Performance of the Contract Chapter Ten Performance of the Contract  basic export procedures basic import procedures the preparation and application of major documents At the end of this chapter, you should be able to understand: Learning Objectives

Overview In international trade, once a sales contract is signed it becomes a legally binding agreement with rights and obligations set out for each party to the contract. The successful performance of the contract, which involves the smooth coordination of different parties, is not only of serious concern for the exporter and importer, but also for the national image on both sides. In practice, the rights and obligations vary according to customer requirements, trade terms, customary procedures, and so on. However, there are always the basic obligations for both parties in each sales contract, which are for the seller to deliver goods as specified in all related documents for the transfer of ownership of the goods and for the buyer to pay and take delivery of the goods. This chapter will briefly introduce the procedures both an exporter and importer need to go through particularly under L/C payment terms.

10. l Export Procedures Sales contracts for export in China are mostly signed under CIF terms and by payment of L/C. Therefore a lot of work is involved in performing this kind of contracts, which mainly deals with the coordination of the goods, L/C, shipment and payment. This can be divided into stages of preparation, production, shipping, documentation and after sales issues.

Export Contract Inspection Loading Gather Production & Documentation Instructions Obtain the Buyer’s Guarantee for Payment Production Space Booking Insurance (if applicable) L/C Management (if applicable) Inspection Customs Declaration Insurance Certificate Documentation Inspection Certificate Loading B/L Gather All Relevant Documents for negotiation Shipping Advice (if applicable) Negotiation for Payment After Sales Issues Foreign Currency Verification & Cancellation Tax Refund Claims & Settlement (if applicable) Feedback for Future Orders

1 Preparation 2 Production 3 Shipping 1) Obtaining the Buyer’s Guarantee for Payment 2) Information Collection 2 Production 1) Quality Control and Production Management 2) Inspection and Certification 3 Shipping 1) Space Booking 2) Customs Declaration 3) Insurance

4 Documentation for Settlement of Payment 1) Documentation and Negotiation Documentation should be completed with absolute accuracy and clarity. Documents for import and export business can be classified into three types: financial documents including L/C, draft,check and promissory note; commercial documents including invoice, packing list, B/L and insurance policy; documents under the control of the government including license, certificate of origin and inspection certificate. Generally the following documents should be presented to the bank for negotiation:  Invoice  B/L  Insurance Policy  Certificate of Origin  Inspection Certificate  Packing List 2) Settlement of Payment  Settlement on receipt  Settlement on guarantee  Settlement on set date

5 After Sales Issues 1) Foreign Currency Verification and Cancellation The procedures for foreign currency verification and cancellation:  Draw the form with the permission certificate before customs declaration; Fill out the form with exactly the same information as on the Customs Declaration Application Form; Register for export Submit the form to the customs to be checked and stamped; Receive the foreign currency payment and verify it with the proof of the bank’s credit note against the registration in the Foreign Currency Administration Bureau to be cancelled. 2) Tax Refund 3) Claims and Settlement Points for attention:  Check the legality of the documents;  Allocate responsibilities of different parties;  Decide a reasonable amount and reimbursement method according to the degree of loss. 4) Feedback and Future Orders

10. 2 Import Procedures   The performance of an import contract generally includes the following procedures: establishing the L/C, or paying the deposit, chartering or booking shipping space, organizing shipping, arranging insurance, paying against the documents, declaring to the customs for importing goods, inspection, taking delivery, claims if any, etc.

Import Contract Book Shipping Space or Charter Ship (if applicable) Apply for L/C Establishment (if applicable) or Pay Deposit Insurance (if applicable) Loading Instructions to the Seller( if applicable) Document Inspection Shipping Pay to Obtain the Original Documents Goods Inspection Customs Declaration Receiving the Goods and Distribution Claim (if any)

Most of the import transactions in China are under FOB trade term, and by payment of L/C. 1 Establish the L/C 2 Arrange Shipping 3 Check the Documents for Payment 4 Inspection 5 Customs Declaration 6 Take Delivery of the Goods 7 Claim (if any)

1 Establish the L/C When opening an L/C, the buyer should be cautious about the following: The L/C should be opened to fit the sales contract terms. The type of the L/C The amount of L/C The drawee / payer of the draft should be the issuing bank or other banks appointed in the L/C, not the applicant of the L/C, or otherwise, the draft will be considered as an additional paper not included in the negotiation documents. Whether the draft should be sight or term needs to be followed strictly according to the contract. Normally a whole set of clean ocean B/L blank endorsed made out to order is required. The issuing organization, form, content and certifying issues should be stated clearly for other required documents such as C/O, quality/weight inspection certificate, test certificate and so on. Without special instructions partial and transshipment are to be considered as allowed even if against the contract. The L/C is not valid without a set expiry date and place for the submission of negotiation documents. The L/C should require an import license number on the commercial invoice for customs inspection since China exercises strict control over foreign currency.  

2 Arrange Shipping delivery of the goods. In China, FOB or FAC trade terms are generally used in import contracts. Therefore, the importer is responsible for shipment. After receiving the exporter’s notification of being ready for the goods, the importer should book shipping space and effect shipment and at the same time, keep the exporter informed of the progress to facilitate smooth delivery of the goods.

3 Check the Documents for Payment Under sight L/C, the bank will pay the seller’s bank at the sight of the draft and the set of documents if the buyer does not bring up objections within 3 working days after the documents are presented. The buyer then needs to buy the foreign currency from the bank at the rate of the day and the bank will issue a credit note as the evidence for the currency exchange. In practice, the bank (normally the issuing bank) would contact the applicant of the L/C within 7 working days for decisions if discrepancies are found in the documents, and the decisions are normally to:  refuse the payment;  pay partially for those which comply;  hold on payment until the goods have arrived and passed inspection;  pay against the letter of indemnity from the seller or the negotiation bank;  require amendments from the seller; or  pay while reserving the right to claim for compensation.

4 Inspection When inspecting the goods, the importer should: Inspect on the arrival of the goods in a timely manner. Inspect the goods within the valid time for claim. Acquire all the necessary inspection certificates for inspection. CISG stipulates that after the seller has supplied the goods, a reasonable period of time should be provided for the buyer to inspect the goods before being considered as accepted. The buyer has the right to claim for compensation or even refuse to accept the goods if the inspections find the goods not complying with the contract. The buyer should always inspect the goods within the time limit set in the contract for claims.

5 Customs Declaration After the arrival and inspection of the goods, the importer or its authorized agent, normally the freight forwarder or professional customs broker should fill out and submit the Import Goods Declaration Form to the customs together with invoices, B/L, insurance policies, and inspection certificate for goods with compulsory inspection requirements. The customs will check the goods against the documents to see whether they match.

6 Take Delivery of the Goods After the goods are cleared and collected, they need to be passed on to the customers directly. If the customers are not within the domain of discharging port, freight forwarders will be contacted to transfer the goods further to reach those customers. The import tax and duties/tariff and the cost of land freight are to be paid by the importer first before being reimbursed by the customers later on.

7 Claim (if any) Three main parties the buyer can claim against: The buyer will sometimes lodge a claim because of quality, quantity, or packaging problems. Three main parties the buyer can claim against:   (1) The Seller (2) The Carrier (3) The Insurance Company: When claiming for compensation, the buyer needs to consider the following: Evidence Amount Expiry date .

10.3 Major Import and Export Documents 1) Booking Note the application form from the shipper to the carrier to book space for the consignment. Once the B/N is signed and one copy returned to the shipper, the shipping contract is established. 2) Shipping Order Three functions:  the notice to let the shipper know when and which boat the consignment should be loaded;  the one of the documents the shipper needs to submit to the customs to apply for the release of the goods;  an order for the captain to take up this consignment. (3) Mate’s Receipt an acknowledgement that the ship owner has received the goods in the condition stated therein, but usually has no further legal relevance. It is usually a preliminary document only, which is later given up in return for the bill of lading.

(4) Bill of Lading (5) Bill of Exchange / Draft (6) Commercial Invoice (7) Manufacturer’s Invoice (8) Insurance Policy (9) Certificate of Origin (10) Generalized System of Preferences Documents (GSP) (11) Packing List and Weight Memo (12) Inspection Certificate

The documents mentioned above are the most common documents The documents mentioned above are the most common documents.According to the UCP, when an L/C requires documents other than transportation documents, insurance policies and commercial invoices, the L/C should specify the issuer and content of the documents required. If the L/C does not contain this specification, the bank will accept the submission of documents so long as the documents’ expression has contained relevant information for the goods or service as related to what is said on the commercial invoice, or when the L/C does not require a commercial invoice, the expression can match the goods or service that is described in the L/C. Therefore when preparing the above documents, it should always be done strictly in conformity with the L/C.

10.6 Follow-up Practice 1 Review and Discussion Questions 1) Please describe briefly the procedures of performing a CIF export contract under L/C payment terms. 2) Please describe briefly the procedures of performing a FOB import contract under L/C payment terms. 3) Why is it important for the exporter to check the L/C against the sales contract carefully after receipt of the L/C? 4) When the L/C is to be amended, what are the points for attention? 5) What will the negotiation bank normally do when it receives documents with discrepancies? 6) What are the main negotiation documents for L/C payment and what are the general requirements for making out these documents?

2 Complete the following sentences with appropriate terms or words. 1) In international trade, ________________________ check the L/C. 2) The application for amendments of an L/C should be submitted via ______________. 3) The shipper exchanges for the original B/L from the shipping company or its agent with __________________. 4) The payee of an L/C is normally ________________________. 5) For a CFR contract, the seller needs to provide _____________ to the buyer as soon as it is available in order for the consignment to be insured without delay. 6) In export transactions, a Form A is issued by _________________________. 7) In export transactions, without special instructions from an L/C, a C/O can be issued by _______________, ________________, or _________________. 8) For man-made damages to the goods during the shipment, the buyer can claim for compensation from ______________________. 9) If an L/C sets 30 November 2007 as the expiry date without instructions on the latest shipment date, ________________ should be considered the latest date for shipment. 10) If an L/C amendment notification includes multiple items of amendments, the seller should either _______________or ________________.  

3 Decide whether the following statements are true or false. 1) In import and export trade, the basic obligation for the seller is only to provide the buyer with the goods which comply with the requirements in the contract. ( ) 2) The mate’s receipt is a temporary receipt issued by the shipping company to the shipper as a proof that the consignment has been loaded onto the ship. 3) For T/T payment terms, the B/L, commercial invoice and packing list should be sent to the buyer through the bank for payment. 4) If the seller fails to make shipment within the time of validity of the inspection certificate, he canrequest that the validity of the inspection certificate be extended automatically. ( ) 5) The importer may refuse to pay if there are discrepancies in the negotiation documents. ( ) 6) In credit operations, the bank deals with documents and not with goods. Any discrepancies may cause refusal of payments. 7) If an L/C states the latest shipment date of 30 April, and expiry date of 15 May. An exporter ships the goods on the 12 April, and submits the documents complying with L/C requirements for negotiation on the 6th May. The bank should pay out according to the Uniform Customs and Practice for Documentary Credits. ( ) 8) A clean B/L shows that the goods on board are in good condition. ( ) 9) The expiry date in an L/C is the date for the seller to receive payment. ( ) 10) For unacceptable clauses in an L/C, the seller should contact the issuing bank directly for amendments. ( )  

Case Study 1   A Chinese exporter received an irrevocable sight L/C from the importer. The L/C required that the latest shipment date was 15th March 2007. Because of lack of shipping space, the exporter could not ship the goods on time so the exporter asked the importer to extend the shipment date to the 20th April 2007 and to extend the expiry date of the L/C accordingly. The importer replied to accept the changes with a phone call. The exporter then arranged the shipment on the 18th April and submitted the documents for negotiation on the 20th April, but was rejected by the bank. Is the bank right in so doing? Why?

Case Study 2   An import contract is signed in July under FOB terms setting out August as the shipment month. However because of lack of ships, the importer fails to obtain shipping space. What should the importer do?  

Web Links http://www 1. http://www.mofcom.gov.cn中国商务部网站 2. http://www.cnexp.net 外贸精英网 3. http://www.customs.gov.cn中国海关网 4. http://www.info.china.alibaba.com 阿里巴巴网  

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