4. Yes FBL evidences a genuine through liability on the part of the issuer, in conformity with the ICC Rules for a Combined Transport Document.

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2 Timber Exports The exporter seems to be in a better bargaining position than his respective buyers with respect to arranging transport and insurance. He may therefore be able to quote a more competitive price under CFR, CIF, DES, DEQ or Delivered terms than under Ex Works, FAS or FOB. Further, he is in a position to support his country's national shipping and insurance. However, only with respect to Country D does he seem to be relieved of the risks arising from his increased obligations. The risks appearing in countries A, B, and C would therefore have to be assessed and set off against the benefits which the exporter (or his country) may get by extending the exporter s obligations. The exporter may avoid the risk of labour disturbances in Country A by using FOB but also by using CFR and CIF, particularly if he has required the buyer to pay upon shipment (by a documentary credit or otherwise). Since, under CFR and CIF, the exporter becomes a party in the contract of carriage, he may be called upon by the carrier to pay for the immobilization of the ship in the port of discharge ("demurrage") but this cost should be borne by the buyer in accordance with the terms mentioned. In practice, it is only seldom that the seller will be required by the carrier to pay demurrage in the port of discharge, since the carrier will make such payment a condition for the delivery of the goods to the buyer and also will have a lien on the goods as security for the claim. The situation, in principle, is the same in respect of the risk of congestion in the port of discharge. However, the exporter should now be even more prudent, since, in our example, the risk of demurrage seems to be quite serious and also un-predictable. In any event, he should require the buyer to pay upon shipment and, if he uses CFR or CIF terms rather than Ex Works, FAS or FOB, try to assess whether a potential claim for demurrage may exceed the value of the goods at the port of discharge or at some other place to which the goods may be carried under "liberty" or "transshipment" clauses in the bill of lading. If so, the buyer even if he has paid for the goods in advance may be

3 unwilling to take delivery from the carrier and may fail to fulfil his obligation to reimburse the seller. The seller may be able to conclude a contract of carriage placing the risk of congestion upon the carrier, but under the given circumstances this would probably be reflected in an increased freight charge. The buyers in Country C should, of course, be required to pay upon shipment at the latest. This being so, no "arrival terms" (DES, DEQ, Delivered) should be used. Ex Works, FAS or FOB are "safest", but CFR or CIF may also be used, provided there is no risk of additional claims by the seller against the buyer arising after the buyer's payment following from his obligation to reimburse the seller for demurrage payments to the carrier or for the costs of pro-curing the documents referred to in CFR and CIF.

4 Television Sets Imports to India 1. It is difficult or, in any event, impractical to quote a price on FOB, CFR or CIF terms. The seller is being offered a through rate which would have to be arbitrarily split between seller and buyer unless the freight forwarder could give a proper account for the portion of the freight attributable to the maritime part of the transport. 2. No. The transport document should not evidence shipment onboard, since the cargo control takes place in the freight forwarder's terminal in Kyoto. Consequently, the transport document should be of the "received for shipment" type. 3. Yes. The freight forwarder would qualify as carrier under the terms "FCA", "CPT" and "CIP" since he has made a contract of carriage with the shipper and has assumed liability as carrier for the through transport. 4. Yes FBL evidences a genuine through liability on the part of the issuer, in conformity with the ICC Rules for a Combined Transport Document. 5. It is suitable to use the term FCA" and to name "Conterm, Kyoto" as the point for delivery of the goods. However, since the risk of freight increases is minimal during the period between the time of the seller's quotation and the delivery of goods for transport, the parties could also agree to use CPT or CIP. In such case, the additional risk would be transferred from the seller to the buyer upon delivery of the goods to the first carrier the freight forwarder at Conterm Kyoto. The trade terms "FOB", "CFR" and "CIF" would not be suitable.

5 Be Careful with the Contract It is true that a supplier is best protected by an irrevocable and confirmed documentary credit which is a definite payment undertaking both by the issuing and by the confirming bank. It is also true that payment security hinges on the ability of the beneficiary to present the stipulated documents in compliance with the terms and conditions of the credit. It is further true that a supplier places himself at risk if he agrees to accept a credit which stipulates one or more documents which are to be issued by or on behalf of the buyer, for example: Certificate of Receipt signed by the buyer Forwarding Agent s Certificate that the goods have been received on behalf of the buyer Certificate of Inspection countersigned by the buyer Finally, it is true again that; - UCP leave the supplier and the buyer free to agree on which documents the credit is to stipulate - The appearance of dangerous documents stipulations in the credit more often than not ensues from in accurate or incomplete terms of payment in the commercial contract between the supplier and the buyer, and consequently - Lack of payment security is caused by the contract not by the documentary credit system As a result, the supplier should make sure at the earliest possible stage, but in any case not later than on receipt of the credit, that no documents are stipulated over the issuance, details or form of which control remains in the hands of the buyer.

6 Role Playing An International Trade Deal The final customer in the transaction is a supermarket chain in northern Germany called NATURLAND ESSEN. Naturland Essen relies on importers to supply it with tropical fruit. In this case it asks an importer called FRUTLAND GMBH to arrange a shipment for it. The proposed contract is for 50 containers of bananas to be purchased from the SUCROSE FRUIT COMPANY S.A. of GULFWAY, Costa Rica. Transportation is to be effected by TRANS BALTIC CARRIERS of Denmark in refrigerated containers on the Danish vessel VIKING NORDIC. Frutland GmbH may initiate the transaction by making a telephone, telex or fax inquiry to Sucrose Fruit and others, asking for a quote for 50 containers of a certain grade of bananas. It specifies certain terms, such as FOB the Viking Nordic at a certain date at the port of Gulfway. Frutland requires an inspection certificate by a certain inspector certifying that the bananas meet the health standards for importation into the European Union and the quality standards for the supermarket chain Naturland Essen. Frutland offers a letter of credit against documents by BANK OF HAMBURG of Hamburg. Frutland GMBH Naturland Essen Sucrose Fruit Company S.A. wishes to make the sale and returns by mail or fax a Proforma Invoice quoting a price of DEM 700 per container. This is considered a fair price by Frutland GmbH. Another bid, made by a small Nicaraguan firm, is slightly lower, but Frutland prefers to deal with Sucrose Fruit because of its consistent quality and reliability and better loading facilities at the Costa Rican seaport. Also, the Nicaraguan firm wants to be paid in U.S. dollars and Frutland does not want to bother covering the exchange rate risk for such a small contract. The proforma invoice is the international equivalent of a formal offer or bid as used in domestic transactions. It usually contains the names and addresses of the parties, is dated and refers back to the original inquiry made by the buyer so that it is clear who is involved and what proposal is being answered. It states the terms of the sale, in this case delivery FOB the vessel Viking Nordic on a certain date at the port of Gulfway, Costa Rica. The proforma invoice will also usually describe the goods to be sold, the quantity offered, the unit price, the total price, the shipping weight and volume and the time frame for which the prices will remain valid. If Frutland wishes to accept the terms as quoted it may simply mark the proforma invoice accepted, have an officer sign it and fax it back or communicate its acceptance by other means. This acceptance creates a legal contract under most legal systems. If this were a domestic transaction the deal would be concluded and a default would probably result in a call to legal counsel for a breach of contract suit. Internationally, however, the deal does not really begin until a letter of credit is actually issued. In this case the price is acceptable but Frutland wants to be furnished a clean, on Sucrose Fruit Company

7 board bill of lading, a customs invoice and a phytosanitary inspection certificate stating that the fruit meets its standards before it makes payment. Frutland takes the first step in consummating the transaction by making an application to Bank of Hamburg for a letter of credit. The bank, knowing that it will have to pay the letter of credit if Frutland fails to do so, will consider the application in roughly the same manner that it would consider a loan. If Frutland is less than perfectly creditworthy, Bank of Hamburg may require it to deposit funds to cover the letter of credit in advance or require that the sale be by means of an order bill of lading in favor of Trans Baltic Carrier the bank. Because Frutland must resell the bananas in order to have enough cash to pay off the letter of credit, the bank offers to honor a 60-day time draft upon Sucrose Fruit s presentation of documents. Frutland is an old, reliable customer of Bank of Hamburg and the application is approved. Just to be cautious, Bank of Hamburg insisted that an order bill of lading be used and Bank of Hamburg be named consignee. Bank of Hamburg issues the letter of credit, requiring as conditions for acceptance of the time draft a clean, on board bill of lading, an inspection certificate and a customs invoice for the European Union. Bank of Hamburg has no branch in Costa Rica, but it has made an agreement with BANCO GENERAL DE AGREGA to handle its business in Costa Rica and Bank of Hamburg handles Banco General de Agrega s business in Germany. Bank of Hamburg Bank of Hamburg forwards the letter of credit to Banco General de Agrega, which notifies Sucrose Fruit Company S.A. that the money is available when the bank is furnished the required documents. Banco General De Agrega Sucrose Fruit s management becomes nervous when it sees the name Banco General de Agrega. Sucrose Fruit s CEO has just won a city mayoral election against one of the directors of Banco General de Agrega after an acrimonious campaign. Further, Banco General de Agrega s head cashier has just been convicted of fraud and one of its directors was observed cheating during the annual charity golf tournament. Sucrose Fruit does not know anything about Bank of Hamburg. The decision is made to ship the bananas, but only if Sucrose Fruit s longtime commercial bank, TACO BANK S.A., will confirm that it will pay the letter of credit if Banco General de Agrega and Bank of Hamburg do not. Taco Bank, aware that Bank of Hamburg is honorable and sound, is happy to confirm the letter of credit for a small fee. Thus Taco Bank becomes the confirming bank.

8 At this point, Sucrose Fruit feels confident enough to gather, pack and ship the fruit according to the contract. It calls the carrier, Trans Baltic Carriers, and requests the delivery of empty containers to its plantation. They use their own Export Forwarder named ALTAVISTA INTERNATIONAL for the whole process of transportation and negotiations with Trans Baltic Carriers. The containers are packed with the fruit and sent to the seaport. At the port of Gulfway an inspector designated by Frutland checks the fruit and determines that it meets the standards required by the European Union and Frutland s customer Naturland Essen. A representative of the carrier also has a look inside the containers before they are Taco Bank S.A. sealed so that the carrier can later issue a bill of lading stating the nature and condition of the cargo. Sucrose Fruit pays the costs of loading aboard ship because the contract is FOB the vessel. An officer of the vessel Viking Nordic observes the loading process and immediately issues a mate s receipt. In a day or two, the vessel s owners will issue the bill of lading to Sucrose Fruit. Altavista International Sucrose Fruit is happy to recive its bill of lading because it already has the inspection certificate and has prepared the customs invoice. It prepares a draft to itself for the contract price and submits all the documents to Banco General de Agrega, whereupon it learns that its fears about the bank were unfounded. Banco General de Agrega s officer routinely stamps the draft accepted and returns it. The draft is now called a banker s acceptance. If it had been a sight draft, Sucrose Fruit could have received credit for it immediately. Because it is a 60-day time draft, Sucrose Fruit must wait until the 60 days expire before Banco General de Agrega will pay the full amount. This creates a problem for Sucrose Fruit, because the field workers, stevedores and inspectors must be paid at the end of the month. To solve this problem, Sucrose Fruit endorses the draft over its bank, Taco Bank, and Taco Bank gives Sucrose Fruit immediate credit for all but a small percentage of the face value of the time draft. This is known as discounting the time draft. The amount of the discount is based on the time value of the money involved, the administrative effort in the transaction and any exchange rate and other risk involved plus a profit for the bank. In this case, because the time involved is short and the risk is small, the discount is not large and Sucrose Fruit receives its funds in time to meet payroll. After a few days the container ship Viking Nordic berths at the port of Hamburg, Germany and off-loads the containers of fruit from a refrigerated hold. According to instructions in the bill of lading, notice of arrival of the shipment has been given to Frutland GmbH and its customs broker by the carrier through the Import Forwarder named IFF (INTERNATIONAL FREIGHT FORWARDERS) GMBH. The order bill of lading, written in favor of Bank of Hamburg but endorsable by Bank of Hamburg to anyone, has arrived days before by air from Banco General de Agrega to the Bank of Hamburg office. If it has not already done so, Frutland reimburses Bank of Hamburg for the amount paid to IFF

9 Sucrose Fruit on the letter of credit, as well as any fees charged by Bank of Hamburg for handling the transaction. Bank of Hamburg then endorses the bill of lading over to Frutland. Frutland next receives payment for the shipment from Naturland Essen and has the shipment off-loaded from the vessel and cleared through customs abd arranges for inland carriage by rail to Naturland Essen s refrigerated warehouse in Hannover. There are many, many variations on the basic transaction outlined here, but some elements of this hypothetical contract are found in most international trade transactions between arm slength parties. Increasingly, the steps and documents enumerated above are replaced with equivalent electronic messages exchanged between computers. One might expect that the entire process will take place in the complete absence of paper at some time in the future. THE PLAYERS BUYER - NATURLAND ESSEN IMPORTER - FRUTLAND GMBH EXPORTER - SUCROSE FRUIT COMPANY S.A. CARRIER - TRANS BALTIC CARRIERS IMPORTER S BANK - BANK OF HAMBURG EXPORTER S BANK - BANCO GENERAL DE AGREGA NEGOTIATING BANK / CONFIRMING BANK - TACO BANK S.A. FORWARDER ( EXPORT ) - ALTAVISTA INTERNATIONAL FORWARDER ( IMPORT ) - IFF ( INTERNATIONAL FREIGHT FORWARDERS ) GMB