Contracts and payment terms
Contract forms
Until the early 2000s each market had contract forms, which had been tailor made for the specific use on that market. These forms had usually been negotiated between Scandinavian producers’ associations and local importing federations. As a norm, both parties followed the terms and conditions of these contract forms very well.
The situation has changed and nowadays there are several different contract versions, formulated by the producers, agents or the buyers. Some of these contract forms do make a reference to the old contract forms, but overall there is not anymore just one way of operating and interpreting the contracts.
There are also major differences between markets in the way they operate for instance as regards payments. Compared with other regions, in Northern and Central Europe the payment terms tend to be shorter and the agreed dates are adhered to – partly because there are also interest payments on late payments.
Terms of payment
Payment terms have also more variations than before. Bigger customers may demand longer payment terms – often because they have agreed to do so with their own customers – and discounts, often linked to annual invoiced volumes.
Traditionally there was on most markets a fixed payment date like 30 days form the invoice, combined with a 2.5% cash discount, which could be deducted from the payment if the remittance was made in full by 30 days.
Some customers do not adhere to the agreed 30 days, but they still deduct the cash discount. In order to clarify the payment practices shippers are now increasingly going for net terms, meaning that the invoice price is the amount payable and there are no discounts.
Proforma Invoice
In Northern Africa and Middle East often the business is confirmed with a Proforma Invoice, which includes the specification, prices and the payment term.
Some customers, however, take this only as an offer and do not find this binding – especially if the market conditions turn against them.
Letter fo Credit
Another payment method in those regions is the Letter of Credit (L/C), which is opened by seller’s bank to buyer’s bank.
With this the banks agree to make the payment against agreed shipping documents, which outline precisely the details of the contract. Commercial risks with L/Cs are minimal.
Documents Against Payment D/P, Cash Against Documents
In Egypt and some other markets, a term “Documents Against Payment D/P, Cash Against Documents” is used.
In this case the shipping documents are being sent to a Finnish bank, where the buyer can get the documents and release the goods against full remittance.
The risk with this can be buyer’s inability to pay for the goods, which are produced. Also, if the Central Bank may not always be able to provide enough currency for the payment of the invoice.
Unloading permit
In the receiving country the cargo can be discharged, if there is room on the quay. The permit for discharge depends on buyer’s ability to take the goods from the port, whether he has paid and got the Bills of Lading.
A delay in the payment can be a big risk to the seller, who has sold the goods with and Incoterms “C” term like C&F, where the seller has taken care of the chartering. If the vessel must wait for the discharge longer than agreed, the seller will be responsible for the vessel’s demurrage (extra payment for the waiting time).
Bill of Exchange
Bill of Exchange (BoE) is a common means of payment in Saudi Arabia and Tunisia. If the bank guarantees the BoE the commercial risk is small, because the bank in the receiving country guarantees the payment in all conditions.
Claims
Despite good cooperation between buyers and sellers sometimes claims cannot be avoided. It is important that the claims are dealt with straight away in a constructive manner.
Most often the reasons for claims are either condition or quality related.
Usually the buyer notifies the seller about a possible claim as soon as possible after the goods have arrived.
Most often the reasons for claims are either condition or quality related.
1. Condition claims can be resulted by goods being wet or damaged. It is important to find out where this has happened: at the mill, in transit, in the receiving port or somewhere else. Depending on where the damage has taken place, the compensation will usually be taken care of by either by the shipper, transport provider, port operator or the haulage company.
2. Quality claims are linked to the grading. Usually the seller sells, and buyer expects the “Shipper’s Usual” grade, against which the claim will be mirrored. If there are, according to the claim, too many and/or too big knots, blue stain, wane or whatever the parameters for the grading of the sold grade are, the next step is that it must be assessed which proportion of the delivery has been affected by the non-conforming grade.
If there are, according to the claim, too many and/or too big knots, blue stain, wane or whatever the parameters for the grading of the sold grade are, the next step is that it must be assessed which proportion of the delivery has been affected by the non-conforming grade.
With this information usually, the supplying mill finds out the production batch details and if there are packs form the same production run that will give a good idea of the grade. If there is a condition related claim the packs at the mill give a good point of comparison to assess where the damage may have happened.
The standard practice is that once the claim has been made the buyer must not “break bulk”, in other words break more packages than he has before noticing something unusual – unless it has been agreed with the seller. If an inspection is arranged, then by going through unopened packages both parties can see the percentage of the substandard goods.
What does not constitute a claim is that buyers comments for instance “this is not as good as I had hoped for”, or “the quality is bad”.
Arbitration
In the old days when the contracts were often full cargoes, if there was not an acceptable solution to the problem there could be an arbitration process.
With arbitration a third party will assess the goods and give his verdict of the case.
These days the contracted volumes are smaller and in practice arbitration is not used anymore.
© Stora Enso/ Hans Koistinen
