THE PCT, INCOTERMS 2020 AND THE DLC
POSTED : MAY 14, 2020
Scenario: Supplier from one country meets the end buyer in his country or visa versa. They meet over a few days to discuss business and settle on some basic understandings. 6 months later the end buyer signs the sales contract with the supplier. The contract notes the delivery mode as specified under ICC Incoterms. The devised method of payment is supported by a whole lot of attributes including a bank guarantee, bank comfort letters, a deposit, as well as at the production of a Bill of Exchange and other attributes pertaining to financial matters including private in-house or bank issued L/C’s. A commercial invoice is used in matters of collection, as well as other delivery documents as supported on the contract. This is the ‘ad hoc’ nature of the international trade deal in where often flawed and improper practices are seen being interlaced with proper aspects of business-which may lead to failed deals, angst and court challenges. FTNX or any PCT cannot apply such ‘ad hoc’ matters when trading in commodities. We can only strictly apply the rules of trade beyond the scope of normal expectations. The methods used by an end buyer to conclude on a commodity deal with the supplier, has nothing to do with the way a PCT must apply to conclude on such business.
FTNX is a Professional Commodity Trader (PCT). A growing number of Professional Commodity Traders are conducting business worldwide thanks to our long time presence in the market place and FTNX doctrine of trade. FTNX created the term ‘PCT’ to separate the informed professional and educated traders, from the many ill informed uneducated traders, found on the net today. A PCT has rules to abide by, they are disciplined traders who follow a very strict routine laden with safe and proper practices. We cannot take shortcuts. “ We need to work lawfully at a much higher level than prescribed under the above scenario. ”
In the above scenario the end buyer and supplier agree to apply ICC Incoterms delivery rules to matters of ‘delivering goods.’ The aspect of payment is separated to the aspect of delivery. The PCT MUST adhere to Incoterms delivery rules as well and interpret such accordingly in CONJUNCTION with ICC UCP banking rules in where a Documentary Letter of Credit (DLC) is used to pay for goods ordered by an end buyer. The delivery rules are an independent globally uniform aspect, as are UCP banking rules and ICC URC collection rules that a PCT must apply in being able to conclude in an International trade deal properly and safely, something that many ‘ad hoc’ traders don’t do. In essence we apply the most secure and safest legally defined method of conducting business that all suppliers and end buyers ought to be using, in where a large number of suppliers and end buyers do not. Our long experience in this business tells us as much.
FTNX (PCT) is not the ‘supplier’ in possession of goods, nor ‘end buyer/user’ of goods we “buy and sell.” We are not brokers, agents nor intermediary. We are legally defined as ‘buyers and sellers’ acting for undisclosed others. We cannot apply business in an ‘ad hoc’ manner. We can only apply legitimate business in the safest manner possible–we have no other options. Therefore, a PCT has to be proficient in not just applying the rules, but interpreting such rules as well, as it applies to our ‘small patch’ of international trade practices. A PCT is a ‘specialist’ at the business being applied. FTNX CEO, is also a world leading respected expert and best selling academic author, who has educated many ‘ad hoc’ traders for decades on proper trading applications, including serving advice not just to Corporations and professional traders, but to related professional entities like bankers and lawyers. We buy goods from a supplier and sell such goods to end buyers, most often at price far better than what the end buyer could ever obtain; and we do so while protecting the deal with formidable practices and procedures, all the way to final delivery and beyond. In this light our specialist position dictates that we only deal in very large single shipment or as preferred, revolving monthly deliveries. We do not conduct business on small single NBC or FCL sales as this market place is well saturated with ‘Ad hoc’ traders, applying their own business practices.
It is very rare to find a contract that does not apply to use Incoterms delivery rules as administered by the ICC Paris, France ; unlike methods of payment which often apply precarious risk laden methods. The law books are “busting at the seams,” where wrongly interpreted Incoterms delivery terms , or ‘ad hoc’ strange payment methods or both were used in commodity deals which resulted in huge financial losses. In this page we take a look at current Incoterms 2020 as released in January 2020 in where previous Incoterms 2010 may still be used on the same basis. Delivery rules is about the obligations of the maligned term “buyer or seller” but what it really refers to, is the obligations of the “Supplier in possession of goods and End buyer taking possession of goods ” when these two entities are concluding a deal amongst themselves applying their own terms of reference. This ‘ buyer/seller’ aspect has confused many ‘traders’ and of which hopefully ICC will change in the future to reflect the full account of such a term–as FTNX has done over decades. When an end buyer or supplier insists on NOT accepting, as a payment mode ICC ruling UCP 600 Bank issued DLC the PCT must cancel the inquiry or business being conducted as this is an indication that the PCT could be led into a precarious transaction. As an example; An end buyer could make demands of the seller after a few deliveries to i.e: Reduce the price of goods. An argument breaks out between parties to the contract where the supplier suspends or even cancels the contract. All payments stop. By applying this one action, the innocent supplier could be liable for a ‘breach of contract’ even though it was the end buyer who intentionally instigated such an action. Failure to perform as it applies to the end buyer also applies to the supplier. By using a UCP 600 DLC, so long as the supplier has full-filled his part of the delivery process by presenting the required documents as specified not on the contract but the UCP endorsed credit, the issuing bank will still honour payments on the DLC. This is what the term ‘irrevocable’ stands for under this aspect. We wrote about this aspect in 2013, 2015 and again in 2020 as more and more end buyers are making unwarranted demands of suppliers after the contract has been signed. This aspect now serves an excellent reason why the PCT MUST secure a UCP 600 endorsed DLC from the end buyer. FTNX is very wary of all similar traps that a supplier (or end buyer) could face, also serves another excellent reason inter alia, why a supplier or end buyer should use FTNX.
INCOTERMS 2020 DELIVERY RULES AND OBLIGATIONS OF THE PCT WHEN APPLYING TO USING AN UCP600 ‘AT SIGHT’ DLC TO PAY FOR GOODS
There are Eleven Incoterms in this new release. The least obligation is served via EXW. The most obligations are applied under DAP and DDP delivery term. Those who want to learn more about Incoterms can by a booklet from the ICC website. A PCT including FTNX can only apply the following Incoterms as per 2020 Edition.
- Any carriage mode: FCA and CIP:
- Carriage by ocean going vessel:CFR, FOB, FAS and CIF.
Incoterms 2010 apply similar aspects except for a few minor differing details, and may still be implied or formally applied while current UCP 600 rules are in effect. The delivery term CPT may also be used at times, mostly for special transactions applied under air cargo deliveries where the supplier accompanies the goods being sold i.e: Deep storage gold bullion carrying no current assay. FOB ‘Freight and Collect’ allowable variable (FOB&F) may also be used by a PCT, and well as ‘CIF&C’(and commission.) In all cases a Charter Party BOL (Bill of lading) cannot be used by a PCT because under UCP, FTNX has to produce a more expensive BOL which is endorsed by the Shipowner is another unseen security feature of UCP.
- FCA:FREE CARRIER: FOB is not the correct term when dealing in Full Container Loads (FCL), FCA is. FTNX as seller arranges all expenses from supplier to Customs Freight Station (CFS) and secure the appropriate Custom documents to that point. All obligations thereafter for is for the end buyer: Further more, FTNX must also secure the added “Received BOL” to the documents it must present to its bank under a UCP DLC payment mode.
- CIP: CARRIAGE AND INSURANCE PAID: CIF is not the correct term when dealing in Full Container Loads (FCL) CIP is. The cost for FTNX includes freight and all expenses in unloading over the ships rails, at port of destination. Exception: FTNX must secure a ‘shipped on board BOL’ as endorsed by the Shipowner POL to be able to collect on the DLC once delivery POL is completed is another added unseen security feature that a PCT must comply with under UCP ‘at sight’ presentation rules.
- CPT: CARRIAGE PAID TO: Not often used or applied by FTNX except for special transactions. All expenses are for FTNX ‘over the ships rails’ port of unloading , or customs terminal at destination airport.
- FAS:FREE ALONG SIDE: FTNX delivers goods to a loading port where they are placed ‘alongside’ ready for loading by a ship heading to berth or is at berth. All expenses at port from ‘lifting’ thereon is for the end buyer.
- CIF:COST FREIGHT AND INSURANCE: All expenses is for FTNX including, freight and insurance ‘over the ship rails’ POL (Port of loading)
- CFR:COST AND FREIGHT: All expenses is for FTNX up to port of loading including freight, ‘over the ships rails.’Does not include insurance which the end buyer must secure priority loading operations.
- FOB:FREE ON BOARD: This is the most popular delivery mode for whole NBC shipments. All expenses POL ‘over the ships rails’ for goods placed in good condition on board. If the end buyer asks the PCT to also secure the BOL, then the PCT may do so on the condition that the BOL does not form part of the payment process applied to the UCP 600 DLC, as secured at buyers expense as the DLC collection conditions will not accept a Charter Party BOL.
Unless other arrangement have been made, under CIF proper , even though freight is marked as pre-paid, as applied for at time of booking the vessel; as served under the reference of the UCP 600 DLC held by FTNX, the freight needs to be ‘earned’ by the carrier before it can collect on any assured pre payment advice served at the time of booking. The freight value is not collected by FTNX which remains in the account of the end buyer as applied as a credit on the sellers (FTNX) invoice so that the end buyer can pay for freight. Under UCP DLC rules sellers invoice is a crucial document and its already applied under such rules that a debit and credit application is in play in matter of freight; is a very good application, as the freight component offered by the PCT must be genuinely served and that; if the total value of goods was applied on the sellers invoice as a lump sum, import duties would be applied of the ‘whole lump sum’ has been tested in international court challenges. Every details must be entered on the invoice separately in where debits and credits must apply is another added unseen feature that FTNX must apply when selling commodities to the end buyers. The Certificate of Origin is secures by the FTNX but its expense is applies as a debit against the end buyer account as this is an import requirement. PSI inspection of goods is for the FTNX to bear and indicated on the offer; if the end buyer wants a different PSI service, then the end buyer says for such etc.etc.The terms ‘delivery’ means delivery of documents and not physical goods is what incoterms is specifying when is comes to collection process of the DLC. Even if FTNX gave the end buyer lets say 90 or 180 days deferred payment option on an exceptional deal, a UCP 600 financial instrument will still need to be issued in advance once the contract is signed.
Working in an ’ad hoc’ matter where Incoterms is used but is not supported by a UCP 600 DLC payment instrument; such an aspect offers very little protection, as Incoterms deals with ‘delivery obligations and expenses’ of parties to the contract. When UCP 600 DLC payment instrument is strictly applied in combination with the virtues offered under Incoterms delivery rules (as all informed PCT’s are required to apply) a formidable routine and safe practices prevail protecting both the supplier, the PCT and the end buyer intently. FTNX will not accept any other payment mode other than a UCP endorsed DLC offers us peace of mind that the intention of the end buyer are clearly served. FTNX applies Incoterms with UCP rules, is an exclusive formidable aspect of trade that all PCT’s must apply.