Question

1. In exporting, to what point does the seller pay transportation and delivery costs? Where does the responsibility for loss or damage pass to the buyer? Use Incoterms in your response.

2. What is the procedure for a letter-of-credit transaction?

Answer 1

1. While exporting, the liability to pay transportation and delivery costs of seller & the time of shift in responsibility for loss or damage to buyer depends on the type of contract between the buyer and seller. The different types of contract are as follows :
   
   a) FOB contract, i.e. "Free on Board". It specifies at what point, the costs and risk will be shifted from the seller to the buyer under the Incoterms standard. For example, FOB USA means that seller will provide the goods and bear the expenses upto USA. And, buyer will be responsible for transporting beyond that place.
   
   b) FAS contract, i.e. "Free along side". It specifies upto which port or vessel, the seller is responsible for bearing the costs and the responsibility of the goods. For example, FAS XYZ Port, this means the seller is responsible to deliver the goods to XYZ port. The buyer would assume the risk of loss and bear the cost once the loading process begins.
   
   c) CIF contract, i.e. "Cost Insured Freight". It means the seller will bear the costs and will be responsible upto the delivery place of the buyer. Once the goods are delivery at the address of the buyer, then the buyer will be responsible for the goods.
   
   d) C&F contract, i.e. "Cost and Freight". It means buyer will bear the cost of shipping, but will not bear the cost of insurance. Any insurance expense or cost will be borne by the buyer in the contract.
   
2. Letter of credit (LOC) is the payment method in which bank pay the buyer's legal obligation to the seller directly, if the buyer is unable to settle it's obligation. Thus, the seller relies on the credit risk of the bank to receive the payment.
   Process of Letter-of-credit transaction is as follows :
   a) First, buyer and seller enters into a commercial contract for doing business together. And, as a part of contract, the seller requires a LOC from the buyer (to secure it's payment).
   b) The buyer will contact it's banker to provide with an LOC, by providing the relevant information regarding the amount to be paid, details of seller, and other details.
   c) The seller's bank review the LOC to ensure that it matches with contract. And, if everything is acceptable, seller will produce and ship the goods to the buyer.
   d) After fulfilling all the requirements of LOC, seller can receive the payment against LOC. Seller need to provide with it's banker, all the necessary documents.
   e) Once seller's bank receives the documents, after verifying them, it will forward the documents to the buyer's bank. And, buyer's bank after verifying again, will transfer the payment to the seller's bank.
   f) Then, the buyer's bank forwards the documents to the buyer, who uses such documents to take the possession of the goods after their arrival.
   g) The seller will receive the payment from it's banker, and the buyer will be required to pay it's banker the amount specified.