Transportation documents and means of payment: formula sheet

Key formulas

What Incoterms govern

Incoterms = delivery point + risk transfer point + split of costs and tasks

They do not govern title, price, payment or remedies for breach.

EXW (Ex Works)

Delivery and risk pass when goods are placed at the buyer's disposal at the seller's premises

Buyer bears almost everything, including loading and export clearance. Any transport mode.

FCA (Free Carrier)

Delivery and risk pass when goods are loaded on the buyer's collecting transport, if the named place is the seller's premises. If the named place is elsewhere, they pass when the goods, on the seller's vehicle and ready for unloading, are placed at the disposal of the buyer's carrier or other nominated person

Seller clears goods for export. Any transport mode.

FAS (Free Alongside Ship)

Delivery and risk pass when goods are placed alongside the vessel at the named port

Sea and inland waterway only. Seller clears for export.

FOB (Free on Board)

Delivery and risk pass when goods are on board the vessel at the named port of shipment

Sea and inland waterway only. Buyer pays main carriage. Neither party has a duty to insure for the other; the buyer bears the risk after loading and will usually insure.

CFR (Cost and Freight)

Seller pays freight to destination port; risk passes when goods are on board at the port of shipment

Sea and inland waterway only. Cost and risk pass at different places. No seller duty to insure.

CIF (Cost, Insurance and Freight)

CFR + seller buys insurance; risk passes when goods are on board at the port of shipment

Sea and inland waterway only. Seller's insurance is minimum cover for the buyer's benefit under Incoterms 2020.

CPT (Carriage Paid To)

Seller pays carriage to the named destination; risk passes when goods are handed to the first carrier

Any transport mode. No seller duty to insure.

CIP (Carriage and Insurance Paid To)

CPT + seller buys insurance; risk passes at handover to the first carrier

Any mode. Under Incoterms 2020 the seller's insurance must be wide cover (Institute Cargo Clauses A) unless agreed otherwise.

DAP (Delivered at Place)

Delivery and risk pass when goods are ready for unloading on the arriving transport at the named destination

Seller bears risk to destination. Buyer unloads and clears import.

DPU (Delivered at Place Unloaded)

Delivery and risk pass when goods are unloaded at the named destination

Seller must unload. This replaced DAT in Incoterms 2020.

DDP (Delivered Duty Paid)

Delivery and risk pass at the named destination, with import clearance and duties paid by the seller

Maximum seller obligation. Any mode.

Three functions of a bill of lading

Receipt for goods + Evidence of contract of carriage + Document of title (if negotiable)

Only the bill of lading in negotiable form is a document of title.

Transfer of a negotiable bill

Order or bearer bill: endorsement + delivery

A bearer bill passes by delivery alone. A straight bill is not transferable in this way.

Bill types by goods condition

Clean = no adverse remarks; Claused = remarks on damage or shortage

A claused bill is usually unacceptable to the buyer's bank under a letter of credit.

Bill types by shipment status

Shipped (on board) = loaded; Received for shipment = in carrier's custody only

Shipped bills give stronger proof that the goods are on the way.

Non-negotiable documents

Sea waybill, air waybill = receipt + contract evidence, not document of title

Delivery is to the named consignee without presenting the document.

Multimodal document

One contract, more than one mode of transport, one carrier responsible for the whole journey

Can be issued in negotiable or non-negotiable form.

Autonomy principle

Credit ≠ sale contract; banks deal in documents, not goods

The bank must pay against complying documents even if the buyer claims the goods are defective. The bank is not concerned with the underlying sale.

Strict compliance

Documents comply on their face with the credit's terms, UCP 600 and standard banking practice → issuing (or confirming) bank must honour

A non-complying presentation may be refused. The bank looks only at the documents, not the goods or the sale contract, which is a separate contract.

Irrevocability under UCP 600

Credit = irrevocable, even if it does not say so

It cannot be amended or cancelled without the agreement of the issuing bank, the confirming bank (if any) and the beneficiary. Revocable credits no longer exist under UCP 600.

Confirmed credit

Issuing bank's promise + confirming bank's promise

The seller has two banks undertaking to pay. Useful when the seller doubts the issuing bank or the buyer's country.

Examination period

Maximum 5 banking days after presentation

The bank must decide whether to honour or refuse within this period.

Presentation period

Within any period stated in the credit, otherwise within 21 calendar days after shipment; in every case no later than the expiry date

Late documents are non-complying. The expiry date always applies as well as the shipment-based period, so check both.

Bill of exchange parties

Drawer (orders payment) → Drawee (pays) → Payee (receives)

In a typical trade bill the seller is drawer and payee, and the buyer is drawee.

Documentary collection D/P

Payment first → documents released → goods collected

Seller keeps control of the goods until the buyer pays. Banks do not guarantee payment.

Documentary collection D/A

Acceptance of term bill → documents released → payment at maturity

Buyer gets the goods before paying. The seller relies on the buyer's acceptance.

Risk ranking for the seller (safest to riskiest)

Advance payment > letter of credit > D/P > D/A > open account

The buyer's risk runs roughly in the opposite direction. This is a guide, not a rule that applies to every deal.

Quick revision

• Incoterms are standard terms chosen by the parties. They are not law unless the contract adopts them.
• Incoterms deal with delivery, costs, risk and who handles carriage, insurance and customs. They do not deal with transfer of ownership.
• Risk passes at the point the chosen Incoterm says, so always find the term in the scenario first.
• A bill of lading acts as a receipt for goods, evidence of the contract of carriage and, if negotiable, a document of title.
• A negotiable bill of lading can be transferred to a new holder, who can then claim the goods.
• Different transport documents do different jobs. Do not assume every one is a document of title.
• In a letter of credit, banks deal in documents, not goods.
• A bank may refuse to pay if the documents do not match the credit terms.
• The issuing bank is the buyer's bank. The seller usually deals with an advising or confirming bank.
• A confirmed credit adds a second bank's promise to pay, which gives the seller extra security.
• A bill of exchange is a written order to pay a sum on demand or at a fixed future time.
• In a collection, banks handle documents and payment but do not promise to pay.

Common mistakes

• Thinking that under CIF the seller bears risk during the voyage because the seller pays freight and insurance. Fix: Remember that in C terms, cost goes further than risk. Under CIF, risk passes on board at the port of shipment. The insurance protects the buyer.
• Believing Incoterms transfer ownership of the goods. Fix: Incoterms deal with delivery, risk and costs only. Title passes under the contract and the governing law.
• Saying every bill of lading is a document of title. Fix: Remember the condition: it is a document of title only if it is in negotiable (order or bearer) form.
• Treating a sea waybill as negotiable. Fix: A waybill is a receipt and contract evidence only. Goods go to the named consignee without surrender of the document.
• Saying the bank can refuse payment because the goods are defective. Fix: Remember the autonomy principle. The bank checks documents only. The buyer must claim against the seller under the sale contract.
• Treating a minor discrepancy as acceptable. Fix: Under strict compliance, the documents must match the credit. A discrepancy gives the bank the right to refuse, so assume it matters unless the question says otherwise.
• Saying a bank guarantees payment in a documentary collection. Fix: Remember that collection banks only handle documents and follow instructions. Only a letter of credit gives a bank payment undertaking.
• Mixing up D/P and D/A. Fix: P is for payment: buyer pays to get documents. A is for acceptance: buyer signs a term bill to get documents and pays later.

Exam tips

• Write the delivery point and the risk point next to each term in your notes. Examiners often test the difference between FOB and CIF.
• Check the transport mode in the scenario. A container or air shipment with FOB is a trap.
• Read the timing carefully: was the loss before or after loading on board, or handover to the first carrier?
• Do not answer title or payment questions using Incoterms. Look for the CISG or contract terms instead.
• For a Section C style answer, state the term, the rule, the facts applied and a conclusion in four short lines.
• Learn the three functions of a bill of lading and be ready to say which ones a waybill lacks.
• In objective questions, watch for the words order, bearer or named consignee. They decide negotiability.
• Match document to mode: bill of lading for sea, air waybill for air, multimodal for combined transport.