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INTERNATIONAL COMMERCIAL TERMS (INCO TERMS)

F.O.B AND C.I.F

INCO TERMS define the mutual obligations of seller and buyer arising from the movement of goods under
an International contract from the standpoint of risks, costs and documents (UNCTAD, 1990. INCO TERMS
are set of international rules for the interpretation of the most commonly used foreign trade terms. The
importance of the rules includes;

 To reduce the uncertainty caused by trade practices in different countries

 Simplify the negotiations involved in international commerce
 Ensure common understanding of obligations

They are many in number such as Free Carrier (FCA), Free Alongside Ship (FAS), Cost and Freight (CFR),
Carriage Paid to (CPT), Carriage and Insurance Paid to (CIP), Delivered at Frontier (DAF), Delivered ex
Ship (DES), Delivery ex quay (DEQ), Delivered Duty unpaid (DDU), Delivered duty paid (DDP) including
the most preferably ways to many people which are Cost, Insurance and Freight (CIF) and Free on board
(FOB)

CIF and FOB

CIF and FOB are part of overseas sales. The export of goods involves the contract of sale as the core of
the operation and a range of ancillary contracts transport, insurance, finance. The physical movement of
goods and physical movement of documents. Overseas sales give rise to special problems mainly because
there is often a long interval of time between dispatch of the goods and their arrival at the agreed
destination. During this period, the parties, which mean the seller and the buyer are exposed to three (3)
types of risks; namely: - Financial risk, Physical risk and Legal risks.

C.I.F is a documentary sale whereby the seller’s normal duty to deliver goods is substituted by a duty to
ship or cause them to be shipped and a duty to tender certain documents evidencing that carriage and
insurance contracts have been entered into on appropriate terms. In transit, the goods are represented by a
transport document, classically a Bill of Lading, which is their documentary expression until the transit
comes into an end.
 Duties of the seller under CIF contract

i. Ship the goods as described in the contract and within agreed shipping period
ii. Arrange for marine insurance
iii. Obtain a bill of lading evidencing the contract of carriage by sea.
iv. Procure a contract of carriage.
v. Produce a commercial invoice
vi. Tender the documents to the buyer to effect payment

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 The buyer’s duty in CIF contract

i. To accept the documents

ii. Receive the goods at agreed port of destination
iii. Bear all costs incidental to the export

NB. A CIF contract principally involves the following documents;

(a). an invoice - commercial invoice relating to goods. An invoice in CIF serves the following;
(i) It contains a list of goods that have been sold
(ii) It shows what must be paid for each item in the contract
(iii) It permits the buyer to ascertain which portion of the price refers the cost of the goods themselves and
which to the freight and insurance.
(b). an insurance policy – covering the goods for their sea transit. The purpose of
insurance policy under C.I.F contract is to cover the goods against marine risks. The seller is bound to
maintain insurance for the whole of the transit.
(c). A bill of lading – showing shipment at the contractual port of shipment (if any) of goods
confirming to the contract. The bill of lading performs the following principal functions;

a. it is evidence of the terms of the contract of carriage

b. it is a receipt for the goods issued by the carrier
c. it is a document of title. This is concerned with the to the buyer of the seller’s rights against the
carrier
d. it evidences the apparent condition of the goods
e. it is a vehicle for transferring the contractual rights it embodies
 The significance of the Bill of lading includes;

a. It is a symbol of goods which normally its transfer from the seller to the buyer effects a
constructive delivery of the goods, meaning that once you have a bill of lading it is like you have
the goods.

b. The bill of lading (like the insurance policy) in commercial sense, the buyer’s guarantee that he will
receive the goods in due course, or if they are lost or damaged he will have a recourse against the
ship owner.

• Free on Board (F.O.B)

Is a type of contract for the international sale of goods in which the seller’s duty is fulfilled by placing the
goods on board (a ship) is a term in international commercial law specifying at what point respective
obligations, costs, and risk involved in the delivery of goods shift from the seller to the buyer.

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 Duties of the seller under the F.O.B contract

a. To ensure goods conforming to the contract are put or placed free on board (over the rail) of a ship
to be named/nominated by the buyer at the port of shipment.
b. The seller’s obligations extend to all charges incurred before shipment. Including loading charges.
c. The seller must furnish the buyer with documents that will enable the buyer to obtain possession of
the carrier.
 Duties of the buyer under the F.O.B contract

a. Making arrangements for the shipment of the goods

b. Give adequate notice to the seller of the nominated ship
c. Nominate effective ship in which the goods may be loaded by the buyer
d. Duty to take insurance policy to cover the goods while in transit

LETTER OF CREDIT (DOCUMENTARY CREDIT)

In modern business practice, a letter of credit (LC) also known as a Documentary Credit, is a written
commitment by a bank issued after a request by an importer (foreign buyer) that payment will be made to
the beneficiary (exporter) provided that the terms and conditions stated in the LC been met, as evidenced
by the presentation of specified documents.

A letter of credit is a method of payment that is an important part of international trade. They are particularly
useful where the buyer and seller may not know each other personally and are separated by distance,
differing laws in each country and different trading customs.

It is generally considered that Letters of Credit offer a good balance of security between the buyer and the
seller, because both the buyer and seller rely upon the security of banks and the banking system to ensure
that payment is received and goods are provided.

In a Letter of Credit transaction the goods are consigned to the order of the issuing bank, meaning that the
bank will not release control of the goods until the buyer has either paid or undertaken to pay the bank for
the documents.

In the event that the buyer is unable to make payment on the purchase, the seller may make a demand for
payment on the bank. The bank will examine the beneficiary's demand and if it complies with the terms of
the letter of credit, will honor the demand.

Most letters of credit are governed by rules promulgated by the International Chamber of Commerce known
as Uniform Customs and Practice (UCP) for Documentary Credits.

The current version, UCP 600, became effective July 1, 2007. Banks will typically require collateral from the
purchaser for issuing a letter of credit and will charge a fee which is often a percentage of the amount
covered by the letter of credit.

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Briefly

1. After a contract is concluded between a buyer and a seller, the buyer's bank supplies a
letter of credit to the seller.

2. Seller consigns the goods to a carrier in exchange for a bill of lading.

3. Seller provides the bill of lading to bank in exchange for payment. Seller's bank then
provides the bill to buyer's bank, who provides the bill to buyer.

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4. Buyer provides the bill of lading to carrier and takes delivery of the goods

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