 By air ........................................................................................................................ 270
8.1.7. Cargo insurance ............................................................................................................. 270
8.1.8. Making delivery............................................................................................................. 271
8.1.9. Setting up the payment documents ................................................................................ 274
8.1.10. Claims (if any) ............................................................................................................. 282
8.1.11 Contract liquidation ...................................................................................................... 283
8.2. Performance of the import contract ................................................................................ 283
8.2.1. Import license application ............................................................................................. 283
8.2.2. Initial work related to settlement ................................................................................... 283
8.2.3. Transport arrangement ................................................................................................... 283
8.2.4. Cargo insurance ............................................................................................................. 283
8.2.6. Taking delivery .............................................................................................................. 284
8.2.7. Post shipment inspection ............................................................................................... 286
8.2.8. Claims (if any) ............................................................................................................... 287
8.2.9. Payment ......................................................................................................................... 288
8.2.10 Contract liquidation ...................................................................................................... 289
8.3. Customs formalities .......................................................................................................... 289
8.3.1. Legal basis ..................................................................................................................... 289
8.3.2.1 Customs formalities .................................................................................................. 290
8.3.2.2 Inspection of export and import goods..................................................................... 293
8.3.2.3 Paying export and import taxes ............................................................................... 294
8.3.3. Electronic customs formalities (VNACCS) .................................................................. 295
References ................................................................................................................................. 298

8
 LIST OF ABBREVIATIONS

Abbreviations Notes
AWB Airway Bill
BEA Bill of Exchange Act of Great Britain
B/L Bill of Lading
CAD Cash against Documents
CISG United Nations Convention on Contracts for the International
sale of goods (Vienna, 1980)
C/O Certificate of Origin
CFR Cost and Freight
CFS Container freight station
CIF Cost Insurance Freight
CIM Computer-integrated manufacturing
CIP Carriage and Insurance Paid To
CISG Convention on Contracts for the International Sale of Goods
COR Cargo outturn report
CMR Carriage of Goods by Road
CPT Carriage Paid To
CSC Certificate of shortlanded cargo
C-TPAT Customs-Trade partnership against terrorism
CY Container Yard
DAF Delivered at Frontier
DAP Delivered at Place
DAT Delivered at Terminal
DCs Distribution Centres
DDP Delivered Duty Paid
DDU Delivered Duty Unpaid
DEQ Delivered Ex Quay
D/O Delivery order
D/P Documents against payment
EEC European Economic Community
EDI Electronic data interchange
EOQ Economic order quantity
ETA Estimated time of arrival
ETD Estimated time of departure
EXW Ex Works

9
FAS Free Alongside Ship
FCA Free carrier
FCL Full Container Load
FC & S Fire, Casualty, and Surety
FGP Factory gate pricing
FSR & CC Free of strikes, riots and civil commotions
GAFTA The Grain and Feed Trade Association
GMO Genetically Modified Organism
FOB Free On Board
HAWB House Airway Bill
IATA The International Air Transportation Association
ICC International Chamber of Commerce
ICD Inland Container Depot
IMF International Monetary Fund
IMO International Maritime Organization
ISBP International Standard Banking Practice for the examination
of documents under documentary credits
ISPS International Ship and Port Facility Security
ITC International Trade Centre
JIT Just in time
KPI Key performance indicator
L/C Letter of credit
LCL Less than container load
LSP Logistics service provider
MAWB Master Airway Bill
MHE Materials handling equipment
M/T Mail transfer
NVOCC Non-Vessel Operating Common Carrier
OAP Old Age Pensioner
RFID Radio frequency identification
ROI Return on Investment
ROROC Report on receipt of cargo
SDR Special Drawing Rights
STS Socio-technical systems
SWIFT Society for Worldwide Interbank Financial
Telecommunications
THC Terminal Handling Charges

10
TIR Transport International Routier
T/T Telegraphic transfer
TEU Twenty-foot equivalent unit
UCP Uniform Customs and Practice for Documentary Credits
UNCITRAL the United Nations Commission on International Trade Law
WWD SHEX EIU Weather Working Day Sunday Holiday Excluded Even If
Used

11
 LIST OF BOXES

Box 5.1: Bill of exchange sample in Collection method

Box 5.2: Bill of exchange sample in Collection method
Box 5.3: Bill of exchange sample in Documentary Credit method
Box 5.4: A sight bill of exchange
Box 5.5: A time bill of exchange
Box 5.6: An accepted bill of exchange
Box 5.7: A cheque sample of BIDV
Box 5.8: A cheque sample of Maritime bank
Box 5.9: A cheque sample of AIB
Box 5.10: A “To order” cheque
Box 5.11 : A traveller’s cheque
Box 5.12: A promissory note sample

12
 LIST OF FIGURES
Figure 3.1: Ex Works
Figure 3.2: Free Carrier
Figure 3.3: Carriage Paid To
Figure 3.4: Carriage & Insurance Paid To
Figure 3.5: Delivered At Terminal
Figure 3.6: Delivered At Place
Figure 3.7: Delivered Duty Paid
Figure 3.8: Free Alongside Ship
Figure 3.9: Free On Board
Figure 3.10: Cost and Freight
Figure 3.11: Cost Insurance and Freight
Figure 5.1: Circulation of sight bills of exchange through the bank
Figure 5.2: Circulation of time bills of exchange
Figure 5.3: Circulation of cheques through one bank
Figure 5.4: Circulation through two banks
Figure 5.5: Circulation of Bank’s cheques
Figure 5.6: Circulation of promissory notes
Figure 5.7: Payment process of deferred remittance method
Figure 5.8: Payment process of advance remittance
Figure 5.9: Payment process of Open Account method
Figure 5.10: Payment process of Cash against Documents method
Figure 5.11: Payment process of Clean Collection method
Figure 5.12: Payment process of Documentary Collection method
Figure 6.1: Cargo claims
Figure 6.2: Development of cargo claim
Figure 7.1: Inbound logistics in the retail sector
Figure 7.2: An overview of contemporary transport security initiatives
Figure 7.3: The Kraljik matrix
Figure 7.4: Supply chain pipeline
Figure 7.5: Inventory flow types (Source: Gattorna & Walters, 1996)
Figure 7.6: Prioritizing storage versus picking
Figure 7.7: Socio-technical systems theory
Figure 7.8: A simplified VMI scenario
Figure 7.9: Category of metric reporting

13
 LIST OF TABLES
Table 5.1: Revolving with respect to time (Cum vs Non-Cum)
Table 5.2: Comparison between Transferable L/C and Back-to-Back L/C
Table 5.1: Types of cargo
Table 7.1: A summary of costs and relative operating characteristics of the different
transport modes
Table 7.2: The difference between buying and selling
Table 7.3: Public sector versus private sector procurement characteristics
Table 7.4: Managing procurement portfolios
Table 7.5: The procurement process
Table 7.6: The benefits and limitations of data capture technologies

14
 INTRODUCTION

International commercial transactions are activities of parties who have their places
of business in different nations to move goods, services, technology, or capital across the
boundaries of different nations. The knowledge to handle well all these transactions in
international commerce is of necessity for students majoring International Commerce.
Therefore, “International commercial transactions” is a compulsory course designed for
International Commerce program.
Because of its wide scope on goods, services, technology, and capital and the
limited time for the couse (3 credits), “International commercial transactions” is designed
to introduce to students the basis and crucial issues on trading goods between entities
operating across national borders. The students have the possibility to get familiar with
all aspects concerning international commercial transactions: basic concepts, types, trade
terms, clauses in international sales contracts and technique of export – import operation.
To perform export and import contracts, students are required to have knowledge on
import - export management, international settlement, transport and insurance, and
logistics. Therefore, a brief overview on these issues is also introduced in this lecture. All
equips the students a stable theory foundation to perform works at Export – Import
companies, Settlement Department of Banks, forwarders … Taken together, the students
have enough knowledge for further study.
The lecture is divided into eight chapters including:
Chapter 1: Introduction to International Commercial Transactions
The chapter provides an overview knowledge of the issues encountered in
international commercial transactions: concepts, features, factors and laws of
International Commercial Transactions, types of International Commercial
Transactions
Chapter 2: Essential Types of International Commercial Transactions
Classical types (direct/indirect export, direct/indirect import, transit trade),
bater transactions, international auction, international bidding, counter trade
…. are introduced in this chapter, from which the students can apply these
types of interntional commercial transactions into practical cases.
Chapter 3: International Commercial Terms (Incoterms)
11 trade terms including Ex Works, Free Carrier, Free Alongside Ship, Free on
Board, Carriage Paid To, Carriage and Insurance Paid to, Cost and Freight,
Cost, Insurance, and Freight, Delivered at Place, Delivered at Terminal,
Delivered Duty Paid of the Incoterms 2010 are introduced.
Chapter 4: International Settlements

15
The chapter differentiates different types of payment instruments: Drafts,
Cheques, Promissory notes, Payment Cards … in international business.
Chapter 5: International Transportation and Insurance
This chapter provides the students with the carriage of goods by sea and by air,
different cargo insurance clauses and instructs how to buy marine insurance
and claim for insurance compensation.
Chapter 6: Logistics Management
The chapter provides the students with knowledge of what is understood by the
term “logistics” and have general insight into logistics in relation to supply
chain management
Chapter 7: The International Sales Contract
The chapter instructs the students know how to form clauses in international
sales, helps them check formed contracts to identify if there is any issue that
may pose problems or repercussions that could harm the business results of
their companies.
Chapter 8: Performance of Export – Import Contracts (Export - Import
Operation)
The procedure to perform import - export contracts and the customs formalities
for export and import goods are presented in this chapter

16
 CHAPTER 1: INTRODUCTION TO INTERNATIONAL COMMERCIAL
TRANSACTIONS

The chapter lays the foundations of the course and explains the concepts, roles and
functions of international commercial transactions, as well as give descriptions of
prevalent governing laws for international commercial transactions.

1.1. International Commercial Transactions: Concepts and roles

1.1.1 Concepts:
An international commercial transaction is any type of deal between parties from at
least two different countries. These transactions include sales, leases, licenses, and
investments. the parties to international business deals include individuals, small and
large multinational corporations, and even countries (Randall & Norris, 1993).
From another perspective, international commercial transaction to take into account
will include those related to agency and distributorship law, sale of goods and services
and letters of credit, international contract problems, regulation of international trade
including customs law, cross-border mergers and acquisitions, project financing and
structure of the foreign investment. (Bourély, n.d)
In conclusion, international commercial transactions are activities of parties who
have their places of business in different nations to move goods, services, technology, or
capital across the boundaries of different nations.
Trading globally gives consumers and countries opportunities to be exposed to new
markets and products. Almost every kind of product can be found on the international
market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies, and water.
Services are also traded: tourism, banking, consulting and transportation. A product that
is sold to the global market is an export, and a product that is bought from the global
market is an import.

1.1.2 Roles:
International commerce plays an important role in every country’s economy. The
balance of trade, or the amount of imports versus exports, drives a country’s evaluation of
its gross domestic product (GDP) and ultimately impacts the public’s perception of the
health of the economy. More importantly, international commerce opens up untapped
markets for sellers and increases the home country’s productivity as workers are
employed to make the goods to sell globally.
It is a common axiom in business that 95% of a company’s potential market is
located overseas. A company that limits itself to sales generated within domestic borders

17
is missing out on the potential to grow the business exponentially. From a business
perspective, the role of international commerce is to maximize profits for owners, the
single most important mandate for corporations and many other types of businesses.
Governments consider the role of international commerce from a larger perspective
on the health of the economy. The ability of the business sector to manufacture goods for
export means that more of the country’s workforce is employed, producing a larger
amount of inventory. It also means that the country is in a stronger position globally, as it
is virtually exporting the country’s values and lifestyle along with its products. Every
domestic product that takes off in a foreign country makes it that much harder for the
foreign country’s government to risk damaging trade relations in international
negotiations on unrelated issues.
Gross domestic product, an economic indicator that monitors a country’s level of
production, is impacted by international trade. If a country imports more than it exports,
its GDP will likely decrease over time as the country becomes reliant on imported goods
and loses the ability to employ its own citizenry in the production of goods that the public
wants to buy. The role of international trade in the economy is to find a balance between
importing and exporting that keeps the country’s economy strong and its standard of
living high.
Perhaps, the most important role of international commerce is to keep the citizens of
a country healthy and happy. International commerce provides all of the goods and
resources that a country cannot effectively produce itself. From making coffee available
in Alaska to providing wood products to desert countries, many would be unhappy if they
could only buy what their own country could produce. As people are better able to
communicate across the globe, it has become harder for governments to convince the
public that it should happily do without modern conveniences that people in other
countries enjoy. The unavailability of modern goods over time has contributed to citizen
uprising in countries with governments that attempted to cut the country off from the
world.

1.2. Main factors influencing International Commercial Transactions.

Factors that influence international business transactions include political,
economic, social, technological, environmental, geographical and legal ones, and some
subjective factors such as human resources, capital, technical equipment, management
system of a company.
Political factors: political policies, or political disputes particularly that result in
military confrontation can disrupt trade and investment.

18
 Legal factors: domestic and international laws play a big role in determining how a
company can operate overseas.
Economic and social factors: refer to the growth of one country. Domestic
manufacturing which develops in a country will be a good condition for producing
exports and will increase the competition ability of the exports in model, quality, and type
in the world market. The more an economy of one country develops, the more
competitive the exports in the world market are.
The development of domestic business system contributes to constrain or encourage
export because it decides the good rotation inside the country and in the world.
The finance and banking system also has a large effect on export activities. The
more developed the banking system is, the more convenient and faster the international
settlement is, which will lubricate the export-import activities.
Environmental and Geographical factors: There are many different geographical
factors that affect international business. In fact, the geographical size, the climatic
challenges happening lately, the natural resources available on a specific territory, the
population distribution in a country, etc. are some of the influences that have an effect on
the international trade

1.3 Functions of International Commercial Transactions

Global competition has made the businesses to change their way of perspective. The
factors such as technological advancements, high-speed communication, and shorter
product life cycle contributed much to the change. Here are some functions of the
international commercial transactions that must be efficiently operated in an organization.
Planning: It is one of the reasons for doing international commercial transactions
for an organization that decides how to do business globally, i.e. whether to export or to
operate as a multinational company. To develop plans and procedures, an organization
should monitor environments such as currency instability, political instability, and
trademark protection very deeply.
Organizing: While doing international commercial transactions, companies should
ensure that their policies adjust the culture of the host country. The international business
must be organized in such a way so that it can be adapted to environmental and cultural
differences.
Staffing: The efficiency of international commercial transactions highly depends on
staffing as it is crucial to the success of any organization. The company must closely
examine how to select the appropriate staff so that they can help in achieving the
objectives.

19
 Directing: The directing function of business become more difficult due to the
employee’s attitude. Sometimes, language barriers also create communication difficulties
and to minimize these problems, organizations used to direct employees in cross-cultural
management.
Controlling: It is a crucial function that helps in monitoring the current
performance and making the necessary alterations to keep the organization moving
towards its objectives.

1.4. The governing laws for International Commercial Transactions.

1.4.1 International laws
United Nations Convention on Contracts for the International Sale of Goods (Vienna,
1980) (CISG)
The contract of sale is the backbone of international trade in all countries,
irrespective of their legal tradition or level of economic development. The CISG is
therefore considered one of the core international trade law conventions whose universal
adoption is desirable.
The CISG is the result of a legislative effort that started at the beginning of the
twentieth century. The resulting text provides a careful balance between the interests of
the buyer and of the seller. It has also inspired contract law reform at the national level.
The adoption of the CISG provides modern, uniform legislation for the international
sale of goods that would apply whenever contracts for the sale of goods are concluded
between parties with a place of business in Contracting States. In these cases, the CISG
would apply directly, avoiding recourse to rules of private international law to determine
the law applicable to the contract, adding significantly to the certainty and predictability
of international sales contracts.
Moreover, the CISG may apply to a contract for international sale of goods when
the rules of private international law point at the law of a Contracting State as the
applicable one, or by virtue of the choice of the contractual parties, regardless of whether
their places of business are located in a Contracting State. In this latter case, the CISG
provides a neutral body of rules that can be easily accepted in light of its transnational
nature and of the wide availability of interpretative materials.
Finally, small and medium-sized enterprises as well as traders located in developing
countries typically have reduced access to legal advice when negotiating a contract. Thus,
they are more vulnerable to problems caused by inadequate treatment in the contract of
issues relating to applicable law. The same enterprises and traders may also be the
weaker contractual parties and could have difficulties in ensuring that the contractual
balance is kept. Those merchants would therefore derive particular benefit from the

20
default application of the fair and uniform regime of the CISG to contracts falling under
its scope.
Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes
(Geneva 1930) (ULB-1930)
ULB 1930 is effective in all European countries, except Great Britain. Although many
other countries are not members of Geneva Convention, their laws on bill of exchange
are set up on ULB 1930 basis.
ULB 1930 has 12 chapters with 78 articles focusing on:
- Issue and form of Bill of Exchange
- Endorsement
- Acceptance
- Avals
- Maturity
- Payment
- Intervention for Hour
- Part of a set and copies
- Alterations
- Limitation of actions
Promissory notes

1.4.2 National laws

Law on Commerce of Vietnam 2005
The Commercial Law shall govern commercial acts, determine the legal status of
traders and provide for principles and standards for the commercial activities in the
Socialist Republic of Vietnam.
Law on Foreign Trade Management 2017
This Law provides for the management of foreign trade, the development of foreign
trade; Dispute resolution on the application of foreign trade management measures.
Consolidated document No. 03/VBHN-VPQH 2017 by the Office of the National
Assembly to unify the Commercial Law.
Decision on detailing provisions of a number of articles of foreign trade management
law No. 69/2018/ND-CP
This Decision details the Commercial Law and the Foreign Trade Management Law
regarding activities of purchase and sale of goods and activities directly related to the
purchase and sale of goods by foreign investors or economic organizations with foreign
investment capital in Vietnam.
Vietnam Customs law 2014

21
 This Law stipulates the state management of customs with regard to goods
permitted to be imported, exported or transited, and vehicle of domestic and foreign
entities which are on exit or entry or in transit within the customs territory; and
organization and operation of the customs service
Law on negotiable instruments of Viet Nam, effective from 1st July 2006
The Law shall be applicable to Vietnamese organizations and individuals and foreign
organizations and individuals involved in negotiable instrument in the territory of The
Socialist Republic of Vietnam.
The Law has 6 chapters and 83 articles, which regulates negotiable instrument with
respect to issuance, acceptance, guarantee, endorsement, pledge, collection, payment,
recourse, and imitation of legal action. Negotiable instruments stipulated in this Law
include Bills of Exchange, Promissory notes, Cheques, and other negotiable instruments,
excluding long-term negotiable instruments issued by organizations aimed at raising
capital on the market.
1.4.3 International customs and practices
INCOTERMS 2010. ICC rules for the use of domestic and international trade terms,
ICC Publication 2010, No. 715
Incoterms 2010 are internationally accepted freight rules defining the respective
responsibilities of the buyer and seller in the arrangement of transportation and other
responsibilities and clarify when the ownership of the merchandise takes place. They are
used in conjunction with a sales agreement or other method of transacting the sale.
Uniform Rules for Collections: ICC Publication No 522
The ICC Uniform rules for collections were first published by the ICC in 1956.
Revised versions were issued in 1967 and 1978. This present otaling was adopted by
the Council of the ICC in June 1995. It is issued with the title “ICC Uniform Rules for
Collections” as ICC Publication No 522.
URC 522 has 26 articles which are divided into 7 groups including:
A – General provisions and definitions: article 1 to 3
B – Form and structure of collections: article 4
C – Form of presentation: article 5 to 8
D – Liabilities and responsibilities: article 9 to 15
E – Payment: article 16 to 19
F – Interest charges and expenses: article 20-21
G – Other provisions: article 22 – 26
Uniform Customs and Practice for Documentary Credits: ICC Publication No 600
Uniform Customs and Practice for Documentary Credits (commonly called UCP) is
the sixth revision of the rules since they were first promulgated in 1933 and modified and

22
supplemented in 1951, 1962, 1974, 1983, 1993 (UCP500). It is the fruit of more than
three years of work by the International Chamber of Commerce Commission on Banking
Technique and Practice.
It should be noticed that the later UCP does not annul the previous ones. Therefore,
all revisions are still valid in the practice of international trade.
ICC, which was established in 1919, had as its primary objective facilitating the flow
of international trade at the time when nationalism and protectionsm posed serious threats
to the world trading system. It was in that spirit that the UCP were first introduced – to
alleviate the confusion caused by individual countries’ promoting their own national rules
on letter of credit practice. The objective, since attained, was to create a set of contractual
rules that would establish uniformity in that practice, so that practitioners would not have
to cope with a plethora of often conflicting national regualtions.
It is important to recall that the UCP represent the work of a private international
organization, not a governmental body. Since its inception, ICC has insisted on the
central role of self-regulation in business practice. These rules, formulated entirely by
experts in the private sector, have validated that approach. The UCP remain the most
successful set of private rules for trade ever developed. However, the UCP are
unforceable to parties in international trade and parties must refer the UCP in their credit.
The main contents of the UCP include:
- Definitions and interpretations
- Form and advising of credits and amendments
- Undertakings of Banks
- Standard for examination of documents
- Bills
…
International Standard Banking Practice for the examination of documents under
documentary credits (ISBP): ICC Publication No 745
The ISBP (full title: International Standard Banking Practice for the Examination of
Documents under Documentary Credits) is an International Chamber of Commerce (ICC)
publication which provides important guidance to documentary credit examiners and
practitioners relating to the examination of documents presented against Letters of Credit.
It is important to note that the ISBP cannot in any way change the UCP 600 rules which
apply to Letters of Credit, but the ISBP is a valuable supplementary guide to UCP.

SUMMARY

23
 International business transactions which involve the movement of goods, services,
technology, or capital across the boundaries are business transactions of parties who have
their places of business in different nations.
International business is prerequisite for the development of any country and makes
a significant contribution to the global economy.
To govern international business, there are many sources of law, customs and
practices, and national laws as well. That utilizing the suitable sources of law depends on
the necessity of each transaction.

REVISION QUESTIONS

1. What are international commercial transactions?

2. Why are international commercial transactions important for national/ global
economy?
3. Which laws are applied to international commercial transactions?
4. Which international practices are applied in international commercial transactions?
5. Which national laws are applied in international commercial transactions?

24
 CHAPTER 2: ESSENTIAL TYPES OF INTERNATIONAL COMMERCIAL
TRANSACTIONS

The chapter introduces some classical types of international commercial transactions,

including:
• Direct transactions
• Purchase of international goods through intermediaries
• Counter trade
• Processing
• International auction
• International bidding
• Trading at international fairs and exhibitions
• Trading in Commodity Exchanges

2.1. Direct transactions:

2.1.1. Concepts.
International sales are transactions in which the buyer and the seller are from
different nations. There are many types of international sales as follow:
2.1.1.1 Exports.
Export means to send goods or services across national frontiers for the purpose of
selling and realizing foreign exchange and import of goods means products of foreign
origin brought into a country (Law on Commerce of Vietnam 2005)
In addition, according to Article 28, Law on Commerce of Vietnam 2005
stipulates export of goods means the bringing of goods out of the territory of the Socialist
Republic of Vietnam or into special zones in the Vietnamese territory, which are regarded
as exclusive customs zones according to the provisions of law.
On the basis of socio-economic conditions in each period and treaties to which the
Socialist Republic of Vietnam is a contracting party, the Government shall specify the
lists of goods banned from import and/or export, goods to be imported or exported under
permits of competent state management agencies, and the procedures for granting permits
2.1.1.2 Imports.
Import of goods means the bringing of goods into the territory of the Socialist
Republic of Vietnam from foreign countries or special zones in the Vietnamese territory,
which are regarded as exclusive customs zones according to the provisions of law. (Law
on Commerce of Vietnam 2005)

25
2.1.1.3 Temporary Import for re – export.
According to article 29 Law on Commerce of Vietnam 2005 stipulates: Temporary
import of goods for re-export means the bringing of goods into Vietnam from foreign
countries or special zones locating in the Vietnamese territory, which are regarded as
exclusive customs zones according to the provisions of law, with the completion of the
procedures for importing such goods into Vietnam, then procedures for exporting the
same goods out of Vietnam.
2.1.1.4 Temporary Export for re- import.
According to article 29 Law on Commerce of Vietnam 2005 stipulates: Temporary
export of goods for re-import means the bringing of goods overseas or into special zones
in the Vietnamese territory which are regarded as exclusive customs zones according to
the provisions of law, with the completion of procedures for exporting such goods out of
Vietnam, then procedures for importing the same goods back into Vietnam.
2.1.1.5 Cross – Border Transshipment (Transfer of goods through border-gates)
Transfer of goods through border-gates indicates the activity of the buying and
selling of goods and services between businesses in neighboring countries, with the seller
being in one country and the buyer in the other country, for example, a company in the
United States selling to a company in Canada.
According to Law on Commerce of Vietnam 2005 - article 30, transfer of goods
through border-gates means the purchase of goods from a country or territory for sale to
another country or territory outside the Vietnamese territory without carrying out the
procedures for importing such goods into Vietnam and the procedures for exporting such
goods out of Vietnam.
Transfer of goods through border-gates shall be conducted in the following forms:
a/ Goods are transported directly from the exporting country to the importing country
without going through Vietnamese border-gates;
b/ Goods are transported from the exporting country to the importing country through
Vietnamese border-gates without carrying out the procedures for importing them into
Vietnam and the procedures for exporting them out of Vietnam;
c/ Goods are transported from the exporting country to the importing country through
Vietnamese border-gates and brought into bonded warehouses or areas for transshipment
of goods at Vietnamese ports without carrying out the procedures for importing them into
Vietnam and the procedures for exporting them out of Vietnam.
The Government shall provide for in detail activities of transfer of goods through
border-gate. One type of trade included in types of international trade is intra-industry
trade in which importers import goods that are similar to those produced in the country.

26
2.1.2. Current regulations of Vietnam in ordinary international sales.
Current regulations in international sales are regulated in Law on Commerce of Vietnam
2005 of Socialist Republic of Vietnam, Law on Foreign Trade Management 2017, and
Decision on detailing provisions of a number of articles of foreign trade management law
No. 69/2018/ND-CP
Following are some main contents that need to be considered:
• The freedom to conduct export or import business for Vietnamese traders who are
not economic organizations with foreign owned capital shall be implemented as
follows
1. Traders may conduct export and import business and carry out other related
activities without dependence on business lines for business registration, except
for those on the list of goods banned or suspended from import or export.
2. Traders, when exporting or importing goods under permits, must meet the permit
and condition requirements under the conditions.
• The freedom to conduct export or import business activities of Vietnamese traders
being foreign-invested economic organizations or branches of foreign traders in
Vietnam shall be as follows:
1. To exercise the right to import and export according to the provisions of this Law
and treaties to which the Socialist Republic of Vietnam is a contracting party.
2. To exercise the right to export through the purchase of goods in Vietnam for
export to foreign countries in the form of their names on the export goods
declarations for implementation and take responsibility for the export-related
procedures. The right to export does not include the right to organize a network for
buying goods in Vietnam for export.
3. To exercise the right to import goods from abroad into Vietnam for sale to traders
having the right to distribute such goods in Vietnam in the form of their names on
the import goods declarations for implementation and taking responsibility for the
import formalities. Import rights do not include the right to organize or participate
in the distribution system in Vietnam.

2.1.3. Characteristics of direct transactions.

Cross border participation: There are lots of parties involved in an international
sales transaction such as exporter, importer, freight forwarder, shipping company,
transporter, insurer … who may be from different countries.
Foreign currency: currency in the contract can be of the buyer, the seller, or a third
party. Therefore, it will be foreign currency for at least one party.

27
 Different laws applied across borders: parties in the contract are from different
countries so governing law is diversified and complicated. Law sources may be
International trade treaties, National laws, and International trade practices.
Transfer of goods/services across borders: Commodities are often transported
from this country to another or others.
Basically, any flow of value across borders.

2.1.4. Pros and cons of direct transactions.

The pros:
International growth
There is a possibility exporting companies can achieve levels of growth not possible
domestically in international markets. Therefore, a company’s sustained revenues from a
well-diversified portfolio of overseas customers are vital for a business to benefit.
Spreading business risk
A company may protect itself from unprecedented global disasters and market
upsets such as financial meltdown, earthquakes and civil unrest through overseas
business. The home market of a business could contract or even disappear during these
unstable times, but the business may be saved by the revenue it generates overseas.
Market competition
If a business competes in several markets, then it may have the ability to thrive
overseas. Companies can improve their competitiveness through the observation of a
range of trends in quality, product development, design and packaging.
Exchange rates
As a business begins to trade overseas the reliance it has on its domestic market
reduces and risks can be spread, especially in relation to exchange rates. For example, if a
business does most of its trade in US Dollars it may be beneficial for said business to
trade
with Japan to spread the exchange rate risk between the Dollar and the Yen, therefore
creating benefit for the company.
The cons:
Exchange rate risk
Because exchange rates fluctuate there is also risk business trading in foreign
currencies may not be able to forecast finances accordingly. Currency fluctuations could
affect either the value of existing assets or liabilities denominated in foreign currency.
This could ultimately result in a business becoming less competitive overnight, resulting
in a loss of sales and loss of revenue.
Political risk

28
 Investing in different countries whose political regimes can change over time also
poses a few risks. Governments could discriminatorily change laws, regulations or
contracts governing an investment. Interest in emerging markets has soared and host
countries have learned more value can be extracted from foreign enterprises through
regulatory control. Firms engaged in international business use a combination of legal
contracts, insurance and trade in financial instruments to protect income streams. These
approaches, however, offer little protection against policy risk.
Cultural risk
In addition to policy, cultural differences could create problems for businesses
wanting to trade overseas. Failure to take into account different cultures might lead to
damaging and costly mistakes. This could range from causing offence by not observing
correct protocol, to inappropriate packaging and marketing. It goes without saying that
the marketing of a certain business in one western country might differ to that of a
country that is still developing and has differing cultural habits and beliefs.
Credit risk
It is very easy to overlook the risk of non-payment when trading overseas too.
Businesses should establish the credit rating of potential clients in many countries and
guard against non-payment through, for instance, letter of credit or arrange credit
insurance. The risk comes with the impact of a customer’s financial drawback of the firm
and how to finance the offered credit period.

2.2. Purchase of international goods through intermediaries

2.2.1 Concepts
Purchase of international goods through intermediaries is the mode of transaction in
which two parties buy and sell through a third party to sign and perform the contract
(Law on Commerce of Vietnam2005).
The forms of selling goods through intermediation are usually expressed in the form
of: Representation of traders, commercial brokerage, purchase and sale of goods by
mandated dealers, and commercial agency (Law on Commerce of Vietnam2005)

2.2.2 Types of purchase of international goods through intermediaries

* Representation of traders:
Representation of traders means an activity whereby a trader (referred to as
representative) is authorized by another trader (referred to as nominator)
- Obligations of representatives
Unless otherwise agreed, a representative shall have the following obligations:

29
 1. To conduct commercial activities in the name and for the interest of the
nominator;
2. To notify the nominator of opportunities and results of performance of
authorized commercial activities;
3. To follow instructions of the nominator if such instructions do not violate the
provisions of law;
4. To refrain from conducting commercial activities in his/her/its own name or in
the name of a third party within the scope of representation;
5. To refrain from disclosing or supplying to other people secrets related to
commercial activities of the nominator during the period of representation and
within two years after the termination of the representation contract;
6. To preserve assets and documents assigned for performing activities of
representation.
- Obligations of nominators
Unless otherwise agreed, a nominator shall have the following obligations:
1. To notify the representative immediately of the signing of contracts negotiated
by the representative, the performance of contracts entered into by the
representative, and the acceptance or non-acceptance of activities conducted by
the representative outside the scope of representation;
2. To supply assets, documents and information necessary for the representative to
perform activities of representation;
3. To pay remuneration and other reasonable expenses to the representative;
4. To notify promptly the representative of the impossibility of entering into or
performing the contract within the scope of representation
* Commercial brokerage
Commercial brokerage means a commercial activity whereby a trader acts as an
intermediary (referred to as broker) between parties selling and purchasing goods or
providing commercial services (referred to as principals) in the course of negotiations and
entering into contracts for sale and purchase of goods or provision of services and shall
be entitled to a remuneration under a brokerage contract.
- Obligations of commercial brokers
Unless otherwise agreed, a commercial broker shall have the following obligations:
1. To preserve samples of goods and documents assigned for the performance of
brokerage activities, and to return them to the principals after the completion of
brokerage;
2. Not to disclose or supply information to the detriment of the interests of the
principals;

30
 3. To be responsible for the legal status, but not for the solvency, of the principals;
4. Not to take part in the performance of contracts between the principals, except
where so authorized by the principals.
- Obligations of principals
Unless otherwise agreed, a principal shall have the following obligations:
1. To supply information, documents, necessary means related to goods and
services;
2. To pay brokerage remuneration and other reasonable expenses to the broker.
* Purchase and sale of goods by mandated dealers
Purchase and sale of goods by mandated dealers mean commercial activities
whereby the mandatory conducts the purchase and sale of goods in his/her/its own name
under terms agreed upon with the mandator and is entitled to receive mandate
commission.
- Mandatories
A mandatory for purchase and sale of goods is a trader dealing in goods which are
consistent with the mandated goods and conducting the purchase and sale of goods on
terms agreed upon with the mandator.
Obligations of mandators
Unless otherwise agreed, mandators shall have the following obligations:
1. To provide information, documents and means necessary for the performance of
mandate contracts;
2. To pay mandate commissions and other reasonable expenses to mandatories;
3. To hand over money and goods as agreed upon;
4. To bear joint responsibility in cases where mandatories commit law violations
which are attributable to acts of mandators or intentional law-breaking act
- Mandators
A mandator of purchase and sale of goods may, or may not, be a trader that
authorizes a mandatory to conduct the purchase and sale of goods at his/her/it request and
pays a commission.
Obligations of mandatories
Unless otherwise agreed, mandatories shall have the following obligations:
1. To conduct the purchase and sale of goods as agreed upon;
2. To notify mandators of matters related to the performance of mandate contracts;
3. To follow instructions of mandators as agreed upon;
4. To preserve assets and documents assigned to them for the performance of
mandate contracts;
5. To keep secret information related to the performance of mandate contracts;

31
 6. To hand over money and goods as agreed upon;
7. To bear joint responsibility for law violation acts of mandators, in cases where
such law violation acts are partially attributable to their own faults
* Commercial agency
Commercial agency means a commercial activity whereby the principal and the
agent agree that the agent, in its own name, sells or purchases goods on behalf of the
principal for remuneration.
- Forms of agency
1. Off-take agency is a form of agency whereby the agent definitely sells or
purchases a specific quantity of goods or provides a full service for the principal.
2. Exclusive agency is a form of agency whereby a sole agent is authorized by the
principal to sell or purchase one or more goods items or to provide one or more
types of services within a given geographical area.
3. General goods sale or purchase or service provision agency is a form of agency
whereby an agent organizes a network of sub-agents to sell or purchase goods or
provide services for the principal.
The general agent represents the network of sub-agents. Sub-agents operate under
the management and in the name of the general agent.
4. Other forms of agency agreed upon by the parties
- Obligations of principals
Unless otherwise agreed, principals shall have the following obligations:
1. To guide, supply information to, and facilitate, agents to perform agency contracts;
2. To bear responsibility for quality of goods of goods sale or purchase agents, and
quality of services of service-providing agents;
3. To pay remuneration and other reasonable expenses to agents;
4. To return to agents their assets used as security (if any) upon the termination of agency
contracts;
5. To bear joint responsibility for law violation acts of agents if such law violation acts
are partly attributable to their faults
- Obligations of agents
Unless otherwise agreed, agents shall have the following obligations:
1. To purchase or sell goods or provide services to customers at prices or charge rates
fixed by principals;
2. To comply strictly with agreements on handover and receipt of money and goods with
principals;
3. To take security measures for performance of civil obligations as provided for by law;

32
4. To pay to principals any proceeds of the sale of goods, for sale agents; to deliver
purchased goods to principals, for purchase agents; or to pay service charges to
principals, for service-providing agents;
5. To preserve goods after the receipt thereof, for sale agents, or prior to the delivery
thereof, for purchase agents; to bear joint responsibility for quality of goods of purchase
or sale agents or quality of services of service-providing agents in cases where they are at
fault;
6. To submit to inspection and supervision by principals, and to report to principals on
their agency activities;
7. Where it is specified by law that an agent shall be allowed to enter into an agency
contract with a principal for a certain type of goods or service, such provision of law
must be strictly followed.

2.2.3 Pros and cons of purchase of international goods through intermediaries

* Pros:
- Intermediaries are often persons who have knowledge of local laws and practices and
have the capacity to promote sales and avoid risks to the trustee.
- Intermediaries, especially agents often have certain facilities, so when using them, the
trustee does not need to do direct investment into foreign countries.
- Thanks to intermediary services in sorting, packaging, the trustee can reduce
transportation costs.
* Cons:
- The import-export business loses its direct contact with the market.
- Capital is often occupied by the agent
- Companies often have to meet the requirements of agents and brokers.
- The profit of the company is shared.

2.2.4 Current regulations of Vietnam in Purchase of international goods through

intermediaries
- Firstly: It is allowable act as agents only for the items having the business
registration inscribed in the permits
- Second: When acting as sale agents for foreign countries, Vietnamese traders shall
have to open separate accounts at banks for payment under the guidance of the State
Bank of Vietnam. However, traders may pay for goods not subject to export ban,
conditional export goods. In case of payment by goods on the list of goods subject to
conditional export, they must be approved by the competent authorities

33
 - Third, when acting as agents to help foreign parties purchase goods, Vietnamese
traders shall have to request foreign partners to transfer foreign currency (ies) which are
capable of being converted through banks so that Vietnamese parties may use such
money to buy goods.
- Fourth: Goods under the agency of goods purchase and sale agency with foreign
traders shall be subject to taxes and other financial obligations as prescribed by
Vietnamese law.
- Fifth: goods under sale and purchase contracts with foreign traders, when being
exported or imported, shall be carried out by Vietnamese traders as for other import and
export goods.
- Sixth: Goods under sale agency contracts in Vietnam for foreign traders to be re-
exported if they cannot be sold in Vietnam and tax shall be rebated.

2.3 Counter Trade.

Over the last few decades there has been an enormous increase in countertrade
throughout the world, and the breakup of the state-planned economies of Eastern Europe
only served to accelerate this development. Some estimates suggest that in anything up to
33 percent of world trade, countertrade at least forms part of the negotiations, although
final payment might actually be made in currency.
It is obvious that the severe hard-currency shortages experienced by many developing
countries lead to countertrade being seen as the only way in which international trade can
occur in some situations.

2.3.1 Concepts
Countertrade is any commercial arrangement in which sellers or exporters are
required to accept in partial or total settlement of their deliveries, a supply of products
from the importing country. In essence, it is a nation’s (or firm’s) use of its purchasing
power as a leverage to force a private firm to purchase or market its marginally
undesirable goods or exact other concessions in order to finance its imports or obtain
needed hard currency or technology. Although the manner in which the transaction is
structured may vary, the distinctive feature of such arrangements is the mandatory
performance element that is either required by the importer or the importer’s government,
or made necessary by competitive considerations (Verzariu, 1992)

2.3.2 Characteristics of countertrade.

Exporter is also importer.
Currency is not a payment tool but a calculation one.

34
 Types of commodity in countertrade are more than those of ordinary international
sales. High value goods can be exchanged for other high value goods. Low value goods
can be exchanged for low value goods.

2.3.3 Types of countertrade.

The expression “countertrade” actually covers a variety of possible procedures,
which include:
Barter means the exchange of goods or services directly for other goods or
services without the use of money as means of purchase or payment. It refers to the direct
exchange of goods between two parties in a transaction.
Bartering brings benefits to individuals, companies and countries that see a mutual
benefit in exchanging goods and services rather than cash, and it enables those who are
lacking hard currency to obtain goods or services.
Barter is not uncommon in Africa and Latin America and is preferred by some oil-
dependent economies. There are specialist consultants who will handle the disposal of the
bartered products on behalf of the exporter.
For example: barter 4 tons of coffee for 1 TOYOTA automobile.
Drawbacks: Delivery is not taken at the same time so there will be difference in
credit.
Switch trading refers to practice where one company sells to another its
obligation to make a purchase in a given country.
For example: Vinaconex takes delivery of brick from an Italian company,
meanwhile Bim Son Cement Company owes Vinaconex a sum of money. Therefore,
Vinaconex requires Bim Son to deliver cement for Italian company.
Counter purchase is the agreement of an exporter to purchase a quantity of
unrelated goods or services from a country in exchange for and approximate in value to
the goods exported. An agreement where one company agrees to sell products to a
foreign purchaser for cash, but also simultaneously agrees to purchase specified products
or services from the foreign partner.
The counter-purchase contract can be anything from 10 to 100 percent (or even
more) of the value of the export sale.
Buy back occurs when a firm builds a plant in a country – or supplies technology,
equipment, training, or other services to the country and agrees to take a certain
percentage of the plant’s output as partial payment for the contract.
Offset is an agreement that a company will offset a hard-currency purchase of an
unspecified product from that nation in the future. Agreement by one nation to buy a
product from another, subject to the purchase of some or all of the components and raw

35
materials from the buyer of the finished product, or the assembly of such product in the
buyer nation.
Compensation trade is a form of barter in which one of the flows is partly in
goods and partly in hard currency.
Examples of Countertrade
Indonesia negotiated for a power station project with Asea Brown Boveri and for
an air traffic control system with Hughes Aircraft. Counter-purchase obligations were to
be 100 percent of the FOB values. The firm export, through a trading company, a range
of Indonesia products: cocoa to the United States, coal to Japan, and fertilizer to Vietnam
and Burma.
Lockheed Martin agreed to sell F-16 military aircraft to Hungary in exchange for
large investment and counter-purchase commitments. The firm agreed to buy $250 (U.S.)
worth of Hungarian goods. It established an office in Budapest to participate in tendering
and to procure the country’s industrial goods for export. One of the classic examples of a
barter deal of the century—that went awry—was when Pepsico Inc. signed in 1990 with
the Soviet Union to double its soft-drink sales there, open two-dozen new bottling plants
and launch its Pizza Hut restaurants in the country's biggest cities.
To finance the expansion, Pepsico promised to increase its sales of Russian vodka
in the United States and begin a new venture selling and leasing Soviet-built ships
abroad.

2.3.4 Pros and cons of countertrade.

Pros of countertrade:
 Transfer of technology: In exchange for a guaranteed supply of raw materials or
other scarce resources, a developed nation will provide the capital, equipment, and
technology that is needed to develop such resources. Western firms, for example, assisted
Saudi Arabia in the development of its refinery and petrochemical industry in exchange
for the right to purchase a certain amount of oil over a given period of time.
 Alleviating Balance of Payments difficulties: the debt crisis of the 1980s,
coupled with adverse movements in the price of key export commodities, such as coffee
or sugar, left may developing countries with severe balance-of-payments difficulties.
Countertrade has been used as a way of financing needed imports without depleting
limited foreign currency reserves. Some countries have been used it as a way of earning
hard currency by promoting the export of their domestic output. Countertrade has thus
helped these nations avoid the burden of additional borrowing to finance imports as well
as the need to restrict domestic economic activity.

36
  Countertrade is also used as method of entering a new market, particularly in
product areas that invite strong competition.
 Maintenance of stable prices of exports: Countertrade allows commodity
exporters to maintain nominal prices for their products even in the face of limited or
declining demand. The price of the product that is purchased in exchange could be
increased to take into account the inflated price of exports. In this way, an exporter can
dispose of its commodities without conceding the real price of the product in a
competitive market.
 Other benefits include increased employment, higher sales, better capacity
utilization.
 Benefits for exporters:
- Increased sales opportunities: Countertrade generates additional sales that
would not otherwise be possible. It also enables entry into difficult markets.
- Access to sources of supply: Countertrade provides exporters access to a
continuous supply of production components, precious raw materials, or
other natural resources in return for sales of manufactured goods or
technology.
- Flexibility in prices: Countertrade enables the exporter to adjust the price of
a product in exchange for overpriced commodities
Cons of countertrade:
 The value proposition may be uncertain, especially in cases where the goods
being exchanged have significant price volatility. Other disadvantages include, but are
not limited to:
 Time-consuming. As in any unconventional tactic, there will be haggling over
the good trades, so expect a long, drawn-out negotiation until all parties are satisfied.
 Complexity in the nature of the negotiations. What should you do with the goods
being offered?
 Higher transaction costs (including brokerage, for instance). Costs can quickly
add up, especially while looking for a buyer for the goods, commissions to middlemen
and so forth.
 Logistical issues, especially if commodities are involved.
 Greater uncertainty on the value of the goods being traded and uncertainty on
the quality of the goods.

2.3.5 Measures to ensure the implementation of countertrade

The measure is often stipulated in the contract:

37
 Reciprocal L/C: this letter of credit is only valid when another letter of credit
with equivalent amount is also opened.
Special account: Bank will be a third party who follows, supervises and speeds
up the contract.

A B

1st time 2m 1m
2nd time 3m 2m
End of the period 5m 3m

The bank will inform B to increase the consignment value by 2m to get equilibrium
in the next period.
Third party controls documents: The third party only delivers documents to
goods receivers if this person presents another equivalent set of documents.
Late delivery or shortage penalty: Penalty will be in strong currency (through
provisions prescribed in the contract or arbitrator)
Notice:
Countertrade is often used when foreign exchange is controlled by the government
or there is the exchange rate fluctuation.

2.4 Processing of international commodities.

2.4.1 Concept.
Processing trade refers to the business activity of importing all or part of the raw
and auxiliary materials, parts and components, accessories, and packaging materials from
abroad in bond, and re-exporting the finished products after processing or assembly by
enterprises within the mainland. It includes processing with supplied materials and
processing with imported materials. (Law on Commerce of Vietnam 2005)
Under processing with supplied materials, the imported materials and parts are
supplied by the foreign party also responsible for selling the finished products. The
business enterprise does not have to make foreign exchange payment for the imports and
only charges the foreign party a processing fee.
Under processing with imported materials, the business enterprise makes foreign
exchange payment for the imported materials and parts and exports the finished products
after processing.

38
 Processing enterprises refer to production enterprises with legal person status that
process or assemble imported materials and parts for business enterprises, or factories
established by business enterprises but with no legal person status and yet practice
independent accounting and have their own business license.

2.4.2. Some current regulations of Vietnam on international processing.

Commercial processing is stipulated in article 128 to article 138 of Law on
Commerce of Vietnam 2005.
Commercial processing
Commercial processing means a commercial activity whereby a processor uses part
or whole of raw materials and materials supplied by the processee to perform one or
several stages of the production process at the latter’s request in order to receive
remuneration.
Processing contracts
Processing contracts must be made in writing or in other forms of equivalent legal
validity.
Goods for processing
Goods of all types can be processed, except for goods banned from business.
In case of processing of goods for foreign traders for overseas consumption, goods
banned from business, goods banned from export or import may be processed if so
permitted by competent state agencies.
Rights and obligations of processees
To hand over part or whole of raw materials and materials for processing in
accordance with processing contracts or transfer money for purchase of materials with
agreed quantities, quality and at agreed prices;
To take back all processed products, leased or lent machinery and equipment, raw
materials, auxiliary materials, supplies and discarded materials after the liquidation of
processing contracts, unless otherwise agreed.
To sell, destroy, donate or give as gifts on the spot processed products, leased or
lent machinery and equipment, raw materials, auxiliary materials, redundant supplies,
faulty products and discarded materials according to agreements and provisions of law.
To send their representatives to examine and supervise processing activities at
processing places, to assign experts to guide production technology and inspect quality of
processed products according to agreements in processing contracts.
To be responsible for the legality of the intellectual property rights over processed
goods, raw materials, materials, machinery and equipment for processing handed over to
processors.

39
 Rights and obligations of processors
To supply a part or whole of raw materials and materials for processing as agreed
upon with processees in terms of quantities, quality, technical standards and prices.
To receive processing remunerations and other reasonable expenses.
In case of processing for foreign organizations and individuals, to be entitled to
export on spot processed products; leased or borrowed machinery and equipment, raw
materials, materials, redundant supplies, faulty products and discarded materials under
the authorization of processees.
In case of processing for foreign organizations and individuals, to be exempt from
import tax on machinery, equipment, raw materials, auxiliary materials and supplies, that
are temporarily imported for the performance of processing contracts according to the
provisions of tax law.
To be responsible for the legality of goods processing activities in cases where
goods being processed are those banned from business, export or import.
Processing remuneration.
Processors may receive processing remuneration paid in cash or in processed
products, or machinery and equipment used for the processing.
In case of processing for foreign organizations and individuals, if processors
receive processing remunerations in processed products, machinery and equipment used
for processing, regulations on import of such products, machinery and equipment must be
complied with.

2.4.3. Characteristics of international commodities processing.

What is the trading object? That is labor force.
What is the difference between Processing contracts and Labor contracts?
The processing contract does not specify risks of using labor. But the labor
contract must bear risks of using labor.
In the processing contract, manufacturing and export are close-knit, but in the
labor contract, those two activities are separate.
- Processing is exporting goods.
- Commodities in processing are labor-intensive and do not require high techniques.
- Country of processee has higher development level than country of processor.
Developing countries are usually processors.

2.4.4. The main forms of international processing.

In terms of title to materials:

40
 Processee hands over part or whole of raw materials and materials, unfinished
products for processing and pay processing remunerations
* Strengths: Processor does not need to use their own capital.
* Drawbacks: Processor receives low processing remunerations, and it’s difficult for
processee to manage materials.
Processee sells materials and then buys finished products from processor.
* Strengths: Processing remuneration is higher.
* Drawbacks: high risks.
Processee supplies main materials and processor supplies auxiliary materials.
In terms of processing remuneration:
Target price: parties define target price for each product (target cost and target
remuneration)
Cost plus contract: processee must pay processor real costs and processing
remuneration.
In terms of processing relation:
Two - party processing: there are only processor and processee. For example,
Japan supplies spare parts for Hanel company to manufacture TV.
Multi-party processing: is a type of processing that finished processed products of
this unit are materials of later unit.
For example: Korea supplies fabric for company A, cotton for company B.
Company B produces thread from cotton. Company A uses thread of company B to make
clothes.

2.4.5. Pros and cons of international processing:

Pros:
For processor:
Create jobs, increase income for laborer, which will stabilize the social political
situation.
Receive new technology and manufacturing methods, and management
experience of foreign countries.
Have less or no risks in consuming goods but low interest.
Have chances to use domestic materials and
For processee:
Prices of finished products are low because of cheap labor.
Unfavorable industries can be moved to foreign countries.
Cons:
For processor:

41
 Low labor price.
Technology received is out of date.
For processee:
The product quality will be low, which will make it difficult to consume.
Model and trademark can be stolen.

2.5. International auction transactions

2.5.1. Concept.
Auction of goods means a commercial activity whereby sellers themselves conduct
or hire auction organizers to conduct public sales of goods to select purchasers that offer
the highest prices (Law on Commerce of Vietnam 2005)

2.5.2. Some provisions of Vietnam on auctions.

In relation to Law on Commerce of Vietnam 2005, auction of goods is stipulated in
following articles:
Auctions of goods
Auction of goods means a commercial activity whereby sellers themselves
conduct or hire auction organizers to conduct public sales of goods to select purchasers
that offer the highest prices.
Auctions of goods shall be performed by either of the following two modes:
Upward bidding mode, which is an auctioning mode whereby the person who
offers the highest price as compared with the reserve price shall have the right to
purchase the auctioned goods;
Downward bidding mode, which is an auctioning mode whereby the person who
first accepts the reserve price or the lower price next to the reserve price shall have the
right to purchase the auctioned goods.
Auction organizers, goods sellers.
1. Auction organizers are traders that register the business of providing auctioning
services or sell their own goods in cases where goods sellers conduct auctions by
themselves.
2. Goods sellers are owners of such goods or persons mandated by goods owners to
sell goods or persons entitled to sell goods of others according to the provisions of law.
Auction participants, auctioneers
1. Auction participants are organizations and individuals that register to participate
in auctions.
2. Auctioneers are auction organizers or persons authorized by auction organizers to
run auctions.

42
 Auctioning principles
The auction of goods in commerce must be conducted on the principles of
publicity, honesty and assurance of legitimated rights and interests of auction
participants.
Rights of auction organizers
Unless otherwise agreed, auction organizers shall have the following rights:
1. To request goods sellers to provide fully, accurately and promptly necessary
information on auctioned goods, to create conditions for auction organizers or auction
participants to examine auctioned goods and hand over auctioned goods to good
purchasers in cases where auction organizers are not goods sellers;
2. To determine reserve prices in cases where auction organizers are sellers of
auctioned goods or persons authorized by goods sellers;
3. To organize auctions;
4. To request goods purchasers to make payment;
5. To receive auction service charges paid by goods sellers according to the
provisions of Article 211 of this Law.
Obligations of auction organizers
1. To organize auctions of goods in compliance with the principles and procedures
provided for by law and by auction modes agreed upon with goods sellers.
To notify and post up in a public, full and accurate manner necessary information
on auctioned goods.
To preserve auctioned goods when they are entrusted by sellers for safe-keeping.
To display goods, goods samples or documents introducing goods for auction
participants to consider.
To compile documents on auctions of goods and send them to goods sellers and
purchasers and relevant parties according to the provisions of Article 203 of this Law.
To deliver auctioned goods to purchasers according to contracts for provision of
goods auctioning services.
To carry out the procedures for transferring ownership rights over auctioned
goods which are subject to the ownership registration as provided for by law, unless
otherwise agreed goods sellers.
To pay to goods sellers proceeds from the sale of goods, including differences
collected from persons that withdraw their offered price defined in Clause 3, Article 204
of this Law or return unsold goods to goods sellers according to agreements. In case of no
agreement, to pay money to goods seller within three working days after receiving money
from goods purchasers, or to return the goods immediately within a reasonable time after
auctions.

43
 Rights of goods sellers that are not auction organizers
Unless otherwise agreed, goods sellers shall have the following rights:
To receive money for auctioned goods and differences collected in cases
specified in Clause 3, Article 204 of this Law or receive goods back in case of
unsuccessful auctions;
To supervise the organization of auctions of goods.
Obligations of goods sellers that are not auction organizers Unless otherwise agreed,
goods sellers shall have the following obligations:
To deliver goods to auction organizers, create conditions for auction organizers and
auction participants to examine goods, and supply in full, accurate and timely manner
necessary information on auctioned goods;
To pay auction organizing service charge according to Article 211 of this Law.
Goods auction-organizing service contract
Goods auction organizing service contracts must be made in writing or in other
forms of equivalent legal validity.
In cases where auctioned goods are objects of pledges or mortgages, goods auction
organizing service contracts must be approved by pledgees or mortgagees, and sellers
shall have to notify auction participants of the pledged or mortgaged goods.
If the auction is agreed upon in pledge or mortgage contracts but pledgers or
mortgagors are absent without plausible reasons or refuse to enter into goods auction
organizing service contracts, such contracts shall be entered into between pledgees or
mortgagees and auction organizers.
Determination of reserve prices
Goods sellers must determine reserve prices. In cases where auction organizers
are authorized to determine reserve prices, goods sellers must be notified thereof before
auctions are posted up.
In cases where auctioned goods are objects of pledges or mortgages, pledgees or
mortgagees must reach agreements with pledgers or mortgagors on the determination of
reserve prices.
In the auction is agreed upon in pledge or mortgage contracts but pledgers or
mortgagors are absent without plausible reasons to refuse to enter into goods auction
organizing service contracts, the reserve prices shall be determined by pledgees or
mortgagees.
Notification to persons with rights and obligations related to goods being
objects of mortgage or pledge.
In cases where goods are objects of pledge or mortgage, auction organizers,
simultaneously with posting up goods auctions, must notify persons with related rights

44
and obligations within seven working days before such goods are auctioned according to
the provisions of Article 197 of this Law.
Time limit for notification and posting up of goods auctions
Within seven working days before a goods auction is held, the auction organizer
must post up the auction venue, the place of goods displays and his/her/its head office
according to the provisions of Article 197 of this Law.
In cases where auction organizers are also goods sellers, the time limit for
posting up auctions shall be decided by goods sellers themselves.
Contents of goods auction notification and posting up
A notice and post-up of a goods auction must have all the following contents:
The date and venue of auction;
The name and address of the auction organizer;
The name and address of the goods seller;
The list of goods, their quantities and quality;
The reserve prices;
Necessary information on the goods;
The place and time for displaying the goods;
The place and time for consulting the goods files;
The place and time for registering the purchase of goods.
Persons not allowed to participate in auctions
Persons who do not have civil act capacity, lose civil act capacity, or have
restricted civil act capacity under the provisions of the Civil Code, or persons who, at the
time of auction, are unable to cognize or control their acts;
Persons working in auctioning organizations; their parents, spouses and children;
Persons who have personally conducted the assessment of to be-auctioned goods;
their parents, spouses and children;
Persons who do not have the right to purchase auctioned goods as provided for by
law.
Registration for participation in auctions
Auction organizers may request persons who wish to participate in auctions to
register for the auction participation before such auctions take place.
Auction organizers may request persons who wish to participate in auctions to
make token payments which must not exceed 2% of the reserve prices of auctioned
goods.
Where persons participating in auctions purchase auctioned goods, their token
payments shall be cleared against the purchase prices; if they cannot purchase auctioned
goods, their token payments shall be refunded to them right after auctions are completed.

45
 Where persons who register for participation in auctions have made token
payments but later failed to participate in auctions, auction organizers shall be entitled to
retain such token payments.
Display of auctioned goods.
Goods, goods samples, documents introducing goods and other necessary
information on such goods must be displayed at places announced since the posting up.
Conducting of auctions.
An auction shall be conducted in the following order:
The auctioneer makers a roll call of registered participants in the goods auction;
The auctioneer presents each auctioned goods item, repeats their reserve prices,
answer questions of the auction participants, and ask them to offer bids;
As for the upward bidding mode, the auctioneer must clearly and accurately repeat
the latest offered price which is higher than the price offered by the previous bidder for at
least three times with an interval of at least thirty seconds. The auctioneer shall announce
the winning bidder to purchase the auctioned goods only if after repeating for three times
the price offered by such person, no one offers a higher price;
As for the downward bidding mode, the auctioneer must clearly and accurately
repeat every reduced-price level below the reserve price for at least three times with an
interval of at least thirty seconds. The auctioneer shall announce immediately the person
who first accepts the reserve price or any reduced-price level below the reserve price to
have the right to purchase the auctioned goods.
In cases where many persons concurrently offer the last price as for the upward
bidding mode, or the first price as for the downward bidding mode, the auctioneer shall
have to organize a lot drawing among such persons and announce the person who has
drawn the winning lot as the purchaser of auctioned goods.
The auctioneer shall have to prepare a document on goods auction right at the
auction venue, even when the auction is unsuccessful. The auction document must clearly
state the auction result and be signed by the auctioneer, the purchaser and two witnesses
from among the auction participants. For auctioned goods which must be notarized by the
State Notary according to the provisions of law, the auction document must also be
notarized.
Unsuccessful auctions
An auction shall be considered unsuccessful in the following cases:
There is no auction participant, or no bid price is offered;
The highest price offered is lower than the reserve price, for the upward bidding
mode.
Goods auction documents

46
 Goods auction documents are documents certifying the goods purchase and sale. A
goods auction document must have the following contents:
a) The name and address of the auction organizer;
b) The name and address of the auctioneer;
c) The name and address of the goods seller;
d) The name and address of the goods purchaser;
e) The time and venue of the auction;
f) The auctioned goods;
g) The price at which the goods were sold;
h) The names and addresses of two witnesses.
Auction documents must be sent to goods sellers, goods purchasers and related
parties.
In case of unsuccessful auctions, auction documents must clearly state that the
auctions were unsuccessful and have the contents specified at Points a, b, c, e, f, and h.
Withdrawal of offered prices
In case of an auction by the upward bidding mode, if the person offering the
highest price immediately withdraws his/ her bid, the auction shall still continue, starting
again from the preceding offered price. In case of an auction by the downward bidding
mode, if the person who first accepts the price immediately withdraws the accepted price,
the auction shall still continue, starting again from the preceding accepted price.
The person who withdraws his/her offered price or withdraws his/her acceptance
of the price shall not be allowed to further participate in the auction.
Where the auctioned goods are sold at a price lower than the withdrawn price
which is previously offered for the upward bidding mode, or accepted for the downward
bidding mode, the bid withdrawer shall have to pay the price difference to the auction
organizer. Where the goods are sold at a higher price, the bid withdrawer shall not be
entitled to such a difference.
In case of an unsuccessful auction, the bid withdrawer shall have to bear
expenses for the auction and not be refunded his/her token payment.
Refusal to purchase
Unless otherwise agreed, after auctions are declared to be complete, purchasers
shall be held liable. If purchasers refuse to purchase goods, they must obtain consents of
goods sellers and bear all costs related to the organization of auctions.
In cases where purchasers of auctioned goods have paid token payments but
refuse to purchase such goods, they shall not be refunded such token payment. Such
token payments shall belong to goods sellers.
Registration of ownership right

47
 Auction documents shall serve as basis for the transfer of the ownership right
over auctioned goods, which must be registered according to the provisions of law.
On the basis of goods auction documents and other valid papers, competent state
agencies shall have to register the goods ownership rights for goods purchasers according
to the provisions of law.
Sellers and auction organizers are obliged to carry out procedures for transferring
goods ownership rights to goods purchasers. Expenses for carrying out procedures for
such transfer shall be deducted from proceeds from goods sale, unless otherwise agreed.
Time of payment for goods purchase
Time of payment for goods purchase shall be agreed upon by auction organizers and
auctioned goods purchasers. If no agreement is reached, the time of payment for goods
purchase shall be the time provided for in Article 55 of this Law.
Place of payment for goods purchase
Place of payment for goods purchase shall be agreed upon by auction organizers
and goods purchasers. If no agreement is reached, the place of payment shall be the
places of business of auction organizers.
Time limit for delivery of auctioned goods
Unless otherwise agreed upon by auction organizers and goods purchasers, the time
limit for delivery of auctioned goods is provided for as follows:
For goods over which the ownership right is not required to be registered, auction
organizers must deliver goods to their purchasers immediately after auction documents
are made;
For goods over which the ownership rights have been registered, auction organizers
must immediately carry out procedures for transferring the ownership rights and deliver
goods to their purchasers immediately after the procedures for ownership right transfer
are completed.
Place of delivery of auctioned goods
Where goods are things attached to land, the place of delivery thereof is the place
where such goods are located.
Where goods are movables, the place of delivery thereof is the place where the
auction is organized, unless otherwise agreed upon by auction organizers and goods
purchasers.
Goods auction service charges
Where there is no agreement on goods auction service charges, such charges shall
be determined as follows:
In case of successful auctions, auction service charges shall be determined
according to Article 86 of this Law;

48
 In case of unsuccessful auctions, goods sellers must pay a charge equal to 50% of
the charge rate.
Expenses related to auctions of goods
Unless otherwise agreed upon between goods sellers and auction organizers,
expenses related to auctions of goods shall be determined as follows
Goods sellers shall bear the expenses for transportation of goods to the agreed
places and the expenses for preservation of goods in cases where they do not deliver the
goods to auction organizers for preservation;
Auction organizers shall bear the expenses for preservation of goods delivered to
them, the expenses for posting up, notification and organization of auctions and other
related expenses.
Responsibilities for auctioned goods untrue to notified or posted up ones
Within the time limit provided for in Article 318 of this Law, goods purchasers may
return the goods to auction organizers and request compensations for damage if the
auctioned goods are untrue to notified or posted up ones.
Where the auction organizer is not the seller and the untruthful notified or posted up
contents are attributable to the fault of the seller, the auction organizer shall have the
right to return the goods and claim damages from the seller.

2.5.3. The types of international auction.

There are two types of auction:
Commercial auction: the goods are often classified and sold for traders.
Non-commercial auction: buyers sell the goods as they are to clear stock.

2.5.4 Procedures of an auction

a) Preparation
Goods owner follows his sale plan, contacts with auction centers to make
formalities.
Auction centers:
Set up sale requirements for each commodity, sale plan, deposit and other
regulations on payment.
Advertise to raise demand.
Divide into lots and mark for each lot and choose a sample.
Display the sample.
b) Goods examination:
Auction center opens display department for everyone who is interested in the
auctioned goods.

49
 If buyers do not come and see the goods, they will lose their rights to complain on
the goods.
c) Auction:
There are two modes:
a) Upward bidding mode, which is an auctioning mode whereby the person who
offers the highest price as compared with the reserve price shall have the right to
purchase the auctioned goods;
b) Downward bidding mode, which is an auctioning mode whereby the person who
first accepts the reserve price or the lower price next to the reserve price shall have the
right to purchase the auctioned goods.
At the auction table, if the person who offers the highest price withdraws the offered
price, auction will be done right away and start at the previous offered price. This person
is not allowed to join the auction anymore.
In case of downward bidding mode, if the person who offers the lower price next to
the reserve price withdraws his offered price, he must pay the differential amount for the
auctioning seller, if the offered price is higher than the reserve price, the withdrawer does
not get the differential amount.
If the auction does not succeed, the withdrawer must pay all costs for that auction
and is not allowed to receive the deposit.
Within 03 days, the buyer is allowed to return the goods if their quality does not
conform to what is advertised.
d) Contract signing and delivery:
The buyer must pay 20-35% of the consignment value after signing the contract.
The remaining will be paid 15 days later; delivery will be executed after 100% of
payment.

2.6. International bidding

2.6.1. Concept
International bidding is a transparent procurement method in which bids from
competing contractors, suppliers, or vendors are invited by openly advertising the scope,
specifications, and terms and conditions of the proposed contract as well as the criteria by
which the bids will be evaluated. Competitive bidding aims at obtaining goods and
services at the lowest prices by stimulating competition, and by preventing favoritism.
(Law on Commerce of Vietnam 2005)
In (1) open competitive bidding (also called open bidding), the sealed bids are
opened in full view of all who may wish to witness the bid opening; in (2) closed

50
competitive bidding (also called closed bidding), the sealed bids are opened in presence
only of authorized personnel.

2.6.2. Some provisions of Vietnam for international bidding.

Bidding for goods or services is regulated from Article 214 to Article 232 in Law on
Commerce of Vietnam 2005:
Bidding for goods or services
Bidding for goods or services means a commercial activity whereby a party
purchases goods or services through bidding (referred to as bid solicitor) in order to
select, among traders participating in the bidding (referred to as bidders), a trader that
satisfies the requirement set forth by the bid solicitor and is selected to enter into and
perform a contract (referred to as bid winner).
The provisions on bidding in this Law shall not apply to bidding for public
procurement according to the provisions of law.
Forms of bidding
Bidding for goods or services shall be conducted in either of the following two
forms:
a) Open bidding which is a form of bidding whereby the bid solicitor does not limit
the number of bidders;
b) Restricted bidding which is a form of bidding whereby the bid solicitor invites
only a limited number of bidders to participate in the bidding.
The selection of the form of open bidding or restricted bidding shall be decided
by bid solicitors.
Modes of bidding
Modes of bidding include bidding with one bid dossier bag and bidding with two
dossier bags. Bid solicitors shall have the right to select the mode of bidding and must
notify such in advance to bidders.
In case of bidding by mode of one dossier bag, a bidder shall submit its bid dossier
consisting of technical and financial proposals in one dossier bag according to the
requirements in the tendering dossier and the opening of bids shall be effected only once.
In case of bidding by mode of two dossier bags, a bidder shall submit its bid
dossier consisting of technical and financial proposals in two separate dossier bags
submitted simultaneously, and the opening of bids shall be effected twice. The dossier on
technical proposals shall be opened first.
Pre-qualification of bidders
Bid solicitors may organize the pre-qualification of bidders in order to select those
bidders that are capable of satisfying the conditions set forth by bid solicitors.

51
 Tendering dossiers
A tendering dossier comprises:
a) Tendering notice;
b) Requirements related to goods or services subject to bidding;
c) Methods of evaluation, comparison, grading and selection of bidders;
d) Other instructions related to bidding.
Expenses for supply of documents provided to bidders shall be stipulated by bid
solicitors.
Tendering notice
A tendering notice comprises the following principal contents:
a) Name and address of the bid solicitor;
Brief description of bidding contents;
Time limit, place and procedures for receipt of tendering dossiers;
Time limit, place and procedures for submission of bid dossiers;
Instructions for reading tendering dossiers.
Bid solicitors shall have to notify on the mass media in case of open bidding or
send notice on invitation on register for bidding participation to qualified bidders in case
of restricted bidding.
Instructions to bidders.
Bid solicitors shall have to provide bidders with instructions on the tendering
conditions, procedures to be applied in the bidding process, and to answer questions of
bidders.
Management of bid dossiers.
Bid solicitors shall have to manage bid dossiers.
Bid bonds
Bid bonds shall be made in the form of bid deposit, collateral or guarantee.
Bid solicitors may request bidders to make bid deposits, bid collaterals or provide
bid guarantees when submitting their bid dossiers. The percentage of a bid deposit or
collateral shall be set out by bid solicitor but must not exceed 3% of the total estimated
value of goods or services subject to bidding.
Bid solicitors shall stipulate the mode and conditions for making deposits,
collaterals or providing bid guarantees. In case of bid deposits or collaterals, such
deposits or collaterals shall be returned to unsuccessful bidders within seven working
days from the date the bidding result are announced.
Bidders shall not be allowed to receive back their bid deposits or collaterals in
cases where they withdraw bid dossiers after the expiration of the time limit for

52
submitting bid dossiers (referred to as “bidding closure”), fail to enter into contracts or
refuse to perform contracts in cases where they are bid winners.
Guarantors for bidders are obliged to guarantee bids for the guaranteed within the
value equal to deposits or collaterals.
Confidentiality of bidding information
Bid solicitors must keep confidential bid dossiers.
Organizations and individuals involved in the organization of bidding and in the
evaluation and selection of bids must keep confidential information relevant to the
bidding.
Bid opening
Bid opening is the opening of bid dossiers at a fixed time or in cases where there is
no prefixed time, the time of bid opening shall be the time immediately after the bidding
closure.
All bid dossiers submitted on time must be opened publicly by bid solicitors.
Bidders shall be entitled to attend the bid opening.
Bid dossiers which are not submitted on time shall be rejected and returned to
bidders unopened.
Consideration of bid dossiers upon bid opening
- Bid solicitors consider the validity of bid dossiers.
- Bid solicitors may request bidders to clarify unclear contents in their bid dossiers.
Requests and clarification of bid dossiers must be made in writing.
Minutes of bid opening
- Upon bid opening, the bid solicitor and bidders that are present shall have to sign
the minutes of bid opening.
- A minute of bid opening must have the following contents:
a) Name of goods or services subject to bidding;
b) Date, time and place of the bid opening;
c) Names and addresses of the bid solicitor and bidders;
d) Bidding prices of bidders;
e) Written amendments or supplements and relevant contents, if any.
Evaluation and comparison of bid dossiers
Bid dossiers shall be evaluated and compared according to each criterion for an
overall evaluation. The criteria for evaluation of bid dossiers shall be provided for by bid
solicitors.
The mentioned criteria shall be evaluated by the score-giving method or other
methods determined prior to the bid opening.
Amendment of bid dossiers.

53
 - Bidders are not allowed to amend their bid dossiers after the bid opening.
- In the course of evaluation and comparison of bid dossiers, bid solicitors may
request bidders to clarity matters related to their bid dossiers. Requests of solicitors and
replies of bidders must be made in writing.
- Where bid solicitors amend some contents in tendering dossiers, they must send
such amendments in writing to all bidders at least ten days before the deadline for
submitting bid dossiers so that bidders have enough time to finalize their bid dossiers.
Classification and selection of bidders
On the basis of the result of the evaluation of bid dossiers, bid solicitors shall have
to classify and select bidders according to the method already determined.
Where many bidders obtain equal scores and equally satisfy criteria to win the
bidding, the bid solicitor shall have the right to select winning bidder.
Notification of biding results and entry into contracts
Immediately after bidding results are available, bid solicitors shall have to notify
them to bidders.
Bid solicitors shall finalize and enter into contracts with bid winners on the
following bases:
a) Bidding results;
b) Requirements stated in tendering dossiers;
c) Contents in bid dossiers.
Contract performance security
Involved parties may agree that bid winners should make deposits or collaterals or
be provided with guarantees to secure the performance of contracts. The amount to be
deposited or used as a collateral shall be set by bid solicitors but must not exceed 10% of
the contract value.
Contract performance security measures shall be effective up to the time of
completion of contractual obligations by bid winners.
Unless otherwise agreed, bid winners shall receive back deposits or collaterals as
security for the performance of contracts upon the liquidation of such contracts. Bid
winners shall not be entitled to receive back deposits or collaterals as security for the
performance of contracts if they refuse to perform such contracts after they are entered
into.
After paying deposits or making collaterals to secure the contract performance,
bid winners shall have their bid deposits or collaterals refunded.
Reorganization of bidding
A bidding shall be reorganized in one of the following cases:
- Where there is a violation of the regulations on bidding;

54
 - Where all bidders fail to satisfy the bidding requirements.

2.6.3. Types of international bidding.

a) In terms of bidding scope:
- Open bidding
- Restricted bidding
b) In terms of quotation form:
- One bid dossier bag
- Two bid dossier bags
c) In terms of bid opening procedure:
- One period bid
- Two period bid
d) In terms of bidder evaluation procedure:
- Preselecting bid
- Un-preselecting bid
e) In terms of bid purposes:
- Purchasing bid
- Service bid
- Management bid

2.7. Trading at international fairs and exhibitions

2.7.1. Concept
Trade fairs and exhibitions are periodically organized in a specific time and place so
that companies in specific industry can showcase and demonstrate their latest products
and services, meet industry partners and customers to sign sale contracts. (Law on
Commerce of Vietnam 2005)

2.7.2. Some current regulations of Vietnam on trade in international fairs and

exhibitions
Trade fairs and exhibitions are regulated in Law on Commerce of Vietnam
2005from Article 129 to Article 140.
Trade fairs and exhibitions
Trade fairs and exhibitions mean commercial promotion activities conducted in a
concentrated manner at particular locations and for given periods of time for traders to
display and introduce their goods and/or services for the purpose of promoting them and
seeking opportunities for entering into contracts for sale and purchase of goods or service
contracts.
Provision of trade fair and exhibition services

55
 Provision of trade fair and exhibition services means commercial activities whereby
traders dealing in these services provide services of organizing or participating in trade
fairs and exhibitions to other traders for receiving trade fair and exhibition organization
service charges.
Trade fair and exhibition organization service contracts must be made in writing or
in other forms of equivalent legal validity.
Rights to organize or participate in trade fairs and exhibitions
Vietnamese traders, branches of Vietnamese traders, Vietnam-based branches of
foreign traders shall have the right to directly organize or participate in trade fairs and
exhibitions for goods and/or services they trade in or hire traders providing trade fair and
exhibition services to do so.
Representative offices of traders shall not be allowed to directly organize or
participate in trade fairs and exhibitions. When being authorized by traders,
representative offices shall have the right to sign contracts with traders providing trade
fair and exhibition services to do so for the traders they are representing.
Foreign traders shall have the right to directly participate or hire Vietnamese
traders providing trade fair and exhibition services to participate, on the behalf, in trade
fairs and exhibitions in Vietnam. Where they wish to organize trade fairs and exhibitions
in Vietnam, foreign traders must hire Vietnamese traders providing trade fair and
exhibition services to do so.
Organization of trade fairs and exhibitions in Vietnam
Trade fairs and exhibitions organized in Vietnam must be registered with and
certified in writing by the state management agencies in charge of commerce of the
provinces or centrally-run cities where such trade fairs and exhibitions are to be
organized.
The Government shall specify the order, procedures, contents of registration and
certification of the organization of trade fairs and exhibitions in Vietnam.
Organization of and participation in overseas trade fairs and exhibitions
Traders not providing trade fair and exhibition services, when directly organizing
or participating in overseas trade fairs and exhibitions for goods and/or services they
trade in, must comply with the regulations on export of goods.
Traders providing trade fair and exhibition services, when arranging for other
traders to participate in overseas trade fairs and exhibitions, must register such with the
Ministry of Trade.
Traders that have not yet to register their business of providing trade fair and
exhibition services shall not be allowed to arrange for other traders to participate in
overseas trade fairs and exhibitions.

56
 The Government shall specify the order, procedures and contents of registration
for organization of, and participation in, overseas trade fairs and exhibitions.
Goods and/or services displayed and introduced at trade fairs and exhibitions
in Vietnam
Goods and/or services which are not permitted for participation in trade fairs and
exhibitions include:
a) Goods and/or services banned from business, subject to business restrictions, or
not yet permitted for circulation according to the provisions of law;
b) Goods and/or services provided by overseas traders and banned from import
according to the provisions of law;
c) Counterfeit goods and goods infringing upon intellectual property rights, except
where they are displayed and introduced for comparison with genuine ones.
Apart from the provisions of this Law on trade fairs and exhibitions, goods and/or
services subject to specialized management must also comply with regulations on
specialized management of such goods and/or services.
Goods temporarily imported for participation in trade fairs or exhibitions in
Vietnam must be re-exported within thirty days after the end of such trade fairs or
exhibitions.
The temporary import for re-export of goods for participation in trade fairs or
exhibitions in Vietnam must comply with the provisions of customs law and other
relevant provisions of law.
Goods and/or services participating in overseas trade fairs and exhibitions
All types of goods and services shall be permitted to participate in overseas trade
fairs and exhibitions, except for those banned from export according to the provisions of
law.
Goods and/or services banned export shall only be permitted for participation in
overseas trade fairs and exhibitions when so approved by the Prime Minister.
The time limit for temporary export of goods for participation in overseas trade
fairs and exhibitions shall be one year from the date such goods are temporarily exported.
If past that time limit, the goods are not re-imported yet, such goods shall be subject to
taxes and other financial obligations as provided for by Vietnamese law.
The temporary export for re-import of goods for participation in overseas trade
fairs and exhibitions must comply with the provisions of customs law and other relevant
provisions of law.
Sale, presentation of goods as gifts and provision of services at trade fairs and
exhibitions in Vietnam

57
 Goods and services displayed and introduced at trade fairs and exhibitions in
Vietnam are permitted to be sold, presented as gifts or provided at such trade fairs and
exhibitions; for imported goods, registration thereof must be made with customs offices,
except for the cases.
Goods which are imported under permits of competent state agencies shall be
sold or presented as gifts only after written approvals of such competent state agencies
are obtained.
The sale and presentation of goods as gifts at trade fairs and exhibitions must
comply with regulations on specialized import management of such goods.
Goods sold or presented as gifts, and service provided at trade fairs and
exhibitions in Vietnam shall be subject to taxes and other financial obligations as
provided for by law.
Sale, presentation of Vietnamese goods as gifts and provision of Vietnamese
services participating in overseas trade fairs and exhibitions
Vietnamese goods and services participating in overseas trade fairs and exhibitions
are permitted to be sold, presented as gifts or provided at such trade fairs and exhibitions,
except:
- The sale and presentation as gifts of goods which are banned from export but
have temporarily exported for participation in overseas trade fairs and exhibitions, shall
be made only after the Prime Minister’s approval is obtained.
- Goods exported under permits of competent state agencies shall be sold or
presented as gifts only after written approvals of such competent state agencies are
obtained.
Vietnamese goods and/or services participating in overseas trade fairs and
exhibitions and being sold, presented as gifts or provided overseas shall be subject to
taxes and other financial obligations as provided for by law.
Rights and obligations of organizations and individuals participating in trade
fairs and exhibitions in Vietnam
To exercise rights and perform obligations as agreed upon with traders
organizing trade fairs and exhibitions.
To sell, present goods as gifts and provided services displayed and introduced at
trade fairs and exhibitions according to the provisions of law.
To temporarily import and re-export goods and documents on goods and/or
services for display at trade fairs and exhibitions.
To comply with regulations on organization of trade fairs and exhibitions in
Vietnam.

58
 Rights and obligations of traders organizing or participating in overseas trade
fairs and exhibitions
To temporarily export and re-import goods and documents on goods and/or services
for display and introduction at trade fairs or exhibitions.
To comply with regulations on organization of, and participation in, overseas trade
fairs and exhibitions.
To sell and present as gifts goods displayed and introduced at overseas trade fairs
and exhibitions; and to pay taxes and fulfill other financial obligations as provided for by
Vietnamese law.
Rights and obligations of traders providing trade fair and exhibition services.
To post up topics and durations of trade fairs and exhibitions at places where such
trade fairs and exhibitions are to be organized before their opening dates.
To request services hirers to supply goods for participation in trade fairs and
exhibitions within time limits agreed upon in contracts.
To request service hirers to supply information on goods and/or services for
participation in trade fairs and exhibitions and other necessary means as agreed upon in
contracts;
To receive service charges and other reasonable expenses;
To organize trade fairs and exhibitions as agreed upon in contracts.

2.7.3. Forms of international fairs and exhibitions.

There are many types of fairs and exhibitions because of its diversity in activities. In
reality, there has not had any classification of fairs and exhibitions. In order to realize
them relatively, we can divide them into many following types:
2.7.3.1 In terms of periodicity
Periodic fairs and exhibitions which are often organized annually or some times
per year in a specific time and place are often large-scale, prestige, and familiar to
customers, and introduces products with large markets.
Non-periodic fairs and exhibitions: are organized to meet demand of enterprises
whose products’ markets are small such as local ones. These fairs and exhibitions are
coordinated and supported by the local authority or related industries.
2.7.3.2 In terms of industry
Synthetic fairs and exhibitions: with the participation of different domestic and
international enterprises of different economic industries in order to introduce and sell
products.

59
 Specialized fairs and exhibitions: The purpose of this type of fair and exhibition is
to introduce products of one economic area in the economy such as Industry Fair,
Environment Fair …
2.7.3.3 In terms of scope
International fairs and exhibitions: can be organized inland or abroad with the
participation of customers from different countries such as Hamburg Trade Fair, Expo
Trade Fair (annually organized in April)
National fairs and exhibitions: Customers are domestic enterprises. The purpose of
this fair and exhibition is to promote sale and capability of domestic businesses such as
Fashion Fair, Consumer Product Fair …
Local fairs and exhibitions: are organized in the town or city or any localities with
the participation of the local businesses so as to encourage the local economy, open
relation with other localities.

2.7.4. Procedure of joining international fairs and exhibitions

After receipt of the invitation from the Fair (or Exhibition)’s organizer in foreign
country, Chamber of Commerce and Industry or Foreign Trade Development Center
studies some issues related to organization.
The purpose, the meaning and the role of the fair or exhibition.
The time, place and period of the fair or exhibition.
The conditions and protocols of showing products and exhibits, the rent of
space.
The prestige of the fair or exhibition that enterprises tend to take part in.
Then Chamber of Commerce and Industry or Foreign Trade Development Center
will inform import-export enterprises or economic organizations of the fair or exhibition
that they can join. Information needed to inform import-export enterprises or economic
organizations involves the fair/ exhibition’s purpose, meaning and prestige; scope and
date of the fair/exhibition; rent cost of space, ability to sell products at the fair, ways to
transport the exhibits to the exhibition or fair, import-export formality for fair and
exhibition, and other related costs.

2.8. Trading in Commodity Exchanges

2.8.1. Concept.
Purchase and sale of goods through the Goods Exchange mean commercial
activities whereby the parties agree to purchase and sell a defined quantity of goods of a
defined type through the Goods Exchange under the standards of the Goods Exchange, at
a price agreed upon at the time the contract is entered into, and with the time of goods

60
delivery determined to be a specific point of time in the future. (Law on Commerce of
Vietnam 2005)

2.8.2. Some current regulations of Vietnam for trading on an exchange of goods.

Purchase and sale of goods through the Goods Exchange
Purchase and sale of goods through the Goods Exchange mean commercial
activities whereby the parties agree to purchase and sell a defined quantity of goods of a
defined type through the Goods Exchange under the standards of the Goods Exchange, at
a price agreed upon at the time the contract is entered into, and with the time of goods
delivery determined to be a specific point of time in the future.
The Government shall specify activities of purchase and sale of goods through
the Goods Exchange.
Contracts for purchase and sale of goods through the Goods Exchange
Contracts for purchase and sale of goods through the Goods Exchange include
forward contracts and option contracts.
Forward contract means an agreement whereby the seller undertakes to deliver,
and the purchaser undertakes to receive the goods at a specific point of time in the future
under the contract.
Call option or put option contract means an agreement whereby the purchaser has
the right to purchase or sell specific goods at a pre-fixed price level (hereinafter called
executed price) and must pay a certain sum of money to buy this right (hereinafter called
option money). The option purchaser may opt to effect or not to effect such purchase or
sale of goods.
Rights and obligations of parties to forward contracts
Where the seller delivers the goods under the contract, the purchaser is obliged to
receive the goods and pay for them.
Where the parties agree that the purchaser may make cash payment and reject the
goods, the purchaser shall have to pay to the seller a sum of money equal to the
difference between the price agreed upon in the contract and the market price announced
by the Goods Exchange at the time the contract is performed.
Where the parties agree that the purchaser may make cash payment and refuse to
deliver the goods, the seller shall have to pay to the purchaser a sum of money equal to
the difference between the market price announced by the Goods Exchange at the time
the contract is performed, and the price agreed upon in the contract.
Rights and obligations of parties to option contracts

61
 The call option or put option purchaser shall have to pay for option purchase in
order to become call option or put option holder. The sum of money to be paid for option
purchase shall be agreed upon by the parties.
The call option holder has the right to purchase but is not obliged to purchase
goods ascertained in the contract. Where the call option holder decides to perform the
contract, the seller shall be obliged to sell goods to the call option holder. The seller that
has no goods to deliver shall have to pay to the call option holder a sum of money equal
to the difference between the price agreed upon in the contract and the market price
announced by the Goods Exchange at the time the contract is performed.
The put option holder has the right to sell but is not obliged to sell goods
ascertained in the contract. Where the put option holder decides to perform the contract,
the purchaser shall be obliged to purchase goods from the put option holder. Where the
purchaser does not purchase goods, it shall have to pay to the put option holder a sum of
money equal to the difference between the market price announced by the Goods
Exchange at the time the contract is performed, and the price agreed upon in the contract.
Where the call option or put option holder decides not to perform the contract
within the valid duration of the contract, the contract shall automatically be invalidated.
The Goods Exchange
The Goods Exchange has the following functions:
a) Providing the material – technical conditions necessary for transactions of
purchasing or selling goods;
b) Running trading operations;
c) Listing specific prices formed at the Goods Exchange at each specific time.
The Government shall specify the conditions for the establishment of the Goods
Exchange, the powers and tasks of the Goods Exchange, and the approval of the
operation charter of the Goods Exchange.
Goods traded at the Goods Exchange
The list of goods traded at the Goods Exchange shall be promulgated by the Trade
Minister.
Brokers for purchase and sale of goods through the Goods Exchange
Brokers for purchase and sale of goods through the Goods Exchange shall be
allowed to operate at the Goods Exchange only when they fully satisfy the conditions
provided for by law. The Government shall specify the conditions for operation of
brokers for the purchase and sale of goods through the Goods Exchange.
Brokers for purchase and sale of goods through the Goods Exchange shall be
allowed to conduct only activities of brokerage for purchase and sale of goods through

62
the Goods Exchange and must not be a party to a contract for purchase and sale of goods
through the Goods Exchange.
Brokers for purchase and sale of goods through the Goods Exchange shall be
obliged to deposit money at the Goods Exchange to secure the performance of their
obligations arising in the course of goods purchase and sale brokerage activities. The
deposit level shall be set by the Goods Exchange.
Prohibited acts of brokers for purchase and sale of goods through the Goods
Exchange
Enticing customers to enter into contracts by promising to compensate the whole
or part of loss incurred or to guarantee profits for them.
Offering or conducting brokerage for goods without entering into contract with
customers.
Using sham prices or other fraudulent measures in the course of brokerage.
Refusing or unreasonably delaying the brokerage for contracts in accordance
with contents agreed upon with customers.
Prohibited acts in activities of purchase and sale of goods through the Goods
Exchange
Staff members of the Goods Exchange shall not be allowed to conduct the
brokerage for, purchase or sale of goods through the Goods Exchange.
Parties involved in the purchase and sale of goods through the Goods Exchange
must not conduct the following acts:
a) Committing fraudulences or deceits about volumes of goods in forward or option
contracts which are transacted or may be transacted, and fraudulences and deceits about
real prices of goods in forward or option contracts;
b) Supplying false information on transactions, the market or prices of goods
purchased or sold through the Goods Exchange.
c) Applying illegal measures to cause disorder of the goods market at the Goods
Exchange.
d) Committing other prohibited acts provided for by law.
Application of management measures in emergency cases
Emergency cases mean circumstances where the disorder of the goods market
occurs, making transactions through the Goods Exchange unable to accurately reflect the
goods supply and demand relation.
In emergency cases, the Trade Minister shall be entitled to apply the following
measures:
a) Temporarily suspending transactions through the Goods Exchange;

63
 b) Limiting transactions within a price bracket or a specific quantity of goods;
c) Changing the schedule of transactions;
d) Adjusting the operation charter of the Goods Exchange;
e) Other necessary measures as provided for by the Government.
Right to conduct the purchase and sale of goods through overseas Goods
Exchanges
Vietnamese traders are entitled to conduct purchase and sale of goods through
overseas Goods Exchange according to regulations of the Government.
In addition to above types of transactions, we also have some other types like Spot,
Forward, Future, Hedge, Franchise, E-commerce …

CHAPTER SUMMARY
In import-export activities, there are lots of transaction methods. Each method has
its own features, drawbacks and strengths. To improve import-export business, each
enterprise will subject to its business conditions (scale, capital, goods, workforce …) to
choose a suitable transaction method or combine some methods into one.
Direct transactions in international trade compose of exports, imports, temporary
import for re – export, temporary export for re- import, and cross-border transshipment
Purchase of international goods through intermediates involve transactions in which
two parties buy and sell through a third party to sign and perform the contract.
Countertrade is any commercial arrangement in which sellers or exporters are
required to accept in partial or total settlement of their deliveries, a supply of products
from the importing country.
Processing trade refers to the business activity of importing all or part of the raw
and auxiliary materials, parts and components, accessories, and packaging materials from
abroad in bond, and re-exporting the finished products after processing or assembly by
enterprises within the mainland. It includes processing with supplied materials and
processing with imported materials.
Auction of goods refers to a commercial activity whereby sellers themselves
conduct or hire auction organizers to conduct public sales of goods to select purchasers
that offer the highest prices.
International bidding is a transparent procurement method in which bids from
competing contractors, suppliers, or vendors are invited by openly advertising the scope,
specifications, and terms and conditions of the proposed contract as well as the criteria by
which the bids will be evaluated.

64
 Trade fairs and exhibitions are periodically organized in a specific time and place so
that companies in specific industry can showcase and demonstrate their latest products
and services, meet industry partners and customers to sign sale contracts.
Purchase and sale of goods through the Goods Exchange mean commercial
activities whereby the parties agree to purchase and sell a defined quantity of goods of a
defined type through the Goods Exchange under the standards of the Goods Exchange, at
a price agreed upon at the time the contract is entered into, and with the time of goods
delivery determined to be a specific point of time in the future.

REVISION QUESTIONS

1. Present characteristics, types, advantages, and disadvantages of countertrade.

2. Present measures to ensure the implementation of countertrade.
3. Present concepts, characteristics and main forms of international processing.
4. Analyze features and procedures of international bidding.
5. Present ways to execute transactions at a trade fair or exhibition.
6. Distinguish temporary import for re-export, temporary export for re-import, and
cross-border transshipment.

65
 CHAPTER 3: INTERNATIONAL COMMERCIAL TERMS (INCOTERMS)

It can be seen that for an exporter to simply say to a potential overseas customer that
a particular product is, for example, $25.00 per unit, does not really say much, in that the
goods could cost the buyer $25.00 each in the seller’s warehouse or $25.00 each
delivered into their own warehouse, and there is obviously a big difference between the
two.
So, for the exporter price to make any sense there must be some expression as to
what is included, and not included, in that price, as in $25.00 per unit CIF Cat Lai port
(Cost, insurance and freight). It is here where the use of what is referred to as delivery
terms or trade terms is necessary, and this has been the case for centuries. The fact is that
international trader has established, over many centuries of international trading, a range
of standard expressions to cover most types of sales contracts.
But perhaps the most important development was in 1936 when the International
Chamber of Commerce (ICC) produced the first version of Incoterms, which set out to
produce standardized and globally accepted definitions of the seller’s and buyer’s
obligations under a range of terms in common use. This publication has been amended
and updated on a number of occasion since then and the current version is 2010.
Through this chapter, students can differentiate among commercial terms of
Incoterms 2010, between the latest version and the previous one; calculate and prepare
prices in quotations under different commercial terms and choose the best quotation,
solve problems which relate to Incoterms.

3.1. Introduction to Incoterms.

3.1.1 Purpose of the Incoterms.
* Introduction to Incoterms
There are lots of rules applied for domestic and international sales of goods. There
are also differences between domestic and international commercial terms, which provide
rules for the rights and obligations of the buyer and seller regarding the delivery of the
goods under a sales contract.
Given the complexity and detail of this subject, parties to international sales
transactions will often wish to adopt an agreed “commercial term” to define the
allocation of responsibilities between the seller and the buyer regarding delivery of the
goods such as terms include, for example, FOB (Free on Board), FAS (Free Alongside
Ship), and CIF (Cost, Insurance and Freight).
Incoterms is an acronym for “International Commercial Terms”, a set of rules first
published by the I.C.C in 1936. The Incoterms have been updated periodically since that

66
time. The current version of Incoterms was published in 2010 and is known as
“Incoterms 2010”.
The purpose of Incoterms
Where the goods are to be carried from one location to another as part of the sale
transaction, the parties will often adopt a commercial term to state the delivery obligation
of the seller.
In international commerce, the Incoterms represent by far the dominant source of
definitions for commercial terms. The Incoterms provide specific rules for determining
the obligations of both the seller and the buyer depending on the specific commercial
term they choose (FOB, CIF, etc.). The Incoterms Rules state what acts the seller must do
to deliver, what acts the buyer must do to accommodate delivery, what costs each party
must bear, and at what point in the delivery process the risk of loss passes from the seller
to the buyer. Each of these obligations may be different for different commercial terms.
For instance, the obligations, costs, and risks of the seller and the buyer are different
under FOB than they are under CIF.

3.1.2. Some definitions or terms used in Incoterms

Delivery In common use, the act of delivery something, while the place
of delivery is often the buyer’s business place.
Pre-carriage The initial transport of goods from the seller’s premises to the
main port or place where the main transport begins, usually
by truck, rail or inland waterway.
Main carriage The primary transport of goods, generally is the international
longest routing by airplane or sea vessel.
Onward carriage Transport from the port, terminal or a place of arrival in the
country of destination, usually by truck, rail or inland
waterway.
Multimodal Using of more than one mode of transport to transport goods
from origin to final destination.
Carrier A transport goods for carrier can be any person or firm who
by contract “undertakes to perform or procure” such service
String Sales The sales or successive resale of a single shipment of goods
while enrouting from place of shipment to destination.
Door-to-door A contract of carriage including pre-carriage, main-carriage
and onward carriage.
Door-to-(air) port A contract of carriage including pre-carriage; main-carriage

67
 Port-to-port A contract of carriage excluding pre-carriage and onward
carriage.
On-board A marine transport doc. notated and bearing the date that the
goods were physically loaded on the carrying vessel. “On
board” is appropriate for FOB, CFR, CIF which specifically
task the seller with vessel loading.
Minimum The very limited coverage is the default position for CIP and
coverage CIF. It corresponds to the American term “Free of Particular
Average (FPA)” and the more widely used term Institute Cargo
Shipment a type of sales/ purchase contract under which the seller’s
contract responsibility ends when the contract goods have been handled
over to a carrier (i.e. the seller delivers by shipping)
Arrival contract a type of sales/ purchase contract under which the seller’s
responsibility ends when the contract goods have arrived at
the agreed place (i.e. the seller delivers when they arrive)
Party of risk the party has most to lose in case of casualty to the contract
goods. Normally, this is sellers up to delivery point then
buyer beyond it.

3.1.3 Development of Incoterms.

The first Incoterms were issued in 1936. After their initial introduction, the
Incoterms rules were revised for the first time in 1953 and thereafter in 1967, 1976, 1980,
1990 and 2000. This appears to suggest that, in recent times, the Incoterms rules have
been revised at 10-year intervals for the last three revisions. The main purpose of the
Incoterms rules is to reflect international commercial practice.
The first version of the Incoterms rules was clearly focused on commodity trading
and fixed the important delivery points at the ship’s side or at the moment when the
goods are taken on board the ship. This point was relevant in the important and well-
known trade terms FOB, CFR and CIF. In cases where the goods were to be delivered
alongside the ship rather than across the ship’s rail, the trade term FAS was available, or
FOR and FOT (“Free on Rail” and “Free on Truck”), and FCA (Free Carrier). The
Incoterms 1936 rules also contained a trade term representing the minimum obligation of
the seller, namely EXW (Ex-Works). This version was mainly used for maritime
transport. Incoterms 1936 included 7 terms.
In 1953, two trade terms – DES (Delivered Ex Ship) and DEQ (Delivered Ex Quay)
were added. Incoterms 1953 included 9 terms.

68
 In 1967, two trade terms - DAF (Delivered At Frontier) and DDP (Delivered Duty
Paid) were added, which increased the number of trade terms to 11.
In 1976, a specific term for air transport was added, namely FOB Airport, to settle
all problems related to delivery at airports, which increased the number of trade terms to
12.
In 1980, it was necessary to add CIP for non-maritime transport as an equivalent to
CIF, under which the seller undertakes to arrange and pay for the carriage and insurance.
As a result, the terms CPT and CIP, corresponding to CFR and CIF for maritime
transport, were both added to the Incoterms rules. Incoterms 1980 had 14 trade terms.
In 1990, it was unnecessary to have specific terms of different modes of non-
maritime transport. It was sufficient to use the general term FCA “Free Carrier named
point”. Therefore, FOB Airport and FOT/FOR were omitted. DDU (Delivered Duty
Unpaid) was supplemented. Incoterms 1990 had 13 trade terms.
In 2000, 13 trade terms as in the Incoterms 1990 were retained. However, Incoterms
2000 had some changes in the obligations of parties in clearance and explained clearly
and fully FCA.
In 2010, the number of Incoterms rules has been reduced from 13 to 11. This has
been achieved by substituting two new rules that may be used irrespective of the agreed
mode of transport – DAT (Delivered at Terminal), and DAP (Delivered at Place) for the
Incoterms 2000 rules DAF, DES, DEQ, and DDU.

3.1.4. Structure of Incoterms 2010.

3.1.4.1 Classification of Incoterms 2010
Incoterms 2010 give the parties a menu of eleven (formerly, thirteen) different
commercial terms (Incoterms Rules) to describe the delivery obligations of the seller and
the reciprocal obligations of the buyer to accommodate delivery. The eleven Incoterms
2010 rules are presented in two distinct groups:
Group 1. Incoterms that apply to any mode of transport are:
EXW (Ex Works)
FCA (Free Carrier)
CPT (Carriage Paid To)
CIP (Carriage and Insurance Paid)
DAT (Delivered at Terminal)
DAP (Delivered at Place)
DDP (Delivered Duty Paid)
Group 2. Incoterms that apply to sea and inland waterway transport only:
FAS (Free Alongside Ship)

69
 FOB (Free On Board)
CFR (Cost and Freight)
CIF (Cost, Insurance and Freight).
The first group includes the seven Incoterms 2010 rules that can be used regardless
of the mode of transport selected and regardless of whether one or more than one mode of
transport is employed. They can be used even when there is no maritime transport at all.
It is important to remember, however, that these rules can be used in cases where a ship is
used for part of the carriage.
In the second group, the point of delivery and the place to which the goods are
carried to the buyer are both ports, hence the label “sea and inland waterway” rules.
Under the last three Incoterms rules, all mention of the ship’s rail as the point of delivery
has been omitted in preference for the goods being delivered when they are “on board”
the vessel. This more closely reflects modern commercial reality and avoids the rather
dated image of the risk swinging to and from across an imaginary perpendicular line.
3.1.4.2 Format of Incoterms 2010
The Incoterms obligations are arranged in a mirror-image format that sets forth ten
specific obligations in adjacent columns, with “the seller’s obligations” in the left column
and “the buyer’s obligations” in the right. Each column has numbered paragraphs, and
each numbered paragraph refers to the comparable obligations of each party. Thus, for
example, for each Incoterms rule, “A4” covers the seller’s obligations regarding
“delivery” and “B4” the buyer’s obligations on the same subject. The other obligations
covered include licenses and other formalities, contracts of carriage and insurance, risk of
loss, division of costs, notices, transportation documents or equivalent electronic
messages, and inspections:
A1/B1. The first set of parallel paragraphs contains a statement of the basis
obligations of the seller and the buyer: the seller must deliver the goods and a commercial
invoice (or its electronic equivalent), and the buyer must pay the contract price.
A2/B2. The second set of paragraphs allocates the responsibilities of the parties
regarding export and import licenses, customs formalities, and (in a new reference)
“security clearances”.
A3/B3. The third set of paragraphs allocates the responsibilities of the parties to
arrange and pay for carriage and insurance during transportation of the goods.
A4/B4. The fourth set of paragraphs specifies the extent of both the seller’s delivery
obligation and the buyer’s obligation to take delivery.
A5/B5. The fifth set of paragraphs specifies when the risk of loss is transferred from
the seller to the buyer.

70
 A6/B6. The sixth set of paragraphs allocates the costs of transportation between the
parties, including not only the freight and insurance costs already allocated in A3/B3, but
also loading costs and the administrative costs of customs clearance, even when no
import duties are charged.
A7/B7. The seventh set of paragraphs defines what notices each party must give to
the other, when such notices must be given, and what each notice should say.
A8/B8. The eighth set of paragraphs specifies the type of transport document or
other proof of delivery that the seller must provide to the buyer and the buyer’s obligation
to accept such a document.
A9/B9. The ninth set of paragraphs allocates who must pay the costs of packaging
the goods, marking the packages, “checking operations” (quality, measuring, weighing,
counting), and any pre-shipment inspection. It does not, however, state whether the buyer
has a right to post-shipment inspection before paying for the goods.
A10/B10. Finally, the tenth set of paragraphs sets forth miscellaneous obligations,
such as duties of assistance and cooperation. New in Incoterms 2010 is a requirement of
cooperation by both parties regarding any “security-related information” that either may
need to fulfill obligations to customs or other government authorities.

3.2. Contents of Incoterms 2010.

3.2.1 Four categories of Incoterms rules
The different nature of the trade terms can be evidenced by the grouping of the terms
in four categories, using the first letter as an indication of the category to which the term
belongs. The first category has only one trade term, namely EXW. But in the other three

71
categories there are three F-terms (FCA, FAS and FOB), four C-terms (CPT, CIP, CFR
and CIF) and three D-terms (DAT, DAP and DDP)
It follows from the presentation of the Incoterms 2010 rules that Group 1 with terms
intended for any mode or modes of transport contains one E-term (EXW), one F-term
(FCA), two C-terms (CPT and CIP) and three D-terms (DAT, DAP and DDP), while
Group with terms for sea and inland waterway transport comprise two F-terms (FAS and
FOB) and two C-terms (CFR and CIF)
The letter E signifies that all transport charges are forward to collect at destination
from the buyer.
The letter F signifies that main carriage is not paid by the seller, cost to loading are
prepaid by the seller, from that point on the main freight charge is paid by the buyer.
The letter C signifies that main carriage is paid by the seller, costs to main port or
airport of destination are prepaid by the seller, and remainder is paid by the buyer.
The letter D signifies that the goods must arrive at a stated destination, all charges
are prepaid to named destination by the seller, and this may or may not exclude taxes.
This grouping and identification of the various trade terms should enable merchants
to understand the different fundamental meanings of the terms and guide them to the
most suitable option.

3.2.2 Contents of the 11 Incoterms rules

3.2.2.1. Group 1- Rules that apply to any mode of transport

EXW (Ex-works)

Figure 3.1: Ex Works

Under the Incoterms Ex Works commercial term, the seller must only tender the
goods by placing them “at the disposal of the buyer” at an agreed point. But if there is no
agreed point, the seller “may select the point that best suits its purpose”, and this most
often will be its own premises. Thus, the seller has no obligation to deliver the goods to a
carrier or to load the goods on any vehicle. Indeed, the seller is not even obligated to

72
arrange for any licenses or authorizations necessary for export. In short, the EXW term
“represents the minimum obligation of the seller” and thus “should be used with care”. It
is best suited for those sellers who are new to international export transactions where the
buyer has substantial experience and expertise.
The seller has no obligation to arrange for transportation or insurance, but must give
the buyer any notice necessary for it to take delivery of the goods. The seller must
provide a commercial invoice, or an equivalent electronic record, but has no obligation to
obtain a document of title (or any other transport document). The Incoterms definition
has no effect upon either payment or inspection rights under the contract (although of
course the buyer must assume any costs of pre-shipment inspection). The risk of loss
transfers to the buyer at the time the goods are placed at the buyer’s disposal.

(2) FCA (Free Carrier)

Figure 3.2: Free Carrier

“Free Carrier” means that the seller delivers the goods to the carrier or another
person nominated by the buyer at the seller’s premises or another named place. The
parties are well advised to specify as clearly as possible the point within the named place
of delivery, as the risk passes to the buyer at that point.
If the parties intend to deliver the goods at the seller’s premises, they should
identify the address of those premises as the named place of delivery. If, on the other
hand, the parties intend the goods to be delivered at another place, they must identify a
different specific place of delivery.
FCA requires the seller to clear the goods for export, where applicable. However,
the seller has no obligation to clear the goods for import, pay any import duty or carry out
any import customs formalities.
The seller has no obligation to pay for transportation costs or insurance. However,
the seller “may” arrange transportation at the buyer’s expense if requested by the buyer,
or if it “commercial practice” for the seller to do so and the buyer does no timely object.
But even under these circumstances, the seller may refuse to make such arrangements as

73
long as it so notifies the buyer. Even if the seller does arrange transportation, it has no
obligation to arrange for insurance coverage during transportation.
The seller completes its delivery obligation when the goods have been loaded at its
premises on the transport arranged by the buyer or otherwise put into the custody of the
carrier or other person nominated by the buyer. The seller then needs only to notify the
buyer when the goods have been so delivered. The risk of loss transfers to the buyer upon
such delivery, although the buyer may not receive notice until after that time. The seller
must provide a commercial invoice or an equivalent electronic record, any necessary
export license, and “the usual proof that the goods have been delivered”.

(3) CPT (Carriage Paid To ...)

Figure 3.3: Carriage Paid To

This rule may be used irrespective of the mode of transport selected and may also
be used where more than one mode of transport is employed.
“Carriage Paid To” means that the seller delivers the goods to the carrier or another
person nominated by the seller at an agreed place (if any such place is agreed between
parties) and that the seller must contract for and pay the costs of carriage necessary to
bring the goods to the named place of destination.
When CPT, CIP, CFR are used, the seller fulfils its obligation to deliver when it
hands the goods over to the carrier and not when the goods reach the place of destination.
This rule has two critical points, because risk passes, and costs are transferred at
different places. The parties are well advised to identify as precisely as possible in the
contract both the place of delivery, where the risk passes to the buyer, and the named
place of destination to which the seller must contract for the carriage. If several carriers
are used for the carriage to the agreed destination and the parties do not agree on a
specific point delivery, the default position is that risk passes when the goods have been
delivered to the first carrier at a point entirely of the seller’s choosing and over which the
buyer has no control. Should the parties wish the risk to pass at a later stage (e.g., at an
ocean port or airport), they need to specify this in their contract of sale.

74
 The parties are also well advised to identify as precisely as possible the point within
the agreed place of destination, as the costs to that point are for the account of the seller.
The seller is advised to procure contracts of carriage related to unloading at the named
place of destination, the seller is not entitled to recover such costs from the buyer unless
otherwise agreed between the parties.
CPT requires the seller to clear the goods for export, where applicable. However,
the seller has no obligation to clear the goods for import, pay any import duty or carry out
any import customs formalities.

(4) CIP (Carriage and Insurance Paid To ...)

Figure 3.4: Carriage & Insurance Paid To

CIP (insert named place of destination) Incoterms 2010
This rule may be used irrespective of the mode of transport selected and may also
be used where more than one mode of transport is employed.
Carriage and Insurance Paid To means that the seller delivers the goods to the
carrier or another person nominated by the seller at an agreed place (if any such place is
agreed between the parties) and that the seller must contract for and pay the costs of
carriage necessary to bring the goods to the named place of destination.
The seller also contracts for insurance cover against the buyer’s risk of loss or
damage to the goods during the carriage. The buyer should note that under CIP the seller
is required to obtain insurance only on minimum cover. Should the buyer wish to have
more insurance protection, it will need either to agree as mush expressly with the seller or
to make its own extra insurance arrangements.
When CPT, CIP, CFR are used, the seller fulfils its obligation to deliver when it
hands the goods over to the carrier and not when the goods reach the place of destination.
This rule has two critical points, because risk passes, and costs are transferred at
different places. The parties are well advised to identify as precisely as possible in the
contract both the place of delivery, where the risk passes to the buyer, and the named
place of destination to which the seller must contract for the carriage. If several carriers

75
are used for the carriage to the agreed destination and the parties do not agree on a
specific point delivery, the default position is that risk passes when the goods have been
delivered to the first carrier at a point entirely of the seller’s choosing and over which the
buyer has no control. Should the parties wish the risk to pass at a later stage (e.g., at an
ocean port or airport), they need to specify this in their contract of sale.
The parties are also well advised to identify as precisely as possible the point within
the agreed place of destination, as the costs to that point are for the account of the seller.
The seller is advised to procure contracts of carriage related to unloading at the named
place of destination, the seller is not entitled to recover such costs from the buyer unless
otherwise agreed between the parties.
CIP requires the seller to clear the goods for export, where applicable. However, the
seller has no obligation to clear the goods for import, pay any import duty or carry out
any import customs formalities

(5) DAT (Delivered at Terminal)

Figure 3.5: Delivered At Terminal

DAT (insert named terminal at port or place of destination) Incoterms 2010
In the Incoterms DAT rule is similar to DAP, for the seller again bears the
responsibility, costs, and risks of delivering the goods to the terminal at the location
specified in the contract. Unlike DAP, however, the seller also is responsible for
unloading the goods from the arriving means of transport. The seller completes its
delivery obligations when the goods are unloaded from the arriving means of transport
and are placed at the disposal of the buyer “at the named terminal” at the place of
destination. Terminal includes all forms of terminals (whether quay, container or rail
yard, or road, rail, or air terminal). The risk of loss also passes to the buyer at that point.
Therefore, the parties are well advised to specify as clearly as possible the terminal and,
if possible, a specific point within the terminal at the agreed port or place of destination,
as the risks to that point are for the account of the seller. The seller is advised to procure a
contract of carriage that matches this choice precisely.

76
 Like DAP, the seller is responsible for export clearance and for clearance through
any country along the way to the delivery terminal but is not responsible for import duties
or other import formalities. Finally, the seller must again provide to the buyer any
document necessary to enable the buyer to take the goods.
The DAT term is especially valuable for sellers who wish to control their supply
chain in order to signal reliability to customers, control costs, and maintain quality of the
goods.

(6) DAP (Delivered at Place)

Figure 3.6: Delivered At Place

DAP (insert named terminal at port or place of destination) Incoterms 2010
The Incoterms 2010 have two new terms, DAP and DAT, which replace four former
terms (DES, DEQ, DAF, and DDU). Both can be used for any type of transportation,
including multimodal transport.
The seller is required to arrange transportation, pay the freight costs, and bear the
risk of loss to a named destination point. Although these definitions have no provisions
on insurance during transportation, because the seller bears the risk of loss during
transport, it is well advised to arrange and pay for insurance or it otherwise will act as a
self-insurer. Under the Incoterms DAP term, the seller bears the responsibility, costs, and
risks of delivering the goods at the destination specified in the contract. The seller
completes its delivery obligations under DAP when the goods reach the named place and
are placed “at the disposal of the buyer on the arriving means of transport ready for
unloading” by the buyer. Thus, the seller is obligated to arrange and pay for
transportation to the named destination port and (although not obligated) is well advised
to arrange and pay for insurance on the goods during transportation. The risk of loss also
will transfer to the buyer when the seller completes its delivery obligation at the named
destination. The seller must clear the goods for export and for transport “through any
country prior to delivery” but is not responsible for import duties or other import

77
formalities. The seller, finally, must provide to the buyer and document necessary to
enable the buyer to take the goods.

(7) DDP (Delivered Duty Paid).

Figure 3.7: Delivered Duty Paid

DDP (insert named place of destination) Incoterms 2010.
The final Incoterm rule, DDP (Delivered Duty Paid), places the highest level of
responsibility on the seller (and thus the lowest responsibility on the buyer). Under the
DDP commercial term, delivery occurs, and the risk of loss passes when the goods are
placed at the buyer’s disposal, “ready for unloading”, at the named place in the country of
destination. The buyer’s only noteworthy responsibility is to arrange and pay for the
unloading of the goods from the arriving means of transport.
But unlike all other Incoterms Rules, the seller under a DDP term not only is
responsible for export clearance, but also must deliver the goods to the buyer cleared for
importation into the destination country. Thus, the seller must obtain the import license,
pay all import duties and terminal charges, and complete all customs formalities at its risk
and expense. The seller must again provide to the buyer any document necessary to
enable the buyer to take the goods at the named destination.
3.2.2.2 Group 2 – Rules for sea and inland waterway transport
(1) FAS (Free Alongside Ship)

Figure 3.8: Free Alongside Ship

78
 FAS (insert named port of shipment) Incoterms 2010.
This rule is to be used only for sea or inland waterway transport.
Under an FAS term, the seller is obligated to deliver the goods alongside a ship
arranged for and named by the buyer at a named port of shipment (or, again, to “procure”
rights to goods already in transit). The seller must bear the costs of inland transportation
to the named port of shipment. The risk of loss also will transfer to the buyer at the time
the goods are delivered alongside the ship. The seller has no obligation to arrange
transportation or insurance for the outbound (or waterborne) part of the carriage but does
have a duty to notify the buyer that the goods have been delivered alongside the ship. The
seller must provide a commercial invoice and the “usual proof” that the goods have been
so delivered (or an equivalent electronic record for either). The seller is obligated to
obtain any licenses or other approvals for exports clearance, and the buyer has the same
obligation regarding import clearance.
Where the goods are in containers, it is typical for the seller to hand the goods over
to the carrier at a terminal and not alongside the vessel. In such situations, the FAS rule
would be inappropriate, and the FCA rule should be used.

(2) FOB (Free Onboard)

Figure 3.9: Free On Board

This rule is to be used only for sea or inland waterway transport.
Under the FOB term, the seller delivers the goods on board the vessel nominated by
the buyer at the named port of shipment or procures the goods already so delivered. The
risk of loss or damage to the goods passes when the goods are on board the vessel, and
the buyer bears all costs from that moment onwards. If the buyer fails to nominate the
vessel in time or the vessel is delayed in arriving, the buyer will bear the risk of loss or
damage from the contractually agreed delivery time for the goods.
The seller has no obligation to the buyer to make a contract of carriage. However, if
requested by the buyer or if it is commercial practice and the buyer does not give an
instruction to the contrary in clue time, the seller may contract for carriage on usual terms

79
at the buyer’s risk and expense. In either case, the seller may decline to make the contract
of carriage, if it does, shall promptly notify the buyer.
The seller also has no obligation to the buyer to make a contract of insurance.
However, the seller must provide the buyer, at the buyer’s request, risk and expense (if
any), with information that the buyer needs for obtaining insurance.
FOB may not be appropriate where goods are handed over to the carrier before they
are on board the vessel, for example goods in containers, which are typically delivered at
a terminal. In such situations, the FCA rule should be used.
FOB requires the seller to clear the goods for export, where applicable. However,
the seller has no obligation to clear the goods for import, pay any import duty or carry out
any import customs formalities.

(3) CFR (Cost and Freight)

Figure 3.10: Cost and Freight

CFR (insert named port of destination) Incoterms 2010

This rule is to be used only for sea or inland waterway transport.
Under CFR term, the seller is obligated to arrange for transportation to a named
destination point and then to deliver the goods on board the ship arranged for by the seller
(or to “procure” rights to the goods already in transit). Thus, the term is appropriate only
for water-borne transportation.
The seller must arrange the transportation and pay the freight costs to the
destination port but has completed its delivery obligations when the goods are placed “on
board the vessel” at the port of shipment. The seller has no express obligation to arrange
or pay for insurance on the goods during transportation, and the risk of loss transfers to
the buyer at the time the goods are on board the vessel at the port of shipment. The seller
must give the buyer any notice needed to enable the buyer to take the goods and the
buyer must notify the seller of any specific required location at the destination port. The

80
seller also is responsible for any license or other official authorization required for the
exportation of the goods, and the buyer is responsible for the same issues regarding the
importation of the goods. The seller must provide a commercial invoice and “the usual
transport document” for the destination port (or an equivalent electronic record for
either). The seller under a CFR term must procure a transport document that will “enable
the buyer to sell the goods in transit by the transfer of the document to a subsequent
buyer or by notification to the carrier”.

(4) CIF (Cost, Insurance and Freight)

Figure 3.11: Cost Insurance and Freight

CIF (insert named port of destination) Incoterms 2010.
This rule is to be used only for sea or inland waterway transport.
Under a CIF term, the seller is obligated to arrange for both transportation and
insurance to a named destination port and to deliver the goods on board the ship arranged
by the seller. Thus, the term also is appropriate only for water-borne transportation.
Many of the standard obligations of the seller and the buyer under the CIF term are
similar to those for the FOB term. Under the CIF term, the seller also is obligated to pay
the cost of the goods and provide a commercial invoice “in conformity with the contract
of sale”, and the buyer is obligated to pay the price as provided in the contract.
Again, the parties may, by agreement or by custom, use an equivalent electronic
record or procedure for any required document. The seller also is responsible for any
license or other official authorization required for exporting the goods, and the buyer is
responsible for the same issues regarding importing the goods.
Also similar to the FOB term, the seller under the CIF term must deliver the goods
by “placing them on board the vessel” or by “procuring” goods already loaded on a ship.
In either case, the seller must perform its delivery obligation within the agreed time and
provide whatever notice is required “to enable the buyer to take the goods”
The risk of loss point under the CIF term also is the same as that for an FOB term.
Under CIF as well, the risk of loss or damage to the goods will pass from the seller to the

81
buyer once the seller has completed its delivery obligation, i.e., when it has placed the
goods “on board the vessel” at the shipment port or “procured” the goods in transit. But if
the buyer fails to give any required notification to the seller, the buyer will bear the risk
of loss or damage from the agreed date of shipment.
The striking contrast with the FOB term lies, however, in the seller’s obligations
regarding transport and insurance, and regarding the costs related to those obligations.
Under the CIF term, the seller is obligated to conclude a contract “for the carriage of the
goods from … the place of delivery to the named port of destination”. The carriage
contract must be on the “usual terms” and provide for carriage “by the usual route in a
vessel of the type normally used” for the goods involved. The seller also must bear the
costs of such carriage to the destination port, including the transportation costs to and the
loading costs at the shipment port.
In addition, the seller is obligated to procure cargo insurance covering the goods
from the point of delivery to the destination port. The insurance must be from a company
of “good repute”, cover 110% of the contract price for the goods, and entitle the buyer to
claim directly from the insurer. And, again, the seller is obligated to assume the costs of
this insurance coverage to the destination port.
Thus, the CIF term establishes a system that separates the cost point from the
delivery and risk of loss point. The seller must arrange and pay for the transportation to
the port of destination but has completed its delivery obligations when the goods are
placed “on board the vessel” at the port of shipment. For its part, the buyer must “take
delivery” of the goods at the port of shipment. Similarly, the seller must arrange and pay
for insurance during transportation to the port of destination, but the risk of loss transfers
to the buyer at the time the goods are on board the vessel at the port of shipment. Thus,
the buyer bears the risk of damages that occur to the goods during transit, but in the event
of a loss may resort to the insurance coverage arranged and paid for by the seller. And
because the seller must pay for freight and insurance to the destination port, it must take
those costs into account when it quotes a price to the buyer upon the formation of the
sales contract.
A second fundamental way in which the CIF term differs from the FOB term relates
to the transport document the seller must obtain upon shipment of the goods. Indeed, this
required transport document defines the essence of the CIF transaction as a “payment
against documents” transaction. CIF A8 first states the basic obligation of the seller to
provide the buyer “with the usual transport document for the agreed port of destination”.
But the most important obligation of the seller lies in the description of the details for this
transport document. In specific, the second paragraph of CIF A8 declares that the
document must (a) “cover the contract goods”, (b) “enable the buyer to claim the goods

82
from the carrier at the port of destination” and (c) unless the parties agree otherwise,
“enable the buyer to sell the goods in transit by the transfer of the document to a
subsequent buyer or by notification to the carrier”.
The last requirement on this list the most important. As a practical matter, the only
secure way for the seller to “enable the buyer to sell the goods in transit” as described
there is to obtain a negotiable bill of lading from the carrier and to tender that negotiable
document to the buyer through a series of banks. The banks will allow the buyer to obtain
possession of the document (thus control over the goods) only after it pays for the goods.
Thus, the buyer “pays against documents”, most often while the goods are still on the
ship at sea. The buyer, therefore, will have to pay without an opportunity to inspect the
goods themselves, although it will have a right to inspect the bill of lading to ensure that
it is in conformity with the sales contract. And after such payment, only a negotiable bill
of lading with “represent the goods” in a way that will permit the buyer to sell them “by
the transfer of the document to a subsequent buyer”. In contrast, a non-negotiable bill
“cannot be used for transferring rights to the goods by the transfer of the document”.

3.3. Notes on use of Incoterms.

 What do Incoterms not deal with?
 The principal duties of the seller.
 The principal duties of the buyer.
 Transfer of risks – place and point in time.
 Allocation of all costs incurred from dispatch to arrival at the place or port of
destination.
 Formalities (e.g. customs formalities) for import, export or transit.
 What do Incoterms not deal with?
The Incoterms rules do not deal with:
 transfer of property rights in the goods;
 relief from obligations and exemptions from liability in case of unexpected or
unforeseeable events; or
 consequences of various breaches of contract, except those relating to the passing
of risks and costs when the buyer is in breach of his obligation to accept the goods or to
nominate the carrier under an F-term.
 method of payment.
 Notes:
- It is not mandatory to use Incoterms in a sale contract.
- Incoterms are not price clauses but do have an impact on the pricing.

83
 - Sales contracts which are based on a former version (e.g. Incoterms 2000)
remain valid according to the terms of that version.
- Buyers and sellers should refer to the appropriate version of the Incoterms. For
example: FOB Hamburg, Incoterms 2010.
- It is possible to add clauses or change the wording of Incoterms. For example:
DDP
Ha Noi Vietnam VAT unpaid, or FCA Vienna Airport loaded on aircraft.

3.4. Some international trade practice variations from Incoterms.

Since the Incoterms rules reflect only the commercial practice most commonly
used, the parties may wish to either depart from the Incoterms rules or add provisions in
order to obtain further precision. It must then be observed that
* the parties operate outside the scope of the Incoterms rules and contract at their
own peril;
* they should therefore carefully consider whether a departure from the Incoterms
rules is appropriate;
* an amended or added term should be carefully worded to avoid unintended
consequences; and
* an added obligation does not necessarily change the risk distribution under the
Incoterms rules; risks do not necessarily follow from functions and costs, as evidenced by
the C-terms under which the seller has to pay for the freight up to the indicated
destination but does not have to assume the risks of loss of or damage to the goods after
dispatch from the country of export.

3.4.1 Additions to EXW

If the parties wish to put additional obligations on the seller, they should make clear
exactly what these imply. If, for instance, the parties merely add the word “loaded” after
EXW, it is reasonable to assume that the seller is obliged to load the goods on the buyer’s
collecting vehicle. But it is not clear whether they also wish the seller to be at risk until
the goods have been so loaded. It is also unclear what would happen to the risk of loss of
or damage to the goods if the buyer’s collecting vehicle did not arrive in time. Should the
seller nevertheless remain at risk?
If the parties do not want any change in the risk allocation under EXW, but only
want to add obligation for the seller to load the goods on the buyer’s collecting vehicle,
they may add after the word “loaded” the words “at buyer’s risk”, or, even more
precisely, “at buyer’s risk subsequent to the seller’s notice that the goods have been
placed at the disposal of the buyer”.

84
3.4.2. Additions to FOB.
In some cases, the trade term will not assist the parties in determining exactly how
the costs of loading or discharge should be distributed between them. This is the case
with the maritime terms FOB, CFR, and CIF. Therefore, the parties frequently seek
further precision by adding after FOB words such as “stowed” or “stowed and trimmed”.
Here again, it is not clear whether they refer not only to functions and costs, but also to
risks, and intend that the latter go along with the former. Clarifications similar to those
suggested for EXW would then be appropriate: for example, “stowed and trimmed but at
buyer’s risk after the goods have been placed on board”.
FOB under tackle – the seller will be responsible for risk of loss and damage to the
goods until they are hooked by the tackle.
FOB stowed or FOB trimmed – the seller has the obligation to stow or trim the
goods in the vessel’s hold. If there are no other provisions in the contract, the risk of loss
and damage will be transferred from the seller to the buyer at the time the buyer
completes its obligation to stow or trim the goods.
FOB shipment to destination: the seller will be responsible for carriage to the
agreed port with the expenses at the buyer’s account and the buyer also bears all risks of
loss or damage to the goods.
FOB liner terms: the freight charge already comprises loading and discharging.

3.4.3. Additions to FCA.

When the parties use FCA instead of FOB, the point of delivery is shifted from the
ship to an inland point in or outside the port area in the country of shipment.
Consequently, a number of costs may arise from the FCA point until the goods have been
placed on board the ship. In particular, difficulties arise with respect to various costs
debited in connection with the handling and storage of the goods in cargo terminals, so-
called Terminal Handling Charges (THC). The buyer’s reluctance to accept payment of
THC may explain why the parties continue to use FOB, even though FOB reflects an
incorrect reception point. However, if the parties wish the seller to pay the THC, it would
be better to say this explicitly: “FCA Bremen Incoterms 2010, THC for seller’s account”.
Alternatively, the parties can divide the THC into percentages: “50% of THC for seller’s
account”.

3.4.4 Additions to the C-terms

Additions to the C-terms are particularly cumbersome, since these terms represent
so-called shipment contracts, under which the seller fulfils his obligations by procuring a
contract of carriage and handling over the goods to the carrier. If obligations referring to

85
the destination are added, this may be interpreted to change the basic nature of the term –
from a shipment term to an arrival term – with the result that the seller would be at risk
until the goods have actually arrived at the destination.
However, when expressions such as “CIF landed” or “CIF outturn weights” are
used, these are normally not intended to change the basic nature of the term. The word
“landed” is usually understood as referring only to the costs of discharge, and the term
“outturn weights” merely signifies that the buyer should pay according to the weight
ascertained after discharge, so that, for instance, condensation of the goods during the
transport should be disregarded when fixing the price. However, this does not mean that
the seller would bear the risk of fortuitous loss of or damage to the goods during the
carriage. Nevertheless, if the parties merely intend to clarify the extent to which the seller
should pay for the discharge of the goods at the port of destination, it would be preferable
to say this explicitly (for example: “discharging costs until placing the goods on the quay
for seller’s account”).
CIF, FO – CIF free out: the freight charge does not comprise discharging. The
seller is not responsible for and does not bear discharge the consignment.
CIF, FIO – CIF free in and out: the freight charge does not comprise loading and
discharging. The seller must bear loading charge and discharging charge will be for the
buyer’s account.
CIF liner terms: the freight charge already comprises loading and discharging.
CIF, CFS – CIF container freight station: the seller completes its delivery
obligation when the consignment is placed at the container freight station.
CIF CY – CIF container yard: the seller completes its delivery obligation when
the consignment is placed at the container yard.
CIF + c: the price includes commission for middle-man
CIF + i: the price includes interest of loan or purchase on credit.
CIF + s: the price includes exchange fee.
CIF + w: the price includes insurance premium for war risks.
CIF – WA: the price includes insurance premium for “with particular average”
term.
CIF under ship’s tackle: the seller will be responsible for risk of loss and damage
to the goods until they are hooked by the tackle.
CIF afloat: under this term, consignment is on the vessel at the time the contract is
signed.
CIF landed: the seller must pay for discharging the consignment on land.

CHAPTER SUMMARY

86
 Incoterms (International Commercial Terms) are used to make international trade
easier by helping traders in different countries understand one another.
The Incoterms rules are accepted by Governments, legal authorities and
practitioners worldwide for the interpretation of most commonly used terms in
international trade. They are intended to reduce or remove altogether uncertainties arising
from different interpretation of the rules in different countries.
Incoterms are the key elements of international contracts of sale. They tell the
parties what to do with respect to carriage of the goods from buyer to seller, and export &
import clearance. They also explain the division of costs and risks between the parties.
Incoterms 2010 have 11 terms which are divided into two categories for any mode
(EXW, FCA, CPT, CIP, DAT, DAP, and DDP) and for sea and inland waterway
transport (FAS, FOB, CFR, and CIF). Goods in container only for terms for any modes of
transport, not for sea terms.

REVISION QUESTIONS
1. Which terms were eliminated from the Incoterms 2010 version?
2. How many categories are there in Incoterms 2010?
3. Distinguish Incoterms 2000 and Incoterms 2010.
4. Are International Commercial Terms compulsory to apply in international
transactions? Must we apply all or part of Incoterms?
5. Which term does the seller assume the maximum obligations, including clearing
goods for import?
6. Which term does the seller assume the minimum obligations?
7. What is the difference between: FOB & FCA, CIF & CIP, CFR & CPT?
8. Export price in an international purchase agreement is 530 USD/MT FOB Saigon
Port, Vietnam. Is this price correct?
9. Which term is suitable for the following case: Company A exports its goods to
Company B (Singapore). The goods are packaged in containers. Company A will clear
export and deliver the goods to the shipping company’s agent at CY in Saigon port.
Shipping company is appointed by the buyer.
10. Which term is suitable for the following case: The exporter arranges the main
carriage to Mumbai port – India, clears export, delivers the goods to the shipping
company at CY in Saigon port?

CASE STUDY

87
 1. Under EXW, the buyer must clear export for the goods. Because of the
government’s regulation, the buyer cannot clear customs, which then affects taking
delivery of the buyer and of course affects payment. Is the buyer free from breaching the
contract or not?
2. A contract under EXW term, the importer fails to give notice about the date and
place of taking delivery in time as stipulated in the contract. Therefore, the exporter
cannot deliver the goods which are stored in the stock. During the time in the stock, the
quality of the goods is affected badly. Who is responsible for this case?
3. A contract under FCA term, the goods will be in containers. When the buyer clears
customs for the goods, he opens the container for the customs authority to inspect the
goods, he finds that the goods’ packages have been torn and affected the quantity. Who is
responsible for this?
4. If the contract specifies to use FAS, but the buyer fails to give notice about the
place of delivery, how will the seller handle this case? The goods are available to be
delivered.
3. Under F terms, if the buyer fails to give notice in detail for the collecting vehicle to
collect the goods in time, so the seller does not identify the goods within the agreed time.
May the seller transfer the risks soon to the buyer?
6. In case the goods are transacted under C terms. On the way of shipment, the ship
master must tranship the goods to avoid unexpected events as strikes, wars, frozen sea …
who will bear the costs of transhipment?
7. A business imports goods packaged in containers under CIP Incoterms 2010, but
the seller fails to send a set of documents in time for the buyer to take delivery, which
causes high-charge store. Who will bear that charge?
8. An importer purchased products under C terms. After having signed the contract,
the product’s price went down in the importer’s market. If the importer had performed
the contract, he would have suffered heavy losses. Therefore, the importer dishonoured
by reason of discrepancies in documents. Was it right or wrong for the importer to do so?
9. A company imported goods packaged in a container under CIP Incoterms 2010, but
the exporter did not deliver documents in time for taking delivery, which caused high
storage charge. The importer did not accept to pay for this charge because according to
him, this was the exporter’s fault. How to resolve this problem?
10. Under D terms, the buyer finds that the goods are defective during transport. Who
will be responsible for this?

88
 CHAPTER 4: THE INTERNATIONAL SALES CONTRACT

Chapter 4 comprises four core sections: an overview of contracts; terms and

conditions of the international sales of goods contract; terms and conditions of an
international supply of services contract; and some contract samples. Through these
contents, students know how to form clauses in international sales and then can check
formed contracts to identify if there are any issues that may pose problems or
repercussions that could harm the business results of their companies, and draft contracts
as lecturer’s requirement.

4.1. An overview of contracts.

4.1.1. Concepts and features of a contract.
* Concepts
There are some concepts in terms of an international sale of goods contract as
follows: According to business dictionary, an international sale of goods contract is a
contract under which the ownership and possession of a good, or entitlement to a service,
is transferred from a seller to a buyer in exchange for a specified sum of money (or its
equivalent).
Under Law on Commerce of Vietnam 2005, there is no clear definition or concept
regarding contracts of international sale of goods. However, through article 34-62, an
international sale of goods contract on its nature is an agreement between the buyer and
the seller (shall be conducted in form of export, import, temporary import for re-export,
temporary export for re-import and transfer through border-gates) in different countries
or between parties which have head offices located in the same territory, but one in
domestic area, and the other in special zones which are regarded as exclusive customs
zones according to the provisions of law.
Or, an international sale of goods contract means a foreign-involved sale of goods
contract, whereby the seller is obliged to deliver goods, transfer ownership of goods to
the buyer and receive payment; the buyer is obliged to pay to the seller, receive goods
and the ownership thereof as agreed.
* Features of an international sale of goods contract
In comparison with domestic sale of goods contract, an international sale of goods
contract has 3 features:
The first, parties to contracts of sale of goods – the buyer and the seller:
Article 1.1, CISG 1980: This Convention applies to contracts of sale of goods
between parties whose places of business are in different states:

89
 (a) when the States are Contracting States; or when the rules of private international
law lead to the application of the law of a Contracting State.
Law on Commerce of Vietnam 2005: Parties to contracts of sale of goods own
places of business in two different countries, or both parties in the same territory, but one
in domestic area, and the other in special zones which are regarded as exclusive customs
zones according to the provisions of law.
However, nationality is not a fundamental basis to distinguish parties. Although
parties have different nationalities, but the purchase and sale are done in the same
territory, the sales contract is not international.
The second, payment currency may be foreign currency for at least one party.
The third, object to the contract
Under CISG 1980: the object may be moved across the border.
According to article 1 of CISG 1980, international factor of an international sale of
goods contract is defined by the just factor that is places of business of parties must be in
different states, but not the place of signing the contract or whether the goods are moved
across borders or not.
Under Law on Commerce of Vietnam 2005: the object must be moved across the
border because this is the only factor used to define the international purchase and sale
relations.

4.1.2. Conditions of a valid contract.

To constitute a legal contract, a contract must include following contents:
Legal parties: parties must be traders.
Traders include lawfully established economic organizations and individuals that
conduct commercial activities in an independent and regular manner and have business
registrations. [Article 6.1 – Law on Commerce of Vietnam 2005]
Traders are obliged to register their business according to the provisions of law.
Where traders have yet to register their business, they are still held responsibility for all
their activities according to the provisions of this Law and other provisions of law
[Article 7 – Law on Commerce of Vietnam 2005]
Legal form:

Law on Commerce of Vietnam 2005:
Under Article 27.2: International purchase and sale of goods shall be conducted on
the basis of written contracts or other forms of equal legal validity.
Under Article 3.15: Forms of validity equivalent to documents include telegraph,
telex, facsimile, data message and other forms provided for the law.

90
 Under Article 3.5: Data message means information created, sent, received and
stored in electronic media.

CISG 1980:
A contract of sale needs not be concluded in or evidenced by writing and is not
subject to any other requirement as to form. It may be proved by any means, including
witnesses.

Developed countries: basically, similar to CISG 1980.
Legal content: A contract comprises fundamental clauses, conventional clauses and
discretionary clauses.
Fundamental clauses include indispensably basic clauses of a contract. If parties
are unable to reach these clauses, there is no contract. For example, clauses on
commodity, quality, quantity, price, shipment, payment, packing and marking, warranty
…
Customary clauses are clauses that are prescribed in Law documents. These
clauses may or may not be stipulated in the contract because they are tacitly applied. For
example, the place of delivery of real asset in an asset purchase agreement is at the
residence of the buyer if parties in the agreement have not agreed on the place of delivery
of the property, otherwise parties must follow the place of delivery prescribed in the
agreement.
Discretionary clauses are clauses that parties agree to add into the contract to
complete and better the contents of the contract such as clauses on fine for breach, force
majeure, governing law, arbitration …
Legal object:
+ According to Article 2 and 3 of CISG 1980, this Convention does not apply to
sales:
(a) of goods bought for personal, family or household use, unless the seller, at any
time before or at the conclusion of the contract, neither knew nor ought to have known
that the goods were bought for any such use;
(b) by auction;
(c) on execution or otherwise by authority of law;
(d) of stocks, shares, investment securities, negotiable instruments or money;
(e) of ships, vessels, hovercraft or aircraft;
(f) of electricity.
Contracts for the supply of goods to be manufactured or produced are to be
considered sales unless the party who orders the goods undertakes to supply a substantial
part of the materials necessary for such manufacture or production.

91
 This Convention does not apply to contracts in which the preponderant part of the
obligations of the party who furnishes the goods consists in the supply of labour or other
services.
+ According to Law on Commerce of Vietnam 2005, the Government specifies
legal objects by prescribing list of goods banned from export and/or import (Decree
69/2018/ND-CP), lists of goods temporarily suspended from export or import, and list of
goods to be imported or exported under permits of competent state management agencies
and the procedures for granting permits.
Voluntary contract:
The contract must be formed on the basis of voluntary agreement and fairness.

4.1.3. Classifications of contracts.

4.1.3.1 In terms of period of time:
 Short-term contract:
Short-term contract is often signed in a relatively short period. After two parties
complete their obligations stipulated in the contract, legal relations between two parties
will come into the end.
 Long-term contract:
Long-term contract is a contract that has a long performance time and during that
period delivery will be performed many times.
4.1.3.2 In terms of business relations in international sale of goods contracts
There are export contract, import contract, temporary import for re-export,
temporary export for re-import and transfer through border-gates contract.
 Export contract: is a contract that sells commodities to foreign buyers in
order to transfer those commodities out of the territory as well as title to them to the
buyer.
 Import contract: is a contract that purchases and brings commodities from
foreign sellers into the territory in order to serve domestic production, process, and
consumption.
 Temporary import for re-export contract: is an export contract of imported
commodities which do not undergo processing or manufacturing in the country.
 Temporary export for re-import contract: is a purchase of commodities
produced in the country and exported to another country and not having undergone
processing in foreign country.
 Transfer through border-gates contract: is a purchase contract of
commodities from one country or territory for sale to another country or territory without

92
carrying out the procedures for importing and exporting such commodities into and out of
the transferring country.
4.1.3.3 In terms of form of contracts
Under Article 27.2: International purchase and sale of goods shall be conducted on
the basis of written contracts or other forms of equal legal validity.
Under Article 3.15: Forms of validity equivalent to documents include telegraph,
telex, facsimile, data message and other forms provided for the law.
Under Article 3.5: Data message means information created, sent, received and
stored in electronic media.

4.1.4. Structure of a contract.

 Opening
 Country name
 Contract name, reference number and contract sign.
 Time and place
 Basis to establish the contract.
 Information about parties
 Name
 Address
 Fax, Telex, Phone number, email …
 Representative
 Contents of a contract
There are three parts of clauses:
 Fundamental clauses include indispensably basic clauses of a contract. If parties
are unable to reach these clauses, there is no contract. For example, clauses on
commodity, quality, quantity, price, shipment, payment, packing and marking, warranty
…
 Customary clauses are clauses that are prescribed in Law documents. These
clauses may or may not be stipulated in the contract because they are tacitly applied. For
example, the place of delivery of real asset in an asset purchase agreement is at the
residence of the buyer if parties in the agreement have not agreed on the place of delivery
of the property, otherwise parties must follow the place of delivery prescribed in the
agreement.
 Discretionary clauses are clauses that parties agree to add into the contract to
complete and better the contents of the contract such as clauses on fine for breach, force
majeure, governing law, arbitration …
 Singing

93
4.2 Terms and conditions of the international commercial sale of goods contracts:
4.2.1. Goods.
A. Commodity:
Name of goods needs to be specified clearly, exactly and briefly in order to not mix
this commodity up with another.
For industrial products:
Commodity + Origin: if the origin affects the quality. For example: Japanese car,
Swiss watch
Commodity + main specifications:
Commodity + brand name: This method is applied for products of prestige
manufactures/ producers/ companies.
For example: HP Probook 2430s, Sony Trinitron TV
For agricultural products
Commodity + scientific name
Commodity + origin
Commodity + use/ usage
Commodity + main specifications
For example: skinless whole dried squid
We can combine some options to clearly identify the contract object for facilitation
of contract performance and avoid misunderstanding or disputes.
Some specific contract samples:
Rice export contract:
Commodity: Vietnamese white rice long grain, crop 2010, 10% broken.
Fertilizer import contract:
Commodity: UREA, fertilizer, Nitrogen 46% min, origin Indonesia.
Aquatic product export contract:
Commodity: Frozen black tiger shrimps
More specific: Semi-IQF Raw Head-On Shell-On Black Tiger Shrimps (Pennnues
Monodon)
B. Quality.
“Quality” is a term that manifests the qualitative issue of a commodity, specifies
feature, specification, size, effect, use, productivity, manufacturing standard … of that
commodity.
Quality is a basis to define the price. Therefore, determination of good quality can
help the buyers define good and right price, purchase right commodity.

94
 There are a lot of ways to define quality:
a) By sample
This method is used to value quality of a consignment based on quality of some
goods taken out from that consignment.
This method’s drawback is the not-high exactness. Thus, it is only used for
commodity that is difficult to determine quality or has not had quality standard.
How to implement:
The seller provides the buyer with a sample to inspect. If the buyer agrees that
sample, the seller will make three pieces: each party keeps one, the remaining will be
kept by a third party appointed by the two parties to resolve later disputes.
Or, the sample can be provided by the buyer, and the seller has to produce counter
samples and both parties will sign contract basing on that counter samples.
Requirements:
Samples will be taken out from the consignment.
Samples must have average quality.
Correspondent to sample
According to sample
For example: “The rice shall be of quality as per sample No…, provided by the
seller on May 25th 20… with two parties’ signatures. The sample shall be made into three
pieces, each party keeps one and the remaining shall be kept by a third party appointed by
the two parties”
b) By standard
For those products having official standards, parties will base on these standards to
define quality.
Notice:
Parties needs to understand the standard applied (the standard can be published by
the Government, industry, or manufacturing agency, so it needs to be specified
unambiguously the publication office, place, and date)
The standard can be modified if necessary.
The applied standard needs to be stated explicitly.
For example: Vietnamese standard coffee: TCVN 4193:2001 or National technical
regulations on products, goods of building materials QCVN 16:2014/BXD
c) By trade-mark
Trade-mark is a sign such as letters, words, names, signatures, labels, shapes, colors
that can be used to distinguish this producer’s goods from those of the others.
Notice:

95
 Has trade-mark registered? (Only purchase registered products as they guarantee
the quality)
Which market has trade-mark registered?
Similar trade-marks need to be paid attention to.
For example: Honda Spacy 125cm3
d) By technical documents
Technical documents can be catalogues, installation instructions, operation
instructions …
Technical documents are an integral part (annex) of contracts.
For example: “Motorbikes with qualifications as stipulated in the technical
document No. 435, published in 20.., provided by the manufacturer, including design
manual/ instructions with signatures and stamps of the two parties,
Those technical documents are in English and Vietnamese and are an integral part
of the contract”.
e) By the main ingredient/ content…
There are two types:
● Useful content: prescribe % min
● Unuseful content: prescribe % max
Cases to apply: mines, chemicals, processed foods …
For example: Malaysian white urea:
- Nitrogen: 45% min;
- Kali: 15% min;
- Moisture: 15% max:
- Mixture: 1% max.
- Biuret: 1.0% max
f) By natural weight
Natural weight of a volume unit of a good is used to evaluate quality.
g) By prior examination/ inspection
If this method is applied, only when the buyer inspects the goods and approves, will
the signed contract become valid. If the buyer does not inspect the goods within the time
stipulated, the buyer tacitly agrees on the quality.
Cases to apply: Commodity with small quantity, not standardized like liquidated
goods, auctioned ones.
Ways to express approval:
Inspected – Approved
As it is.
As it is and where it is.

96
 h) By the actual state of the commodity
This method was born in Italia, then immigrated into UK, France with other names
as “As is sale” or “arrive sale”. Under this method, the seller only delivers the goods
without any responsibility for the product’s quality. The product price is, therefore, not
high.
i) By description
All features about shapes, colors, sizes, uses … of a product will be mentioned. This
method is applied for products with easy-to-describe description.
The effect of this method will be subject to the ability of descriptor. It is often used
with other methods.
For example: “White rice of long grain with natural flavour
Broken: 15% max
Different colour grain: 4% max
Moisture: 15% max
Damaged grain: 0.5% max
Mixture: 5 grains/kg max”
Or, for exported wooded furniture contract:
Commodity, description of goods: Love set wooden furniture
01 table (1,150 x 610 x 840) mm
01 lounge armchair (1,040 x 600 x 450) mm and cushion.
02 Love armchair (590 x 610 x 840) mm and cushion
j) By familiar standard
This method will be applied for agricultural products, not standardized material.
The approximate standards which are often used in the world are FAQ, GMO
FAQ (Fair average quality): Under this standard, the seller from a definite port must
deliver the goods with quality which is not lower than the average quality of that kind of
products delivered from the same port within a specific period (year, quarter, crop …)
GMO (Good merchantable quality): Under this standard, the seller must deliver the
goods with average quality sold and purchased in the market and accepted by ordinary
customers after careful consideration.
For example: Vietnamese white Rice long grain, 5pct broken F.A.Q (fair average
quality) of season 2017/2018 crop as to grain procurable at the time of shipment and shall
conform to the specification laid down in the schedule attached hereto (Schedule A) and
shall be in sound condition.
In reality, above methods can be combined together in order to bring higher effects.
C. Quantity

97
 “Quantity” is a term that manifests the quantitative issue of a commodity, specifies
measurement unit and ways of stipulation.
a) Measurement unit
Measurement is a process that uses numbers to describe things based on what we
can observe about them. This is done to be able to compare them to each other. We can
measure how big things are, how warm they are, how heavy they are, and lots of other
features as well. Measurement unit provides standards for our comparisons, so that the
numbers from our measurements refer to the same thing.
Today, most measurement units fall into one of three systems. The older two, the
British imperial system and the closely related to US customary system use the foot as a
measure of length, the pound as a measure for weight and the second as a measure for
time. A newer system, also called the international system of units, is the metric system
which uses the metre for length, the kilogram for weight, and the second for time. There
are other units as well. To avoid misunderstanding, the metric system is well advised to
use or stipulate the approximate units to metric system.
Some common measurement units:
1 MT = 1 metric ton = 1,000 kg
1 LT (long ton) British = 1,016.04 kg
1 ST (short ton) US = 907.18 kg
1 pound (Lb) = 0.454 kg
1 gallon (petroleum) British = 4.546 litre
1 gallon (petroleum) US = 3.785 litre
1 barrel (petroleum) = 159 litre
1 bushel (grain) = 36 litre
1 ounce = 28.35 gram
1 troy ounce = 31.1 gram
1 inch = 2.54 cm
1m = 39.37 inch = 3.281 ft
1 foot = 12 inches = 0.3048 m
1 mile = 1.609 km
1 yard = 0.9144 m
1m = 1.0936 yard
b) Ways to stipulate quantity
By exact figure: this method is often used for valuable and countable goods.
For example: 100 motorbikes; 15,000 barrels only; 525,000 UK gallons only.
By approximate figure: with tolerance
This method is used for goods in mass like fertilizer, ore, grain …

98
 There are some expressions: about, approximate, more or less, from … to …
For example: 1,000 MT more or less 5%
Notice: Any quantity delivered in the tolerance shall not be deemed a breach of
contract.
c) Ways to stipulate weight
Gross weight: total weight of a commodity inclusive of the weight of the
container and packaging.
Gross weight = net weight + tare.
Net weight: weight of the contents, not including any packaging, etc.
Commercial weight: weight of a commodity with standard humidity.
Exchange real weight of a commodity into commercial weight by following
formula:
100 + Wsh
Gcw = Grw x
100 + Wrh

Where:
Gcw: commercial weight of the commodity
Grw: real weight of the commodity
Wsh: standard humidity of the commodity (%)
Wrh: real humidity of the commodity (%)
Theoretical weight: weight of a commodity is defined by the following formula:
P = ∑Vi miSi
(i = 1 n)
Where:
P: theorical weight of a commodity
Vi: volume of a unit of commodity
mi: specific weight of commodity i
Si: the number of commodity i
n: the number of types of commodity
This method is suitable for commodities with fixed specification and size.
For example: Quantity: 10,000 MT plus or minus 10% at Seller’s option. Or
10,000 MT more or less 5% at Buyer’s option.
D. Packing
Parties often reach an agreement in:
- Packing quality
- Methods to supply packing

99
 - Price of packing
 Regulations on packing quality:
 General regulation:
Packing quality must suit a specific means of transport (rail transport, sea transport,
air transport)
However, disputes can arise because two parties can have different understanding
on packing
 Specific regulation:
- Requirements on material of packing.
- Requirements on form of packing: cases, bales, drums, rolls, bags, crates …
- Requirements on size of packing.
- Requirements on layers of packing and their formation.
- Requirements on hoops and splints of packing …
 Regulations on supply of packing:
 Popular method: the seller supplies the buyer with packing and commodities.
 The seller gives the buyer an advance of packing, but after taking delivery, the
buyer must give back the packing. This method is applied in case packing is more
valuable than specialized packing (for example: container)
 The buyer provides the seller with packing. This method is applied when packing is
scare, and the market belongs to the seller.
 Methods to determine packing price:
 Be calculated as the commodity price. Gross = net + tare = gross weight for net.
 Parking charges are included in the commodity price.
 Parking charges are excluded in the commodity price.
E. Marking
Marking is a symbol, a word line to instruct transportation and maintenance.
Requirements of marking:
 Must be written by paint or colourfast ink.
 Easy to read and see.
 Must be 2cm or more than 2cm in size.
 Must not affect the commodity quality.
 Must be in black or violet for normal commodities, red for dangerous commodities,
orange for hazardous commodities. Marking surface must be smooth.
 Must be in a specific order.
 Must be lined in at least two adjacent faces.
For example:
General stipulation:

100
 Packing: Export standard can withstand with sea transportation.
Coffee packing:
Packing: In about 60 kgs net/ 60.7 kgs gross, 300 bags per container.
Or: 60 kgs net, 0.65 kgs tare. New uniform jute bags required for the whole lot, to
be closed by jute yarn or cotton yarn. Weight for payment is the net shipping weight,
0.5% franchise.

4.2.2 Delivery.
Necessary information of delivery term is date of delivery, place of delivery,
advice/ notice of delivery, delivery instructions.
a) Date of delivery:
Date of delivery is the time that the seller must complete its delivery obligation. In
international business, there are 03 ways to stipulate time of delivery
 Periodical delivery:
- On a specific date: 31st Dec 2017
- On a date which is deemed to be the last date of delivery time: not later than
31st Dec 2017.
- In a period of time: 3rd Quarter, 2017
- In a specific period of time at the buyer’s option: Delivery from Feb to July at
Buyer’s Option.
 Not- periodical delivery: This method has general stipulation, rarely to be
used. Delivery term can be negotiated as follows:
- Shipment by first available steamer.
- Subject to shipping space available.
- Subject to the opening of L/C
- Subject to export license.
 Instant delivery:
- Promptly.
- Immediately.
- As soon as possible.
Each region has its own explanation for these above terms. Therefore, it is well
advised not to use them.
b) Place of delivery:
Places of delivery can be stipulated as follows:
 Specific port (station) of delivery, port (station) of arrival and port (station) of
transfer.
 One port (station) and many ports (stations)

101
  For groceries, many ports (stations) of delivery or many places of destination.
For example:
Port of departure: Hai Phong/ Da Nang/ Hochiminh City
Port of arrival: London/ Liverpool.
 Definite port (station) and optional port (station).
In delivery terms, parties often choose a second or third port.
For example: FOB Hamburg/ Rotterdam
CIF London/ Rotterdam/ Hamburg.
Parties can stipulate main ports in a region which will be a chosen port for one of
them.
For example: Port of destination: CIF European main ports  the seller can
appoint any port in the main ports in Europe to be the port of destination.
c) Method of delivery:
Regulations on delivery at a place as a place of preliminary delivery or a
place of last delivery.
 Preliminary delivery: the buyer at the first step checks the goods to determine
the conformity to the contract’s quantity and quality. Preliminary delivery is often done at
the manufacturing place or place of departure. If there is anything wrong, the buyer asks
the seller to remedy it at once.
 Last delivery: to confirm that the seller completes its delivery obligation.
Regulations on delivery in terms of quantity and quality.
 Delivery in terms of Quantity: real quantity is determined by weighing,
counting or measuring the goods.
 Delivery in terms of Quality: feature, use, productivity, dimension, shape …
will be examined to determine quality of the goods.
 Analysing method or sensible method will be applied.
 Examination can be done on all goods or only some particular goods.
d) Advice/ Notice of delivery:
Notice of delivery is subject to the delivery term. However, parties still stipulate
more about times and contents of the notice.
 Before delivery:
- The seller informs the buyer of: commodity available for delivery, date of
delivery, quantity, qualifications/ specifications, packing, marking.
- The buyer informs the seller of: necessary information for delivery or details of
vessel like vessel’s name, vessel nationality, vessel flag, vessel tonnage, ETA (estimated
time of arrival) (if the buyer arranges transportation).

102
  After delivery: the seller informs the buyer of goods delivery situation,
including: commodity, quantity, qualifications/ specifications, packing, marking, vessel’s
name, vessel nationality, vessel flag, vessel tonnage, B/L number, ETD (estimated time
of departure), ETA (estimated time of arrival).
Contents of the notice is defined by its purpose.
e) Other instructions:
 For commodity in large volume, partial shipment is allowed or not, or total
shipment is required.
 Transhipment is allowed or not?
 Stale bill of lading is acceptable or not?
Stale B/L is presented to its consignee, or at a bank, after the last date specified in
the relevant letter of credit and which, therefore, is not acceptable as a valid document.
 Loading terms: terms that instruct the shipper to deliver the goods on board a
vessel in the agreed port at the time stipulated basing on notice of readiness (NOR)
 Discharging terms: terms that instruct the consignee to take delivery of the
goods at the time stipulated in the port of discharge so that they can be discharged from
the vessel basing on NOR.

Rice export contract:

Shipment:
* Port of loading: Hochiminh City main port.
* Time of shipment: July/ August 2018 (earliest loading on July 1 st, 2018). Buyer
to give Seller minimum 5 days pre-advice of vessel arrival at load port.
* Loading condition: Seller guarantees to load at the rate of minimum 1,000 MT
per weather working day (1,000 MT/4 gangs/ 4 derrick/ day) of 24 consecutive hours
Saturday, Sunday and official holidays excluded unless used then time to count.
* Demurrage/ despatch: USD3,000/ USD1,500 per day.
* Loading term: when NOR tendered before noon, laytime shall be commenced
from 13:00 hour on the same date. When NOR tendered afternoon, laytime shall be
commenced from 8:00 hour on next date.

103
 Fertilizer import contract:
Shipment/ Delivery:
* Time of shipment: not later than 15th Nov 2018.
* Port of loading: Indonesia main port
* Destination: Saigon port.
* Notice of shipment: within 2 days after the sailing date of carrying vessel to
S.R.Vietnam, Seller shall notify by cable to Buyer the following information:
L/C number, Amount, Name and Nationality of the vessel, B/L number/ date,
port of loading, date of shipment, expected date of arrival at discharging port.
* Discharging terms: when NOR tendered before noon, laytime shall be
commenced from 13:00 on the same date. When NOR tendered afternoon,
laytime shall be commenced from 8:00 on next date.
1,000 MT/day WWDSHEX EIU (Saturday, Sunday and official holidays
excluded even in use)
* Dem/des: USD 4,000/ half.

4.2.3. Prices
In this term, currency unit, price, way to stipulate price, discount and delivery term
need to be determined.
a) Currency:
Currency can be of the seller’s country or the buyer’s country, or of a third country
b) Price determination:
Prices in foreign trade contracts are international prices.
Below are some ways to determine prices:
 Fixed price: a price established at the time of signing the contract and
unchanged during the time of the contract.
For example:
“Unit price: USD 250/MT.
Total price: USD250/MT x 200MT = USD 50,000
(In words: US dollars fifty thousand only)
This price shall be understood to be FOB Haiphong port, Incoterms 2010, including
packaging.”

104
  Deferred price: a price determined after signing the contract or by
negotiation in a one period of time, or by basing on the world price at one day before
delivery.
* Included information: time, place and how to identify prices.
* Cases to apply: price fluctuates, market power belongs to the buyer.
For example: “Coffee price shall be identified as the trading price at London
Commodity Exchange at the time of delivery”.
 Revisable/ Flexible price
Although price is fixed in the contract, it can be revised if at the time of delivery,
the market price is fluctuated within a certain level.
For example:
Unit price: USD 600/MT
Total price: USD 600/MT x 500MT = USD 300,000
(In words, US dollars three hundred thousand only)
At the time of delivery, if coffee price on the London market is of 5% different from
this price then market price shall be applied.”
 Sliding scale price: a price that is calculated at the time of signing the
contract includes fluctuation in production costs during the period of the contract.
Sliding scale price is often used for goods that need long time to produce and of
high value.
This price is given by European Economic Committee. Its formula:
Where:

M1 S1

P1 = Po (a + b. ------- + c. -------)

Mo So

P1: final price (used to make payment)

Po: basic price (established at the time of signing the contract)
a, b, c: price structure (percentage of factors)
a + b + c = 100%
a – weight of fixed costs.
b – weight of material costs.
c – weight of labour costs.

105
 Mo and M1: price of material, at the time of signing the contract and determining
payment price.
So and S1: wage or wage index, at the time of signing the contract and
determining payment price
For example: “The initial price of the ship is GBP 5million, of which 50% is for
materials, 40% for manpower and 10% for fixed cost. This price shall be recalculated
upon delivery by the formula given by European Economic Committee as follows:
Reference materials for parties are magazine of ABC, published by XYZ Association
within 20 days upon delivery of the ship.”
c) Discount
In real business transactions, there are a lot of types of discount (about 20 types)
 In terms of discount reasons:
- Discount due to purchase of big quantity.
- Seasonal discount: is used for people buying out-of-season products to
encourage purchasing power.
- Discount due to returning the purchased goods.
 In terms of ways to calculate discount:
- Single discount: is often expressed by a certain percentage in the offering
price.
- Double discount: comprises many single discounts which buyers receive due
to many other reasons.
- Progressive discount: is a discount that will gradually increase in proportion
to quantity of transacted goods in a certain transaction.
- Bonus: is a type of discount that sellers offer regular buyers if in a period (6
months, 1 year) total purchase amount reaches a certain level set by the sellers.
d) Delivery term:
When determining prices, parties always specify delivery term related to that
price. Thus, in purchase contracts, prices are always written next to a certain
delivery term.
For example: Price of a rice contract:
Unit price: USD 475/MT FOB, Saigon port Hochiminh City (Incoterms 2010)
Total amount: USD 4,750,000.00
(In words: US dollars four million seven hundred and fifty thousand only)
4.2.4. Payment.
This term stipulates: currency of payment, time of payment, methods of payment,
and payment documents.

106
 a) Currency of payment
Currency of payment can be currency of the seller’s country, the buyer’s country or
a third party’s country.
Currency of payment does or does not need to be currency of the price. If currency
of payment is not currency of the price, parties must regulate the exchange rate.
b) Time of payment.
 Prompt payment:
Payment will be made in a reasonable time which allows buyers to consider
shipping documents.
 Advance payment:
Payment made after the contract signing but before delivery date.
Purpose: as Performance Bond, guaranteeing the contract performance.
Note:
- Payment before the delivery from 10 to 15 days.
- The delivery date will be of the first shipment.
- No interest on the advanced payment amount.
- The seller only makes delivery when getting the notice of credit available.
 Deferred payment:
Payment shall be made x days after:
- the delivery date.
- the date of document presentation.
- the date of taking delivery.
- the date of guarantee completion.
 Combined/ mixed time of payment:
- X1 days after the contract becomes effective, the Seller shall pay 3% of the
contract value.
- X2 days before the first shipment, the Seller shall pay 5% of the contract
value.
- Right after the first shipment, the Seller shall pay 5% of the contract value.
- Right after the last shipment, the Seller shall pay 10% of the contract value.
- The Buyer will keep 10% of the contract value and pay that upon the
completion of guarantee obligation. The remaining shall be paid in 4 years,
each year an equal amount.
c, Methods of payment
There are lots of different methods of payment: Documentary credit, Collection
(Clean collection, documentary collection), Cash against documents, Remittance (MT or

107
T/T), Open account, Advance payment … Each method has its own drawbacks and
strengths. Parties need to study carefully to choose the best one.
For example:
- By Irrevocable letter of credit the full amount of the contract value.
- L/C beneficiary: Truong Thanh Furniture Corporation.
- L/C advising bank: Agribank (Vietnam Bank Agriculture and Rural Development).
- Bank of opening L/C: Barcelona Bank, Spain.
- Time of opening L/C: Not later than Oct. 10, 2018
4.2.5 Payment documents
Payment documents include: means of payment (usually Draft) and shipping
documents:
- Draft/ Bill of Exchange
- Commercial Invoice
- Bill of Lading
- Insurance policy/ Insurance certificate (If CIF or CIP is applied)
- Certificate of Quality.
- Certificate of Quantity/ Weight.
- Certificate of Origin.
- Packing list.
- Other documents.
For example:
- Payment document:
One full set of shipping document for each shipment is required as follows:
- Bill of lading: 2/3 set of clean on board marine bill of lading made out to order of
shipper and blank endorsed, marked “Freight collect”.
- Signed Commercial Invoice issued by the Seller in 03 originals and 03 copies.
- Packing list in 03 originals issued by the Seller indicating net, gross weight and
measurement for 01 container.
- Certificate of origin form A: Certificate of origin by the Vietnam Chamber of
Commerce and Industry in 01 original and 03 copies.
- Fumigation certificate: Fumigation certificate by Vietnam fumigation company in 01
original and 02 copies.
- Beneficiary’s certificate: Certifying that 1/3 set original B/L and shipping
documents have been set to CFR (buyer) within 05 days after B/L date.
4.2.6. Warranty.
This term needs to be stated in detail those following items:

108
  Cases to apply: The contract must stipulate clearly in which cases warranty
will be applied.
 Time of warranty: needs to be stipulated clearly because different types of
commodities have different duration.
 Place of warranty: will the place of warranty be the seller’s premise or the
buyer’s premise
 Warranty charges: will these charges be for the buyer’s or the seller’s
account?
For example: the seller undertakes to guarantee all quality standards,
specifications in accordance with the contract if the buyer follows all instructions on use
and maintenance of the seller. In the time of warranty, if the buyer finds any defects in
commodities, the seller must repair free of charge or replace another one. The defective
commodities will be shipped back to the seller for repair under the buyer’s account.
4.2.7 Insurance.
In this term, parties need to reach an agreement in who arranges insurance, terms of
insurance and insurance documents needed to take.
For example: Insurance for the contracted goods will be covered by the Buyer. The
seller should supply to the Buyer all necessary documents/information in time for
arranging cargo insurance.
4.2.8 Penalties.
Penalty is a punishment for violating part or all of the terms of a contract.
Cases of penalty:
 Delay in delivery
 Delivery not in conformity with quantity and quality.
Resolution:
- Cancel the contract.
- Do not pay compensation.
- Replace the consignment with expenses for the account of the
seller. Above resolutions can be applied with a penalty of a sum of
money.
 Late payment
- Penalty can be a percentage of the delayed amount based on the time of
delay. For example, 2% of the delayed amount/ month.
- Penalty can be counted based on an interest rate which is often the official
interest rate or overdraft interest of banks (sometimes plus some %). For
example, in case of late payment, from the due date, the unpaid amount shall

109
 be charged an interest. The interest rate shall be subject to overdraft interest of
banks and pluses 2%.
For example:
In case of failure in opening L/C or making delivery in due time as stipulated in this
contract, except the reason of force majeure, the penalty for delayed delivery or delayed
L/C opening shall be counted based on the rate of 1% of the contract value per delayed
day.
4.2.9 Force majeure.
Force majeure is related to the concept of an "Act of God," meaning an event for
which no party can be held accountable, such as a hurricane or a tornado. Force majeure
also encompasses human actions, however, such as armed conflict. Generally speaking,
for events to constitute force majeure, they must be:
 Unforeseeable.
 External to the parties of the contract.
 Unavoidable (irresistible).
Force majeure includes three sub-clauses:
 Events of force majeure
 Procedure to certify force majeure.
 Corollary of force majeure.
In order to avoid the uncertainties and delays involved in relying on the applicable
law, parties to contracts often prefer to provide for a specific regime for force majeure,
along with a definition of which events shall quality for special treatment.
For example:
Force majeure shall be understood to be unforeseeable and unavoidable event
beyond the control of both the contracting parties, which in fact, causes difficulties
directly preventing the performance of the contractual obligation. Force majeure
circumstances must be notified by cable by each party to the other within 7 days and
confirmed by writing within 10 days from the cable together with a certificate of Force
majeure issued by the Chamber of Commerce concerned. Beyond this time Force
majeure circumstances shall not be taken into consideration.
4.2.10 Claim
Claim is some suggestions given by one party to another due to quantity, quality …
not in compatible with terms and conditions in the contract.
In this term, parties must regulate procedure to implement claim, time to claim,
obligations of parties and methods to adjust claim.
Claim must be in written form and include: commodity name, quantity, origin of
commodity, basis for claim, requirements on adjusting claim.

110
 For example:
Any claim about quality must be in written form and sent to the seller within 60
days from the shipment date. Upon this time, the seller will be free from claim. Within 15
days since receiving the buyer’s claim, the seller must send his or her representative for
counter inspection. If the goods are not up to stipulation in the contract, the seller is liable
for replacing new goods compatible with the contract. If the seller fails to do so in due
time, the buyer is allowed to have Vinacontrol inspection. The inspection result by
Vinacontrol will be final and binding both sides.
4.2.11 Arbitration.
In this term, following contents must be included:
 Who is responsible for jurisdiction (National Court or Arbitrator) in case dispute
cannot be resolved amicably?
 Law applicable
 Place to execute arbitration.
 Division of arbitration fees.
For example:
When realizing this contract, if any dispute is unable to be agreed on the
negotiation between both sides, it will be brought to the Vietnam International
Arbitration Centre beside the Chamber of Commerce and Industry in Hanoi to solve
according to the international commercial law and this is final and binding.

4.3. Some contract samples

4.3.1 Purchase contract of rice

PURCHASE CONTRACT NO. 16010440

DATED 28 FEBRUARY 2015
This contract is made on this date of 28th February 2015 by and between:
SELLER
FOOD COMPANY OF HOCHIMINH CITY
57 Nguyen Thi Minh Khai Street, District 1,
Hochiminh City Viet Nam.
Tel: (+84 8) … Fax: (+84 8) …
BUYER
TOEPFER INTERNATIONAL-ASIA PTE. LTD.
100 Beach Road #31-01 Shaw Tower
Singapore 189702

111
Tel: (+65) … Fax: (+65) …
In witness hereof, the Seller and the Buyer agree to conform to the following terms
and conditions:
COMMODITY
VIETNAMESE WHITE RICE LONG GRAIN 5 PCT BROKEN MAXIMUM
SPECIFICATION
1. Broken (basis ¾) max: 5%
2. Chalky kernels (basis ¾) max: 6%
3. Yellow kernels max: 0.5%
4. Damaged kernels max: 0.75%
5. Immature kernels nil
6. Red and red streaked kernels max: 0.75%
7. Foreign matter max: 0.1%
8. Glutinous rice max: 0.5%
9. Moisture max: 14%
10. Paddy (grains per 1kg) max: 15 grains
11. Average length of the whole grain 6.2 mm
Milling degree well milled and double polished
Qualitative requirements must be fulfilled:
a. Crop 2014/2015
b. Smell: normal, without musty and mouldy (free from foreign odour or odour which
indicates deterioration)
c. The rice qualify shall not be inferior in grain and colour.
d. Rice shall be in good condition, free from live insects and free from visible
moulds. e. Rice shall be free from GMO
The Seller must submit before loading 3 sets of 1-kg samples which will be used as
reference in case of any dispute in quality for the items not mentioned above such as
shape, colour, taste. The said representative after being approved by them. One of the
samples will be retained by the seller, one by the buyer and one by the inspection
company.
ORIGIN VIETNAM
QUANTITY
5,000 metric tons more or less 10 pct. at Buyer’s option at contract price. Seller
guarantees the quota/export license in accordance with the quantity nominated by Buyer.
PACKING
In nee single PP woven bags (tare weight of minimum 150 grams per bag) of 50 kgs net
each. The bags must have double threads machine sewing at both ends suitable for rough

112
handling and sea transportation. The stiches must be double sewn at the mouth of bags.
These polypropylene bags used are new, clean, strong odourless and not in anyway
render the grain harmful for human edible purpose. Seller to provide Buyer with 2 pct.
empty bags on the shipment free of charge.
MARKING
As per Buyer’s requirement to be advised by separate fax at least 10 days before vessel’s
ETA at loading port.
SHIPMENT
April 2015, provided the vessel is presented at loading port in readiness to load cargo
within the shipment period, Seller shall complete loading with and/or after the shipment
period and carrying charges shall not apply Partial shipment/ combined shipment allowed
at Buyer’s option and arrangement.
PRICE
USD 247.-/MT net shipped weight FOB Stowed and Trimmed Hochiminh City port,
Vietnam:
Dunnage (bamboo mat/ sticks, kraft paper), if any, to be at Owner’s/ Buyer’s order
and account.
Shore tally to be at Seller’s arrangement and account.
Showing and trimming at Seller’s account must be effected to Master’s/ Buyer’s
satisfaction.
Lighterage, if any, at loading port for Seller’s account.
Shipment on deck is not allowed.
WEIGHT AND QUALITY
Weight, quality and condition of cargo shall be final at loading port as per inspection by
SGS or a first-class independent surveyor at Buyer’s option. All costs for inspection to be
for Seller’s account. Buyer’s representative has the right to inspect cargo at the
mills/warehouses/port with the right of rejection on any uncontractual part of cargo with
the consent of appointed surveyor. The cargo must be replaced at Seller’s expense and
time. However, Seller shall coordinate closely with the appointed surveyor to have cargo
thoroughly inspected at the mills and/or warehouse and to ensure only contractual cargo
is loaded on barges to the port. This aims at avoiding possible problems of cargo rejected
by Buyer’s/ Receiver’s representative alongside ship and incurring expenses (re-
processing/ bagging/ transportation fees and vessel waiting time, demurrage, etc.) which
shall be for Seller’s account.
The use of hand hooks during handling/ loading is strictly prohibited; otherwise Buyer’s
representative shall have the right to stop the loading and time will count as laytime.
FUMIGATION

113
To be effected on board of vessel after completion of loading (by methyl bromide) with
risk and expense to be for Seller’s account. Expenses for crew on shore during
fumigation time, if any, for Owner’s/ Buyer’s account. Maximum 24 hours of fumigation
not to count as laytime.
PAYMENT
By irrevocable L/C to be opened from a first-class bank in Singapore latest by 28 March
2015 and advised to Seller’s nominated bank. L/C is payable at sight for 100 pet of
invoice value against presentation of following shipping documents:
A. Signed commercial invoice
B. Certificate issued and signed by Buyer’s representative, acknowledging receipt of
the original documents plus copies of documents listed below:
1. Full set (3/3) of original clean on-board Bill of Lading made out to order,
blank endorsed and marked “Freight Prepaid” plus 06 non-negotiable copies.
2. Certificate of Weight issued by SGS or independent surveyor.
3. Certificate of Quality issued by SGS or independent surveyor.
4. Certificate of vessel’s holds/ hatches cleanliness issued by SGS or
independent surveyor.
5. Certificate of Origin issued by Vietnam Chamber of Commerce and
Industry.
6. Fumigation certificate issued by Vietnam Fumigation Company of Ministry
of Agriculture and Rural Development or by independent surveyor at Buyer’s
option.
7. Phytosanitary certificate issued by Plant Protection Department of Ministry
of Agriculture and Rural Development.
8. Non-GMO certificate issued by independent surveyor.
9. Radiation certificate issued by independent surveyor or competent authority.
10. Health certificate issued by independent surveyor or competent authority.
11. Packing list.
12. Tally report issued by SGS or independent surveyor.
13. Copy of fax advising Buyer of shipment particulars within 01 working day
after completion of loading.
Other documents, if any, as per L/C requirement and amendment.
C. Copy of documents listed in items (1) to (13)
Third party documents and Charter Party B/L acceptable. All banking charges inside
Vietnam are or Seller’s account. All banking charges outside Vietnam are for Buyer’s
account.
LOADRATE

114
1,500 MT per WWD SHEX EIU basis 04 workable cranes/ derricks/ hooks or pro-rata
DEMURRAGE/ DESPATCH
Demurrage/ dispatch rate as per governing Charter Party to be advised to Seller upon
nomination or vessel or latest before vessel’s arrival at loading port. Demurrage/ dispatch
money to be settled directly between Buyer and Seller within 21 days after submission of
supporting documents.
NOTICE
Ship’s master/ owner/ agents will advise vessel’s ETA and her particulars to Seller 3
days/ 2 days/ 1 day before vessel’s estimated arrival at loading port. Seller shall plan
cargo arrival at loading port according to vessel’s schedule. Buyer shall not be
responsible for barges demurrage and/or carrying charges and/or cargo quality
deterioration, if any should Seller’s cargo wait for the vessel.
BERTH/ISPS
Buyer shall nominate seaworthy suitable for rice in bags within draft restriction of
loading port. Seller undertakes to provide a suitable and safe berth/ buoy for loading of
Buyer’s vessel at Hochiminh City port where Buyer’s vessel may proceed to, lie and
depart therefrom, always safely afloat. Seller warrants that the designated loading berth/
anchorage is safe, and facility is ISPS certified and all costs/ damages resulting from non-
compliance (facility/berth not ISPS certified) will be for account of Seller.
LAYTIME
In case N.O.R is tendered before noon time on a working day, laytime commence to
count the same day at 13:00 hrs. in case N.O.R is tendered after 13:00 hrs, laytime to
commence the next working day at 8:00 hrs. N.O.R can be tendered by cable/ telex/ fax
by ship’s master/ owners/ agents WIBON, WIPON, WIFPON and/or WICCON, even in
case of port congestion. Time from 12:00hrs on Saturday to 07:00 hrs on Monday not to
count as laytime. Time used during holds survey not to count as laytime. If vessel is
declared unclean by independent surveyor, time lost in cleaning vessel holds/ hatches
until she is confirmed clean by surveyor not to count as laytime. Pro-rata will be applied
if a number of holds only need cleaning.
EXPORT QUOTA/ LICENCE
Seller shall obtain the relative export permission, quota and/or license in accordance with
the shipping program including but not restricted to quota’s quantity and validity. The
issuance and/or extension of quota/export license once the vessel is nominated within
contractual shipment and the resulting costs and consequences shall be for Seller’s risk
and account. Failure, if any, in obtaining the license shall not be considered as ground for
force majeure.
DUTIES AND TAXES

115
All export duties, customs duty or charges of whatsoever nature directly applicable to the
export of this cargo shall be for Seller’s account except freight tax which is on Buyer’s
account.
INSURANCE
To be covered by end buyers.
TITLE AND RISK
Seller shall deliver the cargo on vessel nominated by Buyer/ shipping agency. Title and
risk of loss of cargo sold hereunder shall be passes from Seller on to Buyer as the cargo
on board the vessel.
FORCE MAJEURE
As per GAFTA 120
ARBITRATION
As per GAFTA 125
GOVERNING TERMS
This contract states all of the governing terms and conditions to between Buyer and
Seller. There can be no amendment, alteration or deletion without the express written
consent of Buyer and Seller. Both sides guarantee that there will be no request for price
revision, delay of shipment or whatsoever change to the contract terms and conditions.
All other terms, if not conflicting with the above, are as per GAFTA 120.
SPECIAL CONDITIONS
Should Seller fail to deliver the cargo on the vessel nominated by Buyer within the
shipment period due to whatsoever reasons, Seller undertakes to pay to Buyer a penalty
of 100% of contractual value plus dead freight.
Should there’s any short-delivered quantity on Buyer’s nominated vessel within the
shipment period due to whatsoever reasons, Seller undertakes to pay to Buyer a penalty
of 100% of value of the short-delivered quantity at contracted price plus dead freight and
arising costs. This penalty shall be automatically deducted from L/C proceeds upon
payment.
Seller shall confirm acceptance by signing/ stamping on this Contract and fax it back to
Buyer latest 2 March 2015 for record purpose.
Documents by fax/ e-mail by attachment are deemed as original and legally admissible.
BUYER SELLER
TOEPFER INTERNAITONAL
ASIA PTE.LTD FOOD COMPANY OF HOCHIMINH CITY

116
 ANNEX NO.1

TO VIETNAMESE RICE CONTRACT NO.16010440

DATED 28 FEBRUARY 2015

On this date of 2nd March 2015, it is manually agreed by and between:

SELLER
FOOD COMPANY OF HO CHI MINH CITY
57 Nguyen Thi Minh Khai Street, District 1,
Ho Chi Minh City, Vietnam
BUYER
TOEPFER INTERNATIONAL – ASIS PTE. LTD.
100 Beach Road, #31-01 Shaw Tower
Singapore 189702
Upon the following amendments to the above-mentioned contract:
COMMODITY:
VIETNAMESE WHITE LONG GRAIN WELL MILLED RICE IN
BAGS SPECIFICATION
Fit for human consumption at final destination (discharge ports) and are consumed in the
country of origin.
Moisture – up to 14% maximum (up to 15% allowed with penalty 1=1 basis of contract
price)
Broken kernels – up to 5% maximum
Whiteness – no less than 40-degree maximum
Red & damaged kernels – up to 1.5% maximum
Chalky kernels – no more than 4% preferred, but up to 6% maximum allowed, with a 1:1
discount to be deducted from the price for every percentage above 4% chalky kernels
proposed.
Paddy kernels – up to 0.1% maximum
Yellow kernels – up to 0.5% maximum
Foreign matter – up to 0.1% maximum
Pesticide residues to be within international limit
Heavy metals (mercury, lead and cadmium) according to the international limits
Free of any abnormal odour that indicates any damage to the rice Not modified
genetically (non-GMO)
Free from dioxin and radiation
New crop (2014/2015) free of live insects and the larvae.

117
Mycotoxin (Aflatoxin) – up to 5 ppb maximum
The Seller must submit before loading 3 sets of 1-kg samples which items be used as
reference in case of any dispute in quality for the items not mentioned above such as
shape, colour, taste. The said samples should be sealed, signed and stamped by buyers’
representative after being approved by them. One of the samples will be retained by the
seller, one by the buyer and one by the inspection company.
METHOD OF ANALYSIS
The standard method of analysis is to be based on ISO 7301 (details obtainable from
internet under “International Standards Organization”) or a recognized equivalent to the
satisfaction of the Grain Board.
PRICE
USD 253.-/MT net shipped weight FOB Stowed and Trimmed Ho Chi Minh City port,
Vietnam
FORCE MAJEURE
As per GAFTA 120
Since this rice is intended for Iraq and there is a force majeure risk involved with this
contract, both sides have agreed if buyer does not get the L/C from the end buyers, then
buyer will be forced to declare force majeure case for this contract. Under such case,
Buyer shall not be liable for failure or delay in performance of their responsibilities. All
other terms and conditions remain unchanged.
This Annex is an integral part of Contract No. 16010440 dated 28 February 2015.
Seller shall confirm acceptance by signing/ stamping on this annex and fax it back to
Buyer at least 2 March 2015 for record purpose.
Documents by fax/email by attachment are deemed as original.

BUYER SELLER

TOEPFER INTERNATIONAL FOOD COMPANY

ASIA PTE.LTD. HO CHI MINH CITY

118
4.3.2 Purchase contract of fertilizer
CONTRACT
No: …

Date: …

Buyer: ......................................................................

Hereinafter referred to as “Buyer”

Seller: ......................................................................

Hereinafter referred to as “Seller”

Both Seller and Buyer have concluded this Contract on the terms and conditions set forth
hereunder.
1. Commodity
Granulated Chemical Fertilizer NPK (16-16-8-13S) in Bags.
2. Specification
a) Nitrogen 16.0 Percent Min
b) Available P2O5 16.0 Percent Min
c) Water Soluble P2O5 13.6 Percent Min
d) Available K2O 8.0 Percent Min
e) Sulfur 13.0 Percent Min
f) Moisture 2.0 Percent Max
g) Granular, dry, free flowing
h) Free from harmful substances
3. Origin
Philippines
4. Manufacturer
Philippines Phosphate Fertilizer Company (PHIPHOS)
5. Quantity
5,000 Metric tons more or less 5 percent at Seller’s option.
6. Price

119
USD 263.50 (United States Dollars Two Hundred Sixty-Three and Cents Fifty only)
per Metric ton CFR Free Out one safe berth of HCMC Port, Vietnam
7. Total Amount
USD 1,317,500.00 (say: United States Dollars One Million Three Hundred
Seventeen Thousand and Five Hundred +/-5%)
8. Shipment
Not later than Oct. 15th, 2016
9. Loading port
Isabel, Leyte, Philippines
10. Discharging port
One safe berth, one safe port of HCMC Port, Vietnam
11. Marking
Philphos neutral export standard marking
12. Packing
In new white 50 kgs net PP woven outer bag plus PE inner liner bag, 2 percent empty
printing spare bags to be supplied free of charge.
13. Payment
To be effected in US dollar by an irrevocable Letter of Credit payable 100% of invoice
value at sight against presentation of Seller’s shipping documents listed below, to be
opened not later than 17th Sep 2016 through Eastern Asia Commercial bank or
Vietinbank or Vietnam bank of Agriculture in favour of Dong – A Pharmaceutical Co.,
Ltd. L/C to be advised through Standard Chartered bank, Seoul, Korea. All shipping
documents shall be in triplicate otherwise stated:
 Signed Commercial Invoice
 Packing List
 Original clean on-board ocean Bill of Lading made out to order of L/C opening
bank, marked “freight prepaid” and notify the applicant or its nominee.
 Certificate of origin issued by Philippines Customs.
 Certificate of quality and quantity issued by the international independent surveyor.
 Beneficiary’s certificate certifying that one full set of non-negotiable shipping
documents have been sent directly to applicant’s HCMC branch office within five
(05) days.
 Working days from B/L date by express courier whose receipt must be presented for
negotiation.
 Copy of fax advising applicant of full shipment particular within three (03) working
days from B/L date; the name of carrying vessel, name of commodity, shipped

120
 quantity, B/L date and number, ETA at discharging port, invoice value and L/C
number and also fax the same to opening bank.
Remark: One full set of signed shipping documents should be faxed to Buyer within
three (03) working days from B/L date for Buyer’s care of import formalities before
vessel arrival.
14. Terms and conditions of Letter of Credit
 L/C amount and quantity 5 percent more or less.
 Charter Party B/L and third-party document to be acceptable.
 Partial shipment and transhipment to be not allowed.
 Shipping documents to be presented within 21 days from B/L date, but within L/C
validity.
 All banking charges at opening bank for Buyer’s account.
 All banking charges outside Vietnam for Seller’s/ Beneficiary’s account.
 L/C amendment charges will be at faulty party’s account.
 L/C to be freely negotiable at any bank.
In case L/C opening will be delayed, shipment may be delayed.
15. Title and risk
Title and risk of the goods shall pass from Seller to Buyer as the goods pass over the
vessel’s rail at the time of loading.
16. Discharging terms and conditions
Seller or their agent shall inform Buyer of vessel nomination stating main particular
of the vessel and Buyer shall confirm acceptance of vessel nomination to Seller within 24
hours from moment of receipt of Seller’s vessel nomination.
Seller shall warrant that carrying conveyance must be fully covered for P&I risks with
an International Group (or equivalent) P&I club.
Buyer to guarantee discharge rate of 1,000 MT per Weather Working Day of 24
consecutive hours, Sunday and Holiday Excluded Even if Used, on the basis of four (04)
workable derricks available in good order or pro-rata.
Notice of Readiness (NOR) to be tendered on arrival of vessel at sea pilot station or
anchorage, whether in berth or not (WIBON), whether in free particle or not (WIFPON),
whether in port or not (WIPON), whether custom cleared or not (WICCON)
Laytime to be commenced either at 13:00 hours of the same working days, if OR is
tendered during 08:00 -12:00 hours, and at 08:00 hours of the following working day, if
NOR is tendered during afternoon office hours.

121
 Shifting time for the vessel from pilot station to the first berth or anchorage is not to
count as laytime. All other subsequent shifting(s) and waiting time to be for Buyer’s
account and time used to count as laytime.
The time of any break on discharging due to bad weather condition shall be excluded
from laytime.
Demurrage/ dispatch rate to be determined as per the governing charter party.
Demurrage/ dispatch money, if any to be settled between Seller and Buyer at the
demurrage/ dispatch rate per day and pro-rata all time lost/ laytime saved in accordance
with the time Sheet and/or the Statement of Facts signed by the master of the vessel or a
person authorized by the master which is to be made within 15 days after completion of
discharging.
Any lighter at discharging port shall be at Buyer’s accounts. The time used for lighter
age to account as laytime.
17. Insurance
Insurance to be for Buyer’s responsibility and account. Vessel up to 25 years age
acceptable, but OAP, if any, is for Seller’s account on the basis of presentation of official
debit note and evidence by Buyer and shall be calculated at international standard OAP
scale as follows:
Vessel from 16 years old up to 20 years old: 0.185 percent.
Vessel from 21 years old to up 25 years old: 0.375 percent.
18. Determination of quality and quantity:
International independent surveyor’s inspection and certificate of quality and quantity at
loading port arranged and borne by Seller to be taken as final and binding on both parties.
19. Force Majeure
Neither party shall be held responsible for the delay or failure of performance of
obligation in this Contract when such delay or failure is caused by strikes, flood, acts of
god, earthquake, or any laws, rules or regulations of any governmental authority or other
conditions beyond its control which cannot be forecast or provided against and the party
subject to such obligations has exhausted alternative means of performing the obligation
in question.
The party wishing to claim for relief by reason of any said circumstances shall notify
the other party in writing of this intervention and of cessation and deliver certificate
issued by the Chamber of Commerce at the place where the accident occurred exceeds
sixty (60) days, each party shall have the right to cancel this Contract, unless otherwise
agreed in such case neither party shall have the right to claim eventual damages.
20. Claim

122
All claim by Buyer shall be informed by telex or cable immediately after cargo
completely received at destination port and be confirmed in writing delivered to the
Seller within 30 days after such discharge (for claim of any kind of latent defects
respectively) together with survey report of international well-known surveyor.
21. Arbitration
Any dispute arising under or relating to this Contract, or the breach thereof, which
cannot be settled amicably between both parties shall be referred to the Vietnam
International Arbitration Centre beside the Chamber of Commerce and Industry in
HCMC under the Rules of Conciliation and Arbitration of International Chamber of
Commerce, whose award shall be final and binding on both parties, it should be
transferred to the International Arbitrating Committee in Singapore.
The fees for arbitration and/ or any other charges, if any, shall be borne by the losing
party unless otherwise awarded.
22. Other terms and conditions
Seller shall take necessary measures to obtain an export license and Buyer shall take
necessary measures to obtain an import license.
All permits, port duties, taxes, royalties and other charge of any nature on the cargo
imposed or assessed by the country of discharging are for Buyer’s account.
After signing this Contract, all previous negotiations and correspondences pertaining
to the subject matter shall be null and void.
All amendments and supplements to this Contract shall be effective only if they are
made in writing and signed by the authorized representative of both parties.
23. Incoterms
This Contract is subject to interpretation in accordance with the International
Commercial Terms (Incoterms 2010) edition and as amended to apply.
This Contract comes into effect from the signing date and is made into four (04)
originals and each party keep two (02) originals. Hard copy by fax also comes into same
effect as original subject to both parties’ agreement

For and on behalf of Buyer For and on behalf of Seller

CHAPTER SUMMARY

1. International sale of goods contracts play crucial role in import-export activities in

particular and in the modern society in general.

123
 2. An international sale of goods contract is an agreement between Seller and Buyer
in different countries, in which stipulates obligations and benefits of parties in
detail. Seller’s main obligation is to deliver goods in conformity with the contract
on goods’ name, quality, quantity, time of delivery as well as documents related to
the goods. Buyer’s main obligation is to take delivery in time and make payment
as stipulated in the contract.
3. A contract’s main provisions are: commodity, quality, quantity, delivery, prices,
payment, packing and marking, warranty, insurance, penalty, force majeure, claim,
arbitration.

REVISION QUESTIONS
1. What is an international sale of goods contract?
2. List briefly all important terms and conditions of a contract.
3. In your opinion, what provision of a contract is the most important? Why?
4. What is payment method? List all payment methods.
EXERCISES
1. Suppose that you are an importer/ exporter, compose a contract for your product.
2. Suppose that you are a Vietnamese exporter, analyse, make a comment on the
following rice export contract, find mistakes, disadvantages and correct them to
perfect the contract.

SALE CONTRACT
Contract No: RWSC09092201
Date: 22 September 2017
The Seller: REAL WORLD JSC
Add: Hoang Dieu St., Dist. 4, Ho Chi Minh City, Vietnam
Tel: 84.62615872
Acct No.: (USD) 30524189 at ACB – Khanh Hoi branch
FDA Registration No.: 12781904916
Represented by Mr. Nguyen Vu – General Manager
The Buyer: RAMA FOOD MFG. CORP
Add: 1486E, Cedar St., Ontario, CA 91761
Tell: (909) 932 – 5305
Fax: (909) 932 – 6666
Represented by Mrs. Tanya Garrett – Managing Director.

124
 The Seller agrees to sell and the Buyer agrees to buy hereinafter commodities under
the following terms and conditions:
COMMODITY: White, irregular rice
ORIGIN: Vietnam
QUALITY:
- Broken: 25%
- Moisture: 14% - 15%
- Double polish: required
- Chalky kernel: 5.0% max (basis ¾ grain).
- Foreign matter: 1% max
- Yellow kernel: 1% max
- Paddy: 5 per kg.
QUANTITY:
- 929,880 kgs (nine hundred and twenty-nine thousand eight hundred and
eighty kilos)
- Tolerance: 1%

UNIT PRICE: USD 365.00/Ton (US dollars three hundred and sixty per ton)
CFR Long Beach Port, in accordance with Incoterms 2010.
SHIPMENT:
- Shipment date: from 25 September 2017 to 31 December 2017.
- Transhipment: Allowed.
- Partial shipment: Allowed.
- Port of loading: Ho Chi Minh (any terminal)
- Port of destination: Long Beach or Los Angles.
PACKING: the rice is packed in new 45.36-kg PE bags (equivalent to 100
lbs/bag)
INSPECTION: by the buyer’s representative at the seller’s warehouse or at the
port of loading.
FUMIGATION: The rice must be fumigated in container at the port of loading.
DOCUMENTS REQUIRED:
- Full set (3/3) original clean on-board Bill of Lading.
- Signed commercial invoice in triplicate.
- Packing list in triplicate.
- Certificate of Fumigation issued by Vietnam government/ competent
authority.

125
 - Certificate of Origin to be issued by Vietnam Chamber of Commerce and
Industry (VCCI)
PAYMENT: by T/T or by cash 100% in advance or within 5 days after B/L
issuance date.
GENERAL TERMS: Both parties undertake to execute strictly all articles of
this contract. Any amendment or addition to this contract shall be made in
writing after being mutually agreed by both parties
FORCE MAJEURE: Neither party to this contract shall be held responsible for
breach of contract caused by an act of god, insurrection, civil war, war, military
operation or local emergency. The parties do hereby accept the international
provision of “Force Majeure” published by the International Chamber of
Commerce, Geneva, Switzerland, and as defined by I.C.C rules uniform customs
and practice.
CLAIMS AND ARBITRATION: In case of claim on quality discrepancy
against the seller, the buyer shall officially notify the seller by fax within 2
weeks from the date of arrival of vessel at discharging port. Thereafter, both
buyer and seller mutually appoint an international reputable neutral inspection
agency and such inspection result shall be deemed as final to both buyer and
seller.
Any dispute arising under this sales contract would be settled amicably at first.
In case the dispute cannot be settled, the dispute will be referred to the Vietnam
International Arbitration Centre of Vietnam Chamber of Commerce and Industry
(VCCI)
This contract is recognized by email and will come into force after being signed
by both concerning parties.

THE SELLER THE BUYER

3. In position of a Vietnamese importer, make a comment on the following

provisions of a Hot rolled steel plates import contract, find mistakes, disadvantages and
correct them to perfect the contract
 Commodity: Steel
 Quantity: 587 MT.
 Unit price: USD 630.00/MT HCMC port.
 Shipment: 180 days after receiving L/C.

126
  Payment: By irrevocable confirmed L/C, A/S with TTR.
4. In position of a Vietnamese exporter, make a comment on the following
provisions of a Coat export contract, find mistakes, disadvantages and correct them to
perfect the contract
 Commodity: Coat
 Quantity: 6,000 pcs
 Unit price: USD 6.5/pc
 Shipment: 20 days after signing of contract.
 Payment: Clean Collection.
5. In position of a Vietnamese importer, make a comment on the following
provisions of a Milk powder export contract, find mistakes, disadvantages and correct
them to perfect the contract
 Commodity: Milk
 Quantity: 12,000 kg
 Unit price: USD 14.55/kg HCMC port, Vietnam
 Shipment: 180 days after signing of this contract.
 Payment: CAD.
6. In position of a Vietnamese exporter, make a comment on the following
provisions of a wooden furniture export contract, find mistakes, disadvantages and
correct them to perfect the contract
 Commodity: Wooden furniture
 Quantity: 21,000 set
 Unit price: USD 120.00/set FOB
 Shipment: Dec 31, 2018.
 Payment: D/A
7. Compose a rice export contract.
8. Compose a coffee export contract.
9. Compose a fertilizer import contract.
10. Compose a computer component contract.

127
 CHAPTER 5: INTERNATIONAL SETTLEMENTS
Commercial activities always reflect two movements: money and goods movement.
Although both these movements operate contrarily, they reflect the same relationship:
trade relations.
To transfer payment in foreign trade relations, it is common to use means of credit
circulations which have monetary value such as Bills of Exchange, Promissory notes,
Cheques, Payment Cards … which are very popular today.
In addition, method of payment is one of the most important conditions in
international payment. Method of payment means how the seller can collect money after
supplying goods or services and the buyer can make payment. Choosing which method
will depend on:
 Frequent or infrequent trade relations.
 Mutual trust.
 Scale of commercial or service contracts.
 The availability of the goods sold and the financial capacity of buyers.
 The political, economic, and social situation of each party’s country.
Ultimately choosing an appropriate method should also stem from the request of the
seller which is collecting money quickly, sufficiently, and fully and requirement of the
buyer which is importing qualified goods on time and of correct amount
This chapter introduces promissory notes, bills of exchange, cheques, and many types
of plastic card to help students know, establish, check, detect errors, and choose to use
these instruments. Additionally, this chapter covers Remittance, Open Account, Cash
against Document, Bill for Collection, and Documentary Credit in order to help students
understand the process of these methods, know how to compose and check errors of
common documents as a remittance order, a credit opening application, …

5.1 International Payment Instruments

5.1.1 Drafts
5.1.1.1 Definition
There are many definitions about Bills of exchange/ Drafts because there are lots of
legal sources governing Drafts at the national, regional, and international levels. The
below is one of the typical definitions:
“A bill of exchange/ draft is an unconditional order in writing, addressed by one
person to another, signed by the person giving it, requiring the person to whom it is

128
addressed to pay on demand or at a fixed or determinable future time a sum certain in
money to or to the order of a specified person, or to bearer.” – BEA 1882
BILL OF EXCHANGE 
No.: 134/EX Ha Noi, 20th July 2018
For: USD 100,000.00 
At sight of this first Bill of Exchange (second of the same tenor and date being unpaid) Pay to
the order of Saigon Bank for Industry and Trade the sum of US dollars one hundred thousand
only.

To: The Delta Co. Ltd For and on behalf of Tocontap

180 Portland St., Mongkok, HongKong 02 Cau Giay, Dong Da, Ha Noi
(signed)

Nguyen Van A

Box 5.1: Bill of exchange sample in Collection method

5.1.1.2 Features to a bill of exchange

Abstraction:
On the bills we do not need to write the credit relationship – the causes they were
born, but only need to specify the amount to be paid and the content related to payment.
Legal effect of a bill will not be bound by what causes it. In case of dispute, the bill’s
owner must appeal by himself.
Once separated from the contract and in the hands of a third person, a bill becomes
independent business, rather than a business born from the contract. Or in other words,
the obligation to pay the bill is abstract.
Unconditional order of payment:
Payer has to pay fully in compliance with the requirements of the bill. Payer must not
excuse his own reason against the drawer unless the bill is contrary to the law that
governs it. This means the payer cannot give any reasons to reject payment such as
defected goods, goods shortage …
Circulation.
The bill circulates easily by being transferred one or more times during its term. The
reason is because the bill is a claiming order of this person to the other, worth a certain
amount, has a certain period which is usually short-term and accepted by the payer.
5.1.1.3 Legal bases
To unify the bill circulation, capitalist countries have issued laws on bills of exchange
as follows:

129
* Regional and international laws:
- Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes
(Geneva 1930) (ULB-1930). This convention belongs to European region.
 Countries apply: Members of Genera such as Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Hungary, Italia, Luxembourg, Monaco, the Netherlands,
Norway, Poland, Russia, Sweden, Switzerland, Brazil, Japan…
In addition, there are also Viet Nam, Mongolia, Thailand, Korea, Bulgaria, Slovakia,
Belarus, Ukraine … VN is not a member of Geneva Convention 1930 but in relations
with many other countries, VN also applies ULB 1930 because ULB is widely used by
many countries in the world.
- United Nations Convention on International Bill of Exchange and Promissory Notes
adopted by the General Assembly on 9 December 1988
* National law:
- Bill of Exchange Act of 1882 (BEA) of Great Britain.
- Uniform Commercial Codes of 1962 (UCC) of the USA (UCC).
 Countries apply: England, Canada, India, Hongkong, Malaysia, Singapore, Philippine,
Ireland …
* Viet Nam: Law on negotiable instruments, effective from 1st July 2006
 Principles of legal conflict resolution: The Convention on the adjustment of
legal conflicts regarding Bill together with ULB 1930 and BEA 1882 (article 72) are as
follows:
- Capacity of parties: Law of the party
- Legal form of the bill: Law of the place of issue
- Obligations of the acceptor of a bill: Law of the place of payment.
- Validity of the 3rd party’s signature: Law of the place where the bill is signed
- Form and time-limit for protest: Law of the place where protest is forced to set up.
- Where a bill is lost: Law of the place of payment.
5.1.1.4 Parties to a bill of exchange:
Through the definition, there are some parties involved in the creation of a bill
including:
- Drawer:

130
 Drawer in foreign trade is exporter, a service supplier related to exporting goods.
Benefits:
- Draw the bill to demand payment from the drawee or any person designated by him.
- Be the first beneficiary of the bill
- Be able to negotiate or mortgage the bill in the bank.
- Transfer benefits of the bill to the other
- Have legal rights of other future benefits of the bill.
Responsibilities:
- Draw the bill in accordance with Laws and real transaction.
- In case that the bill is rejected by the drawee: be obliged to pay the sum inscribed on
the bill for the beneficiary.
- Drawee:
In foreign trade, payer will be importer (if the bill is used in collection method) or
issuing bank or confirming bank (if the bill is used in documentary credit method).
Benefits:
- Honour or dishonour the bill
- Check the continuity and validity of endorsement line
- Keep or cancel the bill after payment
Responsibilities:
- Make immediate payment for the bill right after the bill is presented.
- Accept payment for the time bill presented.
- Beneficiary:
A person who receives the sum of money inscribed on the bill. Beneficiary can be the
drawer, or any person assigned by the drawer or transferred the benefits through
endorsement by the beneficiary.
According to the Ordinance on Foreign Exchange of Viet Nam, beneficiaries of bills
of exchange are credit institutions and other institutions licensed to provide foreign
exchange services.
Benefits:
- Receive payment of the bill.
- Transfer the benefit of the bill to the other
- Be able to negotiate or mortgage the bill in the bank
Responsibilities:
- Present the bill on time, and at the correct payment address.
- Inform timely for the payer in case of losing the bill in order to prevent wrong
payment.

131
 - Endorser or Assignor:
Endorser is a person who transfers his bill benefits to another by endorsement. Thus,
the first endorser is the drawer.
- Holder or Bearer:
Holder is a person who is entitled to receive payment when the bill is paid. The holder
will be the drawer if he doesn’t transfer his bill to anybody. For the endorsed bill, the
holder is the final beneficiary of the bill provided that the bill is unknown one.
5.1.1.5 Regulations on drawing Bills of exchange
A bill of exchange is a written confirmation of paying for a business, so it must have
certain content and form in accordance with the law governing it.
a, Form
Form of a bill is regulated as follows:
- Must be a deed, document (in writing, typing, or printing). A bill which is made
through speaking, telex, telephone … is null.
- Bill’s pattern does not determine the legal validity of the bill. Pattern of a
commercial bill is determined and issued by each company or firm.
- The language employed in drawing up a bill is written, printed or typed in just
one language. English is the common language of drawing up the bill. A bill will not be
legally valid if it is made up of many different languages. The bills in pencil, red ink to
fade ink will become worthless.
According to Article 7, Ordinance on negotiable instruments 1999 “Negotiable
instruments must be made on the pre-printed forms issued by the Vietnam State Bank.
They must be made in Vietnamese. Where a foreign factor is involved, the negotiable
instruments must be made in Vietnamese and English.”
- Under Article 64 ULB 1930 a bill may be drawn up into 2 or more copies, each
copy will be numbered and have the same legal value. When paying, the bank often sends
bills twice in succession to prevent the lost. Which bill comes first will be paid and any
subsequent copies shall be invalid. So, the first bill is often written on it “At sight of this
first Bill of Exchange (second of the same tenor and date being unpaid) …” In the second
copy “At sight of this second bill of exchange (first of the same tenor and date being
unpaid).
- Valid bills must be originals.
b, Content
The bill’s content is disciplined in Article 16 of Law on negotiable instruments,
Article 1 ULB 1930, Article 3 BEA 1882. One bill contains:
(1) Title (7) Time of payment

132
 (2) Bill number (8) Beneficiaries
(3) Sum payable (9) Drawee
(4) Place of drawing (10) Drawer
(5) Date of drawing (11) Place of payment
(6) Claiming order
BILL OF EXCHANGE 
No.: 134/EX   Ha Noi, 20th July 2018 

For: USD 100,000.00 

 At ……. sight of this first Bill of Exchange (second of the same tenor and date being
unpaid) pay to the order of Saigon Bank for Industry and Trade  the sum of US dollars one
hundred thousand only. 

To: Victoria Co. Ltd  For and on behalf of Tocontap company 

181 Portland St., Mongkok HongKong 02 Cau Giay, Dong Da, Ha Noi 
(signed)

11 Nguyen Van A
h
o
Box 5.2: Bill of exchange sample in Collection method

BILL OF EXCHANGE 
No.: 134/EX   Ha Noi, 20th August 2018 
For: USD 100,000.00 
At …… sight of this first Bill of Exchange (second of the same tenor and date being
unpaid) pay to the order of Saigon Bank for Industry and Trade  the sum of US dollars one
hundred thousand only. 
Value received and charge the same to account of Tocontap company
Drawn under: Delta Bank, Hong Kong by L/C No: 071SGB0709 dated 9th July 2017

To: Victoria Co. Ltd  For and on behalf of Tocontap company 

181 Portland St., Mongkok HongKong 02 Cau Giay, Dong Da, Ha Noi 
(signed)

Nguyen Van A

Box 5.3: Bill of exchange sample in Documentary Credit method

The bill’s contents must be included followings:
(1) Title: The word DRAFT, BILL OF EXCHANGE hay EXCHANGE for … must
be inserted in the body of the instrument to distinguish it with other instruments.
However, laws of the countries influenced by the Anglo-American Legal system are
not required to inscribe the title “Draft” as long as the bill’s content expresses the word

133
“bill”. But laws of the countries affected by the 1930 Geneva Convention and the laws of
Viet Nam are required to record the title, otherwise it will be worthless.
(2) Bill number: Do not require. On the practical experience, many companies often
number the bill.
(3) Sum payable: is a determinate sum of money. The amount is recorded in a
specific and obvious way. One person can also look through and recognize that amount
without having to have any professional calculation, even the simplest. The money can be
written in both figures and words or can be entirely in either figures or words. The
amount of the bill must agree in writing.
When the sum payable by a bill of exchange is expressed in words and also in figures,
and there is a discrepancy between the two, the sum denoted by the words is the amount
payable. Where the sum payable by a bill of exchange is expressed more than once in
words or more than once in figures, and there is a discrepancy, the smaller sum is the sum
payable. (Article 6 ULB 1930, Article 16 Law on negotiable instruments of VN, Article 9
BEA 1882)
(4) Place of drawing: is the place where the bill is drawn. For international bill,
place of drawing is necessary to induce the law which governs the bill. If the bill is issued
in VN, it will be governed by Vietnamese Law.
In international commerce, that businessmen issue bills of exchange is not
necessary to execute in seller’s country, but can be in buyer’s country, even on an
airplane or a ship …Thus, most laws allow to leave empty the place of drawing and the
place of its issue is deemed to have been drawn in the place mentioned beside the name
of the drawer (Article 2 ULB 1930, Article 16 Law on negotiable instruments of VN)
(5) Date of drawing: is the date arising the right of the drawer to claim the drawee.
This date is also a base to determine the time of payment, which is based on the date of
drawing.
E.g.: It is written on a bill “At 360 days after signed of this bill of exchange, pay to
the order …” If the date of drawing is 12 Jan 2017, the bill will be due on 12 Jan 2018.
In addition, the date of drawing is also a base to specify the unity of documents. The
date of drawing is:
+ not earlier than the date of issuing invoice and the date of issuing the credit.
+ in the valid time of the credit.
If the date of drawing is wanting:
+ ULB and Law on negotiable instruments: invalid
+ BEA: valid.

134
 (4) Claiming order: A bill of exchange is an unconditional, not required order to pay
a determinate sum of money. Payer must not excuse his own reason against the
drawer unless the bill is contrary to the law that governs it. In the order, time of
payment and beneficiary must be stated clearly.
(2) Time of payment: two types – sight bill and time bill:
+ Sight bill: make payment on presentation (at sight)
Write: “At sight of this … Bill of Exchange …, pay to …. The sum of …”.
Presentation period:
+ ULB: 1 year (from the date of signing) (Article 34)
+ Law on negotiable instruments of VN: 90 days (from the date of signing)
(Article 43)
+ BEA: a reasonable time (Article 40)
+ Time bill:
- Payable at a fixed period after sight
“At X days after sight of this … (first or second) of Bill of Exchange, pay to …. The sum
of …”
- Payable at a fixed date in the future:
“On……… (date) of this…………. (first or second) of Bill of Exchange, pay
to…………the sum of……….”.
- Payable at a fixed date after signed:
“At X days after signed of this……. (first or second) of Bill of Exchange, pay
to…………. the sum of…………”
Of the three types above, the first type is the most popular one. Any time of payment
is written ambiguously and obscurely, which make people unable to determine the time
of payment or make it become conditional, will be invalid.
E.g. “On the ship’s arrival, pay for the … (first or second) of Bill of Exchange …” or
“After inspection of the goods, pay for the … (first or second) of Bill of Exchange …”
If the time of payment is wanting:
+ ULB and Law on negotiable instruments of VN: invalid
+ BEA: valid (insert therein the true date of issue).
(3) Beneficiaries: first can be drawers, or others assigned by the drawers “Pay to the
order of Krung Thai Bank Public Company Limited …”
Full name of beneficiaries must be written clearly and fully.
(4) Drawee: is a person who has to make payment for the bill, specified in the front
and left corner of the bill after the word “To”
+ ULB: full name of the drawee must be specified

135
 + Law on negotiable instruments of VN: Full name and address of the drawee
must be specified
In case Drawee is not named fully:
• BEA: valid if it is indicated in a bill with reasonable certainty (Article 6)
• ULB and Law on negotiable instruments of VN: invalid (Clause 2 Article 16 Law
on negotiable instruments of VN; Article 2 ULB)
(5) Drawer: is a person who draws the bill and payment order, is inscribed in the
front, right bottom corner of the bill and must sign on the bill.
Under ULB and BEA: sign without a stamp.
Under Law on negotiable instruments of VN: sign and stamp. (Clause 18, Article 4)
* In regard to the drawer’s address:
ULB and BEA: do not prescribe it specifically
Law on negotiable instruments of VN: the drawer’s name and address must be written
clearly (article 16)
The drawer must sign by his common signature in transaction. Any photocopied,
printed and stamped signatures, but not hand-written signatures are invalid.
The drawer does not exclude the authorization. The authorized drawer must express
authorized right next to his signature. Language of authorization must be the same as that
of the bill.
(6) Place of payment: is the place where beneficiary presents the bill to demand
payment. Because of this importance, place of payment must be specified on the bill. If
the bill does not specify or specify unclearly the place of payment, people can use the
address mentioned beside the name of the drawee.
In addition, the bill can also include other contents so long as both parties agree and
these contents do not change the nature of the bill stipulated by the ULB.
For example, when using the bill as a means of demanding money in collection
methods, we may add the invoice or in documentary credit method we can add the credit
number …
5.1.1.6 Circulation of Bills of exchange
a, Circulation of sight bills of exchange
Sight bill is a bill in which stipulates that the drawee must pay immediately when the
bill is presented to him.

136
 BILL OF EXCHANGE
No.: 134/EX Ha Noi, 20th July 2018

For: USD 100,000.00

At sight of this first Bill of Exchange (second of the same tenor and date being unpaid) pay
to the order of Company A the sum of US dollars one hundred thousand only.

To: Company B Company A

HongKong Ha Noi
(signed)

Box 5.4: A sight bill of exchange

(3)
Bank of Drawer Bank of Drawee
(4)

(3) (4)
(3) (4)

(1)
Drawer Drawee
(2)

Figure 5.1: Circulation of sight bills of exchange through the bank

(1) Basic transaction
(2) Perform basic transaction: Drawer/ Exporter delivers goods.
(3) Drawer draws a sight bill to claim Drawee through the banks
(4) Drawee makes payment right after the bill is presented.

b, Circulation of time bills of exchange

A time bill of exchange is a bill in which stipulates the drawee to make payment after
a certain period of time from the date the bill is presented or drawn or on a specific date
in the future.

137
 BILL OF EXCHANGE
No.: 134/EX Ha Noi, 20th July 2018

For: USD 100,000.00

At 90 days after sight of this first Bill of Exchange (second of the same tenor and date being
unpaid) pay to the order of Company A the sum of US dollars one hundred thousand only.

To: Company B Company A

HongKong Ha Noi
(signed)

Box 5.5: A time bill of exchange

(3-5)
Bank of Drawer Bank of Drawee
(4-6)

(3-5) (4-6) (4-6)

(3-5)

(1)
Drawer Drawee
(2)

Figure 5.2: Circulation of time bills of exchange

(1) Basic transaction
(2) Perform basic transaction: Drawer/ Exporter delivers goods
(3) Require the drawee to accept payment.
(4) Return the accepted bill to the drawer
(5) Forward the mature bill to the banks to collect money
(6) Pay when the mature bill is presented.
5.1.1.7 Operations related to bills of exchange
a, Acceptance:
 Definition:
Article 4 – Law on negotiable instruments, “Acceptance” means the commitment of
a drawee to pay part or the whole of the sum of money inscribed on the negotiable
instrument when it matures through signing for acceptance the negotiable instrument as
prescribed in this Ordinance
Article 28 – ULB, by accepting, the drawee undertakes to pay the bill of exchange at
its maturity

138
 Article 17 BEA - The acceptance of a bill is the signification by the drawee of his
assent to the order of the drawer.

Acceptance = payment commitment

 Reasons for acceptance:
Not required to accept the bill. However, the bill is a payment order of this party to
the other, so when the bill is accepted to pay by the other, it has enough reliability, which
then will help the bill circulate more easily. However, the bill still can be put into
circulation before it is accepted for payment, because most of the countries’ law stipulate
that the drawer must pay the beneficiary if the bill is drawn and transferred but refused to
pay by the drawee.
Besides, the bill is accepted in following cases:
+ Acceptance is specified on the bill.
+ The bill has payment period from the date of acceptance.
+ The bill is payable at a fixed time after presentation.
+ The place of payment is different from the drawee’s address.
Time bills should be presented for acceptance before its payment deadline.
 Form of acceptance
There are 2 forms of acceptance: 1) Accept on the front of the bill; 2) Accept by a
separate document.
1) Accept on the front of the bill: The drawer writes on the front bottom left corner
of the bill some words like: agreed or accepted, signs and dates.
No.30/1/92 BILL OF EXCHANGE

For USD 5,000.00 Singapore, 20th February 2018

Ninety (90) days after sight of this FIRST exchange (SECOND of the same tenor and
date being unpaid). Pay to the order of the chartered bank, London the sum of US dollars
five thousand only.
To: MITSUI Co; LTD For and on behalf of Viettai Co. Ltd
Tokyo Singapore
Accepted
Date (Signed)
(Signed) Jonathan Lee

Box 5.6: An accepted bill of exchange

* If the date of signing is wanting:

- Law on negotiable instruments: invalid

139
 - ULB: invalid when the bill is payable at a certain time after sight or when it must be
presented for acceptance within a certain limit of time
E.g.: On the bill “At X days after signed of this……. (first or second) of Bill of
Exchange, pay to………….the sum of…………”  We do not write the date of
acceptance.
However, for the time bill payable at a fixed period after sight “At X days after sight
of this …. (first or second) of Bill of Exchange, pay to …. The sum of …”  the date of
acceptance is the date of sight, a landmark to calculate the term of the bill.
- BEA: holder may insert therein the true date of acceptance.
2) Accept by a separate document
Drawer may set up an acceptance document in which expresses his consent of
payment, date of signing and signature. This document can be traditional document or
electronic one (MT 799). The acceptance document must be transferred to the
beneficiary.
 Principles of acceptance
- Because a bill is an unconditional order, so acceptance is also unconditional, if not it
will be invalid. For example, “agreed to pay if I have permission to buy foreign currency.
Mr. D signed”  This is an invalid acceptance.
- Partial payment is accepted. For example: “agreed to pay 90% of the bill. Mr. D signed”
- Every modification introduced by an acceptance into the tenor of the bill of exchange
operates as a refusal to accept.
E.g.: “agreed to pay in EUR. Mr. D signed” although the bill is drawn in USD.
+ ULB: may supplement the place of payment, or else be deemed as refusal.
+ Law on negotiable instruments: supplement = refuse
- Time of acceptance:
* Time of presentment to demand acceptance:
+ Time bills:
- Within a fixed limit of time when the time for presentment is stipulated on the
bill.
- ULB and Law on negotiable instruments: 1 year (if Bill is payable at a fixed
period after sight)
- BEA: reasonable time
+ Overdue bills:
- ULB and Law on negotiable instruments: invalid.

140
 - BEA: A bill may be accepted when it is overdue, or after it has been dishonoured
by a previous refusal to accept, or by non-payment. (Article18)
+ Sight bills:
- ULB and BEA: not specified.
- Law on negotiable instruments: within 90 days from the date of its drawing
(Article 34)
* Time-limit for replying acceptance request when the bill is presented.
+ ULB and BEA: not specified
+ Law on negotiable instruments: 2 working days later (Article19)
b, Endorsement:
 Concepts:
According to BEA 1882, endorsement means an endorsement completed by delivery.
According to ULB 1930, every bill of exchange, even if not expressly drawn to order,
may be transferred by means of endorsement.
Thus, endorsement is a procedure to transfer the ownership of a bill of exchange from
the beneficiaries to others.
The bill endorsement is made by the endorser who will sign on the back of the bill
and transfer it to the endorsee. According to ULB and BEA, endorsement can be made on
a slip affixed thereto (allonge).
 Legal meaning:
• Acknowledge the transfer of the bill benefits to others specified on the back of
the bill. This endorsement is abstract because the endorser does not need to mention the
reason of endorsement and does not inform the drawee about that endorsement. The
endorsee evidently becomes the beneficiary of the bill.
• Law on negotiable instruments: as an evidence of the endorser’s commitment
to pay the bill for the next beneficiary (endorsee) in case of payment refusal.
* ULB and BEA: not define the responsibilities of the endorser to pay
mandatorily for the bill which was transferred in case of payment refusal.
 Principles of endorsement:
- Endorsement must be unconditional, otherwise invalid.
- Partial endorsement will be invalid.
- Every other modification introduced by an endorsement into the tenor of the bill of
exchange is deemed to be invalid
 Types of endorsement:
1. Blank endorsement/ endorsement in blank

141
 • Definition: Endorsement in blank is an endorsement that does not designate
the beneficiary of the bill/ endorsee, and a bill so indorsed becomes payable to bearer
(BEA 1882)
• Endorser signs on the back of the bill or write general statement like: “pay
to…”; or “Pay to the order of any …”
• With this kind of endorsement, who holds the bill will become the
beneficiary and does not need to endorse for the next endorsement, just hands it to
another.
• Holder can change endorsement in blank to other types by adding “pay to
the order of Mr. A” for “to order” endorsement, or “pay to Mr. A” for nominated
endorsement…
 Strengths: circulate easily.
 Drawbacks: Risky if the bill is lost.
2. Nominated or restrictive endorsement
• Definition: An endorsement is restrictive which prohibits the further
negotiation of the bill or which expresses that it is a mere authority to deal with the bill as
thereby directed and not a transfer of the ownership thereof, as, for example, if a bill be
indorsed “Pay D. only,” (BEA 1882)
In short, restrictive endorsement is an endorsement that designates the beneficiary.
• Endorser writes “pay to Mr. A” and signs.
• Only Mr. A can receive payment of the bill, he cannot re-endorse the bill to
another person.
3. “To order” endorsement
• Definition: “To order” endorsement is an endorsement that infers the
beneficiary through endorsement procedure.
• Endorser writes “pay to the order of Mr. A” and signs.
• The beneficiary in this case is not clearly specified, we need to speculate
Mr. A’s willpower. The beneficiary can be Mr. A if he does not designate anybody to be
the beneficiary, or else the beneficiary can be another person.
• With this type of endorsement, the bill will be endorsed until the last
beneficiary doesn’t endorse anymore, and endorsement must be done before the due date.
• This is one of the most popular types in international payment.
4. Without recourse endorsement

142
 • Definition: Without recourse endorsement is an endorsement that the next
beneficiary may not recover the amount from his endorser in case that the debtor refuses
to pay.
E.g.: “Pay to the order of Mr. B, without recourse” and sign. Once the bill is
refused to pay, Mr. B does not have the right to demand money from his direct endorser.
• If in the bill, one or more endorsers who don’t write “without recourse” will
not be exempted from non-payment. They must pay their next beneficiaries when the
draft is refused to pay.
c, Aval/ guarantee
 Definition: Aval/ guarantee is a commitment of a third-party to pay the whole or
part of the sum of money inscribed on the negotiable instrument if the bill has matured
but the drawee fails to pay or pays not in full the amount.
Guarantors are often reputed banks and required by the drawee.
 Rights and obligations of guarantor:
1. Be obliged to pay the bill if the guarantee fails to fulfil its payment obligation.
2. Have the rights to abrogate the bill which does not have enough contents required
by the regulations.
3. Request the guarantee to repay the amount of security money already paid.
 Form of guarantee: There are 2 types:
+ The guaranty commitment inscribed by the guarantor right on the bill
must include the word “Aval/Guarantee”, the amount of money committed to be
guaranteed, the name, address and signature of the guarantor and the name of the
guarantee.
+ The guaranty commitment is made in a separate written document
attached to the negotiable instrument (allonge)
 Principles of aval:
✓ Unconditional
✓ Obliged to write the name of the guarantee.
✓ Acceptable for partial aval
✓ After making the aval obligation, the guarantor may receive the guarantee’s
rights: tackle the guaranteed assets of the guarantee, ask the guarantee, drawer, and
acceptor jointly execute payment duty for the guaranteed amount
✓ As an irrevocable commitment for the duration of the aval taking effect.
d, Protest:
If acceptance or payment of a bill is refused on the due date, the beneficiary will draw
up the protest to claim back from his endorser.

143
 Time for drawing up the protest:
+ Protest for non-acceptance must be made within the limit of time fixed for
presentment for acceptance.
+ Protest for non-payment of a bill of exchange payable on a fixed day or at a fixed
period after date or sight must be made on one of the two business days following the day
on which the bill is payable.
 Then, within the four business days which follow the day for protest, the holder
must give notice of non-acceptance or non-payment to his endorser and to the drawer
- If there is no protest, assignees are exempted from liability to pay the bill, except
the drawer and the acceptor.
Actually, people execute protest as follows:
E.g.: A: drawer of the bill.
B, C, D: following endorsees
E: final endorsee (beneficiary)
When E is refused to pay, E will forward the bill to D, along with a cost list including
the bill’s amount, protest cost, and other costs. D refunds for E and reclaims that amount
from C… This procedure is kept on until A. Finally, A claims the drawee.

5.1.2 Cheques
5.1.2.1 Definition
A cheque is a bill of exchange drawn on a banker payable on demand (BEA 1882)
Or, a cheque is a written, dated and signed instrument that contains an unconditional
order from the drawer that directs a bank to pay a definite sum of money from his
account to a bearer or a nominated person on the cheque.
Cheques were born with the function as a means of payment and today cheques are
popularly used in domestic payment of most countries and also in international payment
for goods, service supplies, tourism …
5.1.2.2 Legal bases
* International Laws: Cheques are applied under Convention Providing a Uniform
Law for Cheques, date enacted 19th March 1931(ULC 1931).
Members of this Convention are German, France, Denmark, Holland, Swiss, Sweden,
Austria, Portugal, Italy … However, not only is Geneva Convention applied in these
countries but in many other countries in the world.
* National Laws:

144
- Bill of Exchange Act of 1882 (BEA) of Great Britain
- Uniform Commercial Codes of 1962 (UCC) of the USA
 Countries apply: Great Britain, America, Canada, India, HongKong, Malaysia,
Singapore, Philippine, Ireland …
* Viet Nam: Law on negotiable instruments, effective from 1st July 2006
5.1.2.3 Parties to a cheque:
Base on definitions of cheques, there are 3 parties in the formation and mechanics of
cheques:
- Drawer: is a person who has accounts in the bank. The drawer must have
outstanding balance in the account. Typically, the amount written on the cheque does not
exceed the balance in the account, unless the account holder is allowed for overdraft by
the bank. Geneva Convention 1931 stipulates that the drawer not need to have
outstanding balance in the account at the time of issuing the cheque, but he does when the
bank draws money to pay.
- Drawee: is a bank, the recipient of the drawer’s order with the obligation to pay a
sum of money written on the cheque. Cheque is an unconditional payment order, not a
request, thus receiving cheques, banks must abide that order unconditionally, as long as
the account has enough outstanding balance and the signature on the cheque is in
accordance with the specimen signature of the drawer.
- Beneficiary/ payee: is a person who receive the amount inscribed on the cheque.
5.1.2.4 Requirements for the content and form of cheques
a, Cheque’s content:
According to ULC 1931 and Law on negotiable instruments of Vietnam, a valid
cheque must have following elements:
- Cheque’s title: The word “Cheque/ Check” must be inscribed in the front of the
cheque. The title must be in the same language as of the cheque. The bank will deny
performing the order if the cheque has no title.
- Date of drawing: is a base to determine the time of the cheque. The bank will base
on this date to calculate the cheque’s period of validity under the law. If the date is
written wrongly, this action will be fined when it is detected because it can lead to some
corollaries as follows:
+ If the date of drawing is written before the real drawing date: this can shorten the
validity of the cheque, however the drawer can be in powerless sanction at this time
(unable to draw and sign cheques under the law because of bankruptcy, prosecution, or
being wanted …)

145
 + If the date of drawing is backdated: The drawer will sometimes backdate the cheque
to collect enough bail for his cheque as his account at the moment of drawing does not
have enough outstanding balance to pay the cheque. This can prolong the validity of the
cheque but can make void the cheque because the drawer can be in powerless sanction
after then).
Therefore, recording wrong date brings lots of risks for the beneficiary. All laws
encourage the beneficiary to check and investigate the authenticity of this element.
- An unconditional order to pay a determinate sum of money: The drawer must have
an account at a bank. In case the account has outstanding balance, the drawer has the
right to extract a certain amount from the account to pay the cheque holder. The order
execution of the bank is unconditional because the bank is not interested in the cause of
withdrawal of the account holder.
- Name of the payer: The drawee written on the cheque is a financial intermediary
holding the drawer’s account. If the drawer designates another person to pay the cheque,
the cheque will not be valid. This section focuses on the use of cheque in the banking
system, which has specific statutory authority to receive deposits of customers. This
shows the unique role of banks in the performance of functions of non-cash payment
center of the entire society, because only the banking system can fulfill this role fully and
professionally.
- Place of payment (address of paying bank): There are the name and address of the
paying bank on each cheque, where the drawer opens his account. This is an essential
element helping the beneficiaries know the address of the payer to submit the cheque for
payment (when they don’t want to use cheque collection service). On the other hand, this
is the basis for determining the legal authority to judge in case of disputes.
However, if a check has no place of payment, the place of payment will be:
+ Under ULC 1931: In the absence of the place of payment, the address mentioned
beside the name of the drawee is deemed to be the place of payment. If several places are
named beside the name of the drawee, the cheque is payable at the first place named.
In the absence of these statements, and of any other indication, the cheque is
payable at the place where the drawee has his principal establishment.
+ Under Law on negotiable instruments of VN: If the cheque does not specify the
place of payment, it will be presented at the address of the drawee. In case of no place of
payment and address of the drawee on the cheque, the cheque will be presented at the
drawee’s principal establishment.
- Beneficiaries: Beneficiary can a third party or the drawer. In case of no
beneficiary’s name on the cheque, beneficiary will be the holder.

146
 - Sum payable: “Pay to … amount … from the payee’s account…” The amount
must be written in words and in figures.
* According to Law on negotiable instruments of VN, if there is any discrepancy
between the sum in words and in figures, the cheque will be invalid. (Article 58)
* According to ULC 1931, if there is any discrepancy, the sum denoted by the
words is the amount payable. Where the sum payable by a cheque is expressed more than
once in words or more than once in figures, and there is any discrepancy, the smaller sum
is the sum payable (Article 9)
- Drawer’s signature: the legal signature of drawer which has been registered.
“Live” signature is done by hand of the account holder or of the person who is authorized
to sign. Geneva Convention allows authorized signature in case the drawer has no power
to act (for example disable person, diseased individual …). Article 6 of Geneva
Convention: “A cheque may be drawn for account of a third person”
Under Law on negotiable instruments of VN, for cheques of an institution/
organization, the drawer’s signature must be affixed stamp.
- Name of the drawer: name for an organization and full name for individual.
A cheque in which any of the requirements mentioned in the preceding article is
wanting is invalid, except the place of payment.
According to Law on negotiable instruments of VN, except the above requirements,
the cheque supplying organization can put more contents into the cheque without raising
any legal duties such as address of the drawer or the drawee …
b, Cheque’s form:
Cheque’s form is decided by the organization that opens an account for the
customer, which is called as the blank-cheque providing organization. The blank-cheque
providing organizations include State bank, Commercial banks, Financial companies
which are allowed to do the cheque payment service.
A page in a chequebook consists of both the cheque itself and a stub or counterfoil –
when the cheque is written, only the cheque itself is detached for the beneficiary, and the
stub is retained in the chequebook as a record of cheque for striking a balance with the
bank later.

147
 Box 5.7: A cheque sample of BIDV

Box 5.8: A cheque sample of Maritime bank

Box 5.9: A cheque sample of International Islamic

5.1.2.5 Issuance conditions and validity time of cheques.

Issuance conditions of a cheque:
- The drawer must have outstanding balance in the demand deposit account in the
bank.

148
 - The amount in the cheque must not exceed the outstanding balance in the account,
except overdraft accounts or a loan from the bank.
- A cheque must be a document and have a certain form issued by a financial
institution.
Validity time:
• Under ULC 1931, Article 29:
+ A cheque payable in the country in which it was issued must be presented for
payment within eight days.
+ A cheque issued in a country other than that in which it is payable must be
presented within a period of twenty days or of seventy days, according as to whether the
place of issue and the place of payment are situated respectively in the same continent or
in different continents
• Under Law on negotiable instruments of VN, Article 69: 30 days from the date of
issuing
• Under BEA 1882, article 74: reasonable time
5.1.2.6 Circulation of cheques
Cheque circulation is the transfer from the place of issue to the place of payment.
The process is shown in 2 following processes:
a, International Private cheques
a.1 Through one bank:

Bank
(3)
(5)
(4)
(2)
Beneficiary/ Drawer/ Importer
Exporter
(1)
Figure 5.3: Circulation of cheques through one bank
(1) The exporter/ beneficiary performs his obligation
(2) The drawer issues a payment cheque.
(3) The beneficiary presents the cheque to the bank to require payment in the cheque
validity period.
(4) The bank debits the drawer’s account and credits the beneficiary’s account.
(5) The bank strikes a balance with the drawer.

149
 a.2 Through two banks.
(5)
Bank of Beneficiary/ Exporter Bank of Drawer/ Importer

(4)

(5) (3) (6)

(2)
Beneficiary / Exporter Drawer/ Importer

(1)

Figure 5.4: Circulation through two banks

(1) The beneficiary performs his obligation.

(2) The drawer issues a payment cheque.
(3) The beneficiary presents the cheque to the bank to ask for collection in the cheque
validity period.
(4) The bank of beneficiary requests payment of the cheque from the bank of drawer.
(5) The bank of drawer debits the drawer’s account to pay for the beneficiary through
the bank of beneficiary.
(6) The bank of drawer strikes a balance with the drawer.
b, Bank’s cheques

(1)
Importer/ Payer Beneficiary/ Payee

(4)
(2) (3) (5) (6)

(7)
Cheque issuing bank Correspondent bank

Figure 5.5: Circulation of Bank’s cheques

(2) The beneficiary performs his obligation

(3) The importer/ payer buys a cheque in foreign currency at a bank
(4) The cheque issuing bank debits the importer.

150
 (5) The cheque issuing bank issues the cheque for the beneficiary
(6) The beneficiary presents the cheque for payment.
(7) The correspondent bank settles the cheque.
(8) Two banks strike a balance.
5.1.2.7 Operations related to cheques
a, Cheque endorsement:
To use cheques instead of cash in payment, transferring cheques must be carried out
simply, fast and instantly. One effective procedure for transfer which is released is
endorsement to avoid complex transfer procedures as prescribed by civil law.
Cheque endorsement is similar to the one of bills of exchange.
• Requirements for endorsement contents:
- Endorser must be the beneficiary inscribed on the cheque.
- Endorsement takes effect when the next beneficiary receives the cheque.
- Endorsement must express the type of cheque transfer:
+ Transfer to a nominated person. With this type of transfer, the endorsee cannot
transfer the cheque to anyone else.
+ Transfer to the bearer (anyone holds the cheque). With this type of transfer, the
cheque can be transferred many times in its validity period just by handing.
+ Transfer to the order of a nominated person. The cheque can be endorsed many
times in its validity period by endorsement procedure.
- An endorsement must be unconditional.
- A partial endorsement is null and void.
- In international payment, the beneficiary cannot collect money from the cheque
himself, he must endorse the cheque to grant authority to a bank for money
collection.
To avoid confusion between authorized endorsement and transfer endorsement,
endorser must add the phrase “for collection” into his endorsement.
- For endorsement without recourse, in case that the beneficiary cannot get payment
from the drawee or any endorsers, he still has the right to claim payment from the
drawer.
• Requirements for forms of endorsement
- Endorsement must be written on the back of the cheque or on the slip attached
thereto (allonge). The allonge will be the constituent of the cheque.
- Endorsement must be signed directly by hand of the endorser
b, Aval/ guarantee:

151
 The cheque is often payable in the country other than that in which it was issued,
so aval is necessary and has a tight relationship with the international cheque circulation.
Aval is that a third person other than the drawee commits to make unconditional
payment for whole or part of the sum of the cheque in the case that the cheque is
unpayable when presented.
• Requirements for the content of the aval:
- This guarantee may be given by a third person other than the drawee, or even by a
person who has signed the cheque.
- An “aval” must specify for whose account it is given. In default of this, it is deemed
to be given for the drawer.
- An aval is irrevocable during the period of validity of the cheque.
- An aval is only limited in the payment obligation.
- An aval is an independent guarantee. It is not affected by other factors or contents.
• Requirements for the form of the aval
- It is expressed by the words “good as aval” on the face of the cheque, or by any
other equivalent formulas. It is signed by the giver of the “aval”
- An aval may be written on the slip attached thereto (allonge). The allonge will be
the constituent of the cheque.
c, Certified cheques:
A certified cheque is a cheque for which the bank verifies that sufficient funds exist
in the account to cover the cheque, and so certifies, at the time the cheque is written.
Those funds are then blockaded in the drawer’s account until the cheque is cashed or
returned by the payee.
To be certified, the cheque must meet the following conditions:
a. The cheque is filled clearly and completely in all the contents on it;
b. The drawer must have enough outstanding balance in the account or can be
accepted for overdraft by the drawee;
c. The drawer requires to certify the cheque
- The drawee only guarantees payment ability for the amount inscribed on the
cheque in its presentation period.
- After the presentation period, if the cheque is still not presented for payment, the
drawer has the right to ask the drawee to stop blocking the sum certified for the cheque.
5.1.2.8 Types of cheques:
1. Based on the transferability of cheques.
- Nameless cheques: known as cheques to bearer. This cheque does not inscribe the
beneficiary’s name, except “pay to bearer” which means who holds the cheque will be

152
the beneficiary. Lose cheque, lose money. The holder may transfer the cheque to a third
person without endorsing it.
- Nominated cheques: is a type that specifies the name of the beneficiary who is
the only person to receive the money. Therefore, this type is not transferable to another
person by endorsement procedure.
- “To order” cheques: is a type that is used commonly and paid to the order of the
beneficiary. “Pay to order” is inscribed on the cheque. This type can be transferred to
another by endorsement procedure.

Box 5.10: A “To order” cheque

2. Based on the features of use
- Giro cheques: is a cheque that the drawer orders his bank to deduct and transfer
a sum of money from his account into the account of another person. This cheque is non-
transferable, and beneficiary cannot receive cash.
- Confirmed cheques: is a cheque that the cheque’s solvency is guaranteed by the
bank, which can avoid issuing a cheque with the amount exceeding the account balance.
Since the cheque is confirmed, the bank will set aside the cheque’s amount in the bank’s
internal account until the cheque is cashed.
- Traveller’s cheques : These are named cheques. Thanks to these cheques,
travellers do not need to use cash because travellers can be definitely paid at places where
the issuing bank has branches or correspondent banks. The issuing bank is also the
paying bank. Beneficiaries are tourists – cheque buyers. When making payment, the
paying bank will base on the two signatures of the beneficiary, one is made when the
cheque is issued/ bought, and the other is made when beneficiary receives money at the
paying bank, to decide whether or not it should pay for beneficiary.

153
 Box 5.11 : A traveller’s cheque
- Private cheques : are of the account holder issued at the issuing bank. The
account holder typically includes: business, economic units, administrative units, the
social and political organizations and individuals … but not banks.
- Bank’s cheques : are cheques issued by one bank to order its correspondent
bank to deduct from its account a certain sum of money to pay for the beneficiary named
on the cheques. Bank’s cheques have following characteristics:
- The person who requires a bank to issue bank’s cheques to the importer, who is
in need of transferring money abroad.
- The drawer/ issuing bank is the bank performing the request of cheque issuance.
- The drawee is the correspondent bank of the issuing bank which is holding the
issuing bank’s account.
- Crossed cheques : are cheques that have two parallel crosses on the face. The
crosses indiciate that the cheque cannot be cashed, only used to pay through banks. These
cheques are crossed by the beneficiary. With these cheques, the beneficiary cannot get
cash, but asks a bank to collect money and then transfer that amount to his account.
There are two types of crosses : general crosses and special crosses.
+ General crosses : there isn’t a collection bank’s name between two crosses.
+ Special crosses : there is a bank’s name between two crosses and only that bank
can collect the money for the beneficiary.
Nameless cheque can be transferred to named cheque, but named cheque cannot
be changed into nameless cheque.
The content between two lines may be :
* General crosses :
- Or do not write anything
- Or write “&CO”
- Or write “Not negotiable”

154
 - Or write “A/C payee only”
* Special crosses:
- Or write one bank’s name.
- Or write “Not negotiable/ Bank A”
General crosses Special crosses

B
O
CO

5.1.3 Promissory notes

5.1.3.1 Definition
A promissory note is an unconditional promise in writing made by one person to
another signed by the maker, engaging to pay, on demand or at a fixed or determinable
future time, a sum certain in money, to, or to the order of, a specified person or to bearer.
(BEA 1882)
Promissory notes were born in the 14th century.
5.1.3.2 Parties to a promissory note:
Parties in the circulation of promissory notes include:
- Drawer: In international business, drawer is importer, buyer.
- Beneficiary: In international business, beneficiary may be exporter, international
service provider.
5.1.3.3 Requirements for the content and form of promissory notes
According to ULB 1930, one promissory note must include the following:
(1) Title “Promissory note” on the face: The term ‘promissory note’ inserted in the
body of the instrument and expressed in the language employed in drawing up the
instrument
(2) An unconditional promise to pay a determinate sum of money.
(3) A statement of the place where payment is to be made
(4) A statement of the time of payment
(5) Name and address of the maker
(6) Name and address of the beneficiary
(7) A statement of the date and of the place where the promissory note is issued
(8) The signature of the person who issues the instrument (maker)

155
 PROMISSORY NOTE 
No.12658/02  Ha Noi, 25th October 2018 
For GBP 5,243.00

 On the 25th March 2019 fixed by the promissory note, we promise to pay to Victoria
Company or order in Hong Kong the sum of US DOLLARS FIVE THOUSAND TWO HUNDRED
FORTY THREE ONLY. 

To:  Victoria Co. Ltd Tocontap company 

HongKong Ha Noi
(signed) 

(SIGNED)
Box 5.12: A promissory note sample
An instrument in which any of the requirements mentioned in the preceding Article
are wanting is invalid as a promissory note except in the cases specified in the following
paragraphs:
- A promissory note in which the time of payment is not specified is deemed to be
payable at sight.
- In default of special mention, the place where the instrument is made is deemed to
be the place of payment and at the same time the place of the domicile of the maker.
- A promissory note which does not mention the place of its issue is deemed to have
been made in the place mentioned beside the name of the maker.
5.1.3.4 Circulation of Promissory notes
* Circulative features:
Promissory notes have the same circulative features as Drafts/ Bills of Exchange as
promissory notes are also financial instruments. In addition, regulations that stipulate
bills of exchange can be applied for promissory notes. However, they have some own
following features:
- A promissory note is an instrument that one party promises to pay so it needs to be
guaranteed by a bank or a financial company. This aval is to ensure the solvency of a
promissory note which can help it circulate more easily.
- A promissory note can be issued by one or more drawers to promise to pay one or
more beneficiaries.
- There is only one main promissory note drawn by drawer to its beneficiary.
- A statement of acceptance shall be disregarded because the promissory note is
drawn by a debtor.
* Circulation:

156
 (4)
Bank of drawer Bank of
(3) Beneficiary

(4) (3) (3)

(4)

(1)
Drawer Beneficiary
(2)

Figure 5.6: Circulation of promissory notes

(1) Drawer issues a promissory note to promise to pay for his beneficiary first.
(2) Beneficiary implements his duty under the contract.
(3) Beneficiary authorizes his bank to collect money of the promissory note
from the drawer.
(4) Drawer makes payment when the promissory note is due.

5.1.4 Payment cards

5.1.4.1 Definition
Payment card is a payment instrument that the owner can use it to withdraw cash at
ATMS, bank counters and to pay for goods and services at merchants (card accepting
units). In addition, it is a means for card holder to transact with his bank without meeting
bank tellers.
Payment card which appeared the first time in America in 1946 was Charg-It of John
Biggins. From then, many banks in the world have also launched their own cards and one
after other card alliances have been born. Not until 1990 did payment card appear the first
time in Viet Nam through being a Visa card agency for BFCE of Vietcombank in order to
meet the greater and greater demand of foreign tourists in Viet Nam.
5.1.4.2 Types of payment cards
a, According to the production technology
+ Braille card: is a card that all necessary information is engraved on its surface. This
type of card is not used today because of its simple technology which can be forged
easily.
+ Magnetic stripe card: is a card made by using digital magnetic tape mounted
behind the card. The magnetic tape will contain encrypted information. The downside of

157
this card is prone to reveal personal information of cardholder which can be read by
computer technology.
+ Smart card: is attached microchip – the latest technique, so it has high security
level. It’s difficult to forge this type of card. However, the cost of making this card is
quite high. In VN, banks are now changing from the magnetic card to smart cards to
secure cardholder information.
b, According to the nature of payment
+ Credit card: allows cardholders to use a certain credit limit in order to pay for
goods or services without making any loan application.
+ Debit card: is a card issued by a bank for deposit account holder to pay for goods or
services within the card balance. Payment is made by transferring money in the
cardholder’s account to the seller’s account. The bank can provide overdraft to increase
its competition.
+ ATM card: a card with specialized functions for cash withdrawal at ATMs or at
banks. Cardholders must deposit money into the account or overdraft granted to use it.
+ Payment card: customers have to spend money to buy a payment card. Each card
has a standard par value such as 5 million, 10 million. Money in the card is deducted
every time the card is used. This card is often used to purchase goods with relatively
small value such as gasoline, phone calls, paying tolls.
c, According to the using purpose:
+ Company card: Cards are issued to employees of companies in order to help
company manage its spending tightly in the common work of its employees.
+ Travel and entertainment card: is issued by big corporates or private companies to
serve entertainment and tourism.
d, According to the using objects:
+ Classic card: is a credit card issued by Master Card. This is the most popular card.
+ Gold card: is a credit card issued by Master Card and serves the high rank market
with high-incomed, healthily-financial-capabilitied, high-spending-demanded, and
prestigious customers. This card has higher credit limit than classic ones do.
5.1.4.3 Procedure of issue and basic payment
In terms of card issuing procedure, there are some parties as follows:
- Card holder: individuals/ persons authorized by a company who are issued card to
use.
- Issuing bank: a bank that is allowed to issue cards by the State Bank.
- Paying bank: an intermediary paying bank between the cardholder and the issuing
bank. The paying bank receives card payment through POS units that it signed card

158
payment contracts. The paying bank will receive discount charge for dealer when taking
part in card payment.
- Merchant: is a goods or service supplier who signed contracts with the paying bank
or the issuing Bank. Merchant can be restaurants, hotels, shops, supermarkets ...
1. Issuing card
The procedure and conditions for issuing cards of each bank are different, but have
the following contents:
1.1 Require for issuance: In case that a customer is in need of using cards, the issuing
bank will ask them to provide necessary documents such as ID card or documents which
prove their financial abilities (for credit card).
1.2 Issue card: The issuing bank will issue card for the customer if the customer’s file
meets the bank’s conditions.
2. Using card in payment:
The cardholder can use cards to pay goods or services at POS or withdraw money.
2.1 Accept card: POS will check the card solvency.
- If the amount payable is lower than the limit allowed by the paying bank  check
the card’s validity.
- If the amount payable is more than the limit allowed by the paying bank  get
authorization from the paying bank.
2.2 Provide goods/ services: Getting authorization code, POS requests the cardholder
to sign on the invoice and compare the signature with the one on the card. POS supplies
goods to the cardholder together with one slip of invoice.
2.3 Hand in invoices:
For Mechanical machine, POS will set up and submit invoices and statements to the
paying bank (not later than 5 days after the business transaction)
For Electronic card reader, payment data will be transferred to the paying bank and
invoices will be submitted periodically.
2.4 Pay Merchants: The paying bank will credit POS after checking the validity of
information on the invoices.
2.5 Send information: The paying bank collects all invoices, transaction documents
and send them to the Clearing centre.
2.6 Process clearing: The Clearing centre debits the issuing bank and credits the
paying bank the transaction amount after deducting information exchanging fee.
2.7 Issuing bank accepts payment: The issuing bank accepts repayment for the
Clearing centre after receiving documents without any complaints.

159
 2.8 Issuing bank informs the card holder: The issuing bank will periodically set up
and send transaction notices to the cardholder to require payment.
2.9 Card holder pays the issuing bank: After receiving transaction notice without
errors found by cardholder, he will make payment for Issuing bank.
5.2 International Payment methods
5.2.1 Remittance
5.2.1.1 Definition:
Remittance is a method in which a customer (payer) requires his/her bank to transfer a
certain amount to another person (beneficiary) in a certain location by means of transfer
chosen by him/her.
Parties:
- Payer (buyer) or remitter (investor, overseas compatriots sending remittance
home, person sending expenditure abroad): a person who requires a bank to transfer a
sum of money abroad.
- Beneficiary: seller, lender, invested capital receiver, or someone who is assigned
by the remitter.
- Remitting bank: a bank at the remitter’s country.
- Paying bank/ Intermediary bank (Correspondent bank of the remitting bank): a
bank in the beneficiary’s country.
5.2.1.2 Forms of remittance:
- M/T – Mail Transfer: Bank transfers money by sending a letter to its
correspondent bank in a foreign country to request payment for the beneficiary. This
method provides low cost, but it is relatively slow, so easy to be affected by the exchange
rate fluctuations.
- T/T – Telegraphic Transfer: Bank transfers money by ordering its correspondent
bank in a foreign country to pay for the beneficiary by telegraph. With this type of
transfer, the beneficiary gets money quickly, speedily, and promptly, so it is rarely
affected by the fluctuations in foreign exchange. Today, it is the cheapest, safest,
promptest and most accurate method of transfer through SWIFT system (Societies for
Worldwide Interbank Financial Telecommunication). SWIFT system operates
continuously 24/24, 7 days a week with a capacity of 99.7 %, so every telegram is moved
in just a few seconds, and with a very low cost, besides the system is installed with
automatic test equipment to ensure safeness, fastness, and accurateness in international
settlement operations.
Mail transfer is, therefore, replaced by SWIFT today.

160
5.2.1.3 Payment process
Remittance is performed in 2 forms: advance remittance and deferred remittance.
Deferred remittance is that the importer pays the exporter after receiving goods.
Remittance process is as follows:
(1) The exporter supplies goods or services together with full set of documents to the
importer after the contract of purchase is signed by two parties.
(2) The importer sets up and transfers a remittance order to his bank after checking
documents. Remittance order includes:
 Value date.
 Name, address of ordering customer.
 Name, address of beneficiary.
 Account number, remitter’s bank, and beneficiary’s bank.
 Amount in words and in figures
 Details of payment.
 Relevant documents.
 Sign and stamp
(3) If the remittance order is valid and the importer’s account has sufficient balance,
The bank of importer will order his correspondent bank to transfer money from its
Nostro account to the exporter. If the bank of exporter is not a correspondent one of
the bank of importer, the bank of importer will order its correspondent bank to pay the
exporter through the bank of exporter.
(4) After sending payment order to the bank of exporter, the bank of importer will send a
debit note to the importer.
(5) The bank of exporter will credit the exporter’s account and send a credit note to the
exporter.
With this type of remittance, banks just play intermediate roles to remit money, and
don’t have any responsibilities of supervising and speeding up the importer in payment.
Thus, payment will be depended on the importer’s goodwill. The exporter can ensure his
rights by negotiating to apply advance remittance
.

161
 Exporter (5) Importer

(4) (1) (3)

Bank of Exporter
Bank of Importer
(2)

(2')

Correspondent bank

Figure 5.7: Payment process of advance

remittance

Exporter (1) Importer

(5) (2) (4)

Bank of Exporter
Bank of Importer
(3)

(3')

Correspondent bank

Figure 5.8: Payment process of deferred

remittance method

5.2.1.4 Strengths and drawbacks of remittance and scope of use

* Strengths:

162
- Low charge
- Simple procedure
- High speed
* Drawbacks:
- Payment/ Delivery depends on goodwill of one party, which means:
+ Delivery depends on the exporter in advance remittance or
+ Payment depends on the importer in deferred remittance.
It’s unable to ensure the interest of the other.
- Banks just play intermediate roles in payment to get charge without any responsibilities
Functions of the bank are not fully used.
* Cases to apply:
Remittance is applicable to relative small amount of money in import-export such as
premium, shipping charges, sample payment …; or in non-service area such as
transferring capital, profit abroad; overseas remittance; transferring tuition, living
expenses for students studying abroad.
To overcome drawbacks of remittance, we can apply Collection or Documentary
credit method.
5.2.2 Open account
5.2.2.1 Definition:
Open account is an increasingly important payment method recently in which the
exporter ships the goods first and bills the importer later. Upon receipt of goods, the
importer pays the exporter by means of telegraphic transfer or sending a demand draft.
(Luk, 2011)
Or, open account method is a method that the seller opens an account (or a book) to
debit the buyer after the seller has completed delivery of goods or services and is paid
periodically (monthly, quarterly, semi-annually) by the buyer.
Characteristics:
- There is no participation of banks with the function of parties who open accounts
and effect payment.
- Only single account is opened to follow and doesn’t have value to strike a
balance between two parties.
- Only two parties take part in payment: the seller and the buyer.
5.2.2.2 Principles of Open Account.
- The debit currency is unified in the ledger.
- The basis for debit/ accepting debit is invoice or result of getting service at the
prescribed place.

163
 - Two parties make agreement on methods of remittance, by mail or T/T
(telegraphic transfer)
- The price is higher than that of sight payment. The difference is interest arising
during the time of open account.
- There are two types of periodic payment:
+ X days from the date of delivery for each shipment, for example 60 days from
the date of issuing invoice or the date written on B/L.
+ Timeline of calendar, for example payment will be made at the end of each
quarter.
5.2.2.3 Payment process

(4)

Bank of seller Bank of buyer

(account opener)

(5)
(6)

Seller (account Buyer

opener)
(1)
(3) (2)

Figure 5.9: Payment process of Open Account method

(1) The seller supplies goods/ services and opens account to debit the buyer
(2) The buyer requests his bank to transfer money periodically to the seller.
(3) The bank of buyer debits the buyer’s account.
(4) The bank of buyer delivers payment order to an intermediate bank (Bank of
Seller)
(5) The bank of seller debits the bank of seller.
(6) The bank of seller credits the seller’s account.
Comment:
Open account method is beneficial to the importer and applicable when the exporter
wants to give credit to the importer (deferred payment) and often used in the following
cases: Two sides have regular trading relations and mutual trust; It is used for barter,
consignment, business agent … many times in a certain period (6 months or one year); It
is used to pay service charges as shipping charges, premium, commission, profits …; In

164
 the domestic and/or global market, the exporter encounters keen competition; The market
is a buyer’s market; The sellers are eager to increase export volume.
This method is risky for the exporter in payment.

5.2.3 Cash against documents

5.2.3.1 Definition:
Cash against documents is a payment method in which the importer basing on
the agreement of sale requires the exporter’s bank to open one Trust account to pay for
the exporter upon the exporter’s presentment of documents that meets the conditions
stipulated in the agreement (Luk, 2011)
5.2.3.2 Payment process

Foreign trade contract

(3)
Exporter Importer

(5) (1)
(4) (2) (6)

Bank

Figure 5.10: Payment process of Cash against Documents method

(1) On the basis of the foreign trade contract, the importer requires the bank of the
exporter to open a Trust account with balance of 100% of the contract value which will
be used to pay the exporter in case that the exporter presents documents in accordance
with the memorandum signed between the importer and the bank.
(2) The bank informs the importer about the Trust account and requirements related to
presentation of documents.
(3) The exporter delivers goods subject to the agreement to the importer under
supervision of the importer’s assessor or an Inspection company hired by the importer.
(4) The exporter presents documents to the bank (together with the payment
agreement of the importer’s representative).
(5) The bank checks documents under the memorandum. The bank will pay the
exporter from the Trust account if the documents are in accordance with the
memorandum.

165
 (6) The bank transfers all documents to the importer and strikes a balance of the Trust
account.
Advantages to Importers:
- The process is simpler than Documentary Credit method.
- Importers may control the quality of the goods.
Disadvantages to Importers:
- Importers must have their representative in the seller’s country to closely monitor
delivery process, to avoid sellers presenting documents not in accordance with
actual delivery of goods.
- Importers must open a Trust account and sign a memorandum at the exporter’s
bank.
Advantages to Exporters:
- Exporters certainly get money quickly.
- Exporters don’t worry about losing their goods.
Disadvantages to Exporters:
- Importers control the quality tightly.
- Exporters are unable to be paid if documents do not comply with regulations in the
memorandum.
In short, this method is applicable in the case that buyers and sellers have a good
relationship and trust one another. In addition, the buyers should have representative
office in the sellers’ country.
5.2.4 Collections
5.2.4.1 Definition:
According to URC 522, Collection means the handling by banks of documents in
accordance with instructions received, in order to:
1. obtain payment and/or acceptance, or
2. deliver documents against payment and/or against acceptance, or
3. deliver documents on other terms and conditions.
Documents means financial documents and/ or commercial documents:
1. Financial documents means bills of exchange, promissory notes, cheques, or
other similar instruments used for obtaining the payment of money.
2. Commercial documents means invoices, transport documents, documents of
title or other similar documents, or any other documents whatsoever, not being
financial documents.

166
5.2.4.2 Legal bases
Legal document adjusting Collection method is the ICC Uniform Rules for
Collection No. 522 Revision 1995 – URC 522 1995 ICC
- URC 522 1995 ICC is an international practice that does not bind parties to
implement. It is applicable if reference to UCR 522 is included in the Contract,
Collection order and Collection letter “This Collection is subject to the Uniform Rules for
Collection, 1995 Revision ICC Pub. No. 522”
- URC is under the National Law.
5.2.4.3 Parties to a Collection
Parties involved in this method are as follows:
1. the “principal” who is the party entrusting the handling of a collection to a bank:
beneficiary, exporter.
2. the “drawee” is the one to whom presentation is to be made in accordance with
the collection instruction: importer.
3. the “remitting bank” which is the bank to which the principal has entrusted the
handling of a collection. This bank is obliged to receive collection order from the
principal under the condition set out by the principal to collect money for him.
Documents will be transmitted as origin received by the remitting bank.
4. the “collecting bank” which is any bank, other than the remitting bank, involved
in processing the collection.
5. the “presenting bank” which is the collecting making presentation to the drawee.
5.2.4.4 Types of Collection
There are two types: Clean collection and Documentary collection.
Clean collection is a method in which the exporter, after supplying goods /services to
the importer, delegates his bank to collect money basing on the bill of exchange not
accompanied by commercial documents which are directly sent for the importer to obtain
goods.
Documentary collection is a method in which the exporter delegates his bank to
collect money from the importer basing on the bill of exchange accompanied by
commercial documents with the condition that the documents are released to the buyer
when he or she accepts or pays the bill.
5.2.4.5 Payment process
* Clean collection process:

167
 (6)

Collecting bank
Remitting bank
(3)

(5)
(7) (4)
(2)

(1)

Principal Drawee

Figure 5.11: Payment process of Clean Collection method

(1) Basing on the foreign trade contract, the exporter delivers goods and full set of
documents to the importer.
(2) The exporter draws a bill of exchange to claim the importer and a Collection
instruction to delegate his bank to collect money from the importer.
Collection instruction is a credential drawn by a client in accordance with the
bank’s form to authorize his bank to collect money from the payer after his supply of
goods or services.
Collection instruction is a legal document regulating the relation between the bank
and the payee (seller).
A collection instruction should contain the following items of information as
appropriate.
1. Details of the bank from which the collection was received including full name,
postal and SWIFT addresses, telex, facsimile numbers and reference.
2. Details of the principal including full name, postal address, and if applicable
telex, telephone and facsimile numbers.
3. Details of the drawee including full name, postal address, or the domicile at
which presentation is to be made and if applicable telex, telephone and facsimile
numbers.
4. Details of the presenting bank, if any, including full name, postal address, and if
applicable telex, telephone and facsimile numbers.
5. Amount(s) and currency(ies) to be collected.
6. List of documents enclosed and the numerical count of each document.
7. a. Terms and conditions upon which payment and or acceptance is to be
obtained.

168
 b. Terms of delivery of documents against:
+ payment and/or acceptance
+ other terms and conditions
It is the responsibility of the party preparing the collection instruction to ensure
that the terms for delivery of documents are clearly and unambiguously stated, otherwise
banks will not be responsible for any consequences arising therefrom.
8. Charges to be collected, indicating whether they may be waived or not.
9. Interest to be collected, if applicable, indicating whether it may be waived or
not, including:
a. rate of interest
b. interest period
c. basis of calculation (for example 360 or 365 days in a year) as applicable
10. Method of payment and form of payment advice.
11. Instructions in case of non-payment, non-acceptance and/or non-compliance
with other instructions.
(3) The remitting bank forwards the collection letter and bill of exchange to the
collecting bank to request its correspondent bank to collect money from the importer.
(4) The collecting bank presents the bill of exchange to the importer to request payment if
the bill of exchange is at sight or accept payment if the bill of exchange is time/ usance
one.
(5) After receiving and checking the goods, the importer will agree for payment (for bill
of exchange at sight) if the goods are in compliance with the contract, or sign acceptance
(for Usance bill of exchange) or refuse payment if the goods are not in compliance with
the contract.
(6) The collecting bank credits the remitting bank from the importer’s account in case the
importer agrees to pay or informs the remitting bank about the importer’s refusal of
payment.
(7) The remitting bank credits the exporter’s account.
 Strengths and drawbacks of Clean Collection method:
* Strengths:
- Simple
- This method is a benefit for the importer because taking delivery does not involve the
payment.
* Drawbacks:
- The exporter’s interests are not guaranteed because the importer can take delivery but
not make payment.

169
- The speed of payment is slow because of 2 reasons:
+ the importer’s goodwill.
+ that rotating documents enables the importer to appropriate the capital.
- Functions of the bank are not fully used. Banks are only intermediates and do not have
responsibilities in supervising and speeding up the payment process.
 Cases to apply
- To pay service charges related to export: shipping charges, compensation penalty, or
premium because this payment does not require enclosed documents.
- Both the buyer and seller trust each other
- Both sides have internal relations as the parent company and its subsidiary or between
different affiliates
With this clean collection, payment depends on the importer’s goodwill. The exporter,
therefore, is able to negotiate and require the importer to apply Documentary Collection.
Documentary collection is a method in which the exporter delegates his bank to
collect money from the importer basing on the bill of exchange accompanied by
commercial documents with the condition that the documents are released to the buyer
when he or she accepts or pays the bill (Documents against Payment D/P, Documents
against Acceptance D/A, or Documents against other terms and conditions D/TC)
In the case of a D/A collection, the collecting bank is instructed to release documents
against the acceptance of a tenor draft. If the drawee refuses to accept the draft, the
collecting bank should not release the documents and should inform the instructing party
without delay. The Collecting bank fulfils its obligation when it obtains the acceptance of
the draft and delivers the documents to the drawee. Then, it should advise the remitting
bank of the due date and retain the draft until maturity. Upon maturity, it should remit the
proceeds to the remitting bank to the debit of its customer’s account/ cheque or cash.
If it is a D/P collection, the collecting bank should only release the documents against
payment of the sight draft, and the payment must be immediately available for remittance
to the instructing party. If payment is refused or the drawee makes an excuse to make
immediate payment, a collecting bank should not release the original documents to buyer.
For D/TC collection, sometimes, a collecting bank is instructed to release documents
against a promissory note or letter of undertaking issued by the drawee. The collecting
bank fulfils its obligation when the documents are released to the drawee against the
receipt of a promissory note or a letter of undertaking or other conditions as the collecting
instruction. Sometimes, a collecting bank may be instructed to release documents against
“free of payment” in which case, the collecting bank fulfils its obligation when it releases

170
the documents against a receipt for the goods issued by the drawee. No payment will be
collected in this type of collection.
* Documentary Collection process: This is an improved method of Clean collection,
makes good Clean collection’s shortcomings.
(7)
Collecting bank/
Remitting bank Presenting bank
(3)

(5) (6) (4)

(2) (8)

(1)
Principal Drawee

Figure 5.12: Payment process of Documentary Collection method

(1) The exporter delivers goods to the importer without documents.
(2) The exporter makes collection documents including a collection instruction, bills of
exchange and commercial documents.
Commercial documents: The exporter makes commercial documents specified in the
trade contract about type, quantity and requirements of each document.
Collection instruction: The exporter fills necessary information in the collection
instruction and delegates his bank to collect money. Legal nature of the collection
instruction is a service contract signed between the exporter and remitting bank.
(3) The remitting bank forwards the collection letter, bills of exchange and commercial
documents to the collecting bank to request its correspondent bank to collect money from
the importer.
Collection letter is an international service contract by nature. The remitting bank fills
necessary information in the collection letter and refers to legal resource of URC 522,
1995, ICC to adjust this method. The remitting bank must endorse on the back of the bill
of exchange for the collecting bank.
The remitting bank does not have responsibilities to check documents presented by
the exporter, however the remitting bank must make a list of documents to send to the
collecting bank.
(4) The collecting bank presents the bill of exchange and documents to the importer to
request payment under some collection conditions: D/P (Documents against payment),

171
D/A (Documents against acceptance), D/TC (Documents against other terms and
conditions)
Collecting bank receives documents without responsibilities to check them.
(5) The importer makes payment in case of D/P, or accept payment in case of D/A, or
refuse to make payment if he doesn’t want to take delivery.
(6) The collecting bank hands set of documents to the importer.
(7) The collecting bank must send without delay advice of payment to the remitting bank
detailing the amount or amount collected, charges, and/or disbursements and/or expenses
deducted, and method of disposal of funds.
- Advice of acceptance: The collecting bank must send without delay advice of
acceptance to the bank from which it received the collection instruction (the remitting
bank).
- Advice of non-payment and/or non-acceptance:
The presenting bank should endeavor to ascertain the reasons of non-payment
and/or non-acceptance and advice accordingly, without delay, the bank from which it
received the collection instruction (the remitting bank)
The presenting bank must send without delay advice of non-payment and/or
advice of non-acceptance to bank from which it received the collection instruction (the
remitting bank).
On receipt of such advice, the remitting bank must give appropriate instruction as
to the further handling of the documents. If such instructions are not received by the
presenting bank within 60 days after its advice of non-payment and/or non-acceptance,
the documents may be returned to the bank from which the collection instruction was
received without any further responsibility on the part of presenting bank.
(8) The remitting bank credits the exporter’s account and sends a credit note to the
exporter or send advice of non-payment and/or non-acceptance to the exporter.
 Strengths and drawbacks
• Strengths:
Drawbacks of Clean collection are overcome
+ The seller doesn’t worry about losing goods.
+ The bank’s duty is higher: control the buyer by documents
In case of non-payment or non-acceptance, the presenting bank will not deliver
documents for the importer to take delivery. Thus, this method ensures the benefits of the
exporter more than the clean collection. However, there is still a drawback in this
method.
• Drawbacks:

172
 - Do not bind the importer in taking delivery.
When the market after signing the contract faces unfavourable changes which
cause losses for the importer if he implements the contract. In this situation, the importer
is able not to take the delivery, so constraining the documents becomes meaningless. The
importer is able to lengthen the time of payment to cause pressure for the exporter.
+ If the delivery is not taken by the importer, the exporter will be fined cause of
slowliness in releasing the goods out of the ship.
+ If the export discharges the goods, he must pay more for warehousing or
shipping costs if shipping the goods back.
+ If the goods are sold for another, their price will be downed.
As a result, the exporter must down the price to release the goods or else will be at
a loss.

5.2.5 Documentary credits

Through the payment methods presented in the previous sections, we find that banks
only play a mediate role in payment commitments without certainty about the money
collected for the exporter, so interests of the exporter are not guaranteed. The exporter
should take the documentary credit method if he wants to obtain commitment of
collecting money from the bank.
5.2.5.1 Definition
The meaning of a documentary credit embodies the following. It is:
(a) a written undertaking given by a bank, known as an issuing bank or opening bank;
(b) to a seller, known as a beneficiary;
(c) at the request and on the instructions of its customer (buyer), known as the
documentary credit applicant;
(d) to pay either at sight or at a specific future date;
(e) a stated sum of money;
(f) against delivery of shipment and submission of stipulated documents and
fulfilment of all the terms and conditions in the documentary credit (Kwai Wing
LUK, 2011)
In other words, a documentary credit otherwise known as a letter of credit (L/C or
credit), is an instrument issued by a bank on behalf of the importer/ buyer (the issuing
bank) promising to pay the exporter (beneficiary) upon presentation of shipping
documents in compliance with the terms stipulated therein. It is especially appropriate in
the following circumstances:
(a) when the importer is not well-known, the exporter selling on credit terms may
wish to have the importer’s promise of payment backed by his banker;

173
 (b) On the other hand, the importer may not wish to pay the exporter until it is
reasonably certain that the merchandise has been shipped in good condition and/or
in accordance with his instructions.
A documentary credit, in this case, can satisfy both the exporter and the importer.
Significance of a letter of credit:
- A legal document: any letters of credit which are not in documents are invalid. A
credit must be made by telegram, telex, SWIFT.
- A credit is a commitment of payment or an acceptance of payment, not a promise.
- Payment basis of a credit is documents
Nature of a letter of credit:
- A credit is formed on the basis of the sales contract, but it is fully independent with
the sales contract once it is formed
+ The sales contract is the basis of a credit: If the sales contract stipulates that
payment will be made by Documentary Credit method, then a credit will be born.
+ A credit is independent with the sales contract: Upon payment for the seller, the
paying bank only bases on documents and a credit, but not on the contract or any
commercial behaviors.
5.2.5.2 Legal bases
* International Law: No
* International Practice:
+ Uniform Customs and Practice for Documentary Credits – UCP 600, 2007
issued by the International Chamber of Commerce (ICC).
The first UCP was published in 1933, then was amended and supplemented in
1951, 1962, 1974, 1983, 1993 (UCP 500). The latest UCP is UCP 600 effective from
01st July 2007. It should be noted that previous documents are not canceled by later
ones. All documents still have practical value in international payments.
UCP is an international legal document that is not mandatory to apply in
international trade. If UCP is used, it must be referred in A CREDIT.
There are following items in this Rule:
- Application of UCP and definitions
- Issuing and Confirming bank undertaking
- Advising of Credits and amendments
- Standard for Examination of Documents
- Documents
- Other articles like: Quantity, Credit amount, Unit prices, Partial drawings or
shipments, Instalment drawings or shipments.

174
 - …
+ ISBP 745, 2013- ICC – International Standard Banking Practice for the
examination of documents under documentary credits
+ eUCP 1.1, 2007 – Supplement to UCP600 for Electronic Presentation
+ URR 725, 2008-ICC: The Uniform Rules for Bank – to – Bank
Reimbursement under Documentary Credits, effective from 1/10/2008.
5.2.5.3 Parties to a Documentary credit
For the purpose of Documentary credit, parties involved in this method are as follows:
 Applicant means the party on whose request is issued: buyer, importer.
 Opening bank/Issuing bank means the bank that issues a credit at the request of an
applicant or on its own behalf. This is the representative bank of the importer/
applicant.
 Beneficiary means the party in whose favor a credit is issued: seller, exporter, or any
person assigned by the beneficiary.
 Advising bank means the bank that advises the credit at the request of the issuing bank
and is often a correspondent bank of the issuing bank in the beneficiary’s country.
There are many other banks taking part in Documentary credit method as follows:
 Confirming bank means the bank that adds its confirmation to a credit upon the
issuing bank’s authorization or request to pay the beneficiary in case that the issuing
bank is unable to make payment. Confirming bank is often a well-known bank in the
international market.
 Paying bank is able to be the issuing bank, branch of the issuing bank in foreign
country, or a correspondent bank of the issuing bank.
 Negotiating bank means the bank that purchases bills of exchange and/or documents
under a complying presentation, by advancing or agreeing to advance funds to the
beneficiary on or before the banking day on which reimbursement is due to the
negotiating bank.
 Or some other banks as Transferring bank, Nominated bank, Reimbursing bank,
Claiming bank, Accepting bank, Remitting bank
5.2.5.4 Payment Process
For an overview of the documentary credit, the entire contents and payment process
are described in the Figure below:

175
 (4)
Importer/ Applicant Exporter/
Beneficiary

(1) (8) (5)

(3) (9)

(2)
Issuing bank (6) Advising bank

(7)

Figure 5.12: Payment process of Documentary Credit

(1) Basing on the sales contract signed between the exporter and the importer (or pro
method
forma invoice), the importer writes and sends an application for a credit to his bank to
request a credit for the beneficiary. The importer in this case is Applicant.
Each bank has its own application form, so the importer needs to write on the right
form of his bank, at least 2 copies, and:
 must base on the conditions stated in the contract signed by two parties, but in some
necessary cases, can change some contents in the contract.
 must give consideration to conditions that the exporter can fulfil all and his benefits
are guaranteed.
After signing and stamping on the applications for a credit, the bank will send back
the importer 01 copy. Two copies have the same legal value in resolving disputes (if any)
between the importer and the issuing bank and they are the basis for the bank to issue the
credit.
Together with an application for a credit, the importer needs to submit following
documents:
 Business license.
 Import permit or Import quota.
 Sales contract.
 Financial statements.
 Business plan.
(2) After receipt of the application for a credit, the bank will check carefully all its
conditions and related documents, then requires the importer to make a deposit.

176
 A deposit for the credit is to guarantee the solvency of the importer. However, the
amount on deposit depends on the relation between the issuing bank and the importer and
is different in each case.
- For an at sight credit: The deposit can be less than 100% if:
+ The importer has good relationship with the issuing bank.
+ The importer has outstanding balance in the foreign account.
+ Business and financial situation is stable, which means getting profits in 3
consecutive years.
Or else the deposit must be 100%.
- For a deferred credit: In most cases, the deposit is often less than 100% for close
clients of the bank.
Upon deposit, the importer needs to make an application for a deposit or states the
amount on deposit on an application for a credit (for close clients) and explains the fund
origin (own capital or loan) in order that the issuing bank can control the importer’s
solvency. Finally, the issuing bank will issue a credit and sends it to the exporter through
the advising bank.
(3) After receipt of the credit, the advising bank will examine its superficial veracity, and
then advise and send the original credit to the beneficiary.
Examine the credit’s veracity:
+ For the credit in letter: check 2 signatures of the authorized persons.
+ For the credit in telegram: check test key code for the credit issued by Telex; for
credit issued by SWIFT the system will decode automatically.
 For a credit without confirmation, the advising bank only advises and sends the
original one to the beneficiary. The advising bank does not have any responsibilities
except one advising bank.
 For a confirmed credit:
- If the advising bank is not prepared to confirm a credit, it must inform the
issuing bank without delay and may advise that credit without confirmation.
- If the advising bank agrees to confirm a credit, it must inform the beneficiary
and charge.
(4) The exporter delivers the goods to the delivery point if he agrees on the credit’s
contents. Or else, the exporter can request the issuing bank to amend the credit to make it
suitable with the contract.
The bases for the exporter to check the credit are the foreign trade contract, the credit
itself, UCP 600, together with some national laws, international practices …

177
 In terms of the credit’s contents, they must be consistent, if not, the exporter can
request amendment.
In terms of the credit’s form, the exporter must check its language, figures, superficial
veracity. If there is something equivocal, the exporter can request amendment.
(5) After delivery of goods, the exporter will make and present a set of payment
documents under the credit to the advising bank.
(6) The advising bank will examine the documents’ face carefully and reasonably. The
principles for examination are as follows:
- Firstly: examine the consistency of the documents, which means all contents of all
documents must not be contradictory and must be in accordance with the credit
contents.
- Secondly: examine the sufficiency of the documents in type and quantity under
the credit.
- Thirdly: examine the superficial veracity of the documents including signature,
stamp, document issuing offices …
After examination, the advising bank can request the export to amend or supplement
the documents if they are not suitable or forward the documents to the issuing bank if
they are in compliance with the credit.
(7) The issuing bank examines a presentation to determine, on the basis of the documents
alone, whether or not the documents appear on their face to constitute a complying
presentation. If a presentation is complying, it must honor, or else it may refuse to honor
and return the documents to the exporter.
The issuing bank has a maximum of five banking days following the day of
presentation to determine if a presentation is complying. If there is no notice from the
issuing bank after 5 banking days, it is seemed that the issuing bank agrees to make
payment. When the issuing bank determines that a presentation does not comply, it may
refuse to honor and it must give a single notice by the fastest means to that effect to the
presenter. The notice must state each discrepancy in respect of which the bank refuses to
honor.
(8) The issuing bank forwards the documents to the importer. The importer, then,
examines the documents to determine whether or not the documents are complying. If the
documents are complying, the importer shall honor and vice versa.
(9) The advising bank credits the exporter’s account or forwards the accepted bill of
exchange to the exporter or gives notice of refusal.
Today the payment method is used widely in international settlement and is
considered as the best method compared with other methods for both importers and

178
exporters. Documentary credit provides an effective payment method to reach an
agreement acceptable in commercial transactions.
5.2.6 Bank Payment Obligation (BPO)
5.2.6.1 Definition
A Bank Payment Obligation (BPO) is an irrevocable and independent undertaking
of an Obligor Bank to pay or to incur a deferred payment obligation and pay at maturity a
specified amount to a Recipient Bank in accordance with the conditions specified in an
established baseline.
BPO is BPO irrevocable but conditional payment method. (payment is subject to the
electronic matching of agreed datasets). BPO (Bank Payment Obligation) occupies the
sweet spot between the LC and open account. BPO fast, easy to handle, reliable and not
as expensive as letters of credit.
5.2.6.2 Parties involved
- Seller
- Buyer: a person who requests BPO based on purchase order.
- BPO Obligor Bank: a bank which serves the buyer and opens BPO for the seller.
- BPO Recipient Bank: a bank which receives BPO and informs it to the seller.
5.2.6.3 Payment process

Figure 5.13: Bank Payment Obligation transaction flow

179
 Step 1: Buyer and seller agreed on BPO (bank payment obligation) as a payment
term on the sales contract. Buyer send its purchase order to the seller.
Step 2: Buyer provides the minimum data from the purchase order and conditions of
the bank payment obligation to the obligator bank.
Step 3: Seller confirms the data from the PO and send its acceptance of the BPO
conditions to the recipient bank. If both buyer's and seller's data are matched on the
Transaction Matching Application than the baseline is established. Both buyer and seller
will be receiving a matching report from their banks.
Step 4: Seller ships the goods as agreed on the sales contract.
Step 5: Seller presents the shipment data and invoice data to its bank, which submits
it to Transaction Matching Application for matching.
Step 6: Buyer receives a match report from its bank. Buyer is invited to accept any
mismatches if any.
Step 7: Seller's bank inform seller about the successful dataset match.
Step 8: Seller sends the trade documents directly to the buyer. Buyer will clear
goods from the customs with these documents.
Step 9: On the due date, the obligor bank debits the proceeds from buyer's account
5.2.6.4 BPO – Comparison to Letter of Credit and Open Account
Bank Payment Obligation Comparison to Letter of Credit:
• Both bank payment obligation and letter of credit have an irrevocable structure.
• Bank payment obligation and letter of credit are governed by ICC rules. BPO rules
are URBPO, letters of credit rules are UCPDC.
• The conditional payment guarantee is given by a bank to another bank in BPO
transactions. BPO is a bank-to-bank payment obligation. The conditional payment
guarantee is given by a bank to a commercial company in L/C transactions.
(Letters of credit can be issued bank-to-bank transactions as well.)
• Letter of credit is paper intensive. BPO is an electronic payment method.
• Documents have been checked by banks' staff manually under letter of credit
transactions. Data match completed by online means under BPO transactions.
• Under BPO transactions shipment documents would not be sent to banks.
• Letter of credit is slow and expensive. BPO is fast and not as expensive as L/Cs.
Bank Payment Obligation Comparison to Open Account
• Both bank payment obligation and open account are fast and easy to handle.
• Open account is the riskiest payment method for exporters. Nonpayment risk is
stemmed from the importer and must be covered by the exporter in full under open
account payments. On the contrary obligor bank is the entity that is giving the

180
 payment guarantee to the exporter through the recipient bank. As a result, non-
payment risk mitigates from the importer to the importer's bank under BPO
transactions.
• There are no rules exist for open account payments. On the other hand, bank
payment obligations can be issued subject to URBPO 750.
• Under open account transactions exporters must finance importers, whereas they
can be benefited pre-shipment finance and post-shipment finance under BPO.
5.2.6.5 Advantages of BPO for importers and exporters
For importers:
• Bank payment obligation is more secure than advance payment because BPO is a
conditional payment method. Under BPO transactions, banks send payment
amount to exporters only after shipment of the goods, not before.
• Issuing a bank payment obligation may prove that importer is a financially secure
and strong company.
• Bank payment obligation is an irrevocable payment method like letters of credit.
As a result, importers can convince exporters to make shipments with BPO much
more easily comparing to open account or documentary collections.
• BPO facilitates financing of the shipment for the importers.
• Importers can pay goods amount after they receive the shipment if exporters and
importers agree on a term payment due such as "60 days after match", "90 days
after match" etc.
• BPO protects buyers against non-shipments, late shipments and inferior quality of
goods shipments.
For exporters:
• Bank payment obligation is a secure payment method in international trade for
exporters. BPO can be more secure than letter of credit, because documents will
not be checked by humans, which eliminates alleged discrepancies.
• Bank payment obligation is cheaper than letter of credit.
• Exporters could get their money faster from the banks under BPO transactions as
documents are checked by an automatic system instantly.
• Exporters have more control over the goods until they have been paid by the banks
under BPO transactions as shipment documents will be held by the exporters
during the BPO process. Exporters do not send paper documents to the banks.
Once exporters receive their money from the bank, they dispatch the documents to
the importers separately.

181
 • Exporters could reach pre-shipment and post-shipment finance in BPO
transactions.
• Once bank payment obligation is opened, it is almost impossible for the importer
to cancel the order without the consent of the exporter.
• Non-payment risk shifts from importer to importer’s bank, which is called obligor
bank in BPO transaction.

CHAPTER SUMMARY
 Some common methods of payment in international settlement include Remittance,
Open Account, Cash against Document, Bill for Collection, and Documentary Credit.
 Remittance is a method in which a customer (payer) requires his/her bank to
transfer a certain amount to another person (beneficiary) in a certain location by means of
transfer chosen by him/her.
 Open account is an increasingly important payment method recently in which the
exporter ships the goods first and bills the importer later. Upon receipt of goods, the
importer pays the exporter by means of telegraphic transfer or sending a demand draft.
 Cash against documents is a payment method in which the importer basing on the
agreement of sale requires the exporter’s bank to open one Trust account to pay for the
exporter upon the exporter’s presentment of documents that meets the conditions
stipulated in the agreement.
 Collection means the handling by banks of documents in accordance with
instructions received, in order to obtain payment and/or acceptance, or deliver documents
against payment and/or against acceptance,or deliver documents on other terms and
conditions.
 A documentary credit otherwise known as a letter of credit (L/C or credit), is an
instrument issued by a bank on behalf of the importer/ buyer (the issuing bank) promising
to pay the exporter (beneficiary) upon presentation of shipping documents in compliance
with the terms stipulated therein.
REVISION QUESTIONS
1. Analyze the strengths and drawbacks of Remittance method and how to overcome
those drawbacks?
2. Distinguish the differences between Clean Collection and Documentary
Collection. Analyze the strengths and drawbacks of each type of Collection. How to
overcome those drawbacks?
3. Why do people still need to have Documentary credit method besides Remittance
and Collection method?

182
 4. Present the content and process of Documentary credit.
5. Present the strengths and drawbacks of Documentary Credit?
6. Distinguish the differences between Back-to-back L/C and Transferable L/C?
7. Distinguish the differences between Documentary Collection and Documentary
Credit in terms of parties, responsibilities of each party, and risks for each party, and the
process.
8. In respect of clean collection, partial payment is accepted in the collection
instruction. On what conditions will the collecting bank release financial document to the
drawee?
9. Who will nominate the presenting bank if the presenting bank is required in
collection method?
10. The collection instruction specifies that interest is to be collected and the drawee
refuses to pay such interest. What does the collecting bank do?

183
 CHAPTER 6: INTERNATIONAL TRANSPORTATION AND INSURANCE

The chapter introduces the carriage of goods by sea and by air. By the end of this
chapter, students be able to apply them into international commercial transactions. In
addition, this chapter also introduces different cargo insurance clauses and help students
know how to buy marine insurance and claim for insurance compensation.

6.1 International Transportation

Transport is an essential facility for the exploitation or development of economic
resources on a national or international scale. It allows articles or materials to be
conveyed from areas of low utility to areas of high utility. Its provision arises for
economic, social or political reasons. In a society where transport costs are relatively
high, the need for a balanced social policy is paramount, otherwise isolated communities
may cease to exist. (Branch, 2009)
Transport permits the development of economic resources to the full. It makes
possible specialization in economic development whether it be mining, car manufacturing
or farming. Without a low-cost reliable and well-managed transport system, goods or
services would not be exchanged to the serious detriment of living standards worldwide.
Transport is a product which is consumed immediately it is produced. Hence it cannot be
stored. Its intensive economic deployment is, therefore, paramount to help ensure its
viability. The essentials of a transport system embrace three elements: the way, the
vehicle including motive power unit, and the terminal. The way may be naturally
occurring such as the seas or river, or artificially made by man such as the railway, canal
or motorway. One can have a combination of these two circumstances embracing the
inland waterway system where new canals have been built into an established river or
Iake network such as the St Lawrence Seaway thereby offering a through inland
waterway network. The way may be for general public use administered in user terms by
the state as, for example, the vehicle registration licensing system in the UK and most
other countries. Altematively, the exclusive use system is found in the railway network.
The latter has the distinct advantage of operating under a disciplined timetable to obtain
maximum use of the network but conversely, unlike the road operator, is responsible for
financing all the initial, maintenance and replacement cost of the railway system.
Moreover, the railway company provides a policing system through a signalling complex,
but the road user relies on traffic control which is financed by the state.
To conclude, the essential elements of a transport system are the way, the vehicle,
its motive power and the terminal. All must be so designed as to produce an efficient
system, preferably capital intensive with a low labour content, to encourage low tariffs

184
and thereby facilitate traffic development to contribute to economic expansion and social
development. A study of the individual forms of transport now follows (Branch, 2009)

6.1.1 Canals/ inland waterway

The canal network in the UK extends to only 2000 route miles compared with
200000 route miles of roads, some 1200 miles of motorway and 11 000 route miles of
railway. Consequently, the UK canal network makes little impact on the international
trade scene particularly since the era of lighterage serving 'tween deck tonnage has ceased
in many ports, such as London, following the development of deep-sea container
services, and Ro/Ro services UK/ Europe-Asia. In regard to the Continental canal
network, we must bear in mind it is very modern and extensive serving most major ports.
It forms a major transport distributor in Europe, involving transits of considerable
distances and covering a wide range of cargoes embracing general merchandise, bulk
commodities and dangerous-classified products such as oil.
Moreover, the increasing acuteness of the energy situation is forcing countfies to
reduce their consumption of imported energy and develop lower-energy consuming
modes of transport. This strongly favours the development of inland waterways where
suitable conditions obtain. In Western Europethis situation is particularly evident in the
Netherlands, the former Federal Republic of Germany and France. In 1992 the proportion
of freight conveyed by inland waterway came to 45% in the Netherlands, 30% in the
Federal Republic and 14% in France. Monetization of the canal system in these countries
permits an increase in the capacity of barges using the network and leads to an extension
in services. Rotterdam port is a focal point in the extensive network of inland waterway
services and features strongly in the 'just in time' strategy adopted by the shippers who
use it. The area is served by 30 terminals on the Rhine. Apart from the cost savings
achieved through the large-scale barge operation, the additional logistics benefits are
paramount. These include flexibility of services and the close proximity of the terminals
to the shippers' premises.
The barge network acts as feeder services to the ports of Rotterdam, Antwerp and
Amsterdam. An example is the Container Terminal Nijmegen on the River Waal and a
barge terminal at Bornon the River Maas between Maastricht and Roermond. At Born
catchment areas extend beyond the borders of South Lumburg and include container
movements from the neighbouring industrial areas of Germany, Belgium and more
distant markets of Luxembourg. The containers are moved by barges in units of four
operated by a push boat and generate an overall capacity of 360 TEUs. A container
movement which has grown considerably in the lower region of the Rhine is operated by
Haeger & Schmidt, Haniel Reederei and Rhinecontainer. Each vessel has a capacity of

185
156 TEUs and the consortium operate 19 sailings per week between Rotterdam and
Duisburg. The sailings run from Rotterdam and Antwerp to Nijmegen, Emmerich,
Duisburg, Neuss, Stuizeberg, Düsseldorf, Cologne and Leverkusen.
Inland waterways barge distribution acting as port feeder services operate in many
developing and less developed countries. Such services are long established, and
examples are found in the markets of Africa, the subcontinent and the Far East. Examples
are found too in the ports of Bangkok and Klang which permit overside loading thereby
speeding up the turnround of vessels. They tend to be in the bulk and consumer unitized
markets, and such business is tending to be transferred to the containerized network as
the infrastructure is modernized and markets expand with modern methods of handling
and distribution.
Features of the UK canal network are as follows:
(1) It is narrow in many parts which in turn restricts the average lighter to some 60-
70 tons capacity compared with 3000 tons on the Continent. Moreover, the maximum
craft capacity in the UK is 500 tonnes compared with the Continent network of 5000
tonnes.
(2) Basically the transits are slow particularly compared with road transport offering
a door-to-door transit. A significant factor is the narrow canal and manual lock system in
many parts.
(3) Containerization has eliminated the need for lighterage.
(4) The network from an environmental standpoint is virtually noiseless, and non-
polluting.
(5) The canal is ideal for movement of dangerous cargoes and indivisible loads such
as those which cannot be broken down into separate segments to form a composite
consignment.
(6) As much of the canal network is narrow, it inhibits the development of the
higher capacity lighter which is more economical to operate and thereby aids competitive
rate quotation. Meanwhile, on the Continent, the average lighterage capacity continues to
rise whilst in the UK the road transport unit is getting larger and faster with better
utilization. The most recent example is the introduction of the 40 tonnes gross articulated
unit in 1990; on the Continent the figure is 44 tonnes.
(7) The network is ideal for bulk cargoes such as timber, and dangerous cargoes
such as oil, chemicals and coal.
(8) Coasters use the canal network involving vessels of up to 5000 tonnes gross and
of limited draught. An increasing number of similar sized vessels plying from the

186
Continental inland waterway system use the UK canal network primarily the more
modern elements of it, particularly Humberside area, Sharpness Dock, etc.
(9) Few companies in the UK have their warehouse on the canal system thereby
relying on road/rail for feeder/distribution service, which in turn inflates cost and transit
time. The state-owned British Waterways Board who control much of the UK canal
network continue to make strenuous efforts to generate new international business to the
system, especially in the Humberside area.

6.1.2 International air transport

Air transport is one of the youngest forms of transport and undoubtedly continues to
make a major contribution to the exploitation of world resources. The bulk of
international passenger travel today moves by air, and in air freight valuation terms a
significant proportion of world trade (Branch, 2009). At the moment, the latter constitutes
1% in volume and about 20-30% in value terms of total world trade.
The development of civil aviation was particularly fostered during the Second
World War (1939-45) which aided very considerably the advancement of this mode of
transport in technical terms. Initially, the passenger sector was developed, but from the
mid-1950s air freight began to grow rapidly annually until 1973 when the escalation in
fuel cost occurred. Air freight rates were increased to offset the additional operator's cost
and, coupled with the subsequent world trade recession, the annual growth rate of some
airlines almost diminished. During the past few years, major changes have emerged in the
air freight industry, and by 1993 the global air freight market can be divided into three
broad sectors: express, special commodities and traditional air cargo.
The main role for most international air express markets is as carriers acting for the
integrators or wholesalers. British Airways cargo, for example, has now developed a
strong 'on board' courier network under the name 'Speedbird Courier'. Currently it serves
70 international routes and has some 124 couriers flying daily, serving 150 countries. The
'Speedbird' service operates on the basis of a published timetable, detailing all the flights
on which a Speedcourier travels. Space is sold to both retail and wholesale courier
companies, including the big four TNT, Fedex, UPS and DHL. The courier service
bandies documents, parcels and express freight, operating from the airport of departure to
the consignee's premises. Express freight includes computer diskettes, computer
printouts, brochures, tapes, books, annual reports etc. The rates are based on four zones,
with each country being allocated a zone. The rate is inclusive of export processing,
international carriage, import processing, international processing, Customs clearance
and delivery to city centres. The consignment is accompanied by the 'Speedbird'

187
consignment note, completed by the shipper, and which usually avoids the additional
provision of a pro-forma invoice.
A further division is found in the international air freight services. This involves
special commodities such as perishable products, live animals, project outsized cargoes
and hazardous goods. This business is primarily orientated towards the traditional
carriers, the airlines and freight forwarders. The third sector is the traditional air cargo.
This embraces the transportation of normal industrial and commercial shipments moving
in parcel, container or pallet form. The integrators are already making substantial inroads
into that market, forcing the airline and forwarders to look at ways of improving their
services. A large volume represents the consolidation market under agents' sponsorship.
Attention will be directed to improve product quality. In particular, it must strive to
develop an unmistakable performance profile through product enhancement of which
improved information systems will be an integral part.
• Advantages:
(1) High speed and quick transits.
(2) Low risk of damage/pilferage with very competitive insurance rates.
(3) Simplified documentation system - one document, an air waybill for
throughout air freight transit interchangeable between IATA accredited airlines. The
IATA air waybill is, therefore, acceptable on any IATA airline thereby permitting
flexibility of through routing with no transshipment documentation problems at en route
airports.
(4) Common code of liability conditions to all IATA accredited airlines.
(5) Virtually eliminates much packing cost. This is an important cost saving
attributed to air freight and the shipper may find it worthwhile to engage professional
packaging services to ensure the merchandise is having the correct packing specification
for this mode of transport. Significant packaging cost savings can be realized to offset the
higher air freight rate compared with surface transport.
(6) Ideal for palletized consignments. A substantial volume of merchandise is now
moving on pallets which aids handling, reduces packing needs, facilitates stowage and
lessens risk of damage/pilferage. Again, for the shipper new to the export business, it
may prove worthwhile to establish whether it would be advantageous to have the
merchandise palletized. Many such palletized consignments are using the shrink-wrap
packaging technique.
(7) Quick transit reduces amount of capital tied up in transit. This facilitates
prompt financial settlement of individual consignments thereby aiding the exporter's cash

188
flow situation. On this point much depends, of course, on the export sale contract terms
of delivery.
(8) Quick, reliable transit eliminates need for extensive warehouse storage
accommodation provided by the importer, reduces risk of stock piling, that is,
obsolescence, deterioration, and capital cost tied up in warehouse/stock provision.
Moreover, it enables the importer to replenish quickly his stock, such as when demand
for a commodity has become exhausted quicker than forecast.
(9) Ideal for a wide variety of consumer-type cargoes, particularly consignments
up to 1500-2000 kg. Moreover, the average consignment size is increasing as larger air
freighters are introduced.
(10) The existing very extensive air freight international network continues to
expand which aids its development and increases its share of the international trade
market. This in turn encourages new markets to the air freight sector thereby aiding
international trade development. For example, in some large countries major car
manufacturers guarantee a replacement spare service through the medium of air freight,
which in itself has a status symbol and thereby aids the exporter's sales. Likewise, air
freight services generate new markets to the exporter such as day-old chicks being
transported 3000 miles which obviously would not be possible or practicable by sea
transport.
(11) Parity obtains on rates on IATA scheduled international services and
competition exists only on service quality. This in the long-term benefits the shipper as
no rate wars arise to the detriment of the service and trade.
(12) Services are reliable and to a high quality.
(13) Major airports worldwide tend to be situated in the centre of
commercial/industrial areas compared with the major seaport. In consequence the airport
can in many situations be closer situated to the industrial/commercial market which has a
competitive advantage in terms of lower collection/distribution cost.
(14) It facilitates the 'just in time' concept whereby the air freight distributor is the
link between the central warehouse/manufacturing plant and the 'point of sale'. Goods are
simply replenished as they are sold at the importer's premises. Examples are fashionable
goods and perishable products.
(15) The air freight network worldwide is more extensive and offers more frequent
flights than the maritime services.
(16) The 'value added benefit' found in fast transits and service frequency is very
profound. For example, the spares replacement market serving factory plant or the

189
computer software and hardware are good examples. The sooner the goods arrive, the
greater is the financial benefit to the importer.
(17) Services are continuously being improved and new ones developed through
the 'combined transport operation' concept. An example is Singapore and Dubai seaports
linking up with the nearby airports and providing a joint sea and air through door-to-door
service. LCL containerized shipments arrive at Singapore or Dubai and are discharged,
and goods airfreighted to Europe.
(18) Air freight capacity is continuously increasing as the latest generation of
aircraft emerge. Air freighters are now becoming more common. Overall, airline
operation cost is reduced.
• Disadvantages
(1) Limited capacity of air freighter and overall dimensions of acceptable cargo
together with weight restrictions.
(2) Very high operating expenses and initial cost of aircraft when related to overall
capacity - average capacity 20 000-25 000 kg. It is for the latter reason that many air
freighters are converted passenger aircraft. Moreover, some 80% of air freight is
conveyed on passenger scheduled services.
(3) Service is vulnerable to disruption when fog prevails, particularly in airports
with less modern traffic control equipment.
(4) Airline operation today is very sophisticated in all areas including air freight. It
is vulnerable to rates and transit time competition in short hauls by surface transport, due
to the high airport cost and landing fees which inflate terminal costs. Consequently, most
major operators with air freight from London for Paris and Brussels rely on surface
distribution which is more economical in cost and also because the smaller aircraft
operating the short hauls do not have capacity for the larger, more economical, pallet
loads
It must be recognized that an increasing volume of cargo is now conveyed on air
freight charter flights and this latter market is tending to expand quite rapidly. Air freight
is an expanding market and the trend to developing larger capacity air freighters will
continue to meet such demand and facilitate optimum performance/operation. It is
particularly ideal to the small exporter and this form of international distribution should
be continuously borne in mind by the discerning shipper.

6.1.3 International road transport

The road vehicle is a low capacity but very versatile unit of transport which is
most flexible in its operation. It has the following features:

190
 (1) One of its most significant advantages is the road vehicle distributive ability.
Overall it can, therefore, offer a door-to-door service without intermediate handling.
(2) No Customs examination arises in transit countries provided the haulier is
affiliated to TIR (Transport International Routier) as the cargo passes under bond when
the unit is passing through one of their countries. Insofar as transit countries within EC
are concerned, no Customs examination arises.
(3) It is very flexible in operation which is particularly useful when circumstances
demand a change in routeing through road works/blockage or disrupted shipping services.
(4) It is very competitive within certain distance bands compared with air freight
and train ferry, both in terms of transit times and rates.
(5) Documentation is simple as under CMR a through consignment note is
operative with a common code of liability conditions.
(6) The service tends to be reliable and to a high standard. Delays usually only
occur when bad weather prevails or for some other exceptional circumstances.
(7) The TIR vehicle may be of 12.20 m (trailer) or 15.50 m (articulated vehicle)
with an overall gross weight capacity of 40 tonnes (44 tonnes on the Continent). Hence,
initial cost is low when compared to an air freighter. Moreover, limited capacity imposes
certain weight and dimensional restrictions on the traffic which can be carried.
(8) It is ideal for general merchandise and selective cargo in bulk in small
quantities conveyed in a specialized road vehicle. The service is renowned for its
groupage flow under a freight forwarder's sponsorship and, therefore, ideal for the small
exporter. An increasing number of shippers are now using their own vehicles to distribute
their own goods.
(9) Packing costs are less when compared with conventional shipping ('tween deck
tonnage) services.
(10) The driver accompanies the vehicle throughout the road transit thereby
exercising personal supervision and reducing risk of damage and pilfering. Accordingly,
the operator can control his vehicle at all times as the driver usually 'reports in' to his
company control office at staged points en route.
(11) The trailer service is very flexible, and this helps to develop the business. In
many situations, it can be customerized to meet the shipper's needs. This helps cost
efficiency and improves substantially the quality of service

6.1.4 International rail transport

Today railways are a formidable transport system exploiting the economic features
of a high-capacity disciplined transport network using an exclusive way. The modern
railway system is a high-capacity form of transport operating on a disciplined, controlled,

191
reliable, exclusive artificial way. It is capable of attaining relatively high speeds and is
most economical under the complete train load concept as distinct from the individual
wagon load involving frequent marshalling.
The question posed is whether rail freight and combined rail/road transport will be
viable for a wide range of goods in addition to the former traditional bulk traffics. Crucial
factors will include the development of efficient transshipment Operations and good
consignment control capabilities. In fact, good information technology systems -
increasingly including EDI - are already playing a crucial role in general distribution
service development.
The wagon or train load market will involve the ferry wagon distribution system.
The high-capacity wagons are privately owned, and Tiphook is a market leader with 600
purpose-built up to 65 tonnes. Each wagon is available on contract hire, trip hire or part
of a comprehensive all-inclusive forwarding service. Details of the general cargo and
steel rail wagons are given below.
Wagon type Description
Covered freight wagon - general cargo Two axles - capacity 28 000 kg, two
sliding doors per wagon side, capacity 34
Euro-pallets; ideal for high-volume
palletized or breakbulk goods
Covered freight wagon - general cargo Bogie - capacity 33 000 kg, three sliding
doors per wagon side, capacity 48 Euro
or 38 industrial pallets; ideal for heavy or
high-volume palletized or break-bulk
goods, each door gains access to one-
third of area
Covered freight wagon - general cargo Bogie - capacity 52 000 kg, two sliding
doors per wagon side; provides wider
access to the load area, capacity 51 Euro
or 40 industrial pallets; ideal for heavy or
high-volume palletized or break-bulk
goods
Covered freight wagon Bogie - capacity 60 500 kg, five wells set
into wagon floor can accommodate steel
coils; for transport of steel sheets, plates
and other heavy goods, wells covered by

192
 integral drop flaps to give completely flat
loading surface
Covered freight wagon Bogie - capacity 6500 kg, five wells set
into wagon floor for transport of steel
coils
Note that Euro pallet, 800 x 1200 mm; industrial pallet, 1000 x 1200 mm. Features
of the ferry wagon services are given below:
(1) A simplified documentation system, involving the CIM consignment note,
offering a common code of liability for the throughout rail transit.
(2) Ideal for a wide range of consumer products and some bulk cargoes.
(3) Scheduled services between key industrial centres with a very distributive
network extending to 150 000 route miles with each consignment monitored throughout
its transit.
(4) Wide range of wagon types ideal for the complete customerized train load such
as car transporters, or the service originating/terminating at British Rail Euro-terminals.
Such terminals offer individual wagon movements, or the growing freight forwarding rail
package door-to-door offered by MAT Transport Ltd.
(5) The wagons are of higher capacity than the trailers, which improves the load
ability of the services and rate competitiveness.
(6) Packing costs are low and insurance rates competitive.
(7) The Channel Tunnel and Single Market will herald a new era of international rail
freight distribution throughout Europe, with no impediments to schedules at ports or
frontier points.
(8) The market is strongest in the complete ferry wagon load regular movement and
scheduled freight services for the individual wagon hire or freight forwarding rail
package. The reliance on road for collection and delivery is a high-cost factor, especially
on shorter hauls, and an impediment to growth, particularly for the freight forwarding rail
package, compared with the door-to-door trailer movement. This disadvantage is being
overcome with the development of the swap-body concept.
An example of the use of purpose - built wagons operating in train load formation is
the movement of cars from factory to destination rail-head. This includes Amsterdam,
Cologne, Brussels, Lilie, Paris, Basle, Munich, Turin, Port Bou and Hendaye. STV A is
the leading European rail transporter.
The second division is the inter-modal system involving rail and road. This
embraces the swap-body concept and the development of the inter-modal system
providing a door-to-door service; it involves road, rail and sea. Overall, this is a growth

193
market as more dedicated services and facilities are introduced. A description of number
of swap-bodies is given below. All are suitable for road/rail/sea movement and
transshipment by lift truck and crane top loading. The swap-bodies can also be
mounted/demounted on/off draw bars and semitrailers giving quick tum-round time; most
swap-bodies can be stocked up to three high:
Swap-body type Distribution
Steel Swap-body (DTY van) Corrugated steel with grappler pockets with
roller rear door and/or side door and mounted
on four adjustable legs. It has a payload of 13
680 kg, length 7.15 m, width 2.5 m and height
2.67-2.75 m. Also available lengths of 7.45 m
and 7.82 m and 3m high.
Full-side access swap-body Corrugated steel with grappler pockets with full
width or 2.50 m side doors and mounted on four
adjustable legs. It has a payload of 12 620 kg,
length 7.15 m, width 2.5 m and height of 2.67-
2.75 m. Also available lengths of 7.45 m and
7.82 m and 3m high.
Refrigerated swap-body Pallet wide ATP/FRC insulated with grappler
protection plates - refrigeration unit and
mounted on four adjustable legs. It has a
payload of 12 930 kg, length 7.15 m and width
2.6 m. Also available in lengths of 7.45 m, 7.82
m and 13.6 m.
Curtainsiders access swap-body Steel construction with end door of ply metal
construction and one-piece aluminum roof and
curtains running each side throughout its length.
It is mounted on four adjustable legs. It has a
payload of 16 000 kg, length 7.15 m, width
2.480 m, height 2.36/ 2.44/ 2.69 m and side
opening length 6.86 m. Also available in 7.45 m
and 7.820m length. Ideal for automotive and
drinks industries.
Swap-bodies provide complete flexibility for distribution by rail, road and inland
waterway.

194
 The final category is the movement of maritime ISO containers to and from the
seaports. It may be an international movement between the major ports such as
Felixstowe, Liverpool, London, Southampton and the 40 purpose-built terminals
including eight situated at the ports. The trains are run in fixed formation between
terminals to a prescribed timetable in the same way as a passenger train. The wagons are
tailor-made to carry only containers. The transfer from road to rail (or ship) is carried out
at specially built terminals and it is smooth, safe and fast. The method of transfer is by
means of 'portal' -type cranes which can operate over the whole length of the specially
laid rail sidings. Each of the rail-served container bases has a direct distribution facility
which eliminates intermediate warehousing. This rail operation has been established for
over 25 years and is very reliable and cost effective. Individual major container/ship-
owners have contracts with British Rail for the charter of complete trains on a regular
basis. This is completely integrated with the sailing schedules and container base
operation - the latter managed by a consortium of international trade interested parties.

6.2 Cargo insurance

In its proper context, cargo insurance must be seen as an indispensable adjunct to
overseas trade. Adequate insurance is vital to protect the interest of those with goods in
transit.

6.2.1 Cargo insurance market

There are no fixed rates in marine insurance and the actual premium for a particular
ship or cargo is assessed on the incidence of losses in that trade and the risks that the ship
and other conveyances transporting the cargo are likely to experience. This process of
assessing the premium is known as 'underwriting' and the marine insurance contract is
embodied in a document called a policy. Marine insurance is underwritten by
underwriters and insurance companies.
The business can be handled through the intermediary of an insurance broker. The
broker is the agent of the assured, his/her principal, and as such is subject to the common
law of agency in so far as, if his/her principal is prejudiced as a result of negligence, then
the principal may sue for damages. Effectively, brokers' services are provided without
cost to the assured, whose remuneration, brokerage, is paid by the underwriters with
whom the principal's business has been placed. The role of the broker is, first, to advise
clients as to their insurance needs and, secondly, to comply with clients' subsequent
instructions and obtain the cover required at the best possible rate of premium. The
salient details of the risk areentered by the broker on a document known as a 'slip', which
the broker presents to underwriters inviting them to accept all or a proportion of the risk

195
specified thereon. Unless the risk is a small one (i.e. of low monetary value), it will be
placed with a number of underwriters in the market, each accepting a proportion (usually
a percentage) of the sum insured. Upon completion of placing the risk, the broker issues a
policy embodying the terms and conditions stated on the slip, having previously sent the
principal a cover note informing hirn/her of the terms and conditions on which the risk
has been placed and specifying the insurers participating. A further service provided by
the broker on behalf of the principal is the negotiation and collection of any claims
arising on insurances placed.

6.2.2 Fundamental principles of insurance

Marine insurance is governed by Marine Insurance Act 1906 is a UK Act of
Parliament regulating marine insurance. The Act applies both to "ship & cargo" marine
insurance, and to P&I cover. The Act was drafted by Sir Mackenzie Dalzell Chalmers,
who had earlier drafted the Sale of Goods Act 1893. The Act is a codifying act, that is to
say, it attempts to collate existing common law and present it in a statutory (i.e.
“codified”) form. In the event, the Act did more than merely codify the law, and some
new elements were introduced in 1906. The Marine Insurance Act 1906 has been highly
influential, as it governs not merely English Law, but it also dominates marine insurance
worldwide through its wholesale adoption by other jurisdictions. Two modern statutes,
the Consumer Insurance (Disclosure and Representations) Act 2012 (“CIDRA”) and the
Insurance Act 2015 have made amendments to the law of insurance
The basic principles of insurance are specified in the Act. They are insurable
interest; utmost good faith; indemnity and subrogation.
6.2.2.1 Insurable interest
A person has on insurable interest in a marine adventure (any ship goods or other
moveables exposed to maritime perils) where he stands in any legal or equitable
relationship to the adventure or insurable property at risk therein in consequence of which
he may:
(a) benefit by the safety or due arrival of the insurable property, or
(b) be prejudiced by its loss, or by damage thereto, or by the detention thereof, or
(c) incur liability in respect thereof.
The most common forms of insurable interest in cargo insurance are:
(1) Ownersbip of the goods. The cargo owner bas an insurable interest in the goods
since be will benefit by their safe arrival or be prejudiced by loss of or damaged thereto.
Ownersbip usually involves two parties - seller and buyer, or consignor and consignee.
The insurance requirements of these parties will depend upon the terms of the contract of
sale.

196
 (2) Charges of insurance (premium). The assured bas an insurable interest in the
premium paid in respect of any insurance be may effect. Whilst in bull insurance the
sbipowner effects a separate policy to cover the amount expended upon insurance
premiums, in cargo insurance the sum insured reflects the cost of the goods plus the cost
of insurance.
(3) Freight. This is the cost of transporting the goods from the consignor's premises
to the consignee's premises and is either pre-paid or payable at destination. In most cases,
it is advanced or pre-paid freight not returnable even if the goods are lost and not
delivered. In these instances, therefore, the freight pre-paid is at the risk of the cargo
owner and, as in the case of premium, is merged in with the value of the goods.
Consequently, the sum insured reflects the cost of the goods plus the cost of insurance
(premium) plus the cost of transportation (freight).
Other forms of insurable interest in cargo insurance are:
(1) Defeasible interest. This term describes an interest which may cease for reasons
other tban the operation of maritime perils. For example, the insurable interest of the
seller of goods ends wben the title to the goods passes to the buyer. The seller bas a
defeasible interest.
(2) Contingent interest. As the defeasible interest of the seller ceases the interest of
the buyer commences. The contract of sale may contain a provision allowing the buyer to
reject the goods in certain circumstances e.g. delayed delivery. Where the buyer exercises
this right of rejection, the interest immediately and automatically reverts to the seller. The
seller has an insurable interest in respect of this contingency.
(3) Forwarding expenses. The contract of affreightment will probably include a
clause allowing the carrier to discharge the goods at a port other than the one designated
where, for some reason, they cannot be delivered or discharged at the destination port.
For example, the destination port may be strikebound, and the shipowner diverts the ship
to another port. This would involve the cargo owner incurring 'forwarding expenses', i.e.
the cost of getting his cargo on-carried to its intended destination. These charges are not
covered under the standard cargo clauses, and when this situation occurs, it is usually too
late for the cargo owner to effect insurance as the risk has already occurred. A prudent
cargo owner would cover this interest by effecting an insurance on an annual basis for an
amount sufficient to cover his possible expenditure in such circumstances.
(4) Commission. An agent may act for a cargo owner on a commission basis. The
amount he anticipates eaming will depend upon the arrival of the goods and he
accordingly has an insurable interest to this extent.

197
6.2.2.2 Utmost Good Faith
A contract of marine insurance is a contract based upon the 'utmost good faith'
(uberrimae fidei), and if the utmost good faith be not observed by either party, the other
party may avoid the contract.
It would not be practical or, indeed, possible for underwriters to check the accuracy
or completeness of information submitted to them in respect of a risk to be insured. They
have to rely upon the other party - the proposer or the broker acting on his/her behalf -
observing the principle of utmost good faith which means a full disclosure of all material
circumstances relating to the risk before the contract is concluded. A material
circumstance is one which would inftuence a prudent underwriter as to the desirability of
the risk. Where there is a non-disclosure of a material circumstance, the underwriter may
avoid the contract. The underwriter may also avoid the contract if the broker is guilty of
misrepresenting the risk during the placing negotiations. It is important to understand that
avoidance of the contract does not render the contract void. A void contract is one which
has no legal value and is, therefore, inadmissible as evidence in a court of law. If an
underwriter avoids the contract, always provided that there is no fraud, the policy remains
a valid document and the assured may contest the underwriter's action in a court of law.
In practice, this situation usually arises where an underwriter refuses to pay a claim on
the grounds that there has been a non-disclosure or misrepresentation at the time of
placing the insurance. If the assured does not accept this allegation, he/she may challenge
the underwriter's right to avoid the contract
6.2.2.3 Indemnity
The purpose of insurance is to protect the insurable interest of the assured whereby,
in the event of loss of or damage to the subject matter insured resulting from an insured
peril, he/she is placed in the same position that he/she enjoyed immediately before the
loss occurred. This is 'indemnity'. As will be appreciated, this basic principle of
indemnity provides, in effect, that after indemnity the assured may not be in a better, or
worse, position than he/she was in before the loss.
Whilst replacement is the means of effecting indemnity in some types of insurance,
it would not be practical for marine insurers to replace ships and cargoes. The manner of
indemnity is, therefore, a cash settlement. As explained above, the extent of this
indemnity is the value of the insured property immediately before the loss occurs. This
value is the insurable value and the basis for its calculation. In the case of cargo, it is the
prime cost of the goods, plus the costs of and incidental to shipping plus the cost of
insurance upon the whole. Where goods are, say, totally lost, this basis of indemnity
would place the exporter of goods in the same position as if the goods had never left

198
his/her warehouse and, therefore, conforms with the basic principle. Nevertheless, it falls
somewhat short of the indemnity he/she would wish in so far as he/she would prefer to be
in same position as if the goods had arrived safely at their destination, i.e. realized his/her
profit. The inadequacy of basing the indemnity upon the insurable value is further
illustrated in the case of the frequently used CIF sales contract. Here the seller is
responsible for arranging the shipment and insurance of the goods and his/her sales
invoice to the buyer will accordingly reflect the freight and premium paid, in addition to
the price charged for the goods, which will reflect the prime cost plus his/her percentage
of profit.
Consequently, cargo is always insured under a valued policy stating an insured
value in line with the cargo assured's particular requirements. A valued policy will
contain both a value - the insured value - and the sum insured. These may be expressed in
different ways, e.g.:
Sum Insured $2 000 000 on 2000 cases merchandise, valued at $2 000 000 or
Sum Insured $2 000 000 on 2000 cases merchandise, so valued
The sum insured is the total of underwriters' subscriptions to the insurance and is,
therefore, the maximum amount payable inrespect of a claim. The sum insured is also the
figure applied to the rate per centage, charged by the underwriter for writing the risk, to
arrive at the premium due for the insurance. Effectively it represents the amount of
insurance bought and it follows that, in the event of loss, one cannot expect to recover
more than one has paid for.
In order for the subject matter insured to be fully insured, the sum insured and
insured value must of course be for the same amount. If the sum insured is less than the
insured value, this would mean that, for some reason, there is under insurance or the
assured has elected to bear a proportion of the risk himself. For instance, a sum insured of
$ 1,600,000 on an insured value of $2,000,000 would indicate that the assured is bearing
20% of the risk. In other words, he will bear 20% of every claim, recovering 80% from
his underwriters. In return for this he will save 20% of the premium
6.2.2.4 Subrogation
Subrogation is the corollary of indemnity in so far as its application prevents the
assured defeating the principle of indemnity by recovering his loss from more than one
party.
For instance, insured goods may be damaged as a result of faulty stowage by the
carrier. Under an 'all risks' insurance the cargo assured would be entitled to indemnity
from his/her underwriters. He or she would also have recourse against the carrier. Whilst
he/she may lodge claims against both, they may not recover and retain amounts received

199
from both underwriter and carrier as this would defeat the principle of indemnity. In
practice the underwriter, upon payment of the claim for the damage, would automatically
be subrogated to all rights and remedies the cargo owner bad against the carrier and,
accordingly, may exercise these rights either in his/her own name or that of the assured
for a recovery against the amount paid by him under the insurance. Any recovery the
underwriter effects in this respect is limited to the amount of the claim paid under the
insurance. It is possible, for example, where the insured goods have been undervalued,
that the underwriter may recover more than the amount paid by hirn/her as a claim. In
this event, he/she must pass the surplus proceeds to the assured.
The rights of subrogation pass to the underwriter upon payment of any type of
claim. However, where the claim is in respect of a totalloss, the underwriter is
additionally entitled to proprietary rights in respect of whatever may remain of the
insured goods and, accordingly, may dispose of these as is seen fit, retaining the whole of
any proceeds even though these may exceed the amount of the claim paid.
6.2.3 Cargo insurance policy form and clauses
6.2.3.1 Risks covered (ICC, 2009)
General Average
This insurance covers general average and salvage charges, adjusted or determined
according to the contract of carriage and/or the governing law and practice, incurred to
avoid or in connection with the avoidance of loss from any cause except those excluded.
"Both to Blame Collision Clause"
This insurance indemnifies the Assured, in respect of any risk insured herein,
against liability incurred under any Both to Blame Collision Clause in the contract of
carriage. In the event of any claim by carriers under the said Clause, the Assured agree to
notify the Insurers who shall have the right, at their own cost and expense, to defend the
Assured against such claim.
a, Institute cargo clauses (A): This insurance covers all risks of loss of or damage to
the subject-matter insured except as excluded by the provisions.
b, Institute cargo clauses (B): This insurance covers, except as excluded by the
provisions.
• loss of or damage to the subject-matter insured reasonably attributable to:
(1) Fire
(2) vessel or craft being stranded grounded sunk or capsized
(3) overturning or derailment of land conveyance

200
 (4) collision or contact of vessel craft or conveyance with any external object
other than water
(5) discharge of cargo at a port of distress
(6) earthquake volcanic eruption or lightning
• loss of or damage to the subject-matter insured caused by
(1) general average sacrifice
(2) jettison or washing overboard
(3) entry of sea lake or river water into vessel craft hold conveyance container
or place of storage
• total loss of any package lost overboard or dropped whilst loading on to, or
unloading from, vessel or craft
c, Institute cargo clauses (C): This insurance covers, except as excluded by the
provisions.
• loss of or damage to the subject-matter insured reasonably attributable to
(1) fire or explosion
(2) vessel or craft being stranded grounded sunk or capsized
(3) overturning or derailment of land conveyance
(4) collision or contact of vessel craft or conveyance with any external object
other than water
(5) discharge of cargo at a port of distress
• loss of or damage to the subject-matter insured caused by
(1) general average sacrifice
(2) jettison

6.2.3.2 Exclusions
a, Institute cargo clauses (A): In no case shall this insurance cover:
- loss damage or expense attributable to wilful misconduct of the Assured
- ordinary leakage, ordinary loss in weight or volume, or ordinary wear and tear of
the subject-matter insured
- loss damage or expense caused by insufficiency or unsuitability of packing or
preparation of the subject-matter insured to withstand the ordinary incidents of the
insured transit where such packing or preparation is carried out by the Assured or
their employees or prior to the attachment of this insurance (for the purpose of
these Clauses “packing” shall be deemed to include stowage in a container and
“employees” shall not include independent contractors)

201
 - loss damage or expense caused by inherent vice or nature of the subject-matter
insured
- loss damage or expense caused by delay, even though the delay be caused by a
risk insured against (except expenses payable under Clause 2 above)
- loss damage or expense caused by insolvency or financial default of the owners
managers charterers or operators of the vessel where, at the time of loading of the
subject-matter insured on board the vessel, the Assured are aware, or in the
ordinary course of business should be aware, that such insolvency or financial
default could prevent the normal prosecution of the voyage.
This exclusion shall not apply where the contract of insurance has been assigned
to the party claiming hereunder who has bought or agreed to buy the subject-
matter insured in good faith under a binding contract.
- loss damage or expense directly or indirectly caused by or arising from the use of
any weapon or device employing atomic or nuclear fission and/or fusion or other
like reaction or radioactive force or matter.
In no case shall this insurance cover loss damage or expense caused by
- war civil war revolution rebellion insurrection, or civil strife arising therefrom, or
any hostile act by or against a belligerent power.
- capture seizure arrest restraint or detainment (piracy excepted), and the
consequences thereof or any attempt thereat.
- derelict mines torpedoes bombs or other derelict weapons of war.
b, Institute cargo clauses (B) (C):
- deliberate damage to or deliberate destruction of the subject-matter insured or any
part thereof by the wrongful act of any person or persons.
- loss damage or expense directly or indirectly caused by or arising from the use of
any weapon or device employing atomic or nuclear fission and/or fusion or other
like reaction or radioactive force or matter.
In no case shall this insurance cover loss damage or expense arising from
- unseaworthiness of vessel or craft or unfitness of vessel or craft for the safe
carriage of the subject-matter insured, where the Assured are privy to such
unseaworthiness or unfitness, at the time the subject-matter insured is loaded
therein.
This exclusion shall not apply where the contract of insurance has been assigned
to the party claiming hereunder who has bought or agreed to buy the subject-
matter insured in good faith under a binding contract.

202
 - unfitness of container or conveyance for the safe carriage of the subject-matter
insured, where loading therein or thereon is carried out prior to attachment of this
insurance or by the Assured or their employees and they are privy to such
unfitness at the time of loading.
- The Insurers waive any breach of the implied warranties of seaworthiness of the
ship and fitness of the ship to carry the subject-matter insured to destination.
In no case shall this insurance cover loss damage or expense caused by
- war civil war revolution rebellion insurrection, or civil strife arising therefrom, or
any hostile act by or against a belligerent power.
- capture seizure arrest restraint or detainment, and the consequences thereof or any
attempt thereat.
- derelict mines torpedoes bombs or other derelict weapons of war.
In no case shall this insurance cover loss damage or expense
- caused by strikers, locked-out workmen, or persons taking part in labour
disturbances, riots or civil commotions.
- resulting from strikes, lock-outs, labour disturbances, riots or civil commotions.
- caused by any act of terrorism being an act of any person acting on behalf of, or in
connection with, anyorganisation which carries out activities.
- directed towards the overthrowing or influencing, by force or violence, of any
government whether or not legally constituted.
- caused by any person acting from a political, ideological or religious motive.

6.2.3.3 Duration
a, Transit clause:
This insurance attaches from the time the subject-matter insured is first moved in the
warehouse or at the place of storage (at the place named in the contract of insurance) for
the purpose of the immediate loading into or onto the carrying vehicle or other
conveyance for the commencement of transit, continues during the ordinary course of
transit and terminates either
- on completion of unloading from the carrying vehicle or other conveyance in or at
the final warehouse or place of storage at the destination named in the contract of
insurance.
- on completion of unloading from the carrying vehicle or other conveyance in or at
any other warehouse or place of storage, whether prior to or at the destination named in
the contract of insurance, which the Assured or their employees elect to use either for
storage other than in the ordinary course of transit or for allocation or distribution, or

203
 - when the Assured or their employees elect to use any carrying vehicle or other
conveyance or any container for storage other than in the ordinary course of transit or
- on the expiry of 60 days after completion of discharge overside of the subject-
matter insured from the oversea vessel at the final port of discharge, whichever shall
occur first.
If, after discharge overside from the oversea vessel at the final port of discharge, but
prior to termination of this insurance, the subject-matter insured is to be forwarded to a
destination other than that to which it is insured, this insurance, whilst remaining subject
to termination, shall not extend beyond the time the subject-matter insured is first moved
for the purpose of the commencement of transit to such other destination.
This insurance shall remain in force (subject to termination as provided for and to
the provisions of Clause 9 below) during delay beyond the control of the Assured, any
deviation, forced discharge, reshipment or transhipment and during any variation of the
adventure arising from the exercise of a liberty granted to carriers under the contract of
carriage.
b, Termination of Contract of Carriage
If owing to circumstances beyond the control of the Assured either the contract of
carriage is terminated at a port or place other than the destination named therein or the
transit is otherwise terminated before unloading of the subject-matter insured as provided
for in Clause 8 above, then this insurance shall also terminate unless prompt notice is
given to the Insurers and continuation of cover is requested when this insurance shall
remain in force, subject to an additional premium if required by the Insurers, either
- until the subject-matter insured is sold and delivered at such port or place, or,
unless otherwise specially agreed, until the expiry of 60 days after arrival of the subject-
matter insured at such port or place, whichever shall first occur, or
- if the subject-matter insured is forwarded within the said period of 60 days(or any
agreed extension thereof) to the destination named in the contract of insurance or to any
other destination, until terminated
b, Change of Voyage
Where, after attachment of this insurance, the destination is changed by the Assured,
this must be notified promptly to Insurers for rates and terms to be agreed. Should a loss
occur prior to such agreement being obtained cover may be provided but only if cover
would have been available at a reasonable commercial market rate on reasonable market
terms.
Where the subject-matter insured commences the transit contemplated by this
insurance (in accordance with Clause 8.1), but, without the knowledge of the Assured or

204
their employees the ship sails for another destination, this insurance will nevertheless be
deemed to have attached at commencement of such transit.

6.2.4 Cargo insurance claims

Most insurance company policies require that immediate notice be given to the
nearest branch or agency in the event of damage giving rise to a claim under a policy on
goods.
When notified of damage, the company's agent proceeds to appoint a suitable
surveyor to inspect the goods and to report on the nature and extent of the damage. A
common practice is for a report or certificate of loss incorporating the surveyor's findings
to be issued to the consignees, the latter paying the fee. This is the usual procedure
relative to the agent. This certificate of loss is included with the claim papers and, if the
loss is recoverable under the insurance cover, the fee is refunded to the claimants.
In some circumstances, the claim papers are retumed to the place where the
insurance was effected and subsequently presented to the underwriters. However,
especially where goods are sold on CIF terms and the policy is assigned to the
consignees, arrangements are made for any claims to be paid at destination. In such cases,
the consignees approach the agents narned in the policy for payment of their claims. The
policy must be produced by the claimant when a marine claim is put forward because of
the freedom with which the marine policy may be assigned. In circumstances where the
policy or certificate of insurance has been lost or destroyed, underwriters are generally
willing to settle the claim, provided that the claimant completes a letter of indemity.
The presentation of claims is by negotiation on documents supporting the assured's
case. It is very difficult to state with any degree of legal precision exactly on whom the
onus of proof falls in every case, but generally speaking, the assured must be able to
prove a loss by a peril against which he was insured. Once the assured has presented a
prima facie case of loss by a peril insured against, the onus is on the insurers to disprove
liability.
The following documents are required when making an insurance claim:
(1) The export invoice issued to the customer together with shipping specification
and/or weight notes.
(2) The original bill of lading, charter party, air waybill, or CMR or CIM
consignment note.
(3) The original policy or certificate of insurance.
(4) The survey report or other documentary evidence detailing the loss or damage
occurred.

205
 (5) Extended protest or extract from ships logs for salvage loss, particular average in
goods, or total loss of goods for maritime consignments.
(6) Letters of subrogation for total loss or particular average on goods.
(7) Any exchange of correspondence with the carriers and other parties regarding
their liability for the loss or damage.
(8) Any landing account or weight notes at final destination.
Brief details are given below of the claims procedure which involves a bulk
shipment.
(1) Receiver notifies his agent of damage/loss and allows the ship's agent three days
to exarnine cargo.
(2) When extent of damage ascertained by receiver or shipowner's agent, the
shipowner.
(3) A large claim may require a surveyor or a consultant to examine the cargo. An
early examination is essential, and the agent must establish from ship's Masterand
confirm with shipowner/P & I Club, the actual narne of P & I Club involved.
(4) When the cargo claim facts are established, correspondence starts as detailed in
Figures 5.1 and 5.2 involving interested parties: shipowner, receiver's agents, cargo
receiver, shipowner's agent, cargo insurance company, lawyers etc.
(5) The receiver's agent's role is decisive in all stages to ensure prompt settlement is
obtained and quick action essential in the early stages.
It will be appreciated circumstances will vary. The claim could emerge at the
factory warehouse of the buyer rather than at the destination port.
It is important to bear in mind that clean receipts for imported cargo acceptance
should never be given when the goods are in a doubtful condition, but the receipt should
be suitably endorsed and witnessed if possible, for example, if one package is missing.
Furthermore, if the loss of damage incurred was not readily apparent at the time of taking
delivery, written notice must be given to the carriers or other bailees within three days of
delivery acceptance.
It is desirable the claim be progressed as quickly as practicable average bond which
confirms the importer will pay his generat average contribution following the average
adjuster's assessment.

206
 Figure 6.1: Cargo claims

Figure 6.2: Development of cargo claim

207
6.2.5 Cargo claims prevention
Claims prevention is the process of devising a system to reduce/eliminate the level of
claims emerging from the carriage of goods on an international transit. It is important the
exporter gives special attention to claims prevention and thereby maintains a good
relationship with the buyer through the goods arriving in an undamaged condition and
none missing (Figures 6.1 and 6.2).
Circumstances vary giving rise to a cargo claim and the following is a broad summary
of the situations:
(1) Missing goods.
(2) Damaged goods.
(3) Stained/mutilated/soiled goods.
(4) Non-saleable/marketable goods arising through frustration of the transit such as
transit delays causing perishable goods to deteriorate beyond a marketable saleable
product.
(5) Failure of the goods to arrive on specified date resulting in compensation claim.
(6) Poor/inadequate packing.
(7) lnadequate/poor stowage.
(8) Poor handling/stacking of cargo resulting in damage, eroshing etc.
To minimize the level of cargo claims it is most desirable adequate measures be
taken. The following Iist should not be regarded as exhaustive but merely a selection of
the more important areas where measures can be taken to reduce claims:
(1) Transit test to determine where delays/damage/pilferage encountered and institute
any remedial practical measures.
(2) Improved documentation to specify circumstances of claim and reasons for claim.
In particular comprehensive claims reports permit realistic analysis of causes and thereby
produce a possible pattern of circumstances.
(3) Quality control of product, transport service and packaging. (See also item (4).)
(4) Analysis of packaging and adequacy both in terms of handling and stowage plus
compatibility with atmospheric conditions including weather exposure.
(5) Pilferage-improved security and evaluate alternative routeing, packaging, cargo
packing, marking identity etc.
(6) Breakage- improved packaging and better handling/stowage techniques and/or
transport mode i.e. break-bulk to containers.
(7) Evaluation of cost of alternative/remedies to be made and their likelihood of
success.

208
 (8) Staff training especially on the handling/stowage of cargo and measures to lessen
such cargo claims; this to include cargo claims report forms and their comprehensiveness
and prompt submission.
(9) Code of procedure to be devised to report cargo damage/missing thereby ensuring
prompt action can be taken to lessen further claims prospect and institute earlier enquiries
to produce quick remedial measures.
(10) Provision of adequate preventative claims staff resources to lessen such risk.
(11) All modern technology to be used to lessen such claims.
(12) Brochure on claims prevention and packaging/stowage/handling techniques.
(13) Initiate early discussions with the carrier(s) and other interested parties to devise
remedial measures to resolve difficulties/claims encountered.
It is most important that claims be kept to a minimum and thereby ensure cargo
insurance premiums remain competitive and the buyer is well-satisfied with the goods
received in a quality condition. The need to deal with claims promptly and adequately
cannot be overstressed.

CHAPTER SUMMARY
 International transport covers a wide range of modes including:

• Canals/ inland waterway

• International air transport
• International road transport
• International rail transport
 Cargo insurance must be seen as an indispensable adjunct to overseas trade. There are

fundamental principles of insurance including insurable interest, utmost good faith,

indemnity, subrogation, cargo insurance policy form and clauses, Cargo insurance rating,
Cargo insurance claims, …
 Institute Cargo Clauses comprise Institute cargo clauses A, Institute cargo clauses B,

and Institute cargo clauses C.

• Institute cargo clauses A cover all risks of loss of or damage to the subject-matter
insured except as excluded by the provisions.
• Institute cargo clauses B cover, except as excluded by the provisions.
+ loss of or damage to the subject-matter insured reasonably attributable to:
(1) Fire
(2) vessel or craft being stranded grounded sunk or capsized
(3) overturning or derailment of land conveyance

209
 (4) collision or contact of vessel craft or conveyance with any external object
other than water
(5) discharge of cargo at a port of distress
(6) earthquake volcanic eruption or lightning
+ loss of or damage to the subject-matter insured caused by
(1) general average sacrifice
(2) jettison or washing overboard
(3) entry of sea lake or river water into vessel craft hold conveyance container
or place of storage
+ total loss of any package lost overboard or dropped whilst loading on to, or
unloading from, vessel or craft
• Institute cargo clauses C cover, except as excluded by the provisions.
+ loss of or damage to the subject-matter insured reasonably attributable to
(1) fire or explosion
(2) vessel or craft being stranded grounded sunk or capsized
(3) overturning or derailment of land conveyance
(4) collision or contact of vessel craft or conveyance with any external object
other than water
(5) discharge of cargo at a port of distress
+ loss of or damage to the subject-matter insured caused by
(6) general average sacrifice
(7) jettison

REVISION QUESTIONS
1. Present different modes of transport.
2. Present fundamental principles of insurance.
3. Which insurance conditions have the widest coverage?
4. Present the difference among insurance conditions A, B, and C?
5. Cargoes carried in the ship were frozen shrimps which were effected insurance under
Clause A. They were rotten by the carelessness of the captain who forgot to adjust the
temperature in accordance with the shipping contract. Would the cargo owner claim
compensation from the insurer? Which principle of insurance would be used by the
insurer later?

210
 CHAPTER 7: LOGISTICS MANAGEMENT

The chapter presents what is understood by the term “logistics” and the basic
activities of logistics and introduces general insight into logistics in relation to supply
chain management.
Chapter 6 comprises nine core sections:
 Transport in supply chains
 Transport security
 Logistics service providers
 Procurement
 Inventory management
 Warehousing and materials handling
 Information flows and technology
 Logistics and financial management
 Measuring and managing logistics performance

7.1. Transport in Supply Chains

Freight transport is an integral part of supply chain management (SCM), but
traditionally it has been treated as a service that is easily available when required by
suppliers and distributors. Also, transport is typically regared as a non-value-adding
activity in the supply chain, although we challenge this assumption on the basis that it
plays an essential role in the supply chain and when managed properly can allow supply
chains to work more efficiently and effectively.
There are essentially five modes of transport:
* air
* road
* water
* rail
* pipeline

7.1.1 Characteristics of the different transport modes

Choosing which mode(s) to use for freight transportation will usually be a function
of the volume and value of the freight, the distance to be travelled, the availability of
different services, freight rates to be charged and so forth. Once the appropriate mode of
transport has been chosen, it is usually the case that there is nor a simple linear
relationship between the freight rate charged and both the weight of the freight and the

211
distance to be travelled. Regardless of how short the distance to be travelled, the logistics
service provider (LSP) will still have to recover certain fixed costs for transporting a
consignment. For heavier shipments, the rate per kilo will typically decrease as the fixed
costs can be spread over a larger weight. For bulky or difficult to handle shipments, LSPs
will typically apply what is known as volumetric charging based on the dimensions of
the consignment. This is to compensate for lost capacity as a result of carrying the bulky
shipment where applying a rate per kilo would not sufficiently cover the costs incurred of
carrying the shipment.
An interesting feature of logistics systems is that sometimes consignors do not know
exactly which transport mode their freight travels on, leaving this decision to the LSP.
For the LSP it is not a simple matter of trading off one mode against another; sometimes
multiple transport modes are used in combination.
The split of freight among different modes varies by region and type of freight.
Table 7.1: A summary of costs and relative operating characteristics of the
different transport modes
Mode Relative costs and operating characteristics by mode
Road Fixed cost is low as the physical transport infrastructure such as
motorways are in place through public funding; available cost is
medium in terms of rising fuel costs, maintenance and increasing use
of road and congestion charges. In terms of operating characteristics,
road as a mode of transport scores favourably on speed, availability,
dependability and frequency, but not so good on capability due to
limited capacity on weight and volume. Uniquely among transport
modes, it can allow direct access to consignor and consignee sites.
Rail Fixed cost is high and the variable cost is relatively low. Fixed costs
are high due to expensive equipment requirements such as
locomotives, rail is considered good on speed, dependability and
especially capability to move larger quantities of freight.
Air Fixed cost is on the lower side but high variable cost that includes
fuel, maintenance, security requirements, etc. The main advantage of
air is speed; it is however limited in uplift capacity, similarly other
modes of transport are required to take freight to and from airports,
thus air cannot directly link individual consignors and consignees.
Water Fixed cost is on the medium side including vessels, handling
equipment and terminals. Variable cost is low due to the economies of
scale that can be enjoyed from carrying large volumes of freight – this

212
 is the main advantage of the water mode, together with its capability
to uplift large volumes of freight. Like air, it cannot offer direct
consignor-to-consignee connectivity, and vessels are sometimes
limited in terms of what ports they can use. It is also quite a slow
mode.
Pipeline Fixed cost is high due to rights of way, construction and installation,
but the variable cost is relatively low and generally just encompasses
routine maintenance and ongoing inspection/ security. On operational
characteristics, the dependability is excellent, but this mode can only
be used in very limited situations.

Maritime transport is the dominant mode of transport for international transport

movements. Road transport is the dominant mode of transport for inland transport. Due
mainly to the flexibility, directness and speed that the movement of freight by road offers,
when compared to rail, inland waterway or sea transport, it has become the principal
freight transport mode, carrying the majority of inland freight.

7.1.2 Transport operations, distribution centres and the role of factory gate pricing
In the 1970s and 1980s, distribution centres (DCs) were introduced in the retail
sector, with retailers taking over responsibility for deliveries to their stores (sometimes
DCs are referred to as RDCs – regional distribution centres, and NDCs – national
distribution centres). A distribution centre is a type of warehouse where a large number
of products are delivered by different suppliers, preferably in full truck loads. Each
distribution centre services a number of retail stores in the regional area.
In the 1990s, consolidation centres (CCs) were added and served to consolidate
deliveries from multiple suppliers into full roads, which could be deliverd onwards to the
DCs. A recent development has been for the retailers to take control of the delivery of
goods into their DCs and this is known as factory gate pricing – FGP. FGP is the use of
an ex-works price for a product plus the organization and optimisation of transport by the
purchaser to the point of delivery.
The case below on FGP highlights the savings for the retailer due to increased
supply chain visibility and better management of transport leading to reduction in delays
in their inbound logistics.

213
 Supplier
Consolidator
Supplier

Distribution
centre

Retail store Retail store Retail store

Figure 7.1: Inbound logistics in the retail sector

In addition to the control of their inbound logistics using FGP, retailers are also
looking at further improving their efficiency by increasing the backloading of store
delivery vehicles and the consolidation of smaller loads into consolidation centres.
With regard to the impact of FGP on transport, LSPs could feel that the retailers can
use it as a lever to reduce haulage rates and reduce their profit margins.
For FGP implementation a single point of control is required in the supply chain.
With no overall single point of control, there will be additional costs such in achieving
colaboration between all parties for transport movements. The implementation of FGP
heavily depends on the use of ICT, particularly for transport planning but also for
communication with the LSPs.

7.1.3 Efficiency of transport services

A variety of issues impact the efficiency and effectiveness of transport services.
These include:
- congestion problems,
- waste including empty running of vehicles,
- carbon emissions,
- regulatory directives on maximum permitted working time,
- road user charges, and
- skill shortages.
These problems cause inefficiencies and waste such as excessive waiting time, poor
turnaround time, low vehicle fill rates, poor asset utilisation, unnecessary administration
and excessive inventory holding.

214
 The strategies pursued in a supply chain impact the efficiency of the transport
services demanded. Pursuing a JIT strategy for example has many advantages, but one of
its downsides is that it can lead to inefficient transport utilisation with frequent small
loads.

7.2 Transport security

7.2.1 The need for transport security
In the aftermath of 11th September, the US authorities deemed that the security of
maritime transport into US ports was at risk particularly from a terrorist placing a weapon
of mass destruction in a container and setting it to detonate on US soil. Consequently, the
United State Congress and the International Maritime Organization (IMO) began to work
in tandem on introducing new security legislation which culminated in late 2002 in the
US Maritime Transportation Security Act and the IMO’s International Ship and Port
Facility Security (ISPS). Not long after the events of 9/11, in October 2002, the French
tanker Limburg was waiting for the harbour pilot from the port of Aden to come on board
when the ship was attacked by a suicide bomber who drove a small boat packed with
explosives into the starboard side. The explosion caused a major fire and pollution from
the oil, which leaked from the ruptured tanks. In addition, one of the 12 crewmen who
jumped overboard to escape the fire and smoke drowned. These two events, while they
may be considered extreme, nevertheless underline the need for transport security. There
are many security threats to the supply chain including terrorism, piracy, theft, smuggling
and other organized criminal activity.

7.2.2 Global transport security initiatives

7.2.2.1 IMO international ship and port facility security (ISPS) code
The ISPS Code is a mandatory security initiative which came into force on 1 July
2004 and applies to all countries that are members of the International Maritime
Organization. The objectives of the ISPS Code are to enable the prevention and detection
of security threats and the Code applies to ships engaged in international trade, including
passenger vessels with 12 or more berths, cargo vessels of 500 gross tonnes and over,
mobile offshore drilling units and all port facilities serving such vessels engaged in
international trade. As Figure 6.2 shows, the ISPS Code addresses only the port facility-
ship-port facility part of maritime transport.

215
 Figure 7.2: An overview of contemporary transport security initiatives

a, For port facilities, the purpose of the ISPS Code is to:

• Ensure satisfactory performance of all port facility security duties
• Control access to the port facility
• Monitor the port facility, including anchoring and berthing areas
• Monitor restricted areas to ensure only authorized persons have access
• Supervise the handling of cargo
• Supervise the handling of ship’s stores
• Ensure that security communication is readily available
Both ships and port facilities must undergo security assessments by trained
security personnel from which ship and port facility security plans are prepared.
b, For vessels, the ship security assessment includes:
• Identifying key shipboard operations
• Identifying existing security measures
• Identifying threats and vulnerabilities
• Developing and performing a ship security survey
• Identifying weaknesses in security measures and processes
Once the ship security assessment has been conducted, the ship security plan can be
drawn up. The ship security planning process comprises the following actions:
• Decide on corrective security measures.
• Prepare the ship security plan, based on the ship security assessment
• Review, and if necessary amend, the ship security plan
• Approval of the ship security plan by a competent authority

216
 Once the ship security plan has been implemented and independently verified, the
International Ship Security Certificate is issued.
c, For ports, the Port Facility Assessments (PFSA) process includes:
• Identification and evaluation of important assets and infrastructure
• Identification of possible threats to the assets and infrastructure and the likelihood
of occurrence
• Identification, selection and prioritization of countermeasures and procedural
changes and their level of effectiveness in reducing vulnerability
• Identification of weaknesses, including human factors, in the infrastructure,
policies and procedures
• Summary report of how PFSA was conducts, a description of each vulnerability
found during the assessment and a description of countermeasure that could be
used to address each vulnerability
The Port Facility Security Plan will include the following:
• Measures designed to prevent carriage of unauthorized weapons or any other
dangerous substances entering the port facility or on board a ship
• Measures designed to prevent carriage of unauthorized access to the port facility,
to ships moored at the facility, and to restricted areas of the facility
• Procedures for responding to security threats or breaches of security
• Procedures for responding to any security instructions at an enhanced security
level
• Procedures for evacuation in case of serious threats or breaches of security
• Duties of port facility personnel assigned security responsibilities
• Procedures for interfacing with ship security activities
• Procedures for the periodic review of the plan and updating same
• Procedures for the reporting of security incidents
• Identification of the port facility security officer
• Measures to ensure the security of the plan
• Measures designed to ensure effective security of cargo and cargo handling
equipment
• Procedures for auditing the PFSP
• Procedures for responding to a Ship Security Alert System activation
• Procedures for facilitating shore leave for ships’ personnel
7.2.2.2 US Customs-Trade partnership against terrorism (C-TPAT)
C-TPAT is a voluntary government-business initiative to build cooperative
relationships that strengthen and improve overall international supply chain and US

217
border security. Through this initiative, the US Customs and Border Protection Agency
(CBP) asks trade-related businesses to ensure the integrity of their security practices and
communicate and verify the security guidelines of their business partners within the
supply chain. CBP offers benefits to certain certified C-TPAT member categories,
including:
• A reduced number of CBP inspections, which results in reduced border delay
times
• Priority processing for CBP inspections
• Assignment of a C-TPAT Supply Chain Security Specialist (SCSS) who will work
with the company to validate and enhance security throughout the company’s
international supply chain
• Potential eligibility for CBP Importer Self-Assessment (ISA) program with an
emphasis on self-policing, not CBP audits
• Eligibility to attend C-TPAT supply chain security training seminars.
7.2.2.3 US container security initiative (CSI)
The Container Security Initiative was launched in 2002 with 20 of the world’s
largest container terminals and forms part of the US Maritime Transportation Security
Act. By September 2007 there were 55 CSI ports worldwide and in 2009 there were 58
ports that were part of the scheme. The way in which CSI works is that shippers must
send to US Customs and Border Protection details about the container’s cargo and its
origins at least 24 hours before the container is loaded onto the vessel in the foreign port.
gives the US Customs time to apply their security algorithm to the cargo manifest data to
determine whether their customs officers stationed in the foreign port should investigate
the contents of the container or allow it to be loaded onto the US bound ship.
7.2.2.4 European Union Authorized Economic Operator.
The EU’s Authorized Economic Operator (AEO) is a voluntary security initiative
which is designed to reflect the US C-TPAT security initiative. Those eligible to apply
for AEO membership include manufactures, importers, exporters, brokers, carriers,
consolidators, intermediaries, ports, airports, terminal operators, integrated operators,
warehouses and distributors within the EU. There are three certificate types:
• Customs Simplifications: AEOs will be entitled to benefit from simplifications
provided for under the customs rules.
• Security and Safety: AEOs will be entitled to benefit from facilitations of customs
controls relating to security and safety at the entry of the goods into the customs
territory of the Community, or when the goods leave the customs territory of the
Community.

218
 • Customs Simplifications/ Security and Safety: AEOs will be entitled to benefit
from both simplifications provided for under the customs rules and from
facilitations of customs controls relating to security and safety.
7.2.2.5 ISO 28000 – Supply chain security
The International Standards Organization has developed security standards aimed at
becoming the global supply chain security standard programme. ISO 28000 is applicable
to all sizes and types of organizations at any stage of production or anywhere in the
supply chain. It is a voluntary Standard, which may be certified by third-party auditing
companies to demonstrate that a company has taken a proactive and responsible approach
to security by establishing a security management system that assures compliance with a
documented security management policy.
ISO 28000 requires an organization to assess the security environment in which it
operates to determine if adequate security measures are in place and to identify and
comply with relevant regulatory requirements.
The purpose of the Standard is to provide a documented security management
system which identifies security threats, assesses the risks and controls and mitigates
their consequences. This process is continual so that the system can be effectively
maintained and improved. The scope of the security management system needs to be
defined by detailing the physical area covered by the system and the operations that are
undertaken within this area. Any outsourced processes should be considered and
controlled where necessary.

7.2.3 Transport security technology

7.2.3.1 Access control
Access control measures permit access to authorized persons and control access by
non-authorized persons to restricted areas. There are various forms of physical access
control and they include gates, fences, bollards and security netting. Manual gates that are
locked using mechanical locks or padlocks are an effective form of access control and are
generally inexpensive, easy to use and will not stop functioning during a power failure.
Manual gates and locks do not identify who, when and how many times a room, building
or site has been accessed. Where manual gates are used for general access points manned
by security guards, a suitable system for identifying authorized persons and vehicles will
need to be in place e.g. photo identification card.
7.2.3.2 Biometrics
Biometric security systems fall into two groups. The majority of biometric security
systems are identification card systems, including some modern passports, which hold a
certain amount of data about the card or passport holder. These data can simply be a

219
name and a photograph, which can be read using a bar code reader or a radio frequency
identification (RFID) tag within the card.
Access to a restricted area can be gained by the holder of the biometric ID card
when the bar code or RFID tag has been read by the reader and the data on the card have
been both validated and verified to ensure that the person may enter the restricted area at
that time. Biometric systems also refer to readers that conduct fingerprint or retinal scans
to allow access to restricted areas.
7.2.3.3 Detection systems
There are various types of detection systems in use in security today. The
commonest types include:
* Closed circuit television (CCTV): CCTV provides a means of viewing a large area
from a single location and recording it for later review.
* Motion detector systems: can be placed along fences or in restricted areas to sense
movement, which can be used together with a CCTV system to raise an alarm in the
security control room while recording any unauthorized activity.
* X-ray and gamma-ray detection systems: are used in airports and ports to scan
baggage and containers. They are known as non-intrusive inspection equipment as they
use X-rays or gamma-rays to penetrate baggage containers and produce an image of the
contents.

7.3 Logistics service providers

7.3.1 Classifying logistics companies (Branch, 2009)

* Own-account transportation: is when a company provides its own transport
services.
* Logistics service providers (LSPs): companies operate in logistics. Many different
types of companies operate in this sector, which we can broadly categorize as follows:
- Hauliers or trucking companies: carry freight on trucks. Similarly, operators in
the other modes also carry freight – train companies, airlines (with the exception in
particular of many of the “low-cost airlines” who do not generally carry freight), and
shipping companies.
- Freight forwarders: arrange transportation for freight. Different types of freight
forwarders have evolved in recent years.
Freight forwarders also arrange customs clearance for freight that moves
internationally. Freight forwarders have thus broadened out their product portfolio to
encompass many other activities. For example, some act as ship’s agents for vessels that
arrive into a port. Many other freight forwarders have evolved to a stage where they now

220
operate their own vehicles and warehouses. Sometimes freight forwarders are called
freight agents or brokers.
* Non-vessel-owing common carriers: companies who consolidate smaller
shipments from various consignees into full container loads which the NVOCC then
takes responsibility for.
The terms groupage and consolidated shipment (a shipment that comprises a
number of unique, individual shipments all placed together in the one loading unit): are
also used in the logistics sector to refer to aspects of this activity. Many freight
forwarders offer such groupage services, some quite extensively. The freight forwarder
acts not just as an agent but also a principal.
* Couriers: in response to a growing demand for immediate delivery of products.
* Integrators: These companies’ unique sales proposition is that they offer a
seamless end-to-end service from consignor to consignee.
There is considerable overlap between these categories. For example, a company
that operates ships can also have its own freight forwarding operations. The classification
above is given then purely to illustrate the various activities and types of companies that
operate across the sector. As freight company provide a broader and more integrated
range of services, many have come to be known as third-party logistics companies
(3PLs). The evolution of 3PLs is evident in the ‘FedEx and the Hub and Spoke System’
case below. DHL (which can be described as an integrator and as a 3PL; it fact it also
provides 4PL services, an area discussed in the next section) started life as an air courier
company, while Kuehne + Nagel’s origins, for example, were more so as a traditional
freight forwarder, but it is now a full service 3PL.
Some of the many different services provided by 3PLs are given below:
+ Transportation
+ Warehousing - including providing capacity for seasonal and other
fluctuations.
+ Pick and pack - for example, picking multiple different SKUs and
packing these into single units.
+ Light manufacturing - acting as contract manufacturers for OEMs, this is
quite prevalent in for example the electronics sector.
+ Vendor managed inventory
+ Customs clearance – and associated regulatory requirements, such as, for
example, hazardous goods clearances and food safety certificates.
+ Trade financing – for example mitigating currency exposure.

221
 + Managing reverse logistics – in some instances 3PLs manage the entire
reverse logistics process for a client and manage all repairs and returns.
+ Parts distribution – with their extensive networks of warehouses, it is
sometimes more economical and effective for 3PLs to take over the
management of critical spare parts inventories.
+ Inventory management – management of inventory has considerable
financial implications.

FEDEX AND THE HUB AND SPOKE SYSTEM

FedEx started life in the early 1970s and was founded by Frederick Smith. As a student
at Yale, Smith had pondered the economics of the route systems then dominant in US air
freight markets. His deliberations were to lead to the pioneering introduction by FedEx of
hub and spoke networks into air freight markets.
Rather than offer point-to-point services between all city pairs, hub and spoke networks
operate on the simple, but highly effective, principle whereby freight is shipped from all
origin points to a central hub, re-sorted, and then shipped out to destination. Customers were
initially sceptical of this concept in that if they were sending a parcel from for example
Boston to Chicago, they got confused as to why its routeing would take it to Memphis (the
location of FedEx’s central hub, and a place some distance away from both Boston and
Chicago). The logic and economics of Smith’s hub and spoke model, however, quickly won
out and today all of the integrators have large hubs and associated networks across most
continents.
FedEx itself has also grown considerably. Today it has one of the the world’s largest air
freight fleets, employs some 285,000 people and enjoys revenues of approximately $35
billion. The company also operates a diverse range of logistics-related FedEx branded
companies under the core FedEx brand.

7.3.2 Fourth-party logistics (4PL)

4PL sought to offer a radical solution that would offer companies total outsource
supply chain solutions. It was invented and trademarked by Accenture in 1996, who
originally defined it ‘as a supply chain integrator that assembles and manages the
resources, capabilities and technology of its own organization, with those of
complementary service providers, to deliver a comprehensive supply chain solution’.
4PL involves 3PLs in turn outsourcing, where it makes most sense for the final
customer, certain activities to other 3PLs.

222
7.3.3 Carrier responsibilities
Once freight leaves a consignor, it is up to responsible LSPs to ensure that it reaches
the consignee in the right condition, at the right time, etc. Documentation will need to
accompany the freight so as to ensure that anyone who comes into contact with the
freight will know where it comes from, what it comprises, where it is going, and how it is
going to get here. Customs and security agencies, who do not have time to physically
check each consignment, will also want to know the various details about individual
consignments that are moving over international borders.
The document that typically contains all of this requisite information is known as a
Bill of lading, or in air freight the more common term is an air waybill, or AWB for
short. In the case of consolidated shipments, the entire shipment will be covered by a
master airway bill, with the individual shipments covered by documents known as house
air waybills.
When freight moves from consignors to consignees, that who has responsibility for
it at various stages needs to be made clear. Issues such as these are resolved by using
what are called Incoterms (International commercial terms).

7.3.4 Selecting logistics service providers and services

Decision making is an ongoing and important part of many logistics managers’ jobs
because they need to decide which routine to use for a particular shipment, which carriers
to use, and how much inventory to hold.
With regard to using LSPs, a strategy that is often used by logistics managers is to
give a large share of their business to one carrier, and the remaining smaller share to a
competitor carrier. The list below gives some of the many factors that have to be
considered when selecting LSPs: services to be providers (geographical areas, volumes
including fluctuations, time frame, etc.); costs and costing approach (open book, gain
share, penalties, inflation/ cost increases, etc.); terms of carriage, applicable incoterms,
insurance; speed/transit time; performance metrics and service levels, reliability;
information systems (especially with regard to systems integration), other technology
issues (e.g. capability to ‘track and trace’ freight and requirement to use advanced
technologies such as RFID), and documentation requirements; core versus value-adding
services required; staffing issues (e.g. transfer of undertaking with respect to previous
employees, legal responsibilities, image and responsibility, union recognition,
disruptions); reverse logistics issues (packaging, returns – damaged and faulty goods,
failed delivery, etc.); implementation/ termination/ ability to alter conditions; details on
the logistics service provider’s history, client references, etc.

223
7.4 Procurement
7.4.1 Procurement as a strategic activity
Procurement is about specifying requirements, identifying sources, evaluating
options and acquiring resources that are fit for purpose, cost effective and sustainable.
Procurement as a strategic and tactical activity has become increasingly important for
many organizations and businesses. Procurement has also become more significant in
response to governance issues that companies face in terms of having a clear picture of
how, why and with whom they spend money and having the management processes and
controls in place to ensure that this is done in a way that is consistent with legislation,
regulations and the values and objectives that the organization aspires to. (Branch, 2009)
Procurement should be considered in terms of the motivation of the buyer and the
seller. The motivation and incentive for a customer in a procurement exercise is different
from the supplier’s perspective.

Table 7.2: The difference between buying and selling

Buyer motivation Supplier motivation
• Wants the lowest price? • Wants the highest price?
• Increase scope? • Decrease scope?
• Buyer power? • Supplier power?
• Best service? • Fit for purpose?
• Wants to limit risk? • Limit liabilities?

7.4.2 The difference between public and private sector procurement

It is worth while spending some time to consider the difference between private sector
and public-sector procurement

Table 7.3: Public sector versus private sector procurement characteristics

Characteristic Public sector Private sector
Obligation to publish Subject to appropriate financial No obligation to publish
contracts thresholds for goods, works and contracts
service contracts
Information Information about tender process Subject to internal policy
generally available must be generally available but not generally
available
Criteria Established at outset and applied Can evolve and change
consistently through the process as process develops

224
Objectivity Objective criteria must be applied and Customer has discretion
used as basis for decision making about level of objectivity
to be applied
Transparency Required for all aspects of tender Level of transparency in
process decision making is
discretionary
Repeatability Due process is legislated and applied Reflects individual
consistently by public bodies across customers’ own
the EU processes and
requirements
Challenge Unsuccessful candidates can No right to appeal or
challenge outcome challenge

7.4.3 Procurement and markets

Procurement theory and strategies are grounded in the relationships that businesses
and organizations have with markets. This is a fundamental issue in terms of supply and
demand and how a business secure assets and resources on favourable terms in the
marketplace.
7.4.3.1 Sourcing strategies
Sourcing strategy is essentially a business case for an organization to decide on the
best way to procure resources.
Sourcing strategies provide a basis on which to consider a category of spend,
defining the characteristics of that category and how the marketplace determines how and
sometimes when an organization should procure items within that category to secure the
best deal and continuity of supply.
Sourcing strategies are the first step for any organization to consider in how they
will secure supply either on a local, national, regional or global basis and interact with the
marketplace and suppliers.
As a minimum a sourcing strategy for a clearly defined requirement should include:
- Amount of spend being considered
- Risk
- One-off (project) or recurring procurement
- Market maturity
- Technology lifecycle of market
- Number of sources and potential suppliers
- Contract duration

225
 - Potential for performance improvement and cost reduction
7.4.3.2 Aggregation and consolidation
The most basic procurement principle to consider is leverage, that is to realize
economies of scope or scale when spend can be aggregated into larger contracts that can
be procured centrally as opposed to locally.
The tendency to aggregate spend also highlights the requirement to manage the
procurement process properly or in a compliant fashion recognizing any required
legislation, regulations and internal policies and procedures. As spend is aggregated the
level of risk also increases as the level of dependency on a particular supplier or groups
of suppliers increases.

7.4.4 Managing value and risk

The role of procurement is to manage value and risk on behalf of the organization.
The Kraljik matrix - a simple but powerful tool to understand and quantify relative value
and procurement risk issues for any business or organization was developed by Peter
Kraljik (Figure 7.3). This provides a basis to develop portfolios of spend that can be
categorized, assessed in terms of impact (or risk) and value and managed.

Figure 7.3: The Kraljik matrix

Different strategies are appropriate in each portfolio that exists within each quadrant
of the matrix. High value and risk should be managed differently from low value and low
risk. The different categories are described in Table 7.3.

226
 All suppliers are not equal and the level of dependency can be high to the extent that
this becomes a risk unless the relationships are also managed appropriately. It is not
possible to manage every relationship on a one-to-one basis so in many cases businesses
and organizations also consider their procurement portfolio in terms of the number of
suppliers and contractors that they deal with and the nature of the relationships that they
have.

One of the main procurement risks for organizations is ensuring continuity of supply.
Risk assessments usually consider “what will we do if our suppliers’s factory burns down?”.
This happens more often than you might imagine. Dell and Hewlett-Packard were both
affected by a fire at the LG Chem factory in South Korea in 2008. This was a main source
for both PC manufacturers of batteries for laptop computers. This meant a 50% reduction in
output for LG Chem a subsequent shortage or no availability of batteries for PC
manufacturers and others. The fire drove some manufacturers to alternative and competing
soures of batteries including Sony and Panasonics. The shortages lasted for a three-month
period.

7.4.5 The procurement process

Procurement should be considered as a process or lifecycle. This process is repeated
within a business as different contracts mature, expire and are renewed on a continual
basis. In addition to developing the sourcing strategy there are basically four stages to be
considered as illustrated in Table 7.4

Table 7.4: Managing procurement portfolios

Risk/ Value Description Strategy
High/ High Strategic Work strategically and collaborate. High risk and
value usually represents a high dependency
relationship with a supplier with high exist costs.
Source and manage strategically
High/ Low Bottleneck Needs to be managed carefully. The bottleneck
may be technical or commercial but to reduce the
risk, buyers have to design the bottleneck out of
their portfolio or ensure an appropriate
relationship with the supplier is maintained – to
ensure continuity of supply
Low/ High Tactical Tactical procurement required to ensure value for
money is achieved from the most appropriate

227
 source or sources. Increase sources and maintain
competition between suppliers
Low/ Low Leverage Aggregate and consolidate spend. Low-risk/ low-
value items are like commodities where source is
less important than continuity of supply and
assuming all other performance requirements are
met – source on price

Table 7.5: The procurement process

Stage Description Key issue
Specify Specify the requirements • Requirements should be defined from a
that the contract must technical, commercial and end-user
deliver perspective
• In many cases organizations do not
understand the market better than suppliers
• Sometimes the specification is unclear or
ambiguous
Identify Identify suitable potential • Advertising and promoting the contract
suppliers who are able to opportunity
meet the defined • Determining an appropriate level of
requirements or competition to reflect the risk and value
specification being procured
• Attracting new or more interesting
suppliers who may be able to add more value
to your business versus incumbents
• Choosing which suppliers have the
capability and capacity to deliver the
required service
Select Select a suitable supplier or • Picking a winner from suppliers who have
suppliers to deliver the sufficient capability and capacity to deliver
contract the contract
• The evaluation criteria in terms of quality
and price
• The balance needed between quality and
price
Manage Manage the contract to • Success criteria or key performance

228
 ensure that the key indicators are required to ensure that the
deliverables are fully met contract requirements are being met
• Lessons learned are applied to subsequent
contracts

7.4.6 Procurement performance

Procurement performance and metrics reflect a wider range of different key
performance indicators and although price is a vital component many now consider the
wider aspects of performance and measure them on a regular basis.
At the opposite end of the scale from a narrow PPV perspective the University of
Pennsylvania’s Purchasing Services has identified a top-down approach to managing
procurement and contract management performance. This is driven by a strategic plan,
which defines business strategies and a wide range of other issues including governance
and collaborative buying with clear definitions, targets and performance measures.
The business or ‘supply chain strategies’ include:
- Spend analysis
- Strategic sourcing
- Contract management
- Collaborative buying
- Compliance
This includes a comprehensive suite of performance metrics that are defined and
fully described including performance targets and results achieved for the particular
performance element of the strategy. This includes:
- Cost containment, from strategic souring activities for schools and centres within
the university.
- Strategic sourcing, includes improved prices and cost reductions achieved from
contracts that have been resourced.
- Spend management, includes collaborative contracts and preferred contractor
agreements.
- Economic inclusion, includes spend with local suppliers and diversity targets for
spend with minority groups.
- Supplier enablement, includes suppliers ‘enabled’ who participate in the
university’s own private supplier exchange.
- Purchase to pay (P2P), includes targets to conduct business electronically
including invoicing and eliminating paperwork and administration as well as
payment within terms of agreements with suppliers.

229
 - Operations, includes measuring customer (end-user) satisfaction and compliance.
By using this approach, ‘Penn Purchasing Services’ can leverage its buying power
and impact the institution’s bottom line. This of course makes purchasing activity a
strategic resource and the department is able to justify and demonstrate the value it adds
to the business.
7.4.7 Ethical sourcing
Consumers are increasingly more interested in sources of supply. This has led many
businesses to consider their procurement practices, particularly in light of the
‘opportunities’ created by sourcing from low-cost countries.
Ethical sourcing is a complex subject and can sometimes be difficult to manage
when low-cost country sources are involved. The range of ethical issues to consider is
increasing as consumers become more aware of certain practices that they do not
consider to be ethical. Many businesses have responded with ethical reporting or sections
on ethics as part of their annual report. The range of issues is complicated and growing
but may include:
- Green products
- Carbon emissions
- Transport
- Environmental performance
- Health and safety
- Diversity and equality
- Standards at work including suppliers
- Role of the business as an employer, customer and corporate citizen
- Sustainability

230
 A series of TV programmes and documentaries produced by the BBC and others in the
early 2000s exposed working conditions of child labourers employed in swear shop factories
for big brand Western businesses. Nike hit the headlines for all the wrong reasons for using
sub-contractors employing child labour to stitch leather footballs in Cambodia. Chocolate
makers Cadbury and Nestlé among others were named in an investigation that alleged that
90% of the Ivory Coast’s (the world’s biggest producer of cocoa) plantations used slaves.
Clothes retailers Primark and Gap were also identified as indirectly using subcontractors who
used child labour. Gap suspended orders but never cancelled contracts for sub-contractors
who implemented improvements. In 2008 Primark terminated contracts with three Indian
suppliers when they were altered to children being used to finish goods in sub-contracted
firms. Child labour and falsifying documents are considered to be endemic in many low-cost
countries. More recently Nike has responded to consumer concerns about ethical standards in
retail sourcing by providing information about all of its suppliers.

7.4.8 Procurement and supply chain management

The business focus in the late 1980s and early 1990s on quality and performance
combined with emerging thoughts on value not cost, service not just delivery, and the
increasing complexity of product and service delivery becoming a function of different
supply chain partners rather than a single entity, brought the links between customers and
suppliers upstream and downstream into sharp focus. This meant that links in the supply
chain became an area where business improvement could be defined in wider terms of
relationships with suppliers and customers, rather than within the four walls of a
business.
The popularity of quality improvement and lean approaches with an internal focus
provided an additional successful level of improvement but was limited in terms of their
momentum and sustainability when compared to working across the supply chain.
Businesses prioritize relationships with preferred customers but the same is not
always true, or to the same extent, when customers consider their upstream relationships
with suppliers. This increases risk and cost and compromises the performance of the
component part and the chain itself.
Many business inefficiencies are inadvertently designed into the supply chain,
driven in part by sourcing decisions. The effectiveness and efficiency of the enterprise is
determined by the business model, supply chain architecture and links to suppliers and
with customers.

231
7.5 Inventory management
7.5.1 The importance of inventory management
Inventory is another name for materials and is any material that a firm holds in
order to satisfy customer demand. Figure 6.4 show inventory locations throughout a
supply chain. This illustration should give a sense of the ubiquitous nature of inventory,
and the various forms in which it is held. Supply chains hold raw materials in order to
convert these inputs into finished products. When the raw materials are processed, but are
not yet completely finished, they are called work in progress. Once the products are ready
for shipment, they are finished goods. This is inventory being moved from one location to
another.

Figure 7.4: Supply chain pipeline

Inventory turnover is a concept used to measure a firm’s performance in inventory

management. This measure compares the annual sales a firm achieves with the amount of
average inventory held throughout the year: the higher the turnover, the better a firm is
doing in keeping its inventory costs down.

Costs of all goods sold in a year

Inventory turnover =
Value of average inventory held throughout the year
Inventory can be viewed as a necessary evil. Without inventory one minor problem
in the supply chain would result in a stoppage of the entire chain. Hence inventory is used
as a buffer between processes along a supply chain.

232
 Table 7.5: Reasons for holding inventory
Buffer against uncertainty Economic trade-offs
Maintain customer service levels for volatile demand Production batch size
Hedge against price and exchange rate fluctuations Transportation batch size
Protect against delivery lead-time variability Transportation mode
Buffer against unreliable supply sources Order quantity size
Buffer against seasonal demand and supply Order frequency duration
Maintain supply of scare supply Bulk purchase savings
Provide cover for emergencies Supply price fluctuations

7.5.2 Supply chain inventory management

Figure 6.4 showed inventory locations across a supply chain. In a non-integrated
supply chain, inventory managers in each firm along the supply chain manage their own
inventory. Each location will hold its own safety stock. Consider first the inventory of the
finished product from manufacturer down to the retailer (the distribution side of the
supply chain)
Inventory centralization
Manufacturers, distributors and retailers have all their own demand variations to
consider. This means holding safety stock, in proportion to the variations, at each
location. The manufacturer will need to consider the total demand, but the variation of the
total demand will be less than the total variation of the demand considered separately.
Thus, less safety stock will be needed.
With integrated supply chains, the central location could be anywhere, inventory
may even be distributed at different centres (and still inventory would be saved), so long
as all locations have access to inventory information and the transfers between locations
can be quick. This concept is called replacing inventory by information.
Delayed product differentiation
Another instance of reducing variation by combining demand at different points is
the case of a manufacturer making multiple products. The manufacturer will need to
manage inventories of each of these products, with safety stocks for each product. Now
consider if each of these products has a precursor: some intermediate product from which
all the (different) final products are made. If the processing steps from the intermediate
product to the final products are nor that significant, the manufacturer could stock the
intermediate product in place of the final products, thus combing the safety stock required
and gaining similar advantage as above. This gives the manufacturer the flexibility of

233
meeting the demand of the final products, using the intermediate product, as the demand
occurs. Many manufacturers are redesigning their products so that earlier stages of the
products are the same across their product portfolio and differentiating the product into
distinct products as late as possible in the production process. This delayed product
differentiation has the potential to not only save on inventory holding, but also gives
greater flexibility and simplicity to manufacturing.
Part commonality
The concept of part commonality is similar to that of delayed product differentiation
discussed above. Delayed product differentiation would use the same parts and processes
in all earlier stages of manufacture, differentiating products as late as possible. However,
part commonality attempts simply to reduce the number of different parts whenever
possible.
Transit inventory
When inventory moves across a supply chain, it is in transit. Regardless of whether
the upstream or the downstream stage of the supply chain owns this inventory, holding
costs are incurred and this cost is a cost to the supply chain. In making transport mode
choice decisions, a cheaper mode of transport may be chosen to lower the cost of
transportation, but the cheaper mode is slower, resulting in higher transit time and thus
higher transit inventory costs. Transit inventory exists in each part of the supply chain
pipeline where inventory is in transit, such as from the supplier to the manufacturer and
from the manufacturer to the distributor.

7.5.3 Matching inventory policy with inventory type

ABC analysis
ABC analysis is a focusing tool, permitting attention to be focused on the most
important inventory items. For instance, different inventory control systems may be used
for the different classifications: “A” items may be controlled closely, using the recorder
point system; the less demanding periodic system may be used for “B” items; and “C”
items may be blanket purchased once or twice in a year.
Inventory flow types
Gattorna and Walters argue that inventory can be categorized into three flow types
as illustrated in Figure 7.5. The core business products are stable and constitute the base
flow inventory. The wave flow inventory is more unstable and is typified by seasonal or
fashion type products. The fad products have extremely variable demand and therefore
the inventory is very spiky.

234
 Figure 7.5: Inventory flow types (Source: Gattorna & Walters, 1996)
The management approach for each of these inventory types needs to be tailored to
the product and market characteristics.

7.5.4 Inventory reduction principles

Reduction of inventory holding is a primary goad in supply chain management. This
reduction, however, needs to be consistent with the strategic goals of customer service.
There are some principles for inventory reduction:
Pool inventory: this is the case in inventory centralization where demand from
different locations is combines, or in delayed product differentiation where demand for
different products is combined, or by using common components where demands for
different components are combined. Inventory pooling has the added bonus of reduced
inventory management.
Reduce variation: The reason for holding safety stock is variation. Variation of lead
time, variation of demand, variation of supply, variation of quality, all contribute to
safety stock. Whenever variation can be reduced, safety stock can be reduced too.
Reduce leadtime: Lead time directly affects inventory held. Likewise, transit
inventory costs can be reduced by reducing the lead time. Consider the accuracy of the
forecast of demand. It is well known that the farther into the future we forecast, the less
accurate our forecast is. When the lead time is long, we need to forecast more into the
future, thus the accuracy of the forecast suffers, increasing the variability of demand and
consequently requiring higher safety stock.
Just-in-time inventory system (JIT): JIT is as much a philosophy as it is a technique.
JIT has many components and principles, but at the core of JIT is the idea of making do
with the minimum possible level of inventory holding. The core concepts of inventory
reduction in JIT are:

235
 - Inventory hides problems. Inventory holding is needed because of variation of all
kinds, as pointed out above. Equipment failures, production of bad quality, all of
these problems cause variations in manufacturing, and inventory is needed to
cover them. JIT tackles these problems directly and goes to the root of why
inventory needs to be held; by purposely removing inventory holding, the
problems the inventory was covering are surfaced, and the problems are then
proactively fixed.
- Small lot production. The advantage of ordering in small quantities, which in turn
keeps the average inventory level small, was seen above. What is the difficulty in
achieving this? The problem are too many orders and the associated order
processing costs. JIT seeks to reduce order processing costs so that the idea of
small quantity ordering can be accomplished. Manufacturing in small quantities is
hindered by excessive numbers of setups and the time spent in setups. JIT seeks to
facilitate small lot production by actively improving the setup process so that the
time and effort in setups are reduced drastically.

7.6 Warehousing and materials handling

7.6.1 Warehousing in global supply chains
Global supply chains commonly require multiple echelons, spread across various
international locations. As well as extended in-transit inventory travelling between
disparate locations, supply chains also have inventory stored at multiple stages in various
states of manufacture or assembly. Hence warehousing and materials handling systems
have become highly sophisticated to maintain the flow of freight to the end customer. At
each echelon, different types of warehouse perform different functions.
Many different networks of warehouse are possible ranging from a single global
distribution centre to multiple depots within a single country. It often best to have a single
inventory holding level within a supply chain, which can provide sufficient buffer stock
to decouple lean production from an agile supply chain that serves volatile markets
(based on specific customer orders). In some situations, this inventory holding level may
be at a global distribution centre level (e.g. for high-value, low-volume goods) or at the
local level (e.g. for low-value, high-volume goods that may be required on very short
lead times). Being able to achieve inventory holding at a single level often requires close
collaboration between all parties in the supply chain involving open and rapid exchange
of information.
Value-added activities are those supply chain activities that enhance products to
increase the customer’s perceptions of those products’ benefits. Customer value can be
added to a product by improving its quality during storage (e.g. maturing whiskey, wine

236
…), by improving the service associated with it (e.g. delivery information availability or
specialist packaging), by reducing its costs (e.g. reduced packaging or reduced
administration costs) and/or by reducing its lead time (e.g. cross docking). Warehousing
operations can achieve each of these objectives in various ways, such as:
* Creating bulk consignments
* Breaking bulk consignments
* Combining freight
* Smoothing supply to meet demand.
In summary, warehouses should aim to provide value-adding services as well as
minimizing operating costs.

7.6.2 Materials handling and storage

The term materials handling equipment – MHE – is commonly used to describe the
various types of equipment for handling freight. Automated materials handling improves
and standardizes warehouse performance by minimizing human intervention. A further
consequence is the optimization of warehouse space. By employing mechanical and
automated handling technologies, floor space between storage locations can be
minimized and the locations themselves are able to occupy multiple levels.
Storage solutions vary depending on the volume, variety and throughput of freight
in a warehouse or distribution centre. One or more of a variety of storage and picking
systems may be used.
Pallet storage
In the case of palletized storage, the alternatives may be classified into ‘dense’
storage systems and ‘individual access’ systems. The former is suitable where there are
many pallets of a product line and where it is acceptable for any of these to be accessed.
On the other hand, ‘individual access’ systems are suitable where there are few or where
it is important for an individual pallet to be accessed.
Non-pallet storage
Although wooden pallets are the most common unit loads stored in warehouses,
goods may be stored in a variety of formats, for example, in cartons, in plastic tote bins,
bundled together in long loads, as individual items or as handling garments. For small
items, metal shelving is very common, arranged in aisles so that operators can access the
goods easily. Mechanized solutions for small items include vertical carousels, which
contain shelves that rotate vertically by means of an electric motor, and horizontal
carousels, which are similar in concept but contain modules that hang from an overhead
chain and are rotated horizontally.

237
 Order picking
Picking solutions also vary depending on freight volume, variety and throughput.
The simplest sequence is pick-to-order, where the generated pick list will direct the
picker to retrieve freight from multiple locations along a pick face or in storage in the
warehouse to fulfil an order. Pick-to-order is most effective in low-volume operations
and in situations where a customer may order many products that would fill a unit load,
such as a roll-cage.
There are many other methods for order picking such as batch picking (an
alternative sequence whereby many orders are combined together and the picker then
retrieves all goods for those orders at same time), pick-to-zero or pick-by-line sequences
(where an inbound shipment is deconsolidated at the receiving dock), zone picking (a
method of dividing up the warehouse for picking purposes, with each zone containing the
pick stock of particular groups of products, and pickers allocated to each zone), and wave
picking (refer to how orders are released to the picking area, etc. …
Storage and picking combinations
Warehouse designers must select the appropriate balance between storage and
picking, plus the most effective and efficient solutions depending on volume, variety and
throughput of freight in a warehouse or distribution centre.
Despite the obvious benefits of automation, technologies must be fit-for-purpose.
That is to say that different warehouse and distribution centres serve different purposes.

Figure 7.6: Prioritizing storage versus picking

238
7.6.3 Work organization and job design
Another important consideration in implementing warehousing technologies is the
impact of those technologies on the workforce. This is the focus of socio-technical
systems (STS) theory (Figure 6.7). The fundamental principles of STS theory are:
- Joint optimization of the technical and social system
- Quality of work life
- Employee participation in system design
- Semi-autonomous work groups

Figure 7.7: Socio-technical systems theory

Addressing the four principles of STS theory, the capabilities of a social system (i.e.
people) and a technical system should be balanced. There is no point in implementing
high-tech solutions that operators cannot use. This also has a knock-on effect on worker’s
quality of work life. This will include human factors such as ergonomics. Unhappy
workers are not effective workers. This should be a key concern regarding the
implementation of automation in warehousing.

7.7 Information flows and technology

7.7.1 The role of information in global supply chains
There are three keys flows in any supply chain; namely material, resource and
information flows. Material flows enable delivery of freight and resource flows such as
finance ensures supply partners get paid. Information flows are more complex and
multifaceted. Information is the key that unlocks supply chain responsiveness to demand.
Matching supply with demand is essential to delivering freight at the right time, in
the right quantity and to the customer’s specification. But how do suppliers know when
their freight is required, in what quantities or, indeed, what the customer’s exact
specification is? This is the role that demand-side information plays. Furthermore, how
do downstream supply chain partners and customers known when freight will be

239
delivered by suppliers, what quantities it will arrive in or to what specification? Supply-
side information therefore plays a second essential role.
With today’s global supply networks distributed across multiple, widely dispersed
echelons, comes information complexity and proliferation on the supply side. On the
demand side, ever fickler consumers expect the availability of high varieties and volumes
of specific consignments in shortening time frames. This creates the need for accurate
high-velocity market information. So, contemporary supply chains are information
intensive. Information complexity, proliferation, diffusion, velocity and accuracy are thus
key drivers of developing increasingly sophisticated supply chain information
technologies.

7.7.2 Information visibility and transparency

Information visibility is the ability to see information at the various points across the
supply chain as and when required, which can help to manage that complexity. Visibility
of information is highly desirable but is difficult to achieve. The number of supply
partners alone is a major contributing factor but is also compounded by barriers to
sharing information. Effective information visibility is not only facilitated by information
technologies, but also by integrated and collaborative relationships between supply chain
partners. Cultural barriers between supply chain partners should therefore be addressed
before embarking on the implementation of supply chain-wide information technology.
There are further barriers to gaining total visibility of information across a supply
chain. The costs of implementing and maintaining supply chain-spanning information
technologies can be immense. These cost implications become financial barriers if the
aforementioned disparities between trading partners exist. Furthermore, the various
information systems at each supply chain partner should either be the same, or at least
have the ability to ‘talk’ to each other. This issue does not end with the hardware and
software. Supply chain partners must also agree on what data are required to be
transmitted, when, and to whom. Thus, there are myriad complex technical barriers to
overcome before implementing information visibility solutions.
Finally, organizational barriers to implementing supply chain-spanning
technologies can inevitably exist. Divergent processes can exist within single
organizations, and are commonly realigned via large-scale, resource intensive socio-
technical system (STS) or business process reengineering (BPR) projects. Thus, to
align the numerous disparate processes across multiple supply chain echelons, a highly
complex programme of activities is required.

240
 We can therefore classify the barriers to gaining information visibility and
transparency as either: cultural, financial, technical or organizational. Each of these four
types of barrier should be addressed to gain business benefit from supply chain-spanning
information technologies. Nevertheless, such substantial effort is worthwhile, as the
benefits are substantial, and can include:
* Customer-oriented operations
* Time compression
* Reduced schedule variability
* Shorter planning periods
* Consistent partnerships
* Supply chain synchronization and coordination
* Integrated information systems
Ultimately, a supply chain with information sharing, visibility and transparency can
become customer focused and responsive to demand, thereby remaining competitive.

241
 FLORAHOLLAND
FloraHolland is the global market leader in cut flower and ornamental plant supply based
in six locations in the Netherlands. It acts as an intermediary between growers (i.e. suppliers)
and wholesaler or retail buyers with 40 auctions operating simultaneously at its six sites (70%
of sales), plus a direct sale (i.e. mediation operation (30% of sales). Its large auction site alone
sells approximately 20 million flowers per day. The business is a cooperative formed by Dutch
growers to offer timely supply across the globe and to act a conduit for market demand
information.
Cut flowers and ornamental plants are highly seasonal and have short-shelf lives.
Demand fluctuations and time to market are therefore key considerations in the FloraHolland
supply chain. Individual growers operate on a small scale, focusing on product variety rather
than volume to remain responsive to demand. With 3,500 customers who are large-scale
wholesalers and major retailers demanding high volume and variety, growers operating
independently would not be able to meet demand. The 5,200 growers with a stake in
FloraHolland direct sales system, to gain the economies of scale necessary to survive in this
fast-moving market. With 4,500 employees, FloraHolland not only provides auctions but also
works closely with growers to develop the products and processes necessary to remain
competitive and works with buyers to improve supply chain integration.
Although buyers are not a part of the cooperative, the benefits of information integration
are recognised by all supply chain partners. The traditional supply chain model was based on a
series of purely transactionsl relationships between the auction house and the buyers. Yet with
increasing market pressures such as new market entrants, FloraHolland today works closely
with buyers to better meet demand and retain its business. Indeed, through integrated solutions,
buyers can inform growers about consumer preferences such as a preference for 80% of
turnover. Hence FloraHolland operates an account management system to maintain a sound
working relationship with them. Furthermore, the top 50 buyers have FloraHolland personal
account managers.
e-Business is essential to this high-velocity supply network. It is in everyone’s interest
for buyer’s information systems to be integrated with those of the auction house, direct sales
and growers. However, buyers each have their own IT packages. Thus, FloraHolland needs to
be able to offer compatible and tailored integration solutions. Hence, a dedicated IT team is
employed to develop, implement and maintain supply chain integration software. The top 50
buyers’ IT requirements are managed individually by a supply chain automation consultant.
The cost and resource implications are immense but are offset by the business benefit gained.

242
7.7.3 Information technology applications
7.7.3.1 E-Business
E-Business is now integral to trade and commerce in the world today. Many of us
purchase freight and services online. This is also true of trade between businesses across
supply chains. The term e-business encompasses more than just trading via the internet,
to include all electronically mediated information exchanges across a supply chain that
support the various business processes. E-business is essential to both maintaining and
improving supply chain performance.
7.7.3.2 Electronic data interchange (EDI)
EDI is a technology for the electronic interchange of data between two or more
companies. The predominant forms of data transfer via EDI are purchase orders from
customers to suppliers, invoices for payment from suppliers to customers, delivery
schedule data and payment instructions. EDI can be linked to an electronic funds transfer
(EFT) application that enables payment.
Data transmitted via EDI is typically automated, i.e. doesn’t require human
intervention.
7.7.3.3 Enterprise resource planning (ERP)
Throughout a supply chain, any number and combination of various materials with
either independent or dependent demand will be ordered. This creates myriad
complexities for the various production plants, warehouses and distribution centres across
the supply chain. The tool for planning and controlling the manufacture and assembly or
orders with dependent demand is materials requirements planning (MRP)
A combination of demand forecasts and customer orders are input into the master
production schedule (MPS), which informs the shop floor of what should be
manufactured and/or assembled and when. Yet, production cannot begin without the
required materials, components and/or sub-assemblies. The MRP system therefore
interrogates the bill of materials.
MRP forms the basis for wider business planning and control information systems,
namely MRPII (manufacturing resource planning) and latterly ERP (enterprise resource
planning) that integrate information from beyond the shop flow. MRPII utilizes the core
functionality of MRP but integrates business functions beyond manufacturing and
logistics to include finance, procurement, marketing, sales, etc. ERP requires substantial
financial, resource and time investment at implementation and for maintenance and
development. Hence, it is uncommon for small and medium-size enterprises (SMEs) to
operate ERP systems. Nonetheless, scaled-down versions of ERP are now available from
the major software vendors, increasing its reach and applicability. ERP has one main flaw

243
which does not extend across the complete supply chain and therefore constrains
collaborative planning and control between supply chain partners.
7.7.3.4 Collaborative planning, forecasting and replenishment (CPFR)
CPFR is more than just a software application. It is fundamentally a new
collaborative method of scheduling logistics between suppliers and customers. It is,
however, dependent on timely and accurate information sharing, visibility and
transparency. Hence, IT-enabled CPFR is essential in high-velocity supply chains such as
those of the major supermarkets.
Conceptually, CPFR should enable significant scope and depth of collaboration
across a supply chain. Basic CPFR involves a limited number of business processes
integrated between a limited number of supply chain partners. Developed CPFR has
greater scope and depth than basic CPFR. This will involve a greater number of data
exchanges between two partners and may extend to suppliers taking responsibility for
replenishment on behalf of their customer. Advanced CPFR goes beyond data exchanges
to synchronize forecasting information systems and coordinate planning and
replenishment processes. Hence product development, marketing plans, production
planning and transport planning are seamlessly integrated with forecasts based on actual
consumer demand extracted from point-of-sale data. Hence, through this high level of
integration and collaboration close to the consumer interface, retailers and their first-tier
suppliers enable the agility to respond to ever more erratic consumer market demand
fluctuations.
7.7.3.5 Vendor managed inventory (VMI)
VMI is more than just a software application. Customers, such as high-street
retailers, outsource their inventory management to their suppliers. In some cases,
although suppliers are accountable for the VMI system, they may elect to outsource it to a
specialist 3PL. Such collaborative arrangements are common in the fast-moving
consumer goods (FMCG) sector. Dedicated VMI software solutions are available to
manage the intricacies of such systems.
For VMI, a holistic view of inventory levels is taken throughout the supply chain
with a single point of control for all inventory management. By enabling a vendor to
manage stock replenishment at their facilities, a customer (e.g. a supermarket retailer) is
effectively eliminating an echelon in the supply chain. In doing some upstream demand
visibility is improved to reduce the impact of demand fluctuations (i.e. the bullwhip
effect). Hence VMI can enable supply to more accurately and precisely meet demand.

244
 Figure 7.8: A simplified VMI scenario
7.7.3.6 Warehouse management systems (WMS)
WMS applications have become essential to the management and control of
warehouses and distribution centres. As with the other applications discussed, their
integration with other software applications is desirable in order to integrate warehouse
operations with the rest of the supply chains. For example, a customer order transmitted
via EDI will trigger the ERP system to call for freight from production and/or from stock.
This will then trigger the WMS to pick from stock and dispatch.

7.7.4 Radio frequency identification (RFID)

RFID technologies automatically identify and locate physical freight. Individual
items, batches of freight or the containers in which they are held can carry an RFID
transponder or ‘tag’ that transmits a radio frequency signal. This signal can be remotely
detected by an RFID ‘reader’. When connected to a materials management system, the
data downloaded from the reader are used to monitor and control the movement of the
freight. With RFID, line of sight is not required as is the case with traditional bar code
reading systems.
The remote communication capability of RFID is what differentiates it from current
traceability technologies. Existing technologies, such as printed batch cards and bar
coding, require operatives to read or scan the item or batch specific data at the location of
the freight. This can be time consuming, laborious and prone to inaccuracies, due to the
scale and complexity of typical warehousing and distribution operations. Hence design

245
and layout of logistics operations across the supply chain have, until now, needed to
accommodate this constraint.
The advent of RFID as a supply chain traceability technology results from the drive
for agility, to respond to increasing product proliferation and demand volatility. An agile,
or ‘quick response’, supply chain is reliant on the timeliness and quality of shared
information. The ability to access real-time product information anywhere along the
supply chain is thus a key component of becoming truly agile.
RFID has the potential to deliver real-time supply chain agility. This relatively new
technology can offer accurate and precise product traceability at any point in the supply
chain at any time, thereby enabling even the most complex supply networks to respond
immediately to fluctuations in demand. Yet, whilst tag manufacturers and leading
retailers continue research and development into cost-efficient technological solutions,
substantial barriers to effective implementation remain. The benefits and limitations of
RFID against more conventional technologies are summarized in Table 6.6.
More generically, the operational improvements from RFID include:
* Shipping consolidation
* Conveyance loading
* Conveyance tracking
* Shipment and item tracking
* Verification
* Storage
* Item tracking within a manufacturing plant
* Warehouse efficiency, reach, productivity and accuracy
* Reduced retail out of stock, labor requirements, pilferage and phantom stock
problems.

Table 7.6: The benefits and limitations of data capture technologies

Data capture Benefits Limitations Summary
technology
Paper-based Proven technology High potential for human error A low-cost, low-
handwritten Minimal training for Poor traceability (potential for tech solution
use damage/loss of data)
Low cost to Physical storage space required
implement and Requires literate operator
maintain Does not integrate with other
information systems

246
 Time-consuming data input and
extraction
Bar coding Proven technology- Some potential for human error A robust off-the-
and radio data robust (e.g. mis-scans) shelf solution
terminals Minimal training for Requires human operator in
use most warehouse functions
Low cost to maintain Requires literate operator
Good data Some cost to implementation
traceability
Virtual data storage
Integration with other
information systems
Fast data input
Radio Automatic data High cost to implement; A solution that
frequency capture (human High cost to maintain (unless eliminates
identification operator not required) tags are reusable) human error, but
(RFID) Potential to minimize Early stages of adoption and currently has
human input and therefore high risk high entry
therefore error Technologies still in barriers
Real-time data input, development
and extraction Not all solutions are robust

7.7.5 Global standards

Data management and synchronization are critical functions necessary to ensure the
timely and accurate transmission and retrieval of a vast array of product and process data
at any given time. It is therefore necessary to have global standards for data, to ensure a
common data ‘language’ is ‘spoken’ between supply chain partners. For example,
chocolate bars are packaged in printed wrappers with bar codes at the factory in which
they are manufactured. They are then shipped though supply chains to retailers. The
chocolate bars must then be identified by the retailer to know which shelf to put them on,
and what price to charge. The retailer’s bar code scanning technology must therefore
‘speak’ the same ‘language’ as the manufacturer’s bar code printing technology. Global
standards are the solution.
GS1 is a global standard organization that manages the standards for bar codes and
RFID tags for the world’s leading organizations. It provides data services that ensure the
proliferation of products and freight can be uniquely and accurately identified.

247
 With the advent of RFID, GS1 developed the EPCglobal standards system, where
EPC is the acronym for electronic product code. As with bar codes, different types of
RFID tag are used to identify different items. Hence within EPCglobal there are different
classifications for unique electronic product codes.

7.7.6 Supply chain knowledge management

Knowledge management is the term used to describe the capture, storage, use and
sharing of knowledge within an organization. The term supply chain knowledge
management is therefore introduced to describe those knowledge management processes
that span a supply chain.
Supply chain knowledge management is an emerging area of research. As with
information, knowledge created at one point in a supply network should be accessible
across that network. For example, demand-side information is essential for understanding
market demand. However, knowing what to do with that information enables an effective
and efficient response to demand. Furthermore, building up that knowledge over a period
of time enables a supply chain to begin to sense and response to actual demand. Hence
the knowledge-creating supply chain is able to be first to market, gaining competitive
advantage.

7.8 Logistics and financial management

7.8.1 Financial accounting
Financial accounting is ultimately concerned with reporting to and meeting the
requirements of parties outside the organization. These include:
* Investors: that is, those who have subscribed to an issue of shares by the company
and who are therefore part owners of the company; or prospective investors, people or
institutions who might be thinking of buying shares in the company. Both of these parties
are informed by financial analysts who provide investment advice or offer general
commentary in the press.
* The government, in the form of the Registrar of Companies, or similar entity who
performs a regulatory role on companies; and the Revenue and Customs, or similar entity,
who are concerned with the taxation assessment made on companies and any duties
incurred on imports, etc.
* Business contacts, for example bankers who may be approached to lend money to
the company or trade contracts, such as suppliers and customers, who need information
about the company to assess its reliability regarding a regular trading relationship.
Many other parties may also have an interest in the accounts of an organization, for
example competitors, pressure groups, employees and trades unions.

248
 Selected information from the financial accounts of a company is required by law to
be made available to the public and deposited with the appropriate government agency.
The resulting documents are referred to as the published accounts, the annual accounts or
the corporate report. The law and the recommendations of financial reporting practice
dictate what minimum information should be disclosed. The accounting profession
recommends the style and content of the published accounts. In the UK, for example,
these are known as financial reporting standards (FRS). These are not legally binding, but
accountants are expected to follow them and can be disciplined if they do not do so.
Financial statements in general, and published accounts in particular, perform the
role of stewardship; that is, demonstrating that the directors of the company have
managed the finds entrusted to them by shareholders in an appropriate manner. In other
words, they have not spent unnecessarily on assets or made inappropriate decisions on the
buying or selling goods and services and making contracts with third parties. The main
documents that are used as evidence in this context are the balance sheet, the profit and
loss account and the cash flow statement.

7.8.2 Financial management

Financial management is concerned with how the company manages its funds over
the longer term. This involves, for example, decisions on the extent of its financing – how
many shares it issues and at what price, whether it borrows money from the bank or not
to supplement its financing, whether it pays a dividend from its profit to shareholders or
retains this in the company. It extends to decisions as to how the company spends its
finances in the acquisition of new buildings, plant and equipment and the management of
its working capital – stock, debtors and cash.
Ordinary shares are the basic form of business finance. Shareholders may be a
private individual, an insurance company, a unit trust, a trade union and so on. Ordinary
shareholders carry the main investment risk of the business. They get the rewards in the
form of dividend or increased share price if the company does well, but they lose some or
all of their investment if it does badly. The most they can lose is the value of their shares:
the principle of limited liability states that shareholders’ liability is limited to the sum
they have paid or agreed to pay for their shares.
Risk is a fundamental aspect of doing business and has taken on increasing
importance recently. In any stock market, or indeed any market economy, the greater the
risk incurred, the greater the reward that is expected. No one wants to take on more risk
than they need to for a given level of return; likewise, in competitive situations

249
companies and investors will always select a higher rather than lower level of return for
the same risk.

7.8.3 Management accounting

A large multi-product organization is a complex entity and to ensure that the
financial accounts and financial management of the company display a relatively stable
picture is very important. That is, to show that it does not hold any surprises or shocks for
they investors, because this will inevitably affect its share price. This requires detailed
internal information with which to manage the development of the enterprise on a more
short-term basis. This is often called management accounting and is undertaken to ensure
that the long-term financial management of the enterprise is on track.
Inside the organization the finance department produces information for
management, which is not published because it contains details of the company’s plans
and its strategies for going forward. This is called management accounting or sometimes
cost accounting. Management and cost accounting serves internal members of the
organization and often relates to segments of it (departments, machine groups, sales
regions, individuals)
Cost accounting involves accumulating cost information to value stock, help with
judgements on pricing and profitability analysis, decide whether a product or a contract is
worth proceeding with, for example management accounting has a wider role, which
could involve special studies relating to decision making. It also involves the generation
of financial plans and regular reporting of actual results in order to monitor the
performance of departments within a company.

7.9 Measuring and managing logistics performance

7.9.1 Basic measurement
The performance measures that logistics companies traditionally spent more time on
are those measures that were either very basis from an operational viewpoint or imposed
on them by law.
As such LSPs would have concerned themselves with ensuring that statutory
requirements were met and that their financial obligations regarding preparation and
filing of annual accounts and so forth were given some time and focus. For many small
and larger companies alike, the main focus of this work may have been to ensure that tax
affairs were in order and that the correct returns to the relevant government agencies were
made. The overall profit margin of the company would also have been recorded and used
as a key part of internal reviews, though little of this information would have been shared

250
outside the company. The general exception to this would be the annual report which
would have to be filed and depending on local legislation, be publicly available.
LSPs providing transportation have, for a number of years, been required to record
their transport operations. Tachograph is fitted to a truck and is used to record the speed
of the truck, distance travelled, and any breaks taken by the driver. For vehicles over a
certain payload, often defined as four tonnes or more, the tachograph is considered a legal
requirement, and must be regularly tested to ensure that it is in good working order. In
certain geographies the result from tachographs must be recorded and filed by the truck
operator.
Another area that traditionally has been a focus of measurement by LSPs has been
around warehouse and other resource utilization measures. These would typically include
total number of pallet or carton spaces consumed versus total available, or simple
measures of total space consumed within the warehouse. For road transport companies,
the basic operational measure could include total number of deliveries successfully
completed versus dropped deliveries (a term sometimes used to refer to failed deliveries,
i.e. the freight that could not be delivered for whatever reason)

7.9.2 Driving forces for performance measurement

At least eight driving forces behind the increased use of performance measurement
in a logistics context can be identified
1. Increased reliance on contract manufacturers
2. Strategic importance of LSPs to supply chain success
3. Adoption of manufacturing management principles
4. Impact on customer experience
5. Increased competition
6. Information technology improvements
7. Empowerment practices
8. Employee motivation
• Selecting the best measures
A useful maxim is to ‘measure results, not activities’. This is valuable advice, as it
is all too easy to focus on simply assimilating data without necessarily understanding
how these data may be used. When first trying to design a set of indicators, the focus
should not as such be directed towards what data may be easily available, but rather
towards what benefit one hopes to gain as a result of having these measures in place.
The majority of measures should be focused on quantitative results; namely
measures that have their basis in numerical data. Although it is always good to add some

251
qualitative measures to a set of KPIs, it is very important to stress that measures based on
raw data can often be better for accurately comparing performance over time, and indeed
for predicting future results. Also, quantitative measures should in general be more
reliable when comparing over time, as long as the data used to generate them can be
replicated without error.
• Benchmarking costs and other variables
When deciding on which measures to use, a company should always ensure that
benchmarking against other competing companies is not made impossible by its choice of
metrics. Companies should always look to emulate best in class; however, without
benchmarking, it can be very difficult to do this.
In order to benchmark against the industry, the company needs to use a similar set
of measures in order to map performance against the companies being benchmarked.
Thus, the time to first consider benchmarking is when a company is initially putting
together a set of performance measures. Benchmarking should be seen as a continuous
process, and not as a one-off project. Today’s logistics industry is very dynamic and
benchmark levels of performance can constantly change.
Benchmarking logistics costs from one supplier to another can be a complicated
task as there are almost no standard cost templates used by different firms. It also can be
quite difficult for the 3PL’s customers to estimate their specific business requirement at
the request for quotation stage. As such the 3PL might quote a price against a given scope
of work, only to find that, once it starts the business, the scope of work does not represent
all of its customers’ requirements.
• Number of metrics to report
With logistics companies being so process focused, the measures used will need to
ensure that they can measure the performance of these processes. As such it will be
important to tailor measures to reflect the actual work performed in the operation. Prior to
putting together, a set of measures, the company must first ensure that its processes and
procedures are documented, as often it is only after completing this exercise that
management will fully understand all of the different processes employed.
• Designing key performance indicators
One a company understands the need for performance indicators, and also has an
understanding of what the right measures may encompass, the design of a set of KPIs is
the next step. Before KPIs are introduced, the company itself must be clear about its own
aspirations and how performance can be measured against this.
Drafting of metrics is a task that needs to be approached with some degree of
patience. Typically, many measures will be reported and tracked before a key set will

252
emerge. It is important to consider at first a large range of potential measures, and not to
shortlist too many until an attempt is made to trial them. Expectations of how a metric
may perform often change quickly once results start to be seen. During this period of
testing new metrics, it can be useful to see if a baseline, against which future performance
may be measured, can be determined.

7.9.3 Commonly used metrics

When designing a set of KPIs, the logistics company must take into account any
requirements that its customers may have for specific reporting. This does not necessarily
mean that the metrics should simply be what the customer demands, however, as the
customer may not understand the full business offering.
KPIs that may be very important to the warehouse manager, for example, may not
prove useful for senior management. When creating a set of metrics, it is sometimes
useful to split the metrics into three different categories, catering for senior management,
operational management and functional operations. Figure 6.9 illustrates metrics for each
of these three categories

Figure 7.9: Category of metric reporting

In practice, most LSPs tend to have a generic set of metrics, and also additional
customer-specific metrics which would include measures relevant only to that customer.

253
7.9.4 Inventory/ warehouse related metrics
External metrics for a warehousing-based operation need to be specific to the
activities carried out. The following sections give a taste of the type of measures that a
typical warehouse operation may employ
Receiving
Receiving metrics are generally the first to be recorded because receiving of product
into the warehouse is often the most important transaction. If the receiving process is well
thought out and implemented, then one would find that stock accuracy and product
integrity should also be managed well. Indeed, if product is received into the correct
location, and in the correct quantity, then the subsequent picking process too has a good
chance of being problem free.
Receiving time acts as a key metric in this area. Most WMSs can track the time
between a shipment arriving into the warehouse through to it being formally received
onto the WMS. Depending on how well developed the WMS is, advance notification of
inbound shipment from the freight system can automatically initiate the inbound process
prior to the shipment arriving. This advanced shipment notification (ASN) is used by
the warehouse manager to determine workload and space requirements.
The specific metric can vary by facility but should always try to measure the
effectiveness of receiving processes, which will include the following:
• Delivery paperwork detail is correct, ensuring exact delivery location, business
unit and company delivering the product are mentioned.
• Part numbers, lot numbers and purchase order numbers match those on the
paperwork and the ASN.
• Product is physically inspected with unit/carton or pallet count completed, product
inspected for any signs of in-transit damage, repackaging, etc.
Put-away
Put-away involves physically moving product that has just been received onto the IT
system to a pallet or carton location where the product will be stored. Within some
environments, product may at this stage be brought directly to the point of consumption
such as a line-side Kanban.
Metrics should include activity measures such as number of pallet, cartons or units
put away, which in turn could be compared against the resource available to produce a
productivity measure. Percentage of product put away within a stated time is another key
metric.
Inventory accuracy

254
 Cycle counting of product is an activity that customers usually take a keen interest
in because the material being counted generally sits on their balance sheet rather than the
3PL’s balance sheet. Inventory metrics really act as a measure of operational
performance, and reflect the adherence to processes, rather than the performance of the
inventory team who conduct the cycle counts.
System-generated cycle counts, often completed by the inventory team using a
hand-held frequency (RF) terminal or alternatively a printed stock report, are used as the
starting point for compiling inventory metrics. Cycle counts can be completed where a
complete rack or segment of the warehouse is checked in sequential order. Random
counts will require the cycle counter to count all inventory held in certain pallet locations
across the warehouse. Part counts may exist to count all locations where a particular
product is stored, and empty cycle counts should direct a counter to locations where the
systems does not show any stock as stored on the assumption that if the counter finds
anything then it indicates an inventory accuracy problem.
In order to improve inventory accuracy, improvements need to be made in either the
design or execution of the warehouse transactions. Although most inventory metrics will
be quantitative in nature, there should be some effort to also record some qualitative
measures such as ‘housekeeping’ or ‘completion of cycle counts’. An aged stock report,
detailing by part number the number of weeks that product is in stock, is the easiest of
these metrics to report. Alternatively, an overall view of stock movements within the
warehouse can be given with a report outlining the number of inventory turns.

7.9.5 Logistics costs performance

7.9.5.1 Total landed costs
Financial measures are obviously key metrics for 3PLs and indeed ones that their
shareholders will place ultimate importance on. The customers of 3PLs too are also
becoming more focused on analyzing their overall logistics costs and comparing them
across different regions and product lines. They are demanding more and more
information to allow them to better understand the cost of their logistics activities.
Recently outsourcing and offshoring have grown dramatically. Once the various
strategic issues concerning whether or not to outsource and so forth have been resolved,
companies need a tool which will enable them to compare alternative sources while
taking account of all of the various costs that will be incurred. This is the concept of total
landed costs and takes into account the following costs:
* Vendor (i.e. material) and packaging costs
* Transportation charges

255
 * Working capital employed/ opportunity costs
* Costs associated with risk migration
* Broker fees
* Insurance costs
* Taxes and duties
* Management costs
* Reserve logistics costs
The concept of landed costs allows managers to make better decisions regarding raw
material sourcing, and rather than just going with the lowest possible production costs,
companies can compare the overall financial impact from using different potential
suppliers in different markets. Software tools are available that allow importers to
compare landed costs.
Costing materials on an ‘ex works’ basis is not adequate to make a purchasing
decision and so it is important that all related costs are considered and compared. For
example, freight, carrying costs, duty, packaging, warehousing, localization
Freight costs can change dramatically over the short time due to changing fuel and
security surcharges and differing demand patterns for cargo along with changing air and
ocean timetables, it is important that companies continually review their landed product
costs by having metrics to measure these costs on an ongoing basis.
7.9.5.2 3PL cost models
In the highly competitive logistics market, 3PLs are often placed under significant
pressure to ensure that their response to requests for quotations are the most competitive,
while at the same time ensuring that they do not engage in business that may run losses
during the duration of the contract. In order to manage these pressures, many 3PL2 use a
number of different cost models.
(i) Cost plus margin
Cost plus margin is often the preferred model for 3PLs engaging in a new business
where the statement of work is not detailed, or where the customer demands complete
transparency of all costs.
This model is based upon a general assumption that space will be charged at a fixed
cost per square or cubic metre, and staff costs will generally be presented as a loaded cost
to include base wages and related employer costs including contribution to social taxes,
health insurance, pensions and so forth. Material handling equipment (MHE) such as
forklift trucks, racking and any other equipment used would generally be charged as a
depreciated annual charge. IT charges would usually be the next item to be listed in a
schedule of charges and may be split between user licenses, IT support and development,

256
in addition to depreciation for equipment used including warehouse management systems
and office serves and computers.
When all charges are identified, the 3PL will generally then try to negotiate a mark
up to cover corporate allocation or management overhead. Finally, the required profit
margin will be added.
The main advantages with this type of model are:
• It provides complete transparency for all parties involved.
• Risk is reduced for both parties – the customer should be better able to budget and
the 3PL will also live in the certainty that it costs should be covered.
The main disadvantages are:
• There may often be reluctant for the 3PL to drive continuous improvement in
order to reduce cost as the 3PL’s profit margin increases as the total cost increases.
• Resources may be fixed at a level that meets the peak season demand, thus
resulting in excess cost during quieter periods. Also, resources employed may not
be adequate to meet business requirements.
• From the 3PL’s perspective there is little opportunity to make high profits as will
be very difficult to negotiate a margin higher than that quoted by competitors.
(ii) Transactional pricing
Transactional pricing would generally see a 3PL use all its available resources
across multiple customers and quote a unit rate for standard warehouse activities:
• Receiving charged per carton or per pallet.
• Storage charged per carton or pallet on a weekly or monthly basis.
• Picking and handling out at unit, carton or pallet level
These typical charges would be fully inclusive and include all staffing, space and
equipment IT setup charges would likely be charged as part of the original account
project setup costs.
The main advantages of this type of model are:
• Resources are generally not fixed by the customer. Thus, during the off-peak
period, the customer does not have to pay for space or labour for which it does not
have a requirement.
• The 3PL will be highly motivated to drive efficiency at all stages of the process as
any savings made will result in higher profits. An efficient warehouse operation
running to capacity should make it possible for the 3PL to make a larger potential
profit with transactional pricing in place with its customers.
The main disadvantages are:

257
 • The customer may not always get the customer service that is required unless it
separately pays for fixed office resource.
• The 3PL needs to ensure that special requests are charged separately as the base
rates should in general over cover a minimum level of service.
• The customer does not have transparency to resources employed supporting its
business.
(iii) Alternative pricing models
Al the service offered by 3PLs can involve a range of services, some cost models
can be highly complex and may include an element of fixed and variable costs that may
be billed on cost plus or transactional basis, or indeed any combination of each. Often it
is critical for customers to have certain resources within the 3PL dedicated to them while
still ensuring that other resources are only employed as required. For example, the
customer may decide to pay for a dedicated account manager, but may only pay space on
a pallet or carton basis.

CHAPTER SUMMARY
1. The characteristics of the five principal transport modes were described and issues in
determining freight rates were reviewed. The role of distribution centres and in particular
the concept of factory gate pricing was described. This led us to a discussion around the
efficiency and effectiveness of transport services. Transport is typically regarded as a
non-value-adding activity in the supply chain and plays a vital role in ensuring that
supply chain supply chains operate both efficiently and effectively.
2. The key global contemporary transport security initiatives were addressed in turn and
an explanation was made as to how they operate, and which stakeholders are involved.
The need for transport security was addressed, covering not only terrorism but other
security threats to supply chains such as piracy, theft, pilferage and smuggling. Some of
the technology associated with transport security was discussed, including access control,
biometrics and detection systems.
3. The chapter described the important role played in supply chains by logistics service
providers (LSPs). We discussed the various, and overlapping, types of LSPs and noted in
particular the growth of a category of LSPs called 3PLs; the latter we described as LSPs
who generally offer multiple logistics services, often in an integrated fashion. We then
considered the raft of different services which such 3PLs actually provide, with
transportation/ delivery being just one of the many services offered. The concept of
fourth-party logistics was then explored, and we noted the reality that in many instances
it is actually 3PLs that offer 4PL type of solutions.

258
- The issue of LSP responsibilities was next explored and we looked at the important role
played by the bill of lading in international transportation. The issue of who has
responsibility for what at different stages in the supply chain is an important one and we
considered the role that incoterms can play in clarifying this.
- How consignors go about selecting LSPs and services was explored, and we saw the
application of the concept of generalized costs, which helps explain trade-offs between
different sets of costs in supply chain. We noted that many variables need to be
considered when selecting LSPs and that a hierarchy of decision makers’ needs can be
identified in logistics purchasing.
4. Procurement can be considered as a process that has implications upstream in relation
to suppliers and contractors and downstream in relation to specifiers and end-users. This
process is repeated numerous times by organizations as contracts are renewed, mature
and expire.
- The role of procurement is to create an appropriate level of competition to manage the
level of risk and value associated with that contract.
- Risk and value can be quantified and understood using Kraljik’s matrix where different
strategies can be developed to ensure that both risk and value are properly managed.
- Procurement activity has a more prominent role in relation to sourcing, which now has
to consider much wider issues than price including value for money, ethics and
sustainability, which if not managed properly have a huge impact on the environment and
wider society.
- Global businesses have complex procurement needs that have implications for how they
develop procurement process, how they organize resources and the role that technology
has in sharing information and data between all procurement stakeholders.
- Governance and/or how, where and from whom we source are very important questions
from a legal and commercial perspective but now must also stand up to public scrutiny in
terms of public and consumer opinion.
- Value for money provides a more informed view about how sourcing and procurement
decision making is made. Price may provide a short-term benefit, perhaps at the expense
of others, versus a sustainable solution based on total cost.
- Procurement plays a pivotal role in terms of uniting suppliers as part of the end-to-end
process from suppliers to consumers who are part of an overall supply chain.
5. Inventory is one of the most important flows in the supply chain, and how it is
managed can significantly impact firm success. Inventory can be found at multiple points
in the supply chain, and that by measuring inventory turnover we can ascertain a measure
of how effectively an organization manages its inventory. In many instances inventory is

259
used to buffer against uncertainty, and furthermore it can hide problems. Later the
chapter reviewed the just-in-time inventory management approach, one of the objectives
of which is to minimize inventory holding, thus highlighting any problems which need to
be solved.
- Trade-offs are often a feature of logistics systems, especially in the case of inventory
management. We looked in detail at the EOQ model which seeks to balance two
important sets of costs associated with inventory: the costs associated with ordering and
receiving freight and the costs associated with actually holding the freight. Organizations
also need to know when to recorder and we looked at the two principal approaches in this
regard: reordering when inventory drops to a certain level and reordering at fixed time
intervals. We also looked at strategies to manage and reduce where possible inventory
volumes in the supply chain, such as through centralization, delayed product
differentiation, part commonality and reduction of in-transit inventory.
- Matching inventory policy with inventory type is another key concern of inventory
management, and we looked at two main approaches here, namely ABC analysis and
analysis of inventory flow types. Four key principles that organizations can pursue to
effectively manage and reduce inventory holding include pooling, reduction of variation,
reduction of lead time, and following JIT principles. No matter how essential inventory
is, costs are accrued by inventory holding, and supply chains and firms need to reduce
such costs while keeping customer service at a satisfactory level.
6. This chapter also described the important role played in supply chains by warehouse
operations. We discussed the need to minimize the costs of warehousing and inventory
holding, whilst maximizing the value added in these essential operations. At different
points in a supply chain, warehouse and distribution centres will perform different
functions, as detailed. Equally, different internal processes will be employed for different
types of freight.
- The role of the WMS was then discussed. The provision of such an information system
enables precise management of freight through warehouse and distribution centres. We
also discussed different storage and picking solutions that may be employed based on
requirements. Nevertheless, the role of people should not be ignored. Hence, the chapter
continued with a discussion of the need to achieve equilibrium between people, processes
and technology. As warehouses become more high-tech, the important roles that people
play must not be neglected.

REVISION QUESTIONS
1. In your view, does transport add value in the supply chain?

260
2. What are the key characteristics of the five principal modes of transport?
3. Why do we say transport is a derived demand?
4. What is factory gate pricing?
5. Is the ISPS Code a voluntary or a mandatory security initiative?
6. Which types of internationally trading vessels are affected by the ISPS Code?
7. Is there a limit on the type of company which can implement ISO 28000?
8. When the Container Security Initiative was originally set up, how many ports were part
of the scheme?
9. What is ‘own-account’ transportation?
10. Describe the different types of logistics service providers.
11. Describe the various factors that have to be considered when selecting logistics
service providers. How in practice do you think consignors make decisions concerning
choosing logistics services?
12. What is fourth-party logistics (4PL) and how has the concept evolved in recent years?
13. How might we distinguish 3PLs from other LSPs?
14. What are the differences between an SME business and a global business in terms of
how they identify sources of supply?
15. How does consumer opinion impact on sourcing decisions?
16. Which environmental factors should be considered when trying to identify the total
cost of procuring goods in low-cost countries?
17. What elements of risk are there in terms of sourcing and procuring goods from a
Western source versus a low-cost country source such as Vietnam?
18. What type of relationship would be most appropriate with a high-risk/ high-value
supplier versus a low-risk/ low-value suppliers?
19. What sustainability criteria would you include in a sourcing strategy and how would
you manage and measure them in practice?
20. How might technology and social networking impact on procurement activity?
21. Explain how a reduction in lead time can help a supply chain reduce its inventory
buffer without hurting customer service.
22. Discuss the concept of replacing inventory by information.
23. Why should a customer be concerned about transit inventory cost if he pays for the
inventory only when the merchandize arrives at his premises?
24. in the context of postponement, how might downstream distribution centres be
viewed as value-adding?
25. List the various information sources from across the supply chain that will improve
order delivery and discuss how not having each would impact delivery.

261
 CHAPTER 8: PERFORMANCE OF THE IMPORT - EXPORT CONTRACT

An exceptionally important thing after signing a purchase agreement is to perform

that agreement. By the end of this chapter, students are able to grasp well the knowledge
of export – import formalities as well as customs formalities and are able to apply into
practice.

8.1. Performance of the export contract

8.1.1. Export license application
Export license is a major legal premise to implement other steps in each export
shipment and must be subject to the government’s import-export controls in the certain
period of time.
Procedures for import and export license in Vietnam have changed a lot in the past
time, from complicated to simple. Before 1st Sep 1998, enterprises had to get license from
Ministry of Commerce (now Ministry of Industry and Trade) so as to conduct the import-
export business. Today, rights to conduct the business of import and export and
procedures for import and export are subject to Article 4 of Decision No. 69/2018/ND-CP
detailing provisions of a number of articles of foreign trade management law.
1. For goods exported or imported under permits, export or import traders must
obtain permits of the concerned ministries and ministerial-level agencies.
2. For goods exported or imported under the conditions, exporters or importers
must satisfy the conditions prescribed by law.
3. For goods on the list of import or export goods subject to inspection under the
provisions of Article 65 of the Foreign Trade Management Law, merchants exporting or
importing goods shall be under inspection by the competent bodies in accordance with
the law.
4. For goods not falling into the cases specified in Clauses 1, 2 and 3, traders shall
only have to settle the import or export procedures at the customs offices.
Licensing dossiers according to Article 9 of Decision No. 69/2018/ND-CP
detailing provisions of a number of articles of foreign trade management law include:
a) Written request for license of the trader: 1 original.
b) Investment certificate or business registration certificate, enterprise
registration certificate: 1 copy with the seal of the trader.
c) Relevant papers and documents as prescribed by law.
The licensing process is as follows:

262
 a) Traders shall send one set of dossiers directly or by post or online (if
applicable) to the ministries and ministerial-level agencies competent to grant
permits.
b) If the dossier is incomplete or improper, or needs to be supplemented with
explanatory documents, within 3 working days after receiving the dossier, the
ministry or ministerial-level agency shall notify such to the traders to complete
the dossier.
c) Unless otherwise provided for by law, the time limit for issuance of a license
shall be 10 working days from the date of receipt of the complete and correct
dossier, the ministry or ministerial-level agency shall reply the trader in
writing.
d) Where the law stipulates that the ministry or ministerial-level agency
competent to issue permits must exchange opinions with the concerned
agencies, the dossier processing time shall be counted from the time of
receiving the replies of concerned agencies
e) The grant, amendment, supplementation or re-grant of permits due to their loss
or misuse shall be effected according to the following principles: - Traders
shall only have to submit papers related to the contents to be amended or
supplemented. - The time limit for issuance, amendment, re-grant shall not be
longer than the time of granting export or import permits. - In case of refusal to
amend, supplement or re-issue permits, ministries or ministerial-level agencies
shall reply in writing, clearly stating the reasons therefor.
8.1.2. Initial work related to payment
Payment is a critical link in the whole process of performing import-export
contracts. Exporter only keeps his mind on delivery if payment is surely to be made.
Initial work, therefore, needs to be done adequately. Different methods of payment will
have different jobs:
a) In case payment is made by L/C, the seller needs:
 Remind the buyer to open a letter of credit as agreed.
 Check that L/C.
After checking the L/C, the seller will make delivery if the L/C is compatible with
the contract, if not, inform the buyer and the L/C issuing bank to amend it until it’s in
conformity with the contract.
b) In case payment is made by CAD, the seller needs to remind the buyer to
open a Trust account as required. When the Trust account is opened, the seller contacts
the bank to check payment terms. The seller needs to take types of documents, issuers,

263
numbers of copies … into consideration. The seller only makes delivery when everything
after checking is suitable.
c) In case payment is made by advance T/T, the seller reminds the buyer to
make full payment. After receipt of “Credit” notice from the bank, the seller executes
delivery.
For other methods of payment like deferred T/T, Clean Collection, D/A, D/P, the
seller must make delivery before implementing work related to payment.

8.1.3. Goods preparation (production or procurement of goods).

Goods preparation is a critically important job and can be different in terms of the
subject.
❖ For exporters be manufacturers:
Production units need to scrutinize carefully the market and produce products with
quality, design, model … in response to the buyers’ taste. Finished products need to be
checked in quality, packing, marking … in order to conform to the contract.
❖ For exporters be import-export traders:
a) These traders cannot wait for others to authorize import-export, but must be
active in finding goods sources, explore thoroughly export sources by different methods:
* Buy under obligations (according to plans, orders of Government …) and buy out
of obligations.
* Invest directly to produce exports.
* Process.
* Sell materials and buy finished products.
* Order.
* Exchange goods...
b) Vietnamese Government encourages all export activities, which is expressed
in Law on Commerce 2005 and other legal documents.
Legal basis to bind import – export traders and manufacturers is economic contracts
under Law on Commerce 2005 of Vietnam:
* Definitive contract.
* Processing contract.
* Barter contract.
* Entrusted export contract.
After signing the contract, receipt of goods to export, packing, marking … is done.

264
8.1.4. Pre-shipment inspection
Before delivery, exporters are obliged to inspect the goods in quality, quantity,
weight.
If the goods are animal, plan and foodstuff, they must be quarantined.
Inspection and quarantine will be done at grassroots level and at border.
- At grassroots level: play a decisive role.
- A border: for re-verification.
Inspection at grassroots level will be done by KCS, but the unit’s manager is still
responsible for the goods’ quality. Therefore, there are two signatures on the certificate,
one of KCS, and the other of the unit’s manager.
Quarantine at grassroots level will be done by Plant Protection Department or
Veterinary Station, Quarantine – Diagnosis For Animal Centre.
In many cases, according to the buyer’s requirements, inspection must be done by
an independent agency like Vinacontrol, Foodcontrol, Cafecontrol, Davicontrol, Saigon
Inspection Company (SIC), Viet Minh Company, SGS (Société Générale de Surveillance
S.A), ADIL (Adil International Surveyors Co. Ltd) – Bangkok, OMIC (Overseas
Merchandise Inspection Company) – Japan, …
Procedures for goods checking and inspection are as follows:
1. Application for inspection. Documents include:
● Application form.
● Contract + annex (if any)
● L/C and L/C amendment (if any).
2. Inspection office executes on-site inspection.
● Analyze samples in the laboratory.
3. Inspection office informs the result and grants temporary certificate to
clear Customs (if any)
4. Cargo hold checking (for rice, agricultural products …)
5. Supervising goods delivery
● At the plant, warehouse …
● On site
6. Inspection office issues official certificate.
If the goods need to be fumigated, the exporter must submit an application to
“Fumigation Company – phytosantitary department” to fumigate the goods. After being
fumigated, the goods will be granted a fumigation certificate.

265
8.1.5. Customs clearance
❖ Customs formalities
According to Article 21 of Law on Customs of Vietnam 2014 on customs
formalities a customs declarant shall:
a/ Declare and submit customs declarations; submit documentary evidence of customs
documents prescribed in Article 24 of this Law;
b/ Send goods and vehicle to proper places for physical inspection;
c/ Pay taxes and fulfill other financial obligations in accordance with the laws on taxes,
charges and fees and other corresponding regulations of law.
While conducting customs formalities, customs authorities and customs officials
shall:
a/ Receive and register customs documents;
b/ Verify customs documents and conduct physical inspection of goods and vehicle;
c/ Collect taxes and other amounts payable in accordance with the laws on taxes, charges
and fees and other corresponding regulations of law;
d/ Decide grant of customs clearance for goods, release of goods and certification of
completion of customs formalities applied to vehicle.
❖ Customs document: As stipulated in Article 24 of Law on Customs of
Vietnam 2014 on customs document
1. A customs document comprises:
a/ A customs declaration or documentary evidence in substitution;
b/ Relevant documentary evidence.
As the cases maybe, a customs declarant shall submit sale contract, commercial invoice,
bill of lading, certificate of origin of goods, import or export permit, notice of specialized
inspection results or exemption from specialized inspection, and documentary evidence
related to goods as prescribed by corresponding regulations of law.
2. Documents in customs documents may be paper or electronic documents.
Electronic documents must ensure the integrity and format prescribed in regulations of
law on e-transactions.
Customs documents shall be submitted to customs authorities at their head
offices. In case of application of the national single-window mechanism, specialized
regulatory bodies shall send import or export permits and notices of specialized
inspection results or exemption from specialized inspection in the electronic form via the
integrated communication system.
❖ Physical inspection of goods: As stipulated in Article 33 of Law on Customs of
Vietnam 2014

266
 1. The following goods are exempted from physical inspection:
a/ Goods used for urgent demands;
b/ Goods exclusively used for national defense and security purposes;
c/ Goods used for other special cases as decided by the Prime Minister.
2. If there is any violation is detected in goods as prescribed in Clause 1 of this
Article, such goods shall be physically inspected.
3. For goods other than those as prescribed in Clause 1 of this Article, physical
inspection shall be conducted based on the application of risk management.
4. Goods which are live animals or plants, hard to be preserved or other special
goods shall be prioritized for inspection.
5. Physical inspection of goods may be conducted by customs officials manually or
with the aid of machines, technical equipment or by other professional measures.
The physical inspection of goods shall be conducted in the presence of customs
declarants or their legal representatives after customs declarations are registered and
goods are transported to places of inspection, except the cases prescribed in Article 34 of
this Law.
6. The physical inspection of goods at places for joint inspection by Vietnamese
customs authorities and customs authorities of neighboring countries shall be conducted
under agreements between Vietnam and these countries.
7. The Minister of Finance shall provide guidance on the physical inspection of
goods.
❖ Physical inspection of goods in the absence of customs declarants: As
stipulated in Article 34 of Law on Customs of Vietnam 2014
1. Heads of customs authorities in places where goods are retained shall decide and
take responsibility for the physical inspection of goods in the absence of customs
declarants in the following cases:
a/ For security protection;
b/ For hygiene and environmental protection;
c/ Upon detection of law violation;
d/ The customs declarants have not conducted customs formalities at the border
checkpoint although the imported goods arrive over 30 days;
dd/ Other cases prescribed in regulations of law.
2. Physical inspection of goods in the absence of customs declarants shall be
conducted in the following forms:
a/ Non – intrusive inspection;

267
 b/ Inspection with technical equipment and other operational measures of customs
authorities;
c/ Opening goods for direct inspection in the presence of representatives of the
government authorities at the border checkpoint, the transportation enterprises and the
enterprises trading ports and depots. An inspection record shall be made and signed by
related parties
❖ For other regulations, they are stipulated clearly in Law on Customs of
Vietnam 2014.
8.1.6. Arranging carriage
8.1.6.1 By sea
If the seller is obliged to contract for carriage to convey the goods to the destination
under the contract of sale (in case delivery terms are CIF, CFR, CPT, CIP, DAP DAF,
DDP), the exporter must arrange for carriage.
If the contract of sale stipulates that delivery is taken place at the exporter’s country,
the importer must arrange for carriage to bring goods home (delivery terms: EXW, FCA,
FAS, FOB).
Booking space is not an easy operation which requires expert experience in price
situation, freight rates, and provisions of charter-party. In many cases, export entities
often authorize charter for brokers – Charter transport company (Vietfracht, Vinaschart,
Vosco, Gemartrans, Viconship Saigon …)
In each certain case, exporters can choose one of the following methods of charter:
* Liner.
* Voyage charter.
* Time charter.
❖ Liner:
Ship-owner is also carrier. The relation between carrier and shipper is regulated by
liner B/L.
Liner is also called Booking Shipping Space which means shipper through his
broker or by himself requests ship-owner to let one part of the ship for charter to transport
the goods from this port to another port.
Liner has some features: the goods’ quantity is not much, mainly dry goods, packed
goods, fixed trade routes under uniform rates and common terms available on the back of
printed B/L.
Under this method of charter, formalities are simple, but freight rate is high.
The goods’ owner can hire a liner through a broker. Shippers may book for the
entire quarter or full year by a contract with the shipping company.

268
 ❖ Voyage charter:
Under this method, the charterer hires the whole vessel or only a part of the vessel
to convey the goods from one port to some other ports. The relation between the ship-
owner and the charterer is regulated by Voyage Charter Party.
Features:
- The goods are often conveyed full of the vessel (from 90 – 95%).
- The goods are often in mass quantity like grain, mineral, fertilizer …
- Two parties must negotiate to sign charter-party.
- Bill of lading is Charter Party B/L.
- Brokers are often used.
- Freight rate is low, but formalities are complicated and requires the charterer
to have expert experience and relevant information.
The charterer may hire a ship to transport the cargo via a logistics company. The
charterer must provide information on the goods, the name of the cargo, the package, the
quantity and the journey so that the logistics company has a reasonable basis to find an
appropriate ship. On the basis of the information of the charterer, the logistics company
will find a ship to suit the cargo demand.
❖ Time charter:
Time charter is that charterers hire vessels for a specific period of time from the
ship-owners to transport the goods or to re-hire the vessels.
 Under time charter party contracts, ship-owner remains responsible for the
technical operation of the vessel, but commercial control of the vessel is
handled by the charterer.
 Under time charter party contracts, ship-owner must cover all costs associated
with crewing, maintenance of the vessel and insurance, but vessel fuel
consumption and port charges will be compensated by the charterer.
 Time charter party contracts are signed for a limited period of time without
dictating a fixed route to the charterer. During the charter party contract period,
the charterer could operate the vessel commercially within allowed routes
freely.
 Under a time charter the owner will receive hire based on the period of the
charter or per dead-weight tonne per month.
After a period of charter, the charterer must return the vessels in good technical
condition at the stipulated port and time.
Procedure for a time charter is as follows:

269
 • Step 1: The charterer through a broker (Broker) find a vessel to operate in certain
areas. At this stage, the charterer must provide the broker with all information
about the type of vessel, the size, technical specifications, the intended cargo, the
area of operation, etc., for the broker to find a suitable vessel.
• Step 2: On the basis of information about the vessel and the area of operation
provided by the charterer, the broker will find a vessel to suit the needs of the
charterer.
• Step 3: The broker negotiates with the ship owner.
The shipowner and the broker will negotiate with each other all terms of the charter
party such as technical equipment, repair, fuel consumption, freight / day rates, the time
of hiring, the place of delivery, the area of exploitation, the status of the crew, ...
• Step 4: The broker informs the result of the negotiation with the charterer. After
the result of negotiations with the shipowner, the broker will inform the result of
the negotiation to the charterer so that the charterer knows and prepares for the
signing of the charterparty.
• Step 5: The charterer and the shipowner sign the contract. Before signing the
contract, the charterer must review all terms of the contract.
• Step 6: Perform the contract.
After the contract has been signed, the charter contract will be executed.

8.1.6.2 By air
If delivery is done by air, the exporter after signing a contract with a carrier will
deliver the goods to the carrier and get an airway bill.
In Vietnam, air shipment is mainly done through a freight forwarder, a
transportation agency … like Vietrans, Gemartrans, KWE … It is easier for consigners to
execute delivery procedures.

8.1.7. Cargo insurance

Under CIF, CIP, or D terms, the seller is obliged to arrange for insurance.
Following are needed to put into consideration:
❖ Choose insurance clauses:
Under CIF or CIP delivery term, the seller must make a contract of insurance in
conformity with the contract of sale or terms in L/C (if any). If there is no specific term
related to insurance in L/C or in the contract, the seller only need to obtain insurance on
minimum cover.
Under D terms of Incoterms, the seller should consider to choose insurance terms to
both guarantee the goods and get the highest economic result.

270
 ❖ Write Insurance request:
On the basis of the contract of sale and L/C (if any), the seller fill all following
contents in the insurance request:
 The Insured’s name.
 Commodity insured.
 Type of packing, marking of insured commodity.
 Weight or quantity of insured commodity.
 Vessel name or means of transport.
 Ways to arrange insured commodity on the vessel (on board, under the hold …)
 Place of departure, place of transshipment and place of taking delivery the insured
commodity.
 Date of departure of the means of transport on which the insured commodity is
transported.
 Amount insured.
 Insurance conditions.
 Place of claiming.
In addition, the insured needs to inform the insurer of other important situations so
that the insurer can help the insured predict risks.
❖ Pay Insurance premium and obtain Insurance policy/ certificate
After submitting the Insurance request, the insurer will define the premium. The
exporter will pay the premium, obtain Insurance certificate (or Insurance policy), endorse
it and send to the importer.
Insurance certificate must be a document. There will be no later supplement to any
clauses in the insurance certificate. Especially, in case payment is made by L/C,
insurance certificate must comply with L/C requirements, or else the paying bank will not
accept payment.

8.1.8. Making delivery

❖ By sea – not in container:
1. Basing on details of the export goods, the consigner forms a Cargo list
including consignee, mark, B/L number, description of cargoes, number of packages,
gross weight, measurement, named port of destination …
2. Basing on the Cargo list and booking, the shipping company will form a
shipping order (S/O) and a Cargo plan or stowage plan in order that the port authority can
order the cargo and calculate related charges.

271
 Normally, cargo plan is not given directly to the consigner. However, to ensure
safety for the cargo, the consigner needs to require the carrier to deliver the cargo plan. If
the cargo is placed in unfavorable place, the consigner can request a change.
3. Delivery and Stowage will be done by the port with the charge at the
consigner’s account. However, the consigner should supervise stowage on site to solve
any problems arising. Therefore, the consigner should ask for date and time of delivery
from the port authority to assign a representative to supervise stowage.
4. While loading the goods on board, Tally man of the port always supervise the
goods, and, on the basis of documents and the real quantity, forms Tally report. After
each code on board, Tally man will check and sign on that. On the vessel will there also
Tally man of the port, result of goods on board will be expressed in Tally sheet. The
content of tally sheet is similar to the one of tally report.
5. After loading the goods on the vessel, the port authority and the carrier set up
reports of delivering and receiving goods and a document confirming the goods placed on
the vessel. The mate issues a mate’s receipt in which confirms number of packages,
marks, goods condition, port of destination … for the consigner.
6. The consigner exchanges the mate’s receipt for B/L.
❖ By sea –in containers:
 FCL (Full Container Load)
FCL/FCL is a standard (twenty or forty-foot) container that is loaded and unloaded
under the risk and account of the consigner or consignee.
Procedures of FCL shipment:
1. Container will be provided by the carrier or hired by the consigner. The
consigner will pack the goods at his premise or another domestic place. After
being checked by the customs, the container will be sealed.
2. The sealed container will be transported to Container yard (CY) of the port or of
the carrier (according to the agreement between the consigner and the carrier)
and loaded on the vessel by the carrier.
3. At the port of destination, the carrier will unload containers and deliver them to
CY at its own expense.
4. The consignee must be responsible for import clearance and discharge the
goods out of the container at its own account.
Responsibility of the consigner: bear all costs to transport the empty container to the
place of packing, pack, and discharge the goods out of the container.
Responsibility of the carrier:
1. Be responsible for sealed containers received from CY on.

272
 2. Load containers on the vessel, discharge containers from the vessel and move
them to CY.
The carrier completes its responsibility after delivering containers to the consignee
at the CY.
 LCL (Less than container load)
Under an LCL cargo, where in a shipper does not have enough goods to
accommodate in one full container, he books cargo with a carrier/ consolidator to console
his goods along with goods of other shippers. This type of shipment is called LCL
shipment. The said carrier/ consolidator arranges a fully loaded container and consoles
the shipments of other shippers and deliver each shipment to final destination by
separating each shipment at final destination.
Procedures of LCL shipment:
1. Goods of different shippers will be received by a carrier at a container freight
station (CFS) appointed by him.
2. The carrier will console the goods into the container at his own expense.
3. The carrier loads the goods onto the vessel.
4. At the port of destination, the carrier will carry the container to CFS and then
separate the goods out of the container to deliver to the consignee.
Responsibility of the carrier: Under this method, the carrier will arrange the goods
into the container under his own expense, load the container onto the vessel, unload the
container at the port of destination, discharge the goods out of the container and deliver
them to the consignee. The carrier’s responsibility finishes after the goods are delivered
to the consignee at the CFS.
Notice: Shippers can deliver their goods through LSP (Logistics service provider)
instead of a carrier. The procedure will be different from the previous one. The shipper
will receive a House B/L.
❖ By air
If delivery is done by air, the exporter after signing a contract with a carrier will
deliver the goods to the carrier and get an airway bill.
In Vietnam, air shipment is mainly done through a freight forwarder, a
transportation agency … like Vietrans, Gemartrans, KWE … It is easier for consigners to
execute delivery procedures.
- After contacting a freight forwarder, the consigner will carry the goods to the
airport, the operation division of the freight forwarder together with an airport officer to
receive the goods, weigh the goods, clear customs, packing, marking …

273
 - Or, the freight forwarder will receive the goods at the consigner’s warehouse and
transport them to the airport, clear customs, weigh, measure, mark … deliver the goods to
the carrier basing on proforma invoice issued by the consigner. Basing on the
measurement and weighing results, the carrier will issue a Master Airway Bill for the
whole consignment and the consignee on MAWB is the freight forwarder. For the freight
forwarder, he will issue a House Airway Bill for each shipment of each shipper.

8.1.9. Setting up the payment documents

After delivery, the exporter prepares and presents full set of documents as stated in
the contract or L/C to the bank to demand payment.
A set of documents often include:
- Bill of exchange.
- Clean B/L.
- Insurance document (under CIF or CIP term)
- Commercial invoice.
- Quality certificate.
- Quantity certificate.
- Weight certificate.
- Certificate of origin.
- Packing list.
- Phytosanitary certificate (if any)
…
❖ Bill of exchange: See Part 4.1.1 of this lecture
❖ Bill of lading:
After loading the goods on the vessel, the carrier sets up reports of delivering and
receiving goods and a document confirming the goods placed on the vessel. The mate
issues a mate’s receipt in which confirms number of packages, marks, goods condition,
port of destination … for the consigner. Then, the consigner exchanges the mate’s receipt
for B/L. The consigner needs to present documents related to the consignment to the
carrier including commercial invoice, packing list and customs declaration, and pay
necessary charges to get B/L.

❖ Airway bill:
Warsaw Convention 1929, Articles 5 and 6 defined as follows: each carrier may
request the consignor to make and give her a certificate, called the airway bill (the Decree

274
Hague in 1955 renamed it as the airway bill), every consignor has the right to require the
carrier to accept this document.
The shipper must make the airway bills into 3 copies (original) handed with the
goods. The first is for the carrier and signed by the shipper. The second copy is for the
consignee, issued by the consignor and signed by the carrier and the consignor and
attached with the goods. The third is signed by the carrier and delivered to the consignee
after the carrier’s receipt of goods to transport.
The carrier will sign the bill of lading as a receipt of the goods. The carrier’s signature
can be stamped and the consignor’s signature may be signed or stamped.
At the request of the consignor, if the carrier set AWBs, the carrier shall be deemed
doing so to replace the consignor, unless there is the contrary proof.
Thus, under the Warsaw Convention 1929 and the consignor is responsible for
making the bill of lading.
The shipper is responsible for the accuracy of the information and statements relating
to the goods written on the bill of lading.
The shipper is responsible for all the damages that the carrier or any others incurred
because of inaccurate, incomplete, not under-the-rules statements related to the goods,
whether the bill of lading is issued by the consignor or any person on behalf of the
consignor, including the carrier or agent of the carrier is authorized to do so.
On the other hand, that the consignor has signed bills of lading means he has
confirmed that he agrees with the conditions of the contract of carriage written on the
back of the bills.
❖ Commercial invoice:
Commercial invoice is issued by the seller to the buyer after delivery of goods. It’s a
payment request from the seller to the buyer based on the total goods written on the
invoice.
Contents of a commercial invoice: include the date of issue, name and address of the
seller and the buyer, name of the goods or services, quantity, unit price, total amount.
Besides, there are also number and kind of packages, marking, net weight, gross weight,
contract number and date, date of shipment, terms of delivery, terms of payment.
❖ Packing list
Packing list is an itemized list of articles usually included in each shipping package,
giving the quantity, description and weight of the contents, prepared by the shipper/
exporter and sent to the consignee for accurate tallying of the delivered goods.

275
 * Contents: A packing list may indicate name of the seller; name of the goods; the
invoice number; the ordinal number, weight, volume of packs, or name of the factory, the
packer, and the technical inspector.
Packing list is issued into 3 copies:
+ one in the pack for comparing the goods in reality with the one sent by the seller.
+ one accompanied with other packing lists to make a full set of packing lists of the
consignment which will be put in the first pack for easy check.
+ one accompanied with other packing lists to make another full set of packing lists
which will be sent to the export company. Then the company will enclose the packing
lists with the commercial invoice upon presentation of the documents to the bank to
demand payment.
❖ Insurance document:
Insurance invoice
An insurance invoice is a document issued by an insurance company.
* Effects:
- Confirming that an insurance contract and its terms and decisions are signed.
- Confirming that the premium has been paid.
- A necessary document to claim the insurance company and to receive payment.
* Contents: An insurance invoice indicates general and regular terms and special
conditions.
- General and regular terms regulate the responsibilities of the insurer and insured
party according to each insurance condition. These terms are pre-printed.
- Special conditions include:
+ Insured object: name of the goods, quantity, marking, and means of
transportation.
+ Insured value: insurance coverage must be at least 110% of the CIF or CIP value
of the goods.
+ Insured conditions: AR (All Risks), WA (War Risk), FPA (free from particular
average, SRCC (Strikes, Riots, and Civil Commotion)
+ Insured premium
Insurance Certificate
An insurance certificate is a certificate issued by an insurance company for the
insured party to insure a specific consignment.
* Effects:
- Substitute the insurance invoice.
- A proof of a signed insurance contract.

276
 - A proof of an insurance coverage which is a necessary document in insurance
document of the insurance company.
* Contents: same as the insurance invoice, however this one does not include general
and regular terms. It shows the value and details of the shipment, and the risks covered. It
is a standard form prepared by the insurance company, filled in and signed by the
exporter. Then the certificate will be countersigned by the insurance company. It is
normally used with an open policy. The certificate describes, among other information,
the shipping details and makes reference to the open policy.
Depending on each case, an insurance document also can be:
 Cover note – this is issued by an insurance broker to provide notice that steps are
being taken to issue an insurance policy or certificate. Hence, it is not a legally valid
insurance document and in documentary credit transactions is not acceptable by UCP
600.
 Insurance policy – it gives full details of the risks covered and is evidence of a
contract of insurance between the insurance company (insurer) and the customer
(insured). It is used for single consignments.
 Open policy – in doing business, a seller may have to ship goods on a regular basis.
To insure against damage or loss to the goods, he may have to purchase an insurance
policy whenever he ships the goods. This is inconvenient for the seller. Instead of
purchasing several successive insurance policies, he can take out an open policy.
An open policy allows the seller under one policy to cover all shipments (up to a limit
per shipment) under the same terms and conditions in a given period of time.
Under open policy cover, the seller (the insured) must advise the insurance company of
all the details of each shipment by entering the details of the goods in an Insurance
Certificate. When the seller has taken an open policy, he is authorized to issue an
Insurance Certificate (a pre-printed) form designed and given by the insurance company).
❖ Inspection certificate: See part 8.1.4
❖ Certificate of origin
A certificate of origin is a document declaring in which country the commodities or
goods are manufactured. The certificate of origin contains information regarding the
product’s destination and the export country and is required by many treaty agreements
before being accepted into another nation.
When a credit requires the presentation of a certificate of origin issued by the
beneficiary, the exporter or the manufacturer, this condition will also be satisfied by the
presentation of a certificate of origin issued by a Chamber of Commerce or the like such
as but not limited to Chamber of Industry, Association of Industry, Economic Chamber,

277
Customs Authorities and Department of Trade or the like, provided it indicates the
beneficiary, the exporter or the manufacturer as the case may be.
When a credit requires the presentation of a certificate of origin issued by a
Chamber of Commerce, this condition will also be satisfied by the presentation of a
certificate of origin issued by a Chamber of Industry, Association of Industry, Economic
Chamber, Customs Authorities and Department of Trade or the like.
* How to get C/O from Vietnam Chamber of Commerce and Industry (VCCI)
Pursuant to Decree No. 31/2018 / ND-CP, effective from July 1, 2018.
Step 1:
1. Traders applying for certificates of origin must first register their trader dossiers
(Download here) with VCCI's C / O team and shall only be considered for issuance of
certificates of origin once registering full and valid trader profile. Traders' profiles
include:
a) Registration of specimen signatures of the representative at law of the trader or
the person authorized to sign the application for the certificate of origin, sign the
certificate of origin and the seal of the trader;
b) A copy of the enterprise registration certificate (with the trader's official seal);
c) List of establishments producing goods requesting the issuance of certificates of
origin (if any).
2. The trader dossiers shall be declared via the website: comis.covcci.com.vn
3. Any changes in the trader dossiers must be updated at the website:
comis.covcci.com.vn. In case of no change, the trader profile should still be updated
every 2 years
Step 2:
1. For traders applying for the first-time certificates of goods origin or for products
newly exported for the first time or for non-fixed products (with changes in norms of
quantity, weight norms and codes HS, value and supply of raw materials for both input
materials or output products each time issuance certificates of goods origin), dossiers of
application for certificates of goods origin shall include:
a) An application for a certificate of origin of goods, which is fully and validly
declared, made according to a set form (not printed herein); it shall be declared via
website: comis.covcci.com.vn;
b) The corresponding form of the certificate of origin of goods already declared;
c) The printed copy of the export customs declaration. Where the exported goods
are not required to be declared by the customs according to the provisions of law, copies
of the customs declarations are not required;

278
 d) A copy of the commercial invoice (seal of the trader's original seal);
e) A copy of the bill of lading or a copy of the transport document (certified true
copy by the trader) in case traders do not have a bill of lading. Traders are considered not
required to submit these documents in the case of export of goods in the form of delivery
of goods without using bill of lading or other transport documents in accordance with the
provisions of law or international practice;
f) The detailed list of export goods meeting the preferential origin criteria or the non-
preferential origin criteria according to the set form;
g) The origin declaration of the producer or supplier of origin materials or goods of
home-made origin, made according to a set form, if such raw materials are used for a
subsequent stage. to produce another commodity;
h) A copy of the goods production process (affixed with the trader's true copy);
i) In case of necessity, VCCI's C / O team shall conduct field inspection at traders'
production establishments; or request the trader applying for a certificate of origin to
submit additional documents in the form of a copy (seal of the trader's original seal) such
as customs declaration for import of raw materials and auxiliary materials to produce
goods for export (in case raw materials and accessories are used in the production
process); sales contracts or value added invoices for purchase and sale of domestic raw
materials and auxiliary materials (in cases where domestic raw materials and / or
auxiliary materials are used in the course of production); Export permit (if any); and other
necessary documents.
2. For traders producing and exporting fixed products (no change in norms of
quantity, weight norms, HS codes, value and supply of raw materials for input materials
and products), the dossiers of application for certificates of origin of goods for the first
time must be made according to the provisions in Clause 1.
3. In cases where the documents mentioned at Points c and e of Clause 1 are not yet
available, traders requesting the grant of certificates of origin shall be allowed to submit
these documents later, but not later than 15 working days as from the date of issuance of
the Certificate of Origin. After this time limit, if the trader fails to submit additional
documents, the VCCI C/O shall request the withdrawal or cancellation of the granted
certificate of origin.
4. VCCI's C/O team may request traders to supply originals of documents in
dossiers of application for certificates of origin according to Clauses 1, 2 and 3 for
inspection. Checking and reconciling in case of doubt about the authenticity of these
documents.

279
 5. VCCI's C/O team shall consider and issue certificates of origin of goods for
export goods to bonded warehouses to member countries under international treaties
which Vietnam has signed or acceded to. Apart from the documents specified in Clause
1, traders shall also submit the following documents: a) Copies of the goods declarations
warehoused or ex-warehoused with the customs office's certification of goods arriving at
export border gates (seal of traders' original copy); b) A copy of the contract or document
specifying that the Vietnamese trader shall deliver goods to the importer in the country or
group of countries or territories which Vietnam has signed or acceded to under
international treaties true copy of the trader).
6. VCCI's C/O team shall consider the grant of certificates of origin of goods for
export or import goods from export processing enterprises, export processing zones,
bonded warehouses, non-tariff areas and marine areas. Other import and export relations
with the inland where the goods meet preferential rules of origin or non-preferential rules
of origin.
❖ Phytosanitary certificate
An inspection certificate issued by a competent governmental authority to show that a
particular shipment has been treated to be free from harmful pests and plant diseases. The
phytosanitary certificate must be issued before the customs clearance for export and
import
Procedure to get a phytosanitary certificate:
Step 1: Register the account via online
• To register new account at registration department of Phytosanitary agency
(Branch of Phytosanitary Zone II for the South), it will issue 2 samples including
the account registration information letter (take 01 day to activate the account),
and Phytosantitary registration letter.
• Fill in 2 letters and sign in Phytosantitary website.
Step 2: Register phytosanitary certificate
Shippers or authorized persons register phytosanitary certificate 1-2 days before
the shipment date at the phytosanitary agency (Branch of Phytosanitary zone II for
the South)
The documents include:
1) Phytosanitary registration form (declare full information on the quarantine
shipment)
2) Sales contract along with bills of lading, invoice, and packing lists (if any)
3) Attorney letter of the owners (if the party is registered as authorized shippers)
4) Samples of quarantine shipment (if any)

280
 • In case samples of quarantine are submitted, reception department will check the
documents and samples. If the documents are valid, the owners or authorized
persons will receive a receipt number.
• In case samples of quarantine or documents are not submitted or invalid, the
reception department will forward all documents to the supervisor at the loading
port so that the supervisor will check the goods and issue a receipt number.
Then, the goods owners or authorized persons will declare all information related to
quarantine shipment via the website of Branch of phytosanitary zone II (shipper,
consignee, description, quantity, port of loading, port of destination, etc.). Within 24
hours, the quarantine agency will send a draft phytosanitary by email to their owners
or authorized persons.
Step 3: Submit full documents to get phytosanitary certificate
• The goods owners or authorized persons receive the draft of phytosanitary, check
with the consignee and get his confirmation.
• The goods owners or the authorized persons revise the draft’s information and
submit complete documents to phytosanitary agency within 1-2 days (after getting
the receipt number)
• The goods owners or the authorized persons pay quarantine fee for the accounting
department according to the price list applicable to the weight and each item.
• The goods owners or the authorized persons then submit documents to the
reception department
Documents include:
1) The receipt number signed by supervisor
2) the initial documents submitted for registration (phytosanitary registration
letter, sales contract)
3) Draft phytosanitary was declared online
4) Bill of lading contains the most accurate information and confirmation by
shippers.
5) Commercial invoice, packing list.
Step 4: In case full documents are submitted, phytosanitary agency will issue the
phytosanitary certificate to owners or authorized persons within 1-2 hours. If documents
are incomplete or invalid, the owners or authorized persons need to supplement
documents.
❖ Quarantine certificates for animal and aquatic animal products

281
 The main purpose of animal quarantine inspection certificate is to prevent the ingress
of dangerous exotic diseases into the country through imported livestock and livestock
products.
Procedure to get a phytosanitary certificate:
Step 1: Before exporting animals and aquatic animal products on the list of animals
and aquatic animal products subject to quarantine for use as food, organizations and
individuals need to register for quarantine with the competent authorities.
Step 2: Upon receiving quarantine registration of organizations and individuals, the
competent agencies shall apply the quarantine of animals and animal products as follows:
+ Inspection of the quantity, types and packages of animals and aquatic animal
products;
+ Check for signs of animal diseases;
+ Taking samples for testing of diseases at the request of the importing country (if
any), except for diseases which have been recognized as disease-free for establishments
rearing aquatic animal breeds; In case of taking samples for disease testing, the
competent quarantine offices shall, within 01 working day after the date of sampling,
send samples to the designated laboratories for disease testing;
- Step 3: Within three working days from the date of receipt of the sample, the
laboratory shall notify the results of the disease test to the competent quarantine agency.
- Step 4: Issuance of quarantine certificates:
If the samples for disease testing are not required to be collected, the competent
quarantine agencies shall grant export quarantine certificates within one working day
after receiving the satisfactory test results;
Where samples of diseased animals are collected, the competent bodies of the
quarantine shall grant export quarantine certificates within one working day after
receiving the satisfactory test results;
In cases where the goods owners request the change of the quarantine certificates for
the goods lots, the agencies competent to quarantine inspect the goods lots and change
the quarantine certificates.

8.1.10. Claims (if any)

a) Sellers make claims:
In case the buyer breaches the contract, the seller has a right to claim. Documents
include:
- Letter of complaint.

282
 - Relevant documents: Contract, B/L, Tally sheet, Report on receipt of cargo,
Certificate of short-landed cargo, Cargo outturn report, Survey record, Customs
inspection report.
b) Buyers or related offices make claims
If receiving complaint documents from the buyer or any relevant offices, the seller
must promptly study the documents and find solutions.

8.1.11 Contract liquidation

8.2. Performance of the import contract

8.2.1. Import license application
Regulations on the goods for which import or export is prohibited, goods for which
import and export is subject to issuance of a permit, goods for which import and export is
subject to issuance of a permit by the ministry managing the specialized industry.
Each good must follow certain regulations of Government or the authority
managing the specialized industry on export license/ procedure.

8.2.2. Initial work related to settlement

a) In case payment is made by L/C: the importer needs to:
❖ write and submit a Letter of Credit application to a bank.
❖ deposit money to open a L/C.
b) In case payment is made by CAD: the importer needs to open a Trust
account at a bank to pay the exporter.
c) In case payment is made by advance TT: the importer needs to transfer
money as stipulated in the contract.
d) In case payment is made by Collection or Deferred TT: the importer will
only make payment after the export’s delivery.

8.2.3. Transport arrangement

In case the importer must arrange for carriage under EXW, FAS, FCA, FOB
delivery terms, it must do so.
(See more in 8.1.6 for how to hire transportation means)

8.2.4. Cargo insurance

When purchasing goods under EXW, FCA, FAS, FOB, CFR, CPT delivery terms,
the importer needs to buy insurance for the goods. Following are needed to put into
consideration:

283
 ❖ Choose a suitable insurance condition:
The importer bases on the goods’ features, packing, means of transport … to choose
suitable insurance condition that guarantees the goods and get highest economic results.
❖ Write Insurance request: (see more in 8.1.7)
❖ Pay Insurance premium and obtain Insurance policy/ certificate
After submitting the Insurance request, the insurer will define the premium. The
importer will pay the premium and obtain Insurance certificate (or Insurance policy)

8.2.5. Customs clearance

(See in 8.3)

8.2.6. Taking delivery

Under the Government’s regulations, transport authorities (station, port) have
obligations to receive imported cargo on means of transport from oversea, keep the cargo
in good condition during discharging, storage, and deliver it to the importer according to
Delivery order (D/O) of transport companies (shipping company, shipping agency …)
which received the cargo.
Therefore, when the cargo reaches the port, shipping company will take the cargo
from the port authority and bring it to a safe place (warehouse or yard).
Before the vessel’s arrival, shipping agency or shipping company will send an
“Arrival Notice” to the consignee so that he can receive D/O at the shipping agency. To
get D/O, the consignee needs to submit Original B/L, the company’s Letter of
recommendation. The shipping agency will keep the original B/L and deliver 03 copies of
D/O to the consignee. When holding D/O, the importer needs to carry out taking his
consignment. If the importer takes delivery late, he will bear high storage cost and all
arising risks.
In case the documents come later than the consignment, the importer has two
solutions: (1) keep on waiting for the documents, (2) ask for a Letter of Guarantee from
the issuing bank
Procedures of taking delivery:
a) Bulk cargo (not full container) or LCL cargo:
Goods owner pays storage fee and handling charge to get a warehouse receipt at the
port or the ship owner (if the ship owner subscribes the warehouse), then submit the
warehouse receipt, 03 D/O, Invoice and Packing list at a shipping agency in the port to
confirm D/O and find the goods’ position. One D/O is kept for recording here. The
goods’ owner brings two remaining receipt to the Warehouse division to make Stock-out

284
slip. This division keeps 01 D/O and delivers 02 Stock-out slips for the goods owner.
Two Stock-out slips are used for stock-out procedure. The goods will be separated to wait
for customs check. Taking delivery at the port will be done under the supervision of
customs. After confirmation of customs “complete customs formalities”, the goods will
be stocked out of the port to the stipulated place.
b) FCL cargo, customs inspect at a separate warehouse:
If the goods owner wishes to receive full container and be checked at a separate
warehouse, he needs to:
- make and submit a Request for the goods to be checked at a separate
warehouse with a set of documents for customs formalities. Container is only
allowed to bring back to a separate warehouse in case registration is made in
advance and the warehouse meets the customs’ standard and is licensed.
- proceed to borrow container at the shipping company, deposit money, pay
handling and transporting container from the port to the separate warehouse
charges.
- Present a set of documents to the shipping agency to get a Container-out-of-
the-yard permission slip. Documents include:
+ 03 D/O with signature of customs officer at Formality Registration
division and stamp “Declaration received”.
+ Handling and transport charge receipt of the shipping company.
+ Demurrage charge receipt.
+ Approved Letter of borrowing container.
 The shipping agency will keep one D/O.
 The goods owner with an officer of the container yard finds the container
in the yard, check the container and seal.
 The goods owner receives 02 “Transport order” from the officer of the
yard.
 The goods owner submits all documents to the customs to check and
confirm container number, seal number, declaration and transport order.
 The goods owner takes the container out of the yard, submits one
transport order to the customs officer at the gate, one to the port’s
security, and transport the container to his own warehouse.
 The goods owner comes to Customs Control and Supervision
Department of City Customs to fetch a customs officer to check the
goods.

285
  After being checked by the customs officer, if there is no problem, the
goods will be granted “Complete Customs Formalities”.
c) Whole ship cargo or cargo in large quantity:
After receiving D/O, submitting documents to customs, receiving NOR (Notice of
readiness), the goods owner carries out receiving the goods. Before opening the hold,
there must be:
- The importer/ goods owner
- Seller’s representative (if the seller has its representative in the importer’s
country)
- Inspection organization
- The ship’s representative, shipping agency
- Customs control and supervision department officer
- The port’s representative
- Insurer (if there is any doubt about damages on the goods)
During the process of receiving the goods, the importer needs to supervise the
scene, update data every month, every shift, every day to handle timely all arising
problems.
Inspection organization takes a sample and analyzes it to determine whether its
quality and quantity is in conformity with the contract or not.
Insurance company will define the degree of loss and make Survey Report.
The port authority will make a Cargo out turn report, Report on receipt of cargo and
Certificate of short overlanded cargo and outturn report.
Finally, after finishing delivery, the importer signs in a Final report on receipt of
cargo.

8.2.7. Post shipment inspection

Under the Government’s regulation, the imported goods will be carefully examined
when imported into the country.
For all imported goods, every authority will have its own function to execute
inspection.
The port/station checks the seal before discharging the goods out of the means of
transport. If the goods are not in right position as stated in B/L or in loss, the port/station
will invite Inspection Company to make Survey Report. If the goods transported by sea
are in loss or shortage, there must be a “report on receipt of cargo” with the port. If the
goods by sea are in damage, there must be “report on damage”.

286
 For the importer, he needs to set up a Letter of Reservation if there is any suspicion
about loss, requires to make a Survey Report if the goods are in damage, shortage and do
not conform with the contract.
Quarantine Authority must quarantine the goods if the imported goods are animals
or plants.

8.2.8. Claims (if any)

Claim is one of two ways to solve disputes arising in foreign trade. By claiming,
parties can negotiate directly to solve disputes.
a) Claim the seller:
The buyer has a right to claim the seller when the seller does not deliver the goods
or deliver the goods late, or the goods are in shortage …or the goods’ quality is not in
conformity with the contract, bad packing, wrong marking, or the technical material is
not delivered or delivered late.
Documents for claim include:
- Letter of Complaint made by mail, fax or telex. There must be a letter of
confirmation if fax or telex is used.
- Purchase agreement.
- Bill of lading
- Survey report.
Contents of the Letter of complaint include:
- Claimer’s name and address.
- Defendant’s name and address.
- Legal basis of claim (contract number ...)
- Reasons of claim
- Specific demands from the seller.
b) Claim the transporter.
Claim the transporter when it breaches the transport contract: the vessel does not
come or come late; the goods are in loss, damage or shortage because the transporter’s
fault.
Documents include: Letter of complaint and other documents such as:
- Contract of transport
- Bill of lading
- Checking sheet of deliverer and consignee.
- Report on receipt of cargo (ROROC)
- Certificate of shortlanded cargo (CSC)

287
 - Draft survey
- Cargo outturn report (COR)
- Report on stowage of cargo
- Inspection report of customs.
c) Claim the insurer
Necessary documents for claim include:
- Original insurance certificate/policy
- Original bill of lading
- Copy of original contract or invoices
- Certificate of quality, quantity
- Letter of complaint in which includes claiming amount.
Other documents for specific cases:
1) For damaged or lost goods:
- Survey report issued by insurance company or insurance agency.
- COR
2) For shortlanded goods in full container
- ROROC
- CSC …
3) For general average:
- Notice of general average of ship-owner.
- Allocation of general average expenditures of adjuster
- Other related documents
4) For total loss:
- Notice of total loss of transporter
- Certificate of transport about the goods on the vessel.
- Letter of complaint for shipping company (if any)
Claiming documents must be presented directly to insurance company or insurance
agency as soon as possible but not later than 9 months (if related to a third party) since
the goods are discharged out of the vessel named in the contract of insurance unless
otherwise stated.

8.2.9. Payment
Payment is the main obligation of the buyer. According to each method, payment
procedure is different.
If payment is made by L/C, when receiving documents from the seller, the issuing
bank will examine them carefully. If presentation is complied with L/C, the issuing bank

288
will make payment and inform the buyer to reimburse the bank and receive documents. If
documents are not perfect, the issuing bank will ask for advice from the buyer and have a
specific resolution for each discrepancy.

8.2.10 Contract liquidation

8.3. Customs formalities

8.3.1. Legal basis
- Law on Customs of Vietnam No. 54/2014/QH13 dated 23rd June 2014.
- Law on Import and Export Duties 2016.
- Law on amending and supplementing a number of articles of the value added tax
law, the special consumption tax law and the law on tax management No.
106/2016/QH13 dated 06th April 2016.
- Decree 08/2015/ND-CP dated 21st Jan 2015 providing specific provisions and
guidance on enforcement of the customs law on customs procedures, examination,
supervision and control procedures.
- Decree 59/2018/ND-CP dated 20th April 2018 amending and supplementing
some articles of the Decision 08/2015/ND-CP.
- Circular 38/2015/TT-BTC on customs procedures; customs inspection and
supervision; export tax, import tax and tax administration for export and import goods.
- Circular 39/2018/TT-BTC amending Circular 38/2015 / TT-BTC providing new
guidance on a wide range of customs compliance areas including customs procedures,
supervision, inspection; import and export duty, administration of imported goods and
exported goods.
- Decree No. 134/2016/ND-CP of 01st September 2016, detailing a number of
articles of the Law on Import Duty and Export Duty
- Decree No. 43/2017/ND-CP of 14th April 2017 of the Government on labelling
of goods.

8.3.2. Customs formalities for export and import goods

According to Article 21 of Law on Customs:
1. While following the customs formalities, a customs declarant shall:
a/ Declare and submit customs declarations; submit documentary evidence of customs
documents prescribed in Article 24 of this Law;
b/ Send goods and vehicle to proper places for physical inspection;
c/ Pay taxes and fulfill other financial obligations in accordance with the laws on taxes,
charges and fees and other corresponding regulations of law.

289
 2. While conducting customs formalities, customs authorities and customs officials
shall:
a/ Receive and register customs documents;
b/ Verify customs documents and conduct physical inspection of goods and vehicle;
c/ Collect taxes and other amounts payable in accordance with the laws on taxes, charges
and fees and other corresponding regulations of law;
d/ Decide grant of customs clearance for goods, release of goods and certification of
completion of customs formalities applied to vehicle.
8.3.2.1 Customs formalities
1. Declare and submit customs declarations; submit documentary evidence
of customs documents:
a. Time limits for declaration and submission of customs declarations and
relevant documents
According to Article 25 and 69 of Law on Customs of Vietnam:
(1) After goods are transported to places notified by customs declarants and at least
4 hours before the exit of vehicle regarding to exported goods; at least 2 hours before the
exit of vehicle regarding exported goods delivered by express delivery services;
(2) Before goods arrive at border checkpoints or within 30 days after goods arrive at
border checkpoints regarding to imported goods;
(3) For vehicle in transit, immediately after their arrival at the first entry border
checkpoint and before they go through the last border checkpoint for exit;
(4) For seagoing vehicle on entry, within 2 hours after the port authorities announce
that these vehicles have arrived at the places for pilot embarkation; for seagoing vehicle
on exit, within 1 hour before they exit;
(5) For air vehicle on exit or entry, immediately after their arrival at the border
checkpoint and before carriers stop carrying out formalities for receiving exported goods
and passengers on exit;
(6) For railway, land and river way vehicle on exit or entry, immediately after their
arrival at the first entry border checkpoint and before they go through the last border
checkpoint for exit.
b. Places of customs formalities
According to Article 22 of Law on Customs of Vietnam
Places of customs formalities are places where customs authorities receive, register
and verify customs documents and conduct physical inspection of goods and vehicle.
Places where customs documents are received, registered and examined are head
offices of Customs Departments or Customs Sub-Departments.

290
 Places of physical inspection of goods include:
a/ Places of inspection at the land border checkpoints, international railway stations,
international civil airports; international post offices; seaports and inland waterway ports
where import, export, exit, entry and transit operation are carried out; inland ports of
importation or exportation of goods;
b/ Head offices of Customs Sub-Departments;
c/ Places of centralized inspection under decisions of the General Director of
Customs;
d/ Places of inspection at facilities or works; places where trade fairs or exhibitions
are held;
đ/ Places of inspection at bonded warehouses, tax suspension warehouses and
container freight stations;
e/ Places of joint inspection by Vietnam Customs and Customs Service of
neighboring countries at the land border checkpoints;
g/ Other places decided by the General Director of Customs in case of necessity.
c. Customs documents
According to Article 24 of Law on Customs of Vietnam, a customs document
comprises:
a/ A customs declaration or documentary evidence in substitution;
b/ Relevant documentary evidence.
As the cases maybe, a customs declarant shall submit sale contract, commercial
invoice, bill of lading, certificate of origin of goods, import or export permit, notice of
specialized inspection results or exemption from specialized inspection, and documentary
evidence related to goods as prescribed by corresponding regulations of law.
Documents in customs documents may be paper or electronic documents.
Electronic documents must ensure the integrity and format prescribed in regulations of
law on e-transactions.
Customs documents shall be submitted to customs authorities at their head offices.
In case of application of the national single-window mechanism, specialized regulatory
bodies shall send import or export permits and notices of specialized inspection results or
exemption from specialized inspection in the electronic form via the integrated
communication system.
The Minister of Finance shall set the customs declaration form, use of customs
declarations and documents in substitution of customs declarations, and cases in which
relevant documents
❖ Documents for export goods:

291
 ● Basic documents include:
- Customs declaration: 02 originals.
- Commercial invoice or other equivalent legal documents: 01 photo
● As the cases maybe, a customs declarant shall submit some other documents:
- In case there are lots of types of goods or packages are not
homogeneous: packing list in 01 original and 01 photo.
- In case goods must have export permit under the law: Export permit 01
copy (original in case of one-time export or photocopy in case of many-time
export and original must be presented to check).
- In case goods imported for export processing and production: Bill of
materials of the HS code 01 original (only submit one time when exporting that
product).
- Other documents prescribed in regulations of law: one original.
❖ Documents for import goods:
● Basic documents include:
- Customs declaration: 02 originals.
- Sale contract or other equivalent legal documents: 01 photo.
- Commercial invoice: 01 original and 01 photo.
- Bill of lading: 01 photo or 01 copy Bill of lading.
● As the cases maybe, a customs declarant shall submit some other
documents:
- In case there are lots of types of goods or packages are not
homogeneous: 01 original and 01 photo of packing list
- In case import goods subject to quality inspection: 01 original of
Registration for state inspection of goods’ quality or Notice on being
exempt from state inspection issued by competent regulatory bodies.
- In case the goods are released on the basis of inspection result: 01
original of Inspection certificate.
- In case the goods must be declared in Declaration of Value: 01 original
of Declaration of Value of imports.
- In case the goods must have Import Permit under Law: 01 copy of
Import Permit issued by a competent regulatory body (original in case of
one-time import or photocopy in case many-time import and the original
must be presented for comparison).
- In case the goods owner wishes to enjoy preferential import tariffs: 01
original and the third copy of Certificate of Origin.

292
 - In case the imported consignment has the total value (FOB) not more
than USD 200, the goods owner does not need to present Certificate of
Origin.
- Other documents prescribed in regulations of law: one original.
8.3.2.2 Inspection of export and import goods.
1. Places of physical inspection of goods include:
a/ Places of inspection at the land border checkpoints, international railway stations,
international civil airports; international post offices; seaports and inland waterway ports
where import, export, exit, entry and transit operation are carried out; inland ports of
importation or exportation of goods;
b/ Head offices of Customs Sub-Departments;
c/ Places of centralized inspection under decisions of the General Director of
Customs;
d/ Places of inspection at facilities or works; places where trade fairs or exhibitions
are held;
e/ Places of inspection at bonded warehouses, tax suspension warehouses and
container freight stations;
f/ Places of joint inspection by Vietnam Customs and Customs Service of
neighboring countries at the land border checkpoints;
g/ Other places decided by the General Director of Customs in case of necessity
2. Physical inspection of goods:
* Exemption from physical inspection of goods:
The following goods are exempted from physical inspection:
a/ Goods used for urgent demands;
b/ Goods exclusively used for national defense and security purposes;
c/ Goods used for other special cases as decided by the Prime
Minister.
d/ An enterprise fully satisfies the following requirements:
d.1 Strictly observe the customs and law on taxation for 2 consecutive years;
d.2 Earn an annual export and import value reaching the prescribed level;
d.3 Carry out e-customs formalities and e-tax formalities; have an information
technology program for managing its export and import activities connected with
the customs authority’s network;
d.4 Make via-bank payment;
d.5 Have its internal control system;
d.6 Strictly observe accounting and audit regulations.

293
 * Physical inspection of goods:
There are two methods of physical inspection:
+ Method 1: Percentage-random check: not more than 10% of the imported,
exported goods. If the goods are packaged, not more than 10% of packages. If the goods
are in containers, 10% of containers or not more than 10% of packages in the container.
+ Method 2: Full and complete inspection: in case the goods owner has violated
the customs law many times or the consignments have following signs of violation:
- The goods owner has violated the customs law many times and has been
fined for administrative violations more than 3 times within 2 years from the
date of executing customs formalities and 1 year for export.
- There is a sign of violation in quantity and types of goods in percentage-
random check.
3. Physical inspection of goods may be conducted by customs officials manually
or with the aid of machines, technical equipment or by other professional measures.
The physical inspection of goods shall be conducted in the presence of customs
declarants or their legal representatives after customs declarations are registered and
goods are transported to places of inspection, except the cases prescribed in Article 34 of
Law on Customs of Vietnam:
a/ For security protection;
b/ For hygiene and environmental protection;
c/ Upon detection of law violation;
d/ The customs declarants have not conducted customs formalities at the border
checkpoint although the imported goods arrive over 30 days;
e/ Other cases prescribed in regulations of law.
Physical inspection of goods in the absence of customs declarants shall be
conducted in the following forms:
a/ Non – intrusive inspection;
b/ Inspection with technical equipment and other operational measures of customs
authorities;
c/ Opening goods for direct inspection in the presence of representatives of the
government authorities at the border checkpoint, the transportation enterprises and the
enterprises trading ports and depots. An inspection record shall be made and signed by
related parties.
8.3.2.3 Paying export and import taxes
a. Declaration obligation

294
 Customs declarant declares and calculates taxes and must be responsible for his
declaration.
Within 6 months from the time of declaration, if customs declarant finds out any
mistakes in declaration, he must inform customs authority to adjust the amount payable.
b. The time of tax calculation
According to HS codes and tax policies applicable to imported and exported
goods, the determination of tax rates for imported and exported goods shall be effective
at the time of tax calculation.
Import and export duties are calculated basing on the tax rate, customs value, the
exchange rate for tax calculation at the time of declaration of imported and exported
goods.
Customs declarations are valid for customs formalities within 15 days from the
day on which they are registered. If after 15 days from the date of customs declaration,
there are no exported or imported goods, that customs declaration will be invalid. When
there are exported or imported goods, tax payer must do customs declaration formalities,
time of tax calculation is the date of the next declaration.
c. Time limit for tax payment
Pursuant to the Law on Import and Export Duties 2016, export and import goods
subject to tax shall be subject to tax prior to clearance or release of goods in accordance
with the provisions of the Customs Law.
In cases where the payable tax amounts are paid by the credit institutions, they shall
be cleared or released from goods, but shall have to pay the amounts for late payment
according to the provisions of the Tax Management Law from the date of customs
clearance or the release of goods to the date of payment. tax. The maximum duration of a
guarantee is 30 days from the date of registration of the customs declaration.
In cases where the guarantor has already been guaranteed by the credit institution but
the guarantee duration has expired but the taxpayers have not yet paid tax and the late
payment, the guaranteeing organizations shall have to pay tax and late payment on behalf
of the taxpayers.

8.3.3. Electronic customs formalities (VNACCS)

Electronic customs formalities allow customs declarants to send information and
electronic documents for following customs formalities and formalities of regulatory
bodies related to imported and exported goods through an integrated communication
system. Regulatory bodies shall decide goods that are permitted to be imported, exported
and transited; customs authorities shall make decisions about granting customs clearance
and releasing goods on the integrated communication system

295
 NACCS/VCIS (Vietnam Automated Cargo Clearance System) is a new electronic
customs clearance system integrated with one single window policy. This is sponsored by
the Japanese government and will be officially applied from 1 April 2014. The system is
centralized based on encoding operations and information criteria. Main modules of the
new system include e-Declaration, e-Manifest, e-Invoice, e-Payment, e-C/O, selectivity,
management of risk documents, management of import/export enterprise, customs
clearance, control and supervision.
 Customs documents: Electronic documents must ensure the integrity and format
prescribed in regulations of law on e-transactions.
Specialized regulatory bodies shall send import or export permits and notices of
specialized inspection results or exemption from specialized inspection in the
electronic form via the integrated communication system.
 Time limit for submission of customs documents:
When customs authorities conduct examination of customs documents and physical
inspection of goods, customs declarants shall submit paper documents in customs
documents, except documents which are already available in the national single- window
communication system.
 Registration of customs declarations:
E- customs declarations shall be electronically registered
SUMMARY
1. Performing customs formality is an important part in a series of foreign trade
contract performance.
2. To perform an export contract, Seller needs to execute the following:
- Export license application
- Initial work related to payment.
- Goods preparation (production or procurement of goods).
- Pre-shipment inspection.
- Customs clearance
- Arranging carriage.
- Arranging cargo insurance.
- Making delivery.
- Setting up the payment documents.
- Claims (if any)
- Contract liquidation.
3. To perform an import contract, Seller needs to execute the following:
- Import license application

296
 - Initial work related to settlement.
- Transport arrangement.
- Cargo insurance.
- Taking delivery.
- Customs clearance.
- Post shipment inspection.
- Claims (if any).
- Settlement.
- Contract liquidation
4. Customs formalities include:
- Declare and submit customs declarations; submit documentary evidence of
customs documents prescribed in Law on Customs of Vietnam;
- Send goods and vehicle to proper places for physical inspection;
- Pay taxes and fulfill other financial obligations in accordance with the laws on
taxes, charges and fees and other corresponding regulations of law.

REVISION QUESTIONS
1. Present the export performance procedure.
2. Present the import performance procedure.
3. To master customs formalities for export and import, which documents do
enterprises need to read?
4. Present the customs formalities for export goods (by using mechanic and
documents)
5. Present the customs formalities for import goods (by using mechanic and
documents)
6. Give comments on Customs formalities of Vietnam.
7. Give solutions to improve customs formalities of Vietnam.

297
References
Alan E. Branch (2013), Export practice and management, Springer-Science+Business
Media, B.V.
Bourély, N. (n.d). The Context for Transactional Legal Harmonization in the Americas.
Legal Harmonization in the Americas: Business Transactions, Bijuralism and the
OAS, 7-28.
Branch, A. E. (2009). Global supply chain management and international logistics. New
York: Routledge.
Chow, D. C., & Schoenbaum, T. J. (2017). International Trade Law: Problems, Cases,
and Materials. Wolters Kluwer Law & Business.
Cook, T. A., Alston, R., & Raia, K. (2004). Mastering import & export management
(Vol. 1). Amacom Books.
Doan Thi Hoang Van & Kim Ngoc Dat (2013), Import Export Management, General
Publisher
Folsom, R. H., Gordon, M. W., Spanogle Jr, J. A., & Van Alstine, M. P. (2013).
Principles of international business transactions. West Academic.
ICC. (2009). Institute Cargo Clauses. Paris: international chamber of commmerce.
Luk, K. W. (2011). International Trade Finance: A Practical Guide. Hongkong: City
University of HK Press.
Mangan, J., Lalwani, C., & Lalwani, C. L. (2016). Global logistics and supply chain
management. John Wiley & Sons.
Randall, K. C., & Norris, J. E. (1993). A New Paradigm for International Business
Transactions. Washington University Law Review, 71(3), 599.
Verzariu, P. (1992). International Countertrade: A Guide for Managers and Executives,
US Department of Commerce. Washington DC: International Trade Administration.
Sources of Law:
Circular 38/2015/TT-BTC on customs procedures; customs inspection and supervision;
export tax, import tax and tax administration for export and import goods.
Circular 39/2018/TT-BTC amending Circular 38/2015 / TT-BTC providing new
guidance on a wide range of customs compliance areas including customs
procedures, supervision, inspection; import and export duty, administration of
imported goods and exported goods.
Consolidated document No. 03/VBHN-VPQH 2017 by the Office of the National
Assembly to unify the Commercial Law.
Decision on detailing provisions of a number of articles of foreign trade management law
No. 69/2018/ND-CP

298
Decree No. 134/2016/ND-CP of 01st September 2016, detailing a number of articles of
the Law on Import Duty and Export Duty
Decree No. 43/2017/ND-CP of 14th April 2017 of the Government on labelling of goods.
Decree 08/2015/ND-CP dated 21st Jan 2015 providing specific provisions and guidance
on enforcement of the customs law on customs procedures, examination,
supervision and control procedures.
Decree 59/2018/ND-CP dated 20th April 2018 amending and supplementing some articles
of the Decision 08/2015/ND-CP.
Law on Customs of Vietnam No. 54/2014/QH13 dated 23rd June 2014.
Law on Import and Export Duties 2016.
Law on amending and supplementing a number of articles of the value added tax law, the
special consumption tax law and the law on tax management No. 106/2016/QH13
dated 06th April 2016.
Law on Foreign Trade Management 2017
Law on negotiable instruments of Vietnam 2005

299
 APPENDIX
INTERNATIONAL SALES OF GOODS CONTRACT
(SAMPLE OF ITC)

PARTIES:
Seller
Name (name of company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
Legal form (e.g. limited liability company) . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Country of incorporation and (if appropriate) trade register number. . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Address (address of place of business of the Seller, phone, fax, e-mail). . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Represented by (surname and first name, address, position, legal title of representation. .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buyer
Name (name of company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
Legal form (e.g. limited liability company) . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Country of incorporation and (if appropriate) trade register number . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Address (address of place of business of the Buyer, phone, fax, e-mail) . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Represented by (surname and first name, address, position, legal title of representation) .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hereinafter: “the Parties”
1. Goods
1.1 Subject to the terms agreed in this contract, the Seller shall deliver the following
good(s) (hereinafter: “the Goods”) to the Buyer.

300
 1.2 Description of the Goods (details necessary to define/specify the Goods which are
the object of the sale, including required quality, description, certificates, country of
origin, other details).
1.3 Quantity of the Goods (including unit of measurement).
1.3.1 Total quantity .................................................................................................
1.3.2 Per delivery instalment (in the case of a contract for delivery of the Goods by
instalments) .............................................................................................................
1.3.3 Tolerance percentage: Plus or minus . . . . . . . . . . . . % (if appropriate).
1.4 Inspection of the Goods (where an inspection is required, specify, as appropriate,
details of organization responsible for inspecting quality and/ or quantity, place and
date and/or period of inspection, responsibility for inspection costs).
1.5 Packaging ...............................................................................................................
1.6 Other specification ………(e.g. the intended use of the Goods could be specified).
2. Delivery
2.1 Applicable International Chamber of Commerce (hereinafter: ICC) Incoterms (by
reference to most recent version of the Incoterms at date of conclusion of the contract)
.......................................................................................................................................
2.2 Place of delivery .....................................................................................................
2.3 Date or period of delivery ......................................................................................
[Comment: Where there is a delivery by instalments the Parties should indicate every
date of delivery for each instalment.]
2.4 Carrier (where applicable) (name and address of carrier, contact person) ............
.......................................................................................................................................
2.5 Other delivery terms (if any) ..................................................................................
3. Price
3.1 Total price ..............................................................................................................
3.2 Price per unit of measurement (if appropriate) ......................................................
3.3 Amount in numbers ................................................................................................
3.4 Amount in letters ....................................................................................................
3.5 Currency .................................................................................................................
3.6 Method for determining the price (if appropriate) .................................................
4. Payment conditions
4.1 Means of payment (e.g. cash, cheque, bank draft, transfer) ..................................
4.2 Details of Seller’s bank account [if appropriate] ..................................................
4.3 Time for payment [specify the time] ......................................................................

301
The Parties may choose a payment arrangement among the possibilities set out
below, in which case they should specify the arrangement chosen and provide the
corresponding details:
❑ Payment in advance
Amount to be paid (total price or part of the price and/or percentage of the total
price) .......................................................................................................................
Latest date for payment to be received by the Seller’s bank ..................................
Special conditions applying to this payment [if any] ...............................................
❑ Payment by documentary collection
Amount to be paid [total price or price per delivery instalment] ............................. .
Latest date for payment ..........................................................................................
Means of payment: (i.e. documents against payment − D/P, documents against
acceptance – D/A) hereafter: ................................................................................
The documents to be presented are specified at Article 5 of this contract.
Payment by documentary collection shall be the subject to the Uniform Rules for
Collections published by the International Chamber of Commerce (ICC).
❑ Payment by irrevocable documentary credit
The Buyer must arrange for an irrevocable documentary credit in favour of the
Seller to be issued by a reputable bank, subject to the Uniform Customs and
Practice for Documentary Credits published by the International Chamber of
Commerce (ICC). The issue must be notified at least 14 days before the agreed
date for delivery, or before the beginning of the agreed delivery period specified at
Article 2 of this contract, as appropriate, unless the Parties agree otherwise as
specified hereafter:
[Date on which the documentary credit must be notified to the Seller, other]
......................................................
The credit shall expire 14 days after the end of the period or date of delivery
specified in Article 2 of this contract, unless otherwise agreed hereafter: ...............
The documentary credit does not have to be confirmed, unless the Parties agree
otherwise, as specified hereafter: ...........................................................................
All costs incurred in relation to confirmation shall be borne by the Seller, unless
the Parties agree otherwise, as specified hereafter: ................................................
The documentary credit shall be payable at sight and allow partial shipments and
trans-shipments, unless the Parties agree otherwise, as specified hereafter: ..........
❑ Payment backed by bank guarantee

302
 The Buyer shall provide, at least 30 days before the agreed date of delivery or the
beginning of the agreed delivery period specified at Article 2 of this contract,
unless the Parties specify hereafter some other date: . . . . . . . . . , either a first
demand bank guarantee subject to the Uniform Rules for Demand Guarantees
published by the ICC, or a standby letter of credit subject either to such rules or to
the Uniform Customs and Practice for Documentary Credits published by the ICC,
in either case issued by a reputable bank.
❑ Other payment arrangements
...............................................................................................................................
5. Documents
5.1 The Seller shall make available to the Buyer (or shall present to the bank specified
by the Buyer) the following documents (tick corresponding boxes and indicate, as
appropriate, the number of copies to be provided):
❑ Commercial invoice ..........................................................................................
❑ The following transport documents (specify any detailed requirements).
❑ Packing list .......................................................................................................
❑ Insurance documents .........................................................................................
❑ Certificate of origin ..........................................................................................
❑ Certificate of inspection ....................................................................................
❑ Customs documents ..........................................................................................
❑ Other documents .................................................................................................
5.2 In addition, the Seller shall make available to the Buyer the documents indicated
in the ICC Incoterms the Parties have selected under Article 2 of this contract.
6. Non-performance of the Buyer’s obligation to pay the price at the agreed time
6.1 If the Buyer fails to pay the price at the agreed time, the Seller shall fix to the
Buyer an additional period of time of (specify the length, e.g. 7 days, 14 days, 30
days, etc. or opt for a “period of time of reasonable length”) for performance of
payment. If the Buyer fails to pay the price at the expiration of the additional period,
the Seller may declare this contract avoided in accordance with Article 11 of this
contract.
6.2 If the Buyer fails to pay the price at the agreed time, the Seller shall in any event
be entitled, without limiting any other rights it may have, to charge interest on the
outstanding amount (both before and after any judgment) at the rate of [specify] % per
annum. [alternatively: Specify other rate of interest agreed by the Parties.]

303
 [Comment: The Parties should take into consideration that in some legal systems
payment of interest is unlawful, or is subject to a legal maximum rate, or there is
provision for statutory interest on late payments.]
7. Non-performance of the Seller’s obligation to deliver the Goods at the agreed
time
7.1 If the Seller fails to deliver the Goods at the agreed time, the Buyer shall fix to the
Seller an additional period of time (specify the length, e.g. 7 days, 14 days, 30 days,
etc. or opt for a “period of time of reasonable length”) for performance of delivery. If
the Seller fails to deliver the Goods at the expiration of the additional period, the
Buyer may declare this contract avoided in accordance with Article 11 of this
contract.
[Option: The Parties may provide liquidated damages for late delivery. If they decide
so, they could use the following model clause on liquidated damages unless otherwise
agreed.
“7.2 If the Seller is in delay in delivery of any goods as provided in this contract, the
Buyer is entitled to claim liquidated damages equal to 0.5% (parties may agree some
other percentage: . . . . . . . %) of the price of those goods for each complete day of
delay as from the agreed date of delivery or the last day of the agreed delivery period,
as specified in Article 2 of this contract, provided the Buyer notifies the Seller of the
delay.
Where the Buyer so notifies the Seller within . . . . . . . days from the agreed date of
delivery or the last day of the agreed delivery period, damages will run from the
agreed date of delivery or from the last day of the agreed delivery period. Where the
Buyer so notifies the Seller more than . . . . . . . days after the agreed date of delivery
or the last day of the agreed delivery period, damages will run from the date of notice.
Liquidated damages for delay shall not exceed . . . . . . . % of the price of the delayed
goods. Liquidated damages for delay do not preclude avoidance of contract in
accordance with Article 11.”]
8. Lack of conformity
8.1 There is a lack of conformity where the Seller has delivered:
8.1.1 Part only or a larger or a smaller quantity of the Goods than specified in
Article 1 of this contract;
8.1.2 The Goods which are not those to which this contract relates or goods of a
different kind;

304
 8.1.3 The Goods which lack the qualities and/or characteristics specified in Article
1 of this contract and/or which lack the qualities of a sample or model which the
Seller has held out to the Buyer;
8.1.4 The Goods which do not possess the qualities and/or characteristics
necessary for their ordinary or commercial use;
8.1.5 The Goods which do not possess the qualities and/or characteristics for any
particular purpose expressly or impliedly made known to the Seller at the time of
the conclusion of this contract;
8.1.6 The Goods which are not contained or packaged in the manner specified in
Article 1 of this contract. [Comment: In the absence of such a contract clause, it
shall be the manner usual for such goods or, where there is no such manner, in a
manner adequate to preserve and protect the Goods.]
8.2 The Seller shall be liable under paragraph 8.1 of this Article for any lack of
conformity that exists at the time when the risk passes to the Buyer, even though the
lack of conformity becomes apparent only after that time.
[Comment: The Parties may limit the Seller’s liability for lack of conformity of the
Goods. However, such a contract clause shall be null and void if a lack of conformity
was known to the Seller and he failed to notify the Buyer thereof. If the Parties decide
to limit the Seller’s liability for lack of conformity, they could use the following
clause:
The Seller’s liability under paragraph 8.1 of this Article for lack of conformity of the
Goods is limited to [specify the limitation(s)].]
8.3 The Seller shall not be liable under paragraph 8.1 of this Article for any lack of
conformity if, at time of the conclusion of this contract, the Buyer knew or could not
have been unaware of such lack of conformity.
8.4 The Buyer shall examine the Goods, or cause them to be examined, within as
short period as is practicable in the circumstances. The Buyer shall notify the Seller of
any lack of conformity of the Goods, specifying the nature of the lack of conformity,
within . . . . . . . . . . days after the Buyer has discovered or ought to have discovered
the lack of conformity. In any event, the Buyer loses the right to rely on a lack of
conformity if he fails to notify the Seller thereof at the latest within a period of two
years (other period of time) from the date on which the Goods were actually handed
over to the Buyer.
Comment: The Parties may specify that the notice of non-conformity shall be in
writing. The Parties may also specify that, where the notice of non-conformity has
been sent by letter or other appropriate means, the fact that such notice is delayed or

305
 fails to arrive at its destination shall not deprive the Buyer of the right to rely
thereon.]
8.5 Where the Buyer has given due notice of non-conformity to the Seller, the Buyer
may at his option:
8.5.1 Require the Seller to deliver any missing quantity of the Goods, without any
additional expense to the Buyer;
8.5.2 Require the Seller to replace the Goods with conforming goods, without any
additional expense to the Buyer;
8.5.3 Require the Seller to repair the Goods, without any additional expense to the
Buyer;
8.5.4 Reduce the price in the same proportion as the value that the Goods actually
delivered had at the time of the delivery bears to the value that conforming goods
would have had at that time. The Buyer may not reduce the price if the Seller
replaces the Goods with conforming goods or repairs the Goods in accordance
with paragraph 8.5.3 and 8.5.3 of this Article or if the Buyer refuses to accept such
performance by the Seller;
8.5.5 Declare this contract avoided in accordance with Article 11 of this contract.
The Buyer may also claim damages as provided for in Article 14 of this contract.
[9. Expertise procedure [Optional]
9.1 In the event that the Buyer is not satisfied with the quality of the Goods delivered
or to be delivered, it must inform the Seller of such dissatisfaction as soon as possible,
and in any event within . . . . . . . days of delivery of the Goods.
9.2 The Buyer shall immediately apply to the following institution . . . . . . . for an
expert to be appointed. If no institution has been specified by the Parties, then the
Buyer shall immediately proceed to appoint an expert. Any expert appointed shall be
independent of the Parties.
9.3 The expert shall consider and report to the Parties on the alleged non-conformity
of the Goods.
9.4 For this purpose, the expert shall be entitled to inspect the entire goods, or
samples taken under his supervision, and may carry out any test which he considers
to be appropriate.
9.5 The expert shall submit his report to both parties by (specify the means, e.g.
registered post). The report shall be final and binding upon the Parties unless, within
. . . . . . . days after it has been received, it is challenged by one of the Parties by the
commencement of proceedings in accordance with the dispute resolution procedure
provided under this contract.

306
 9.6 The expert’s fees and expenses shall be borne by the Buyer pending completion of
the expertise procedure, but shall be reimbursed to the Buyer by the Seller if the
nonconformity of the Goods is established.]
10. Transfer of property
10.1 The Seller must deliver to the Buyer the Goods specified in Article 1 of this
contract free from any right or claim of a third person.
[Option: The Parties may provide for the retention of title clause if such a clause is
valid under the law applicable to the contract. According to that clause, the Goods
shall remain the property of the Seller until the full payment of the price. If the Parties
decide so, they can use the following clause:
“10.1 Retention of title. The property in the Goods specified in Article 1 of this
contract shall not pass to the Buyer until the Seller has received payment in full of the
price of the Goods. Until property in the Goods passes to the Buyer, the Buyer shall
keep the Goods separate from those of the Buyer and third parties and properly
stored, protected and insured and identified as the Seller’s property.”]
10.2 If the Goods specified in Article 1 of this contract are subject to a right or claim
of a third person, the Buyer shall notify the Seller of such right or claim and request
that the other goods free from all rights and claims of third persons be delivered to it
by the Seller without any additional expense to the Buyer. [alternatively, the Buyer
may request the Seller to free the Goods from all rights and claims of third persons
within (specify the period of time e.g. reasonable time, immediately, 30 days, etc.)
without any additional expense to the Buyer.]
10.3 If the Seller complies with a request made under paragraph 10.2 of this Article,
and the Buyer nevertheless suffers a loss, the Buyer may claim damages in
accordance with Article 14 of this contract.
10.4 If the Seller fails to comply with a request made under paragraph 10.2 of this
Article, the Buyer may declare this contract avoided in accordance with Article 11 of
this contract and claim damages in accordance with Article 14.3 of this contract. If the
Buyer does not declare this contract avoided, he shall have the right to claim damages
in accordance with Article 14.3 of this contract.
10.5 The Buyer shall lose his right to declare this contract avoided if he fails to notify
the Seller as provided in paragraph 10.2 of this Article within . . . . . . . . . . days
[Alternative: Reasonable time, immediately, etc. from the moment when he became
aware or ought to have become aware of the right or claim of the third person in
respect of the Goods.]

307
 10.6 The Seller shall not be liable under this Article if the existence of right or claim
of a third person on the Goods was notified to the Buyer at the time of the conclusion
of this contract and the Buyer agreed to take the Goods subject to such right or claim.
[10.7 Optional: “No action for legal defects can be taken by the Buyer after one year
(specify other period of time) from the date when the Buyer became aware of the
existence of right or claim of a third person on the Goods.”]
11. Avoidance of contract
11.1 There is a breach of contract where a party fails to perform any of its obligations
under this contract, including defective, partial or late performance.
11.2 There is a fundamental breach of contract where:
11.2.1 Strict compliance with the obligation which has not been performed is of the
essence under this contract; or
11.2.2 The non-performance substantially deprives the aggrieved party of what it was
reasonably entitled to expect under this contract.
[Option: The Parties additionally agree that the following is to be considered as a
fundamental breach of contract: [Specify the cases that constitute a fundamental
breach of contract e.g. late payment, late delivery, non-conformity, etc.”].]
11.3 In a case of a breach of contract according to paragraph 11.1 of this Article, the
aggrieved party shall, by notice to the other party, fix an additional period of time of
reasonable length [alternatively, the Parties may specify the length, e.g. 15 days, 30
days] for performance. During the additional period of time the aggrieved party may
withhold performance of its own reciprocal obligations and may claim damages but
may not declare this contract avoided. If the other party fails to perform its obligation
within the additional period of time, the aggrieved party may declare this contract
avoided.
11.4 In case of a fundamental breach of contract according to paragraph 11.2 of this
Article, the aggrieved party may declare this contract avoided without fixing an
additional period of time for performance to the other party.
11.5 A declaration of avoidance of this contract is effective only if made by notice to
the other party.
* Note: For the purposes of this Model Contract, the term “Avoidance” is taken from the
CISG and means termination of contract.
12. Effects of avoidance in general
12.1 Avoidance of this contract releases both parties from their obligation to effect
and to receive future performance, subject to any damages that may be due.

308
 12.2 Avoidance of this contract does not preclude a claim for damages for non-
performance.
12.3 Avoidance of this contract does not affect any provision in this contract for the
settlement of disputes or any other term of this contract that is to operate even after
avoidance.
13. Restitution
13.1 On avoidance of this contract either party may claim restitution of whatever it
has supplied, provided that such party concurrently makes restitution of whatever it
has received.
13.2 If both parties are required to make restitution, they shall do so concurrently.
13.3 Where the Seller is under an obligation to refund the price, he shall also be liable
for the interest thereon at the rate fixed by Article 6.2 of this contract, as of the date of
payment.
13.4 The Buyer shall be liable to account to the Seller for all the benefits which he has
derived from the Goods or part of them, as the case may be:
13.4.1 Where he is under an obligation to return the Goods or part of them; or
13.4.2 Where it is impossible for him to return the Goods or part of them, but the
contract is nevertheless avoided.
14. Damages
14.1 Any non-performance gives the aggrieved party a right to damages either
exclusively or in conjunction with any other remedies except where the
nonperformance is excused under force majeure as provided for in Article 17 of this
contract.
14.2 Where this contract is not avoided, damages for a breach of this contract by one
party shall consist of a sum equal to the loss, including loss of profit, suffered by the
other party. Such damages shall not exceed the loss which the Party in breach ought to
have foreseen at the time of the conclusion of this contract, in the light of the facts and
matters which then were known or ought to have been known to it, as a possible
consequence of the breach of this contract.
14.3 [To be adapted to a particular contract] In case of avoidance of this contract,
where there is a current price for the Goods, damages shall be equal to the difference
between the price fixed by the contract and the current price on the date on which the
contract is avoided. In calculating the amount of damages, the current price to be
taken into account shall be that prevailing at the place where delivery of the Goods
should have been made. If there is no such current price or if its application is
inappropriate, it shall be the price in a market which serves as a reasonable substitute,

309
 making due allowance for differences in the cost of transporting the Goods. If there is
no current price for the Goods, damages shall be calculated on the same basis as that
provided in paragraph 14.2 of this Article.
14.4 If this contract is avoided and if, in a reasonable manner and within a reasonable
time after avoidance [the Parties may specify the concrete terms], the Buyer has
bought goods in replacement or the Seller has resold goods, the Party claiming
damages shall recover the difference between the contract price and the price paid for
the Goods bought in replacement or that obtained by the resale.
14.5 The damages referred to in paragraphs 14.5 and 14.6 of this Article may be
increased by the amount of any reasonable expenses incurred as a result of the breach
or up to the amount of any loss, including loss of profit, which should have been
foreseen by the Party in breach, at the time of the conclusion of this contract, in the
light of the facts and matters which were known or ought to have been known to it, as
a possible consequence of the breach of this contract.
14.6 Damages are to be paid in a lump sum [the Parties may specify the other
solution. Comment: Damages may be payable in instalments where the nature of the
harm makes this appropriate. Damages to be paid in instalments may be indexed].
14.7. Damages are to be assessed in the currency in which the monetary obligation
was expressed [the Parties may specify the other solution, e.g. in the currency in
which the harm was suffered].
15. Mitigation of harm
A party who relies on a breach of this contract must take such measures as are
reasonable in the circumstances to mitigate the loss, including loss of profit, resulting
from the breach. If it fails to take such measures, the Party in breach may claim a
reduction in the damages in the amount by which the loss should have been mitigated.
16. Change of circumstances (hardship)
[Comment: The Parties should be free to consult each other in the event of a major
change in circumstances − particularly one creating hardship for a particular party.
However, an SME should only include the option at the end of Article 16.3 (right to
refer to the courts/arbitral tribunal to make a revision or to terminate the contract) if
(i) the SME considers that it is not likely to be used against that party’s interests by a
party in a stronger tactical position or (ii) the right to refer to a court/tribunal is
already an existing right under the applicable governing law in the event of
hardship.]

310
 16.1 Where the performance of this contract becomes more onerous for one of the
Parties, that party is nevertheless bound to perform its obligations subject to the
following provisions on change of circumstances (hardship).
16.2 If, however, after the time of conclusion of this contract, events occur which
have not been contemplated by the Parties and which fundamentally alter the
equilibrium of the present contract, thereby placing an excessive burden on one of the
Parties in the performance of its contractual obligations (hardship), that party shall be
entitled to request revision of this contract provided that:
16.2.1 The events could not reasonably have been taken into account by the
affected party at the time of conclusion of this contract;
16.2.2 The events are beyond the control of the affected party;
16.2.3 The risk of the events is not one which, according to this contract, the Party
affected should be required to bear;
16.2.4 Each party shall in good faith consider any proposed revision seriously put
forward by the other party in the interests of the relationship between the
Parties. [Option [add if wished: Otherwise delete if not applicable or not
enforceable under the law governing the contract.
“16.3 If the Parties fail to reach agreement on the requested revision within [specify
time limit if appropriate], a party may resort to the dispute resolution procedure
provided in Article 22. The [court/arbitral tribunal] shall have the power to make any
revision to this contract that it finds just and equitable in the circumstances, or to
terminate this contract at a date and on terms to be fixed.”.]
17. Force majeure – excuse for non-performance
17.1 “Force majeure” means war, emergency, accident, fire, earthquake, flood, storm,
industrial strike or other impediment which the affected party proves was beyond its
control and that it could not reasonably be expected to have taken the impediment into
account at the time of the conclusion of this contract or to have avoided or overcome
it or its consequences.
17.2 A party affected by force majeure shall not be deemed to be in breach of this
contract, or otherwise be liable to the other, by reason of any delay in performance, or
the non-performance, of any of its obligations under this contract to the extent that the
delay or non-performance is due to any force majeure of which it has notified the
other party in accordance with Article 17.3. The time for performance of that
obligation shall be extended accordingly, subject to Article 17.4.
17.3 If any force majeure occurs in relation to either party which affects or is likely to
affect the performance of any of its obligations under this contract, it shall notify the

311
 other party within a reasonable time as to the nature and extent of the circumstances
in question and their effect on its ability to perform.
17.4 If the performance by either party of any of its obligations under this contract is
prevented or delayed by force majeure for a continuous period in excess of three
[specify any other figure] months, the other party shall be entitled to terminate this
contract by giving written notice to the Party affected by the force majeure.
[Alternative: If preferred, replace 17.4 with the following alternative:
“17.4 If the performance by either party of any of its obligations under this contract is
prevented or delayed by force majeure for a continuous period in excess of three
[specify any other figure] months, the Parties shall negotiate in good faith, and use
their best endeavours to agree upon such amendments to this contract or alternative
arrangements as may be fair and reasonable with a view to alleviating its effects, but
if they do not agree upon such amendments or arrangements within a further period
of 30 [specify any other figure] days, the other party shall be entitled to terminate this
contract by giving written notice to the Party affected by the force majeure.”.]
18. Entire agreement
18.1 This contract sets out the entire agreement between the Parties. Neither party has
entered into this contract in reliance upon any representation, warranty or undertaking
of the other party that is not expressly set out or referred to in this contract. This
Article shall not exclude any liability for fraudulent misrepresentation. [Add where
relevant: “This contract supersedes any previous agreement or understanding
relating its subject matter”].
18.2 This contract may not be varied except by an agreement of the Parties in writing,
(which may include e-mail). [Add where Article 16.3 or equivalent is included: “Or
in accordance with Article 16.3”].
19. Notices
19.1 Any notice under this contract shall be in writing (which may include e-mail)
and may be served by leaving it or sending it to the address of the other party as
specified in Article 19.2 below, in a manner that ensures receipt of the notice can be
proved.
19.2 For the purposes of Article 19.1, notification details are the following, unless
other details have been duly notified in accordance with this Article:
– ...................................................................................................................................
– ...................................................................................................................................
20. Effect of invalid or unenforceable provisions

312
 If any provision of this contract is held by any court or other competent authority to
be invalid or unenforceable in whole or in part, this contract shall continue to be valid
as to its other provisions and the remainder of the affected provision, unless it can be
concluded from the circumstances that, in the absence of the provision found to be
null and void, the Parties would not have concluded this contract. The Parties shall
use all reasonable efforts to replace all provisions found to be null and void by
provisions that are valid under the applicable law and come closest to their original
intention.
21. Authorizations [add where relevant]
21.1 This contract is conditional upon the following authorizations first being
obtained [specify the authorization(s) or other conditions required e.g. of
governmental or regulatory authority].
21.2 The relevant party shall use all reasonable efforts on its part to obtain such
authorizations and shall notify the other party promptly of any difficulty encountered.
22. Dispute resolution procedure
Any dispute, controversy or claim arising out of or relating to this contract, including
its conclusion, interpretation, performance, breach, termination or invalidity, shall be
finally settled under the rules of [specify the arbitration institution] by [specify the
number of arbitrators, e.g. sole arbitrator or, if appropriate, three arbitrators]
appointed in accordance with the said rules. The place of arbitration shall be [specify].
The language of the arbitration shall be [specify].
[The following are alternatives to a specified arbitral institution under Article 22.
Alternative 1: Ad hoc arbitration
“Any dispute, controversy or claim arising out of or relating to this contract,
including its conclusion, interpretation, performance, breach, termination or
invalidity, shall be finally settled under the rules of UNCITRAL [specify other rules]
by [specify the number of arbitrators, e.g. sole arbitrator or, if appropriate, three
arbitrators] appointed by [specify name of appointing institution or person]. The
place of arbitration shall be [specify]. The language of the arbitration shall be
[specify].”]
[Alternative 2: State courts
“Any dispute, controversy or claim arising out of or relating to this contract, in
particular its conclusion, interpretation, performance, breach, termination or
invalidity, shall be finally settled by the courts of (specify place and country) which
will have exclusive jurisdiction.”.]
23. Applicable law and guiding principles

313
 23.1 Questions relating to this contract that are not settled by the provisions contained
in the contract itself shall be governed by the United Nations Convention on Contracts
for the International Sale of Goods (Vienna Sales Convention of 1980, hereafter
referred to as CISG).
Questions not covered by the CISG shall be governed by the UNIDROIT Principles
of International Commercial Contracts (hereafter referred to as UNIDROIT
Principles), and to the extent that such questions are not covered by the UNIDROIT
Principles, by reference to [specify the relevant national law by choosing one of the
following options:
The applicable national law of the country where the Seller has his place of business,
or
The applicable national law of the country where the Buyer has his place of business,
or
The applicable national law of a third country (specify the country)].
23.2 This contract shall be performed in a spirit of good faith and fair dealing.

DATE AND SIGNATURE OF THE PARTIES

Seller Buyer
Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Name. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Signature Signature

314