The Risks and The Risks and Terms of Trade Terms of Trade involved with involved with International International

Sale of Goods Sale of Goods

PresentersPresenters

Varun Chawla503290001-6

Sunny Chawla513290001-7

IntroductionIntroduction The Importance of Sale & Trade termThe Importance of Sale & Trade term

• Terms of Sale and Trade define the obligations, risks, and costs of the seller Terms of Sale and Trade define the obligations, risks, and costs of the seller

and buyer for the delivery of goods.and buyer for the delivery of goods.

• Understanding the risks in International Trade and how to apply the most Understanding the risks in International Trade and how to apply the most

critical elements in negotiating an International Sales Contract is very critical elements in negotiating an International Sales Contract is very

important.important.

• When ever there is any transaction or deals between a buyer and seller. It is When ever there is any transaction or deals between a buyer and seller. It is

always best to have a clear understanding of their dealing written in a always best to have a clear understanding of their dealing written in a

document. The dealing might include a negotiation of delivering goods at document. The dealing might include a negotiation of delivering goods at

specific time, transferring money, fix price and quality, warranty, and the specific time, transferring money, fix price and quality, warranty, and the

term of good performance as well as the responsibilities for any adverse term of good performance as well as the responsibilities for any adverse

consequences.consequences.

The Risks and Terms of Trade The Risks and Terms of Trade involved with International involved with International

Sale of Goods Sale of Goods

•ContentsContents

What is Risks?What is Risks? International TradeInternational Trade Risks in International Trade.Risks in International Trade. Preventing risk in International Trade.Preventing risk in International Trade. Destination Contract & Trade term RiskDestination Contract & Trade term Risk A Role play for CISG case studyA Role play for CISG case study

If your company import shoes and then you already make contract

Contract Must Includes:Contract Must Includes:

•What is the payment term?What is the payment term?

•Transportation responsibility.Transportation responsibility.

•Clear contract such as ( The product kind, color, size,…… Clear contract such as ( The product kind, color, size,…… etc.)etc.)

•Fix price and quality including warranty.Fix price and quality including warranty.

•Date (dd/mm/yy) of delivery the product or service (if Date (dd/mm/yy) of delivery the product or service (if have)have)

* All party should be clear about the contract.* All party should be clear about the contract.

International TradeInternational Trade

• International trade: International trade: It is It is

define  as the exchange define  as the exchange

of capital, goods, and services of capital, goods, and services

across international borders or across international borders or

territories. it represents a territories. it represents a

significant share of gross significant share of gross

domestic product (GDP)domestic product (GDP)

Risks In International TradeRisks In International Trade

Payment & RisksPayment & Risks

Payment term is one of the most important trade term. Since Payment term is one of the most important trade term. Since

1:Exporter- Concern on how to get the money1:Exporter- Concern on how to get the money

2:Importer- Concern on how to get the goods.2:Importer- Concern on how to get the goods.

Risk in Payment such as : Risk in Payment such as :

Cash in Advance: Cash in Advance: The most favorable term to the exporter because all the The most favorable term to the exporter because all the exporters would be happy if importer pay cash in advance. The reason of exporters would be happy if importer pay cash in advance. The reason of happy is that it’s remove all risk and allow the exporter to use money happy is that it’s remove all risk and allow the exporter to use money immediately. However, it could turn a risk for the importer.immediately. However, it could turn a risk for the importer.

Exporter

1- invoice

2- money

Importer

Quality Quality

The qualities of the product must be written in the contract . The The qualities of the product must be written in the contract . The

another best way to prevent the quality risk is that the importer another best way to prevent the quality risk is that the importer

send their own people to QC the product before being ship.send their own people to QC the product before being ship.

Note: Weather is also one the important causes that has a great Note: Weather is also one the important causes that has a great

affect in international transportation. Ex. If you import grape from affect in international transportation. Ex. If you import grape from

Europe to Thailand the season in both country is different. Europe to Thailand the season in both country is different.

Currency rateCurrency rate

Currency rate change can be benefit for one of the importer or Currency rate change can be benefit for one of the importer or exporter. exporter.

Example:Example:

Thailand import Ferrari from USA at the original cost at 1,000,000 Thailand import Ferrari from USA at the original cost at 1,000,000 $ * 35 = 35,000,000 but now the exchange rate is at 30 so now $ * 35 = 35,000,000 but now the exchange rate is at 30 so now the price will be 1,000,000 $ * 30= 30,000,000 Thailand got the price will be 1,000,000 $ * 30= 30,000,000 Thailand got 5,000,000 profit.5,000,000 profit.

DeliveryDeliveryIt is not only what type or cost of delivery should It is not only what type or cost of delivery should

be use in the transportation, but the importer be use in the transportation, but the importer

and exporter should know what type of delivery and exporter should know what type of delivery

should be use of the product of selling.should be use of the product of selling.

Example. Example. If you are importing pure If you are importing pure

vitamin which can’t stay longer then 90 days. So vitamin which can’t stay longer then 90 days. So

the importer party should use the fastest type of the importer party should use the fastest type of

transportation.transportation.

CustomCustomss

One of the problem is the tariff or tax for importing and exporting so all the party should have a clear detail on who is going to pay for the custom. The importer and exporter should know the rules and regulation properly before importing or exporting

Note; One of the problem is Under value invoice.

Source:: My own experience.

Preventing Risk

s

in Internatio

nal

Trading

Case study: ( Assume)

Mr. V is a Thai business men and want to import cosmetic products from Japan owned by Mr. Sunny. The importer gives company a purchase order number by telephone. The importer request the deliveries of 10,000 units with 30 $ per unit before 31st December 2010.

The importer agree to pay cash in advance and appreciate for 2% discount. The exporter send a acknowledgment mail to importer containing a limitation on any consequential damages and a 90-day warranty period for defective workmanship only before deliveries. Mr. Sunny is so happy to do dealing with Mr. V.

Therefore, Mr. V now can open L/C to do trading or apply CISG in a case if both or either one party is under the contracting state.

What Makes Our dealing The Contract:

-Offer and acceptance

-Intention to create a legal relationship

- Capacity of the party

- Lawful consideration

-Free consent & Social agreement

Letter of CreditLetter of Credit

-   It is the instrument issued by a bank at the request of a buyer. In L/C It is the instrument issued by a bank at the request of a buyer. In L/C the bank promises to pay a specific amount of money based upon bill the bank promises to pay a specific amount of money based upon bill of lading and a description of goods. of lading and a description of goods.

- The Letters of Credit give importers the most extensively used and The Letters of Credit give importers the most extensively used and conventional conventional international tradeinternational trade payment means and finance  payment means and finance instrument. instrument.

- By making Letter of Credit terms to permit Deferred Payment or Trade By making Letter of Credit terms to permit Deferred Payment or Trade Acceptance .Acceptance .

- Letter of Credit facilitates financing to the importer. Letter of Credit facilitates financing to the importer.

1 Mr. V ( importer) ask Thai bank to open L/C1 Mr. V ( importer) ask Thai bank to open L/C2 The importer bank send a L/C to Mr. Sunny ( exporter) Japan bank2 The importer bank send a L/C to Mr. Sunny ( exporter) Japan bank3 The Japan bank send L/C to Mr. Sunny3 The Japan bank send L/C to Mr. Sunny4 Mr. Sunny ship the products to Mr. V and get a bill of lading from 4 Mr. Sunny ship the products to Mr. V and get a bill of lading from

shipping company.shipping company.5 Mr. Sunny send shipping document including B/L and a draft of payment 5 Mr. Sunny send shipping document including B/L and a draft of payment

to JPN bankto JPN bank6 JPN bank pay to Mr. Sunny6 JPN bank pay to Mr. Sunny7 JPN send shipping document and a draft to Thai Bank.7 JPN send shipping document and a draft to Thai Bank.8 Thai bank send the shipping document and a draft to Mr. V.8 Thai bank send the shipping document and a draft to Mr. V.9 Mr. V pays to the Thai bank to get the shipping document and drafts. 9 Mr. V pays to the Thai bank to get the shipping document and drafts.

Kinds of L/CKinds of L/C

• 1: Irrevocable L/C: No cancellation or any modification 1: Irrevocable L/C: No cancellation or any modification without the consent of the beneficiary of exporter.without the consent of the beneficiary of exporter.

• 2: Confirmed L/C: Judging the credibility of the bank.2: Confirmed L/C: Judging the credibility of the bank.

• 3: Revolving L/C: Validity for the one transaction only3: Revolving L/C: Validity for the one transaction only

Appling of CISGAppling of CISG

Assume to the Case study: Assume to the Case study:

If Both Japan and Thailand are the contracting states. Therefore If Both Japan and Thailand are the contracting states. Therefore the CISG can be easily apply when there is any contract.the CISG can be easily apply when there is any contract.

• Even if one or both parties do not have their place of business Even if one or both parties do not have their place of business

in a contracting state the CISG might still apply in a contracting state the CISG might still apply

• However, if Thailand is only a contracting and Japan parties However, if Thailand is only a contracting and Japan parties choose Thai law as the law of the contract. Therefore, the CISG choose Thai law as the law of the contract. Therefore, the CISG would normally apply. According to article 1. when the rules of would normally apply. According to article 1. when the rules of private international law lead to the application of the law of aprivate international law lead to the application of the law of a

• Contracting State.Contracting State.

Bill of LadingBill of Lading• It is the most important It is the most important

document to the exporter, document to the exporter, importer and shipping importer and shipping company.company.

• It acknowledges receipt of It acknowledges receipt of the goods and represent the goods and represent the basic contract the basic contract between the exporter and between the exporter and shipping company that shipping company that show as evidence of title show as evidence of title to the goods for collection to the goods for collection by the importer.by the importer.

DraftDraft

• L/C is a promise to pay but it’s not a L/C is a promise to pay but it’s not a payment. The actual payment is payment. The actual payment is accomplished by DRAFT accomplished by DRAFT ( Documentary draft). ( Documentary draft).

• Clean draft: No shipping documentClean draft: No shipping document• Time draft: The time given like Time draft: The time given like

30/60/90/180 day. Pay after these 30/60/90/180 day. Pay after these days.days.

• Sight draft: Pay immediately Sight draft: Pay immediately

Forward Rate Forward Rate AgreementAgreement

We will guarantee u

Destination Contract & Trade Destination Contract & Trade term Riskterm Risk

1: Group E – Departure1: Group E – Departure2: Group F – Main carriage unpaid2: Group F – Main carriage unpaid3:Group C – Main carriage paid3:Group C – Main carriage paid4: Group D – Arrival4: Group D – Arrival

The most common trade terms for The most common trade terms for international tradeinternational trade

• 1 Ex. Works1 Ex. Works• 2 F.O.B2 F.O.B• 3 C.I.F3 C.I.F

E-TERME-TERMEXW – Ex Works (named place)

The seller makes the goods available at his premises. The buyer is responsible for all charges. The seller is not responsible

for loading the good In the vehicle for the exporter.

F-TermF-Term1: FOB – Free on board

The seller must load the goods on board the ship nominated by the buyer, cost and risk being divided at ship's rail. The seller must clear the goods for export.

CIF – Cost, Insurance and Freight :

The seller must bear cost, insurance and freight to a named overseas port. The seller pay for insurance for the insurance for buyer

C-TermC-Term

For a given term,For a given term,  ""YesYes""  indicates that theindicates that the  sellerseller  has the responsibility to provide the service has the responsibility to provide the service included in the priceincluded in the price  . . ""NoNo""  indicates it is indicates it is thethe  buyer'sbuyer's  responsibilityresponsibility..

CISG case studyCISG case study

Two friends doing Two friends doing businessbusiness

From : Denmark From : Finland

A B

They agree to do They agree to do BusinessBusiness

AA want to export want to export medicine to medicine to BB

A ring up to B officeA ring up to B office

Let us make a

contact !!!

It is ok we are friend

They agree on the They agree on the contract by telephonecontract by telephone

What about the payment

?

I will sent it to u after 30 days

when I receive the goods

AA sent goods to sent goods to BB

AA got betray by got betray by BB

I will go to Arbitration

!!!

You don’t have

contract paper hahah

Arbitrator

Arbitrator

We don’t have contract paper.

haha

To: A, do you have any

other evidence ?

I have phone conversation

tape

Arbitrator

Since both of your country is under the CISG contract then I will use CISG

Arbitrator

B you are wrong you

will be punish.

Never do business with friend with out any

contract :: BECAREFUL

The reason that CISG can The reason that CISG can help is ::help is ::

Article 11 say ::

A contract of sale need not be conclude d in or evidenced by writing and is not

subject to any other requirement as to form. It may be proved by any means, i

ncluding witnesses.

Thank youThank you