Chapter 6 The use of documents in trade
service is in a particularly weak position in
the event of the counterparty failing after a
service has been provided.
In the event the importer takes control of
the goods, but refuses to pay, the exporter
has to rely on pursuing a claim through the
appropriate courts. This effectively means
the exporter is exposed to a country and
a contract risk. The exporter effectively
has two contracts: one with the importer
to pay for the received goods, and one
with the shipping company (or a series
of companies) to deliver the goods to the
correct place undamaged.
This second contract (or contracts) also
represents a significant risk for the exporter.
Because payment is on open account,
the importer will only pay on receipt of
undamaged goods listed in the invoice. If
there is a problem with shipping, either in
terms of delay, or due to loss or damage to
some or all of the consignment, the importer
is likely either not to pay or to only pay part
of the final amount invoiced. The exporter
needs to be aware of this risk, and to be
confident of being able to seek redress
through the courts or recompense from an
insurance policy.
However, in all cases where there is a
dispute, the exporter, under open account
terms, needs to be aware that there will be
a delay in seeking a resolution, whether
through legal proceedings or via a claim
against an insurance policy. This will
inevitably result in a delay in the receipt of
payment, which will have an impact on cash
flow and working capital levels.Benefits
Transit insurance
Both parties can arrange insurance to cover
a variety of risks. The use of Incoterms or
a letter of credit may indicate which party
should arrange a particular level of cover, and
what evidence of cover is required against
loss or damage in transit.
For regular exporters, rolling insurance
policies can be arranged which cover all
exports over the term insured. Under such
policies, individual cover notes or certificates
then need to be issued for each individualconsignment. Responsibility for the issuance
of the cover notes will be listed in the
insurance policy, although the exporter must
always check that appropriate insurance is in
place before the goods are handed over to
the shipper. This is most appropriate to cover
regular consignments of the output of the
exporter’s core business.
For particular transactions, insurance can
also be arranged on a one-off basis. This is
appropriate where additional cover is required
(perhaps for a large consignment) or where
the trade is with a new counterparty or into a
new country where there is additional risk.
Finally, either party may decide to arrange
cover even when Incoterms are used and
state that the other party is responsible.
This will provide cover in the event of the
counterparty failing to meet the terms of the
agreement, and is particularly appropriate
when the relationship with the counterparty
is new, or the counterparty is located in
a jurisdiction where the exporter has little
experience of trading.Credit insurance
Exporters will often seek to arrange credit
insurance. Depending on the policy chosen,
credit insurance can provide protection
against a range of risks associated with
trade. It is available to protect against credit
risk associated in the provision of services
as well as goods.
Broadly speaking, credit insurance can be
arranged to protect against both counterparty
and country risk.
Counterparty risk.
Common counterparty risk events for
which credit insurance can be arranged
include counterparty insolvency, refusal
to pay, and failure to accept goods or
services provided in accordance with
the contract.
Country risk.
Common country risk events for which
credit insurance can be arranged include
changes in government policy that
prevent completion of the contract, or
payment in settlement of the contract,
natural disasters, war or terrorist activity
that prevents completion of the contract