Letter of Credit Forum

Hello

OK, we need to assume that we are talking Incoterms and further, Incoterms 2000. We also need to assume that the terms are written correctly, in a contract and all of the other conditions which need to be met have been met.

Then:

“D” prefixed terms are ‘arrival’ contracts in that the end of the contract (‘delivery’ as it is referred to in Incoterms) is linked to the delivery of the goods at the named place in the destination country. Myself, I think of this moment as the seller’s ‘right to be paid’

So, it is crucial that the terms name a specific place – one that can be identified readily and measured. This is an important point, for if the seller’s right to be paid is linked to delivery at that named place, it is logical for the parties to ponder “how will this be proven?” or “What document would prove that this happened?” For example, “DDU London” is very vague – where exactly in London will the contract end? But, “DDU, Bay 27, 23 Acorn Avenue, Lewisham, London SE26” is very precise in comparison and now the parties can ponder on the document which would be generated at that very specific address...and so on.

You asked about risks: the biggest risk with either term is that it is not written correctly, not written in such a way that delivery can be precisely measured so we can be certain that it has or has not happened.

The second risk is that one party takes unfair advantage of the other by linking the term to an inappropriate payment mechanism or condition. Although there is no linkage at law between a commercial term (Incoterms are a type of commercial term, but not all commercial terms are Incoterms) and a payment condition, risk management in part begins by finding a connection between these two strands.

For example, if the seller’s right to be paid arose on delivery of the goods at the buyer’s premises, it would be more appropriate to link payment to a delivery note than to (say) a bill of lading which evidences despatch rather than the ‘arrival’ of the goods. In general terms, in a D-prefixed sale of this nature, you’d expect to see the seller offering the buyer an open-account i.e. unsecured payment terms.

That brings us to the third risk. If the seller delivers, and the buyer now has the cargo and the money, look at the seller’s exposure should the buyer default. They will have the ‘right’ to be paid, but the buyer will have the money – and in business, rights are often worthless, whereas money is rarely so. What if the buyer claims (say) two of five-hundred items were not delivered and accordingly short-pays the seller – what recourse does the seller have to protect himself?

What then if the seller gets payment secured – let’s say they do get paid on the bill of lading or they get paid ‘up front’ in advance – where now is the buyer’s security that the seller will perform?

In my experience, these risks only arise because Mr Smith is trying to do business with Mr Brown – two strangers. Where the D-prefixes work is with Mercedes doing business with Mercedes. Inter-company transactions where delivery is simply an accounting trigger to move stock holdings. Between strangers D-terms often lead to trouble.

Technically, DDU means the seller pays everything prior to the country of arrival and all of the costs in the country of arrival which arise in the physical movement of the cargo to the named place. The DDU buyer pays for all of the administrative costs associated with the customs and taxation process in the destination country – finding the clearing agent, paying the agent, the paperwork, the taxes etc.

In a DDP deal, the seller pays everything prior to the moment of arrival – physical and administrative. It is common practice that if any of the taxes which arise in the destination country are recoverable – e.g. VAT – then these are excluded from the seller’s cost by modification “DDP excluding recoverable taxes” etc, and the buyer takes these costs.

Note that this is only relevant to the seller and buyer’s position. The buyer will still have obligations as an IMPORTER and will be subject to risks under the local customs laws – of the DDP seller’s clearing agent, using the buyers' importer’s code who then uses the wrong tariff heading for example and attracts a fine; this will be the IMPORTER's fine, despite the BUYER's position. 

That’s the broad picture – others will have more detail I am sure...

cheers

phill doran

"...in armour bright, the merchant men..."