Transport Documentation

It is the common practice of the industry that the contract of carriage is accompanied with the relevant documentation required for transportation and carriage prior to loading of the goods with the purpose of handing over them to the owner of the goods at the receiving end. This process is generally conducted in two ways either through the carrier or through relevant financial institutions such as banks. In international commercial transactions for the purchasing of goods and commodities, carriage forms an essential element in the entire scenario. Once a buyer accepts to buy goods from a seller in accordance with the latters offer, the parties to such export / import trade undertake to submit certain documentation that are required to effect and fulfil the carriage obligation. These diversified documents would vary from type of trade to mode of carriage. Therefore, it is vital to analyse these important documents in respect of duties of the parties to furnish them as and when compelled to do so depending on the said types and modes. These documents thereby become part of the contract of carriage as mandatorily or optionally required to enable the transportation and especially the delivery aspect. While some remain mandatory to attach to the main contract some other remain as non-mandatory but supplementary documents that may need for certain purposes to fulfil the entire obligation of carriage and delivery. According to the law in Sri Lanka, the sales contract in export and import trade where the seller hands over to the buyer, a pro-forma invoice in which details such as product description, quality, price, terms of payment i.e. whether letter of credit, DP or DA, terms of delivery such as FOB, CIF, CFR and etc, and packing and marking details.

5.1

Use of Terms

Foremostly, the parties to an export / import contract agree upon their main rights and duties by entering into specific types of agreements based on the international commercial terms. This is done purely to safeguard each others entitlements and especially to know their respective duties and obligations in the carriage process. These terms were commonly known to be INCOTERMS having derived from its full expression; International Commercial Terms. These terms are widely used in international commercial transactions and in procurement process. Quite frequently, the use of three-letter trade terms can be seen in common contractual sales practices where they are intended to be used to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods. INCOTERMS can have a direct financial impact on the business and the results that it generates. It is essential for shippers to know the exact status of their shipments, responsibilities and terms on ownership while it is of vital importance for sellers and buyers to safeguard the goods and meet the commercial obligation involved in the transaction as the said good would remain in the legal possession of these parties depending on the nature of the contract until the final delivery is made. In order to grasp a fair knowledge on these terms and especially to identify the necessary documentation that are needed in respect of each and every carriage obligation it is important to analyse these INCOTERMS separately. EXW Ex Works Here the seller makes available the goods at his / her premises by asserting minimum responsibility. This terms means that the goods are ready for collection at a place and date designated by the seller

while the buyer taken upon him the responsibility of paying all transportation costs and risks up to the point of final destination. In that respect, the seller is expected to make available the commercial invoice for the sold goods. Here, since the seller will not be engaged with the loading and clearing for export purposes, the buyer is under the burden of organising and obtaining the insurance policies for the goods, export licenses, quarantine certificates if needed, prepare shipping list, enter into carriage contracts and finalise other necessary documentation required for shipment. In case the seller agrees to execute the acts of loading and arranging other necessary means for exportation, he does such acts at buyers risk and cost. If parties desire to entrust such acts on the seller, it is of utmost importance to include such provision in the sales contract. FCA Free Carrier Here the seller is responsible for arranging transportation but on the assumption that the buyer takes the risk and pay costs. In doing so, the seller will deliver the goods having cleared export burdens to a buyer-designated carrier at a named location while the burden of obtaining export licenses, quarantine certifications, prepare shipping list, enter into carriage contract on behalf of the buyer, and finalise all necessary documentation required for shipment rest with the seller while taking insurance policy lies with the buyer. CPT Carriage Paid To Here the seller pays for carriage and the risk transfers to the buyer upon handing of the goods to the first carrier at place of shipment in the country of export. In that case, the seller has to obtain the export license, quarantine certificates, prepare shipping list and other documentation required up to shipping process while the seller has to buy cargo insurance where he should name the buyer as the insured while the goods are on transit. The buyers burden would thus include entering into carriage contract with a carrier. CIP Carriage and Insurance Paid To This is a term that is used primarily in multi modal transportation where the seller pays for carriage and insurance. In that respect, the seller has to organise the carriage contract as well as insurance policy in addition to the obtaining of export licenses, quarantine certificates and prepare shipping list. DAT Delivered at Terminal This is also used for any type of shipments and here the seller pays for carriage to the terminal point at destination except import clearance costs. It means that the seller is expected to take export licence, quarantine certificate, prepare shipping list, enter into carriage contracts and take up insurance policy. He too assumes all risks up to the point that the goods are unloaded at the said point of terminal. DAP Delivered at Place Here the seller pays for carriage to the named place of the buyer except export clearance costs while seller assuming all risks up to the point of unloading at the said named place of the buyer. Therefore, the burden of taking export licenses, quarantine certificates, preparing shipping list, entering into

carriage contracts, obtaining of insurance, obtaining import clearances, quarantine clearance at destination and obtaining import clearances lies with the seller in this respect. FAS Free Alongside Ship Here the seller is required to clear goods for export and place the goods alongside the ship at the buyers named port. Again, this is used in sea transport rather than in multi modal where the delivery is accomplished when the goods are handed over to the buyers forwarders. In such context, the seller is expected to export licences and quarantine certificates while the buyer has to take insurance policies, import clearances and enter into contract of carriage. FOB Free on Board This is one of the most common types where the seller takes on the duty to load the goods on board a vessel designated by the buyer. The sellers responsibility is therefore expands only up to the point of loading while is expected to do the export clearing. In that sense, he is expected to take out the export licences and execute transportation means up to point of loading and the other necessary means on loading process. The buyer must indicate the seller the description of the carrier to whom the latter has to hand over the goods and in doing so the buyer is expected to enter into carriage contract while taking up insurance. He also has to obtain import clearances at his receiving end. The notion of delivery refers to the point of handing over of the goods to the named carrier of the buyer. It is said that the passing of risk occurs when the goods pass the ships rail at the port of shipment / loading. CFR Cost and Freight Here the seller must pay the cost and freight associated with carriage up to the point of destination and therefore enter into contract of carriage and obtains export licences and quarantine certificates. But however the obtaining of insurance policy rests on the buyer. This term was formerly used as C&F or CNF and is used only in maritime sector transport. However, the delivery is accomplished at the port of destination. CIF Cost, Insurance and Freight Although this is very much similar to the CFR, the insurance burden lies upon the seller where the and therefore he is expected to obtain the insurance policy. The delivery is accomplished at the port of destination with extremely less burden on the buyer with regard to the goods.

Use of INCOTERMS and Risk Sharing

Foreign trade is conducted upon certain predefined terms between the participants to the transactions especially for the convenience of the trade on one side and for the protection of commercial interests on the other side. In international trade, it is quite often that parties do not meet each other face-to-face and most of the transactions are conducted through the execution of

documents. Since these documents use a particular language, is creates so many complexities depending on the nature of the business involved. In modern day sophisticated businesses, even small changes in the language that is used can pose major impact on all aspects of the business agreement. Therefore, it is important that commonly understood language and phrases are used to mean trade business undertakings at all times during the transaction. For business terminology to be effective, phrases that have been used in these agreements and documents must mean the same throughout the industry. Understanding this importance, the International Chamber of Commerce as way back as 1936 created a uniform set of terms that could well be used by the trade, for harmonious usage as a matter of bridging the different and diverse use of language that suit those differing jurisdictions. These terms were commonly known to be INCOTERMS having derived from its full expression; International Commercial Terms. These terms are widely used in international commercial transactions and in procurement process. Quite frequently, the use of three-letter trade terms can be seen in common contractual sales practices where they are intended to be used to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods.

Types and Nature of Terms The INCOTERM refers to a type of agreement for the purchase and shipping of goods internationally. Though they are mainly and primarily used in international trade, modern practices of domestic trade prove that these terms are quite generally used in internal trade in a state. Although some may be confused as to its real application and usage in domestic trade, there is no such prohibition that these terms cannot however be used domestically. Nevertheless, their real appearance in international trade is focused on mitigating risks associated with the subject of shipping and delivery process. At present there are around 11 different trade terms that are generally used in the trade practice. Since its origination, there have been several versions of these terms with the first being introduced in 1936 with the modern one being done in 2010, which came into force in January, 2011. The first set of such rules were developed even before the official version of INCOTERMS came into being in 1936, and that was in 1923 when the most commonly used terms such as FOB, FAS, FOT, FOR, Free Delivered CIF and C&F were developed by the ICC National Committees. The reasons behind revising these terms from time to time is to update these terms with the development of the areas of commercial practices, types of goods and transport and the international law that relates to the subject matter. This process is conducted by international experts of various expertises assembling at the ICC for such purpose of revision. Some of the significant revisions were done in 1980s, 1990s and 2000s where the trade and activities were rapidly grown with the evolution of technology. These terms not only deal with transport but also with documentation required for global trade. Therefore, the insurance aspect thus depends widely on the use of such terms in order to mitigate risks associated with physical carriage and transfer of documents within the framework of transportation of goods. The use of these terms in documentation involved with the transfer of goods and services would define the rights and responsibilities of the parties involved and also determine the party that is responsible for each of the documents associated with the particular transaction. INCOTERMS can have a direct financial impact on the business and the results that it generates. It is essential for shippers to know the exact status of their shipments, responsibilities and terms on ownership while it is of vital importance for sellers and buyers to arrange insurance accordingly for the goods involved in the transaction as the said good would remain in the legal possession of these parties depending on the nature of the

contract until the final delivery is made. Lack of insurance may certainly result in waste of time, unnecessary legal actions and bitter relationships between the parties and more. INCOTERMS are mostly listed by category where terms beginning with the letter F refer to shipments where the cost of shipping is not paid by the seller while terms beginning with C refer to shipments where the cost of shipping is borne by the seller. With regard to terms beginning with the letter E, the sellers responsibilities are fulfilled when the goods are ready to depart from his facilities. D terms cover shipments where the sellers responsibilities end when the goods arrive at the destination. The latest version, which is the INCOTERMS 2010, is the eighth (08) published set of pre-defined terms. It not only curtailed the 13 terms that prevailed in the older version to 11 terms but also introduced two important new rules. In this present set, 7 terms apply regardless of the mode of transport while the other 4 applies solely for transportation over water. Classification of Terms In order to grasp a fair knowledge on the terms and to identify the risk factors associated with these terms for the purpose of meeting the insurance burden associated with foreign trade, it is important to analyse these INCOTERMS categorically. Therefore, the following classification and description would thus provide a basic knowledge on how they operate.
Any Mode of Transportation

EXW Ex Works Here the seller makes available the goods at his / her premises by asserting minimum responsibility for him/her thus imposing greater responsibility on the buyer. This terms means that the goods are ready for collection at a place and date designated by the seller while the buyer taken upon him the responsibility of paying all transportation costs and risks up to the point of final destination. Therefore, it is clear that the insurance has to be organized by the buyer as he takes upon him the risks of loss or damage to goods. Here, the seller will not be engaged with the loading and clearing for export purposes. In case the seller agrees to execute the acts of loading and arranging other necessary means for exportation, he does such acts at buyers risk and cost. If parties desire to entrust such acts on the seller, it is of utmost importance to include such provision in the sales contract. FCA Free Carrier Here the seller is responsible for arranging transportation but on the assumption that the buyer takes the risk and pay costs. In doing so, the seller will deliver the goods having cleared export burdens to a buyer-designated carrier at a named location while the burden of taking insurance lies with the buyer. CPT Carriage Paid To

Here the seller pays for carriage and the risk transfers to the buyer upon handing of the goods to the first carrier at place of shipment in the country of export. This term can be used in all kinds of transportation system. Although the seller has to buy cargo insurance, he should name the buyer as the insured while the goods are on transit. CIP Carriage and Insurance Paid To This is a term that is used primarily in multi modal transportation where the seller pays for carriage and insurance. However, the insurance coverage is to be a minimum one as the risk passes to the buyer once they are handed over to the first carrier such as a forwarder who often acts as the carrier. The buyer has to take insurance in order to cover risks from the point where his said forwarder takes charge of the goods. DAT Delivered at Terminal This is also used for any type of shipments and here the seller pays for carriage to the terminal point at destination except import clearance costs. He too assumes all risks up to the point that the goods are unloaded at the said point of terminal. Thereafter it is buyers burden to bear insurance relating to the goods up to final destination. DAP Delivered at Place Here seller pays for carriage to the named place of the buyer except export clearance costs while seller assuming all risks up to the point of unloading at the said named place of the buyer. Therefore, the burden of taking insurance lies with the seller in this respect. DDP Delivered Duty paid Here the seller is responsible for delivering the goods to the named place in the country of the buyer while paying all related costs as to transportation, clearance including import taxes and duties and insurance. But however, the seller is not responsible for unloading. This term is widely used in multimodal or courier type of transportation, and is known as a term that imposes maximum burden upon the seller while imposing minimum burden on the buyer.
Sea and Inland Waterway Mode of Transportation

FAS Free Alongside Ship Here the seller is required to clear goods for export and place the goods alongside the ship at the buyers named port. Again, this is used in sea transport rather than in multi modal where the delivery is accomplished when the goods are handed over to the buyers forwarders. In such context, the buyer has to take insurance from that point of handing over and pay the costs for carriage there onwards. FOB Free on Board

This is one of the most common types where the seller takes on the duty to load the goods on board a vessel designated by the buyer. The sellers responsibility is therefore expands only up to the point of loading while is expected to do the export clearing. Though this term is applicable for sea transport, it is not applicable for multi-modal transportation. The seller has to bear the costs of transportation up to point of loading and the loading process. The buyer must indicate the seller the description of the carrier to whom the latter has to hand over the goods while it is advisable for the seller to obtain insurance up to point of loading and the buyer to obtain insurance thereafter until receiving. The buyer needs to pay freight charges, transportation costs to final destination, unloading charges and other port charges at the arriving port. The notion of delivery refers to the point of handing over of the goods to the named carrier of the buyer. It is said that the passing of risk occurs when the goods pass the ships rail at the port of shipment / loading. CFR Cost and Freight Here the seller must pay the cost and freight associated with carriage up to the point of destination but however leaving the risk of loss or damage on the buyer, so that the latter has to take up insurance during voyage and up to the time of delivery. This term was formerly used as C&F or CNF and is used only in maritime sector transport. However, the deliver is accomplished at the port of destination. Furthermore, the burden of vesting upon a carrier thus lies on the buyer in this respect. CIF Cost, Insurance and Freight Although this is very much similar to the CFR, the insurance burden lies upon the seller where the risk is associated with him until he delivers the goods to the buyer at the final destination in a carrier chosen by the seller. The delivery is accomplished at the port of destination with extremely less burden on the buyer with regard to the goods.