International Terms of Sale: Incoterms Webinar. Miller & Company P.C. Charles W. Ballard Kansas City, Missouri June 14, 2012

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1 International Terms of Sale: Incoterms Webinar Miller & Company P.C. Charles W. Ballard Kansas City, Missouri June 14, 2012

2 What are Incoterms? Incoterms are internationally agreed-upon definitions for shipment/delivery terms, published by the International Chamber of Commerce (ICC) For sales of tangible, portable goods Translated into 36 languages English is source language Commonly misunderstood Define: When delivery occurs Seller & Buyer responsibilities 2

3 Incoterms are not: Law Incoterms must be incorporated into a contract by reference e.g., FCA London Heathrow Airport (Incoterms 2010) Title Transfer Normally conveyed through sales orders or contracts Why? Too many country-specific rules on ownership/title All inclusive Unchangeable 3

4 Incoterms are used to: Incoterms Basics: Key Issues Align contract/shipping documents Assign legal liability/responsibility Arrangement for carriage of goods Point of risk transfer Point of cost transfer Determine method of carriage Designate control of shipment Impact/determine Importer of Record and Exporter designations Assign payment of Customs duties Incoterms are not used to transfer title 4

5 Incoterms Basics: Structure 11 different terms, three-letter abbreviations Grouped into 4 categories 5

6 Summary of Terms and Issues Group E Departure Seller EXW Ex Works Group F Main Carriage Unpaid FCA Free Carrier FAS Free Alongside Ship FOB Free On Board Group C Main Carriage Paid CFR Cost & Freight CIF Cost, Insurance & Freight CPT Carriage Paid To CIP Carriage & Insurance Paid Group D Arrival DAT Delivered At Terminal DAP Delivered At Place DDP Delivered Duty Paid Port of Export Port of Customs Entry Buyer Issues: Delivery Location Control Risk 6

7 Delivery Obligations E Terms: Seller makes goods available at seller s premises Actually a domestic transaction EXW is the only Incoterm where the seller is not ever responsible for export licensing/formalities (absent specific contract language to the contrary) F Terms: Seller delivers goods to a carrier designated by buyer C Terms: Seller contracts for carriage, but does not assume risk of loss/damage or add l costs during shipment; delivery occurs when goods are delivered to the carrier (often used with prepay and add ) D Terms: Seller bears all risk/costs to bring goods to destination Except: Buyer is responsible for customs duties and customs formalities unless DDP Remember: Delivery Transfer of Title 7

8 Delivery Location Group E - Departure Terms EXW - Ex Works [named place] - Usually the seller s premises Group F - Main Carriage Unpaid Terms FCA - Free Carrier [named place] Usually the seller s premises or a buyer-appointed carrier terminal on seller s side FAS - Free Alongside Ship [port of export] FOB - Free On Board [port of export] 8

9 Delivery Location Group C - Main Carriage Paid Terms CFR - Cost & Freight [destination port] CIF - Cost, Insurance & Freight [destination port] CPT - Carriage Paid To [named place] CIP - Carriage & Insurance Paid [named place] 9

10 Delivery Location Group D Arrival Terms DAT - Delivered At Terminal [named place] DAP - Delivered At Place DDP - Delivered Duty Paid [named place] General Rule Be as specific as possible in naming delivery location 10

11 Method of Carriage Method of carriage = any mode of transport (Omni-modal) (require only a named place of delivery): EXW FCA CPT CIP DAT DAP DDP 11

12 Method of Carriage Method of carriage = only by ship/waterway (require a named port of delivery): FAS FOB CFR CIF 12

13 FOB DENVER 13

14 Control and Responsibility Delivery terms relative to supply chain control and responsibility EXW FCA FAS FOB CFR CIF CPT CIP DAT DAP DDP Inland Freight to Port of Export Int l Freight Inland Freight From Port of Import Shipment Contracts Seller responsible for goods until provided to carrier Destination Contracts Seller responsible for goods until they arrive at agreed place 14

15 Control and Responsibility Responsibility for Carriage Contract No obligation: EXW Buyer: FCA, FAS, FOB Seller: CFR, CIF, CPT, CIP, DAT, DAP, DDP Seller s Responsibility: must contract on usual terms at his own expense to the agreed point at the named place of destination by a usual route and in a customary manner. 15

16 Risk of Loss Risk of Loss Insurance Requirement Insurance: Neither Party Required to Insure: EXW, FCA, FAS, FOB, CFR, CPT, DAT, DAP, DDP Seller Required to Insure: CIF, CIP So buyer can directly claim Minimum cover Buyer Required to Insure: None 16

17 Control and Responsibility Delivery terms relative to import/export control and responsibility EXW FCA FAS FOB CFR CIF CPT CIP DAT DAP DDP Port of Export: Export Formalities Port of Entry: Customs Entry 17

18 Customs Impact Determines Importer of Record vs. Ultimate Consignee DDP - only Incoterm that places import licensing/formalities burden on seller Affects dutiable value declared to Customs Additional U.S. issue: the deduction of nondutiable charges (NDCs) 18

19 Incoterms and Procedures No Preferred Terms = Flexibility Preferred Terms = Consistency Most Commonly Used: EXW FCA CIP DDP 19

20 Strengths & Weaknesses EXW Seller delivers when places goods at buyer s disposal at seller s premises or other named place Seller must have goods ready when promised, export packed, and notify buyer Trade-offs: The absolute minimum obligation to sellers; buyer bears all risks and costs in taking goods Diversion concerns? No obligation for seller to help buyer with: Loading Export clearances Minimizes duties for U.S. imports 20

21 Strengths & Weaknesses FCA Seller delivers the goods, cleared for export, to buyer-nominated carrier at the named place Trade-offs: Omni-modal Preferred current F term - Not FOB Delivery location impacts loading obligation Seller only liable if at its premises Buyer selects carrier Seller must arrange export clearance 21

22 Strengths & Weaknesses CIP Seller delivers goods to carrier it nominates, but seller must pay for carriage Trade-offs: Omni-modal Seller pays costs and freight to named destination, but risk of loss/damage and additional postdelivery costs transfer to buyer Seller must procure insurance to cover damage risk of loss during carriage Insurance covers goods post-delivery Insurance only minimum cover Risk point may not protect buyer 22

23 Strengths & Weaknesses DAT Seller delivers the goods to the buyer, not cleared for import, at the named terminal at the port of entry Trade-offs: Omni-modal Buyer responsible for import customs formalities and duties Including failure to timely clear customs Can impact seller delivery obligations 23

24 Strengths & Weaknesses DDP Seller delivers the goods to the buyer, cleared for import, and not unloaded, at the named destination place Trade-offs: The maximum obligation on sellers Seller controls supply chain Seller bears all risks of export/import clearances Seller obligations and risks should be reflected in higher price to buyer Works best for related parties or in domestic applications (i.e., EU) 24

25 Incoterms vs. Uniform Commercial Code (UCC) UCC terms are: Model laws U.S. only For shipment and delivery Incorporated into state law If a contract is controlled by the UCC (e.g., domestic transactions) trade terms are set by UCC through 322 New UCC does not include them 25

26 Incoterms vs. Uniform Commercial Code (UCC) UCC Terms: Six FOB terms FOB Origin, Freight Collect FOB Origin Car (or other vehicle), Freight Collect FOB Origin, Freight Prepaid FOB Destination, Freight Collect FOB Destination, Freight Prepaid FOB Vessel FAS Delivery Ex Ship CIF UCC Bill of Lading C&F No Arrival No Sale CIF/ C&F not landed weights 26

27 Incoterms vs. Uniform Commercial Code (UCC) Removed in 2004 UCC Updates Slowly being deleted from state laws Left to contracting parties Be Careful: Contractual choice of law clauses Example: This contract is to be construed pursuant to the laws of the state of Illinois. 27

28 Fake Incoterms Examples: Ex-Factory F.O.B. Origin F.O.B. Destination Freight Collect Prepay and Add Some companies make up their own If your customer or supplier does, chances are it is NOT in your favor 28

29 The Future of Incoterms Periodically update to reflect trade practice Scheduled roughly every 10 years: Incoterms 2010 Domestic applicability Issues for Incoterms 2010 Incorporating trade security requirements (i.e., U.S. C-TPAT, EU AEO) Removal of DAF, DEQ, DES, and DDU 29

30 Do You Need To Control Transportation? Your Supplier s Express Carrier 30

31 Determining Incoterms: How to Decide Is product foreign sourced? Consider agents, distributors, re-sellers Can company manage Logistics? Insurance? Licenses/permits? Customs entry? Product expertise Core product competency Compare promotional materials Example: T-shirts and key chains Financial disclosure Special trade issues Example: Ball bearings If not, then use EXW (for exports) or DDP (for imports) to avoid import/export requirements 31

32 Summary Review Must be specifically included in contract terms Must be clear and consistent Follow the Company requirements or determine the best procedure under the circumstances Review actual activity to determine whether it is consistent with terms USE THEM! 32 TMM/PP/63373 (3809)

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