Dotting the i's and crossing the seas

Filling out export documents properly is critical to the success of an international sale. Here's what you should know about some of the most common documents.

By -- Logistics Management, 10/1/2000

Trying to write a document about documents, or what's worse, trying to read a document about documents is not exactly a sexy venture. Like it or not, though, proper documents are the key to a successful export sale. Correctly executed documents, one might say, put food on the table and allow for a good night's sleep. That's because without them, exporters would have nothing to show for their efforts.

To manage export documents properly, it's important to know not only what they are, but also why they exist, what functions they perform, and what their legal implications may be. A brief look at some of the most important documents in three general categories-business documents, transport documents, and government documents-will help exporters recognize their value and understand the roles that they play in a successful export transaction.

Business Documents

Export business documents include quotations, commercial invoices, and when necessary, insurance documents and bank drafts. Because many U.S. domestic documents, such as purchase orders, are typically used in open-account situations, they are rarely employed in international transactions. One exception would be when companies sell to an offshore affiliate and the actual value of the sale or cost of purchase is merely a book entry within the same corporate family. When purchase orders are accepted for use in international sales, they create a "presumption of contract" and are clearly governed by the United Nations Convention on Contracts for the International Sale of Goods (CISG) treaty.

1. Pro Forma Invoice

The first business document that comes into play in an export transaction is the international quotation, commonly called a pro forma invoice . The pro forma proffers the terms of the sale, which in turn set the costs, risks, and responsibilities of the parties involved. It is, therefore, essential to construct a quotation within the proper legal framework for international sales.

The United Nations CISG treaty, to which many of the major trading nations-including the NAFTA nations-are signatories, provides the legal structure for an international sale. This means that if there is a problem with the sale (not involving injury or death) and litigation results, the seller in the United States cannot rely on the Uniform Commercial Code (UCC) to provide guidelines in arguing the case. Unless the buyer and seller explicitly agree to use the UCC, the CISG automatically pre-empts it.

The CISG describes what constitutes an offer to purchase, when the offer is effective, and when and how it may be accepted, withdrawn, revoked, or changed. In other words, the written offer and the pro forma invoice must be consistent with the CISG. If not, the U.S. exporter or the foreign importer may be simply "rolling the dice." Under that convention, however, offers need not be made in writing. An oral offer and acceptance can be legally binding. Likewise an oral pro forma invoice in response to an offer may constitute a counter offer and be legally binding if accepted.

For the protection of both buyer and seller, an offer or quotation should be written, and it should include specifics such as quantity, quality, description, method of payment, type of currency acceptable, and time limitation on pricing. It also should include any special instructions, such as method of resolving disputes, selection of banking channels, or anything else material to the sale. Finally, the quotation must specify the terms of sale under the Incoterms 2000, which fix delivery points and allocate costs and risks between buyer and seller.

2. Commercial Invoice

The commercial invoice is absolutely essential to the international sale. The commercial invoice demonstrates that a sale has been consummated and is the base document used to assess value for customs purposes. Although customs practices differ from country to country, the process of determining value follows international guidelines established by the World Trade Organization (WTO). For example, to determine the transaction value, the exporter must separate the actual costs of international freight, insurance, and other expenses that are incidental to international shipments, such as foreign inland freight, so that the importer will not have to pay duty on those charges.

The primary elements commonly included in a commercial invoice are: name, address, and contact information for the buyer and seller, place of sale, place from where the goods were shipped, price, quantity, detailed description of the commodities, and any other costs or facts necessary for appraising the goods. The number of commercial invoices an exporter must produce will usually be spelled out in the letter of credit (L/C), also known as a documentary credit, or in separate instructions from the buyer. If the credit specifies six "originals," don't worry. Simply stamping a copy with the word "original" will suffice.

3. Insurance Documents

Insurance documents are only necessary when the international terms of sale require them. If the exporter is obligated to insure the cargo for the importer, then the exporter must show proof of insurance. In almost all countries, an original of the certificate of insurance is all that is necessary. Exporters should not use cover notes issued by brokers unless the L/C permits it, and the exporter must make sure that the insurance coverage is in the same currency as the letter of credit.

4. Bank Draft

Finally, the exporter must use a bank draft if the sale is made under a letter of credit. This document is merely a demand for payment drawn on the account of the bank that issued the L/C. It may also be drawn on the account of the bank in the United States that confirms the obligation of the issuing bank to pay the documentary credit. The exporter may design the draft itself or simply buy one from an office supply store.

Transport Documents

Transport documents are used to establish the terms for moving cargo from one point to another as well as the liability and costs for that movement. Of the many types of transport documents, the bill of lading (B/L) is the most important.

1. Bill of Lading

The bill of lading is the primary document for carriage and serves three main purposes. First, it is a contract for carriage between the exporter and the carrier. No other contract is necessary under ordinary circumstances. Second, the B/L is a receipt that legally demonstrates the transfer of custody from the exporter to the carrier. And third, in certain circumstances, a B/L can serve to convey title to the goods.

There are many types of bills of lading used in international commerce, including the ocean bill of lading, combined transport bill of lading, air waybill, sea waybill, and even the NVOCC (non-vessel-operating common carrier) bill of lading. Each of these documents can be formatted as either a "straight" or an "order" bill of lading.

A straight bill is one that obligates the carrier to deliver the goods to the person or company to whom the property has been consigned and who is named as the "consignee" on the bill of lading. The consignee is not required to have a copy of the B/L in its possession in order to take possession of the goods. Air waybills, sea waybills, and truck and train bills of lading all commonly are issued as straight bills of lading.

An order bill is negotiable; that is, whichever party has possession of a bill in his or her name has the right to take delivery. The consignee, therefore, must have the bill of lading in its possession before the carrier may hand over the merchandise. For example, say an exporter has sold goods on a "CIF (Cost, Insurance, & Freight) Incoterms 2000" basis, with the importer paying with a letter of credit. Because the CIF Incoterm may only be used when carriage is performed by vessel, the exporter's responsibility is to place the cargo aboard the ship. Delivery takes place when the goods "cross the rail" of the ship. Because the exporter has contracted for the carriage, it receives an order bill of lading from the ocean carrier.

The exporter submits that bill of lading and other export documents (such as a commercial invoice, bank draft, proof of insurance, and any government documents necessary to meet the stipulations of the L/C) to the bank for payment. Because the goods are already en route to the destination, the exporter now holds leverage to ensure payment in the form of the order bill of lading. The exporter signs the bill of lading over to the bank, which in turn pays the exporter, assuming all documents are in order. The bank now owns the goods until it receives payment from the buyer. Once it has been paid, it in turn signs the B/L over to the buyer. The new owner of the B/L now has title to the goods and may even sell them before they land at the port of destination, as is typical of international commodity sales.

2. Other Transport Documents

Other transport documents besides the bill of lading may be required. Examples include "alongside receipts," "on-board receipts," and other variants of freight receipts. In most cases the exporter needs them to prove that the goods have been delivered as specified in the terms of sale.

Government Documents

Few government documents are required for export shipments, with the exception of goods that are included in the U.S. Export Control list. If the exporter is shipping an item that appears on that list-which restricts exports of items that could be detrimental to national security in the wrong hands, for example-an export license will be required.

1. Shippers Export Declaration

The primary government document is the Shippers Export Declaration (SED), U.S. Customs Form 7525-V. The SED contains information about the product and must be signed by the exporter or its agent. The purpose of the form is to provide the U.S. Census Bureau with accurate export statistics and to monitor the type of commodities being exported.

2. Inspection Certificates

A wide variety of other government documents may be required by various government agencies or by the importer. For instance, the exporter may have to provide the importer with a sanitary (for animals) or phytosanitary (for plant life) certificate to satisfy agricultural inspection requirements in the importing country. Another example is the Certificate of Free Sale that is required for certain commodities in Mexico. In that document, the exporter must certify, among other things, that the product is of the same quality as that sold in the United States and is fit for human consumption. Yet another document required by some foreign governments is the Consular Invoice, which certifies the identity of the exporter and importer and provides a description of the goods.

3. Certificate of Origin

The importer may also require the exporter to provide Customs Form 434, the Certificate of Origin (CO). The importer uses the CO to receive preferential tariff treatment. Under NAFTA, the exporter is the only one who has the legal obligation to complete the certificate, although the manufacturer may voluntarily fill it out. When executing a Certificate of Origin, the exporter should check the applicable Customs rules to determine how many years the copies must be maintained.

Some exporters may feel that document handling is a nuisance. But it's to their advantage to dedicate time to this critical function. Properly executed business documents clarify the terms of sale, reduce costs and risks, and preclude potential litigation. Proper transport documents ensure confidence in the physical distribution of your product, and sound government documents ensure smooth customs entry and preferential tariff treatment. Dot your i's, and your goods will cross the seas (or borders) without incident!

Dr. James R. Giermanski is professor and director of International Business Studies at Belmont Abbey College in Belmont, N.C. He has frequently written, commented, and testified on issues affecting international logistics in North America.