Incoterms: Pre-Shipment Inspection

Topics: International trade, World Trade Organization, General Agreement on Tariffs and Trade Pages: 6 (1906 words) Published: April 12, 2013

The trade term is one of the most important terms to be negotiated in an export or import contract. The rules for interpreting trade terms are of primary importance in international sale of goods transactions. Trade terms are used to allocate the costs of freight and insurance, along with stating the time that the risk of loss passes to the purchaser. The rules of interpretation of trade terms also determines who is responsible for dealing with custom agents and the payment of tariffs, along with other import-export fees and who pays for the cost of loading and off-loading. In international trade, trade terms as defined in the INCOTERM manuals (published by the International Chamber of Commerce) has gained universal acceptance. The word “Incoterms” is an abbreviation of International commercial terms. Incoterms make international trade easier and help traders in different countries to understand one another. These standard trade definitions that are most commonly used in international contracts are protected by ICC copyright. Although the Incoterm rules are primarily intended for international sales, they can be applied to domestic contracts by reference. Trade terms are, in fact, key elements of international contracts of sale, since they tell parties what to do with respect to carriage of goods from the seller to the buyer and export, import and security-related clearance. In this assignment, I will look into the aspect of pre-shipment inspection. Even though the pre-shipment inspection aspect is not strictly a part of the buyer’s obligations, for reasons discussed later, it is still discussed as a part of the same. I will examine the definition, scope and practical usage of pre-shipment inspection as a trade term as well as a means of minimizing corruption and preventing large scale frauds in business transactions. The World Trade Organization’s Agreement on Pre-Shipment Inspection has also been discussed, along with the mechanism for dispute settlement, as well as the Indian scenario relating to pre-shipment inspection.


Pre-shipment inspection (PSI) is the government contracted or mandated employment of specialized private companies to verify shipment details - essentially price, quantity and quality – of goods ordered from overseas. Used currently by some 30 developing countries, mainly in Africa, the purpose is to safeguard national financial interests (prevention of capital flight and commercial fraud as well as customs duty evasion, for instance) and to compensate for inadequacies in administrative infrastructures. Pre-shipment inspection is governed by Section B9 of the Incoterms rules, which requires the buyer to bear the costs of the pre-shipment inspection, unless otherwise agreed (however, there is an exception to this principle when the inspection has been mandated by the country of export). First and foremost, it is vital to understand that pre-shipment inspection is different from an inspection by the buyer himself. Pre-shipment inspection is generally required when the buyer requires a licence or permit from the authorities to ensure that the goods conform to the specifications of the contract. In these circumstances, the authorities order an inspection and generally engage an independent inspection agency to perform it. Legislation in the country of import will determine whether and to what extent the authorities can require reimbursement of costs paid by them for the inspection, but if reimbursement is required from one of the parties, the obligation to do so will generally fall upon the buyer. Contractual stipulations relating to inspection usually require the buyer to pay for it, but there are other variants which require the seller to pay for it to the extent that the inspection shows that the goods were not in a condition to satisfy the requirements of the contract. A pre-shipment inspection by competent authorities may be important to the...

Bibliography: Larry A. DiMatteo, “The Law of International Contracting”.
Ramberg, Jan, “ICC Guide to Incoterms 2010, Understanding and practical use”.
“Introduction to Trade Documentation”
Steve Charnovitz, “The WTO and the Rights of the Individual”
[ 1 ]. The “independent inspection agency” is a third party pre-shipment inspection agency. In India, these inspection agencies are governed by the Directorate General of Foreign Trade, under the Ministry of Commerce and Industry. Under Section 2.32.2A of the Handbook of Procedures (Vol. I)( 27th August 2009 – 31st March 2014) -Recognition as Pre-shipment Inspection Agency (PSIA) and issuance of Pre-shipment Certificate (PSIC), the PSIAs will be issued, after consideration by an Inter-Ministerial Committee, a recognition certificate valid for three years. However, the DGFT has the right to suspend/cancel such a certificate at any time during the 3 year term. At the end of 3 years, PSIA has to make a fresh application for further recognition.
[ 2 ]. WTO Agreement on Preshipment Inspection , Article 2.21.
[ 3 ]. WTO Agreement on Preshipment Inspection , Article 4.
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