There are risks involved with Import transactions which are often overlooked. Some of these are:
• Transport Risk - the risk of loss of, or damage to, the goods whilst in transit from the Seller to the Buyer.
• Quality Risk - the risk the goods are not in accordance with samples or quality is not as specified.
• Delivery Risk - merchandise not arriving within the time required (eg. goods ordered for Christmas trade).
• Exchange Risk - a change in the final amount paid in Australian Dollars due to exchange rate movements.
These risks are explained more fully below.
Transport Risk
Whether transport is by Sea or by Air, the risk can be covered by Insurance under normal Marine Insurance policies.
Where the supplier has the responsibility of taking out Insurance cover, it is desirable that the Contract of Sale sets out the agreement between the parties as to the type of cover to be obtained. If you're an Importer this enables you to make sure your interests are adequately protected.
Often Importers will wish to obtain Insurance cover from their own Insurance Company under a 'blanket cover' called an 'Open Policy' thus taking advantage of bulk billing and other relationships.
In the event the Supplier has indicated the goods have been insured, you may consider taking out 'contingency cover' to protect your interest in the goods, should a loss occur, and the Supplier has not covered the goods.
Quality risk
Occasionally the goods are not in accordance with samples, quality is not as specified, or they are otherwise unsatisfactory. If you are unable to negotiate a settlement with the Supplier, and cannot resort to an agreed arbitration procedure - then the question of legal action may arise, based on the Contract of Sale, to secure a settlement or damages. Whether such action is warranted depends on the amount involved, the national law applicable, where legal action must be taken, the costs of the action, and whether a judgment against the Supplier, if obtained, can be enforced.
Where the Supplier draws a term Bill of Exchange on the Importer, with documents released against acceptance, the Importer is able to inspect the goods before payment is made to the Supplier at the maturity date.
In this method of payment, if the goods are not in accordance with the Contract of Sale the Importer is able to stop payment on the accepted draft prior to maturity.
Importers should consider what measures can be taken to ensure that the need for legal action does not arise. If the Importer has an agent in the Supplier's country it may be possible for closer supervision to be maintained over shipments.
In some cases, where the type of goods and amount involved warrant greater attention, it is generally possible to arrange for an independent superintendence company (specialising in such work) to inspect the goods prior to shipment and provide their certificate that the quality etc is in accordance with the Contract of Sale. SGS or Bureau Veritas are companies which will perform this inspection service in most countries. This supervision is expensive, which often prohibits its use.
One of the best safeguards is through investigation of the reputation and standing of the Supplier and the product prior to placing orders. BankSA can assist in this respect by seeking a Bank opinion from the exporters bank on your behalf.
Delivery Risk
If the date by which goods are shipped is a vital aspect (eg goods ordered for Christmas trade) the Contract of Sale should be specific, so that the Importer has clear legal grounds for refusing payment if it is apparent that goods have not been shipped by the specific shipment date. Where an Importer is paying for goods by means of a Documentary Credit, the Issuing Bank can be instructed to include a 'latest date for shipment' in the terms of the Credit.
Exchange Risk
When buying goods for a price expressed in an overseas currency an Importer can determine the price equivalent in AUD at the time of entering into the commercial contract.
However, the settlement of trade usually involves some delay between the time of entering into the contract and the actual payment for the goods is received.
Therefore the AUD value could change before the actual settlement between the Seller and Buyer is affected.
The possibility of exchange rate movement is referred to as 'Exchange Risk' and can be eliminated by -
• Contracting to import in Australian Dollars
• Entering into a Foreign Exchange Contract through your Bank.
• Offsetting Export receivables against Import payables in the same currency by using a Foreign Currency Account.
• Where Pre/Post-Shipment Finance is provided with a Foreign Currency Loan in the currency of the transaction and Export receipts repay the loan.
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