INCOTERMS International Law Institute International Procure Seminar Washington, DC March 7, Pierce Lee

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1 Practical Issues in International Contracts and Trade Mechanics of Payment and Delivery INCOTERMS 2010 International Law Institute International Procure Seminar Washington, DC March 7, 2014 Pierce Lee

2 International Commercial Contract Inland carrier Port Shipper Port Inland carrier Buyer Important Terms 1. Goods 2. Price 3. Delivery 4. Risk 5. Payment 6. Choice of Law 7. Choice of Forum 8. Dispute Settlement Mechanism 9. More

3 Incoterms EXW, FCA, CPT, CIP, DAT, DAP, DDP, FAS, FOB, CFR, CIF

4 Incoterms Short for International Commercial Terms Promulgated by the International Chamber of Commerce ( ICC ) First Published in 1936 Revised Time to Time Latest Edition (Incoterms 2010) came into force on January 1, 2011

5 Incoterm Rules The Incoterm Rules explain a set of three-letter trade terms reflecting business-to-business practice in contracts for the sale of goods. The Incoterm rules deal with the following three matters in relation to delivery: 1. Tasks 2. s 3. Risks

6 Incoterm Rules Incoterms rules are found here. ICC publication no. 715

7 There are also two other official publications that can help you understand the rules better. Incoterm Rules

8 Incoterm Rules Example, FOB On the first page of the section describing each Incoterm, you have the general definition and description of the term. FOB Free on Board The delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered.

9 Incoterm Rules Example, FOB

10 Incoterm Rules Example, FOB

11 Incoterm Rules Example, FOB

12 Incoterm Rules Example, FOB Are the Incoterm rules law? NO Why are they applicable then? Because you incorporate them into your contract! Ex) FOB Port of Banjul, Gambia Incoterms 2010 incorporation by reference Would they apply if you have omitted Incoterms 2010? Mostly likely for international commercial transactions because they are considered the evidence of the established practices in the trade community. Not necessarily, however, if there is another law that is applicable. For example, the Uniform Commercial Code has a different definition of FOB. Therefore, the applicability depends on the parties choice of law Party Autonomy! Do you want to incorporate Incoterms into your contract? Yes! Why? Certainty! Certainty! Certainty!

13 Why Do Incoterms Matter? Example) In March 2011, tsunami wrecked the Sendai container terminal in Japan damaging hundreds of containers awaiting dispatch. Many had delivery term of FOB Port of Sendai. Who was responsible? Exporters!

14 Why Do Incoterms Matter? Example) In March 2011, tsunami wrecked the Sendai container terminal in Japan damaging hundreds of containers awaiting dispatch. Many had delivery term of FOB Port of Sendai. So what was wrong? When goods are containerized, how are they handed over to the carrier? They are left at the terminal. Who is in control of the containers then? The carrier! You never assume the risk when you don t have the control! RISK = CONTROL So could the exporters avoided the risk? Yes! If they had used a different Incoterm!

15 Incoterms EXW (Ex Works) 2. FCA (Free Carrier) 3. CPT (Carriage Paid To) 4. CIP (Carriage and Insurance Paid To) 5. DAT (Delivered At Terminal) 6. DAP (Delivered At Place) 7. DDP (Delivered Duty Paid) 8. FAS (Free Alongside Ship) 9. FOB (Free on Board) 10. CFR ( and Freight) 11. CIF ( Insurance and Freight) Each Incoterm in like a predefined set of contract terms you can add to your contract very easily. s obligations A1, A2, Buyer s obligations B1, B2, So you don t need to write them out every time you enter into a contract.

16 Incoterms 2010 Can be used with any mode of transportation Can be used with only water transportation 1. EXW (Ex Works) 2. FCA (Free Carrier) 3. CPT (Carriage Paid To) 4. CIP (Carriage and Insurance Paid To) 5. DAT (Delivered At Terminal) 6. DAP (Delivered At Place) 7. DDP (Delivered Duty Paid) 8. FAS (Free Alongside Ship) 9. FOB (Free on Board) 10. CFR ( and Freight) 11. CIF ( Insurance and Freight) Generally the transport by sea or inland waterway only rules should only be used for bulk cargos (e.g. oil, coal etc) and non-containerized goods, where the exporter can load the goods directly onto the vessel.

17 Delivery EXW (Ex Works) The delivers when it places the goods at the disposal of the buyer at the seller s premises or at another named place (i.e., works, factory, warehouse, etc.). Why is delivery so important? because delivery = transfer of risk

18 1. EXW (Ex Works) The seller delivers when it places the goods at the disposal of the buyer at the seller s premises or at another named place (i.e., works, factory, warehouse, etc.). Task Make the goods available for pickup at the agreed place Minimum obligation No obligation to load the goods on any collecting vehicle (If the seller does so, this is at the buyer s risk!) No need to clear the goods for export Still need to provide assistance required by the buyer to effect export Risk to deliver the goods to the agreed place. If the pickup place is the seller s premises, no cost The risk of loss transfers at the time goods are delivered. If the buyer gives sufficient notice of the pickup time, the risk of loss occurs at that time. If not, on the agreed date or on the expiry date of the agreed period. Buyer Task Risk Do you notice? Everything else Arrange for pick up (including loading) Inland transportation to the port Export clearance Marine transportation Obtain insurance Import clearance (duties and taxes) Inland transportation to the buyer s premises of transportation. of insurance. of export/import compliance. Duties and taxes. The risk of loss transfer at the time goods are delivered. Task = Delivery = Transfer of Risk

19 1. EXW (Ex Works) (cont d) The seller delivers when it places the goods at the disposal of the buyer at the seller s premises or at another named place (i.e., works, factory, warehouse, etc.). Practical difficulties: 1. The exporter may need to be involved in export reporting and clearance processes. Otherwise, the exporter may become liable for violating the export control law of the exporting country without knowing. E.g., dual use goods. 2. The seller may need evidence that the goods are to be exported for example, in relation to value added tax (VAT) or sales tax. Consider FCA (Free Carrier) [seller s premises] instead

20 2. FCA (Free Carrier) The seller delivers the goods to the carrier or another person nominated by the buyer at the seller s premises or another named place. Task Deliver the goods to the carrier at the designated place Does the seller have to load the goods? Load, if at the seller s premises Don t load if elsewhere CLEAR THE GOODS FOR EXPORT (fees, taxes) Risk for all of above Risk passes at the time of delivery. Delivery occurs: 1) If the named place is the seller s premises, when the goods have been loaded on the means of transportation provided by the buyer. 2) In any other case, when the goods are placed at the disposal of the carrier ready for unloading. Task Risk Everything else Arrange for pick up (loading if applicable) Export clearance Inland transportation to the port Load goods to the vessel Marine transportation Unload goods from the vessel Obtain insurance Import clearance (duties and taxes) Inland transportation to the buyer s premises for all of above The risk of loss transfer at the time goods are delivered. Why is loading/unloading important? Terminal Handling Charges (THC) Charged by terminals to cover the cost of moving the container between the container yard and ocean vessel.

21 3. CPT (Carriage Paid To) The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if such place is agreed between the parties) and the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. Task Contract for the carriage of the goods from the agreed place of delivery, if any, to the named destination (usual terms, usual route, customary manner may include charges for unloading at the port of destination) HAND the goods OVER to the carrier Clear the goods for export NO NEED TO OBTAIN INSURANCE Risk for all of above Risk passes at the time of delivery. Delivery occurs: 1) The risk of loss transfers at the time goods are handed over to the carrier. 2) If the buyer gives sufficient notice of the dispatch time, the risk of loss occurs at that time. If not, on the agreed date or on the expiry date of the agreed period. Task Risk Remember Everything else Import clearance (duties and taxes) Inland transportation to the buyer s premises for all of above The risk of loss transfer at the time goods are delivered. Task = Delivery = Transfer of Risk

22 4. CIP (Carriage and Insurance Paid To) The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if such place is agreed between the parties) and the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. The seller also contracts for insurance cover against the buyer s risk of loss of or damage to the goods during the carriage. Task Contract for the carriage of the goods from the agreed place of delivery, if any, to the named destination (usual terms, usual route, customary manner) HAND the goods OVER to the carrier Clear the goods for export OBTAIN INSURANCE Risk for all of above Risk passes at the time of delivery. Task Risk Everything else Unloading from the arriving means of transport (depending on the usual terms) Import clearance (duties and taxes) Inland transportation to the buyer s premises for all of above The risk of loss transfer at the time goods are delivered (when the goods are handed over to the carrier). Delivery occurs: 1) The risk of loss transfers at the time goods are handed over to the carrier. 2) If the buyer gives sufficient notice of the dispatch time, the risk of loss transfers at that time. If not, on the agreed date or on the expiry date of the agreed period. How much insurance do you need to obtain? The seller is required to obtain insurance only on minimum cover (contract price + 10%). Otherwise, it must be agreed separately in the contract.

23 Interterms & Letters of Credit Letter of Credit A document issued by a financial institution assuring payment to a seller of goods provided certain documents have been presented to the bank. Important features: 1. Letter of Credit vs. Contract for Purchase and Sale These are completely different instruments. One does not affect the other. 2. A very common form of payment for international commercial transaction because the seller and the buyer cannot trust each other! 3. Parties determine which documents to be presented to the bank: 1. Bill of Lading 2. Commercial Invoice 3. Insurance Certificate 4. Export Control Permit 5. Import Control Permit 6. Inspection Certification 7. More Out of these documents, the Bill of Lading is the most important because Bill of Lading evidences the right to title, possession, custody and control and it is transferable. It serves as the collateral! The bank releases the sale proceeds upon receiving the bill of landing and hands it over to the buyer. The buyer then claims the goods with the bill of lading. The carrier takes the role of an independent third party, trusted to take charge of the goods at the beginning of the journey and to release them to the holder of the bill of lading at their destination.

24 Interterms & Letters of Credit Letter of Credit is effective when: 1. The seller arranges the carriage If the buyer arranges the carriage, the buyer can frustrate the contract by cancelling the carriage contract. The seller cannot get paid without the letter of credit. Example) EXW (Ex Works) The seller fulfill its obligation by placing the goods at the agreed place for pickup by the buyer s carrier. The buyer terminates the carriage contract. The seller cannot obtain the bill of lading and cannot get paid under the letter of credit! 2. The seller s responsibility is limited to handing over the goods to the carrier. Any responsibility beyond that cannot be evidenced by the bill of lading. Other than the carrier, neutral third-party that can evidence the seller s performance is rare. So no other documentary evidence may be available. Example) DAP (Delivered at Place) Under this term, the seller must deliver the goods to the place designated by the buyer. The buyer may be only person to issue evidence of such delivery. But is the buyer neutral? Therefore, the following rules are generally more effective with letters of credit: CFR ( and Freight), CIF ( Insurance and Freight) CPT (Carriage Paid To), CIP (Carriage Insurance Paid To) A.k.a. the C rules!

25 5. DAT (Delivered at Terminal) The seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the destination. Terminal includes any place, whether covered or not, such as quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal. Task Contract for the carriage of the goods from the agreed place of delivery, if any, to the named destination Clear the goods for export Obtain insurance Unload the goods from the arriving means of transport and place them at the disposal of the buyer at the named terminal for all of above Risk Risk passes at the time of delivery. Delivery occurs when the goods are unloaded at the terminal. If the buyer fails to clear imports, the buyer bears all resulting risks. If the buyer fails to give notice of the time of delivery, the risk of loss transfers on the agreed date or on the expiry date of the agreed period. Task Risk Everything else import clearance (duties and taxes) Inland transportation to the buyer s premises (including loading) for all of above The risk of loss transfer at the time goods are delivered (when the goods are unloaded at the terminal). Complications can arise if the goods have to go through a clearance point before delivery. Clearance of the goods may require close cooperation between the carrier and the buyer.

26 6. DAP (Delivered at Place) The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involving in bringing the goods to the named place. Task Contract for the carriage of the goods from the agreed place of delivery, if any, to the named destination Clear the goods for export Obtain insurance Place the goods at the disposal of the buyer on the arriving means of transport ready for unloading. for all of above Risk Risk passes at the time of delivery. Delivery occurs when the goods are at the disposal of the buyer on the arriving means of transport ready for unloading. * If the buyer fails to clear imports, the buyer bears all resulting risks. If the buyer fails to give notice of the time of delivery, the risk of loss transfers on the agreed date or on the expiry date of the agreed period. Task Risk Everything else Unload the arriving means of transport import clearance (duties and taxes) Inland transportation to the buyer s premises for all of above The risk of loss transfer at the time goods are delivered (when the goods are ready for unloading). Complications can arise if the goods have to go through a clearance point before delivery. Clearance of the goods may require close cooperation between the carrier and the buyer. *If the seller incurs costs under its contract of carriage related to unloading at the place of destination, the seller is not entitled to recover the costs unless agreed otherwise. Unloading is at the buyer s risk.

27 7. DDP (Delivered Duty Paid) The seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport of the buyer ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities. Task Contract for the carriage of the goods from the agreed place of delivery, if any, to the named destination Clear the goods for export Obtain insurance CLEAR THE GOODS FOR IMPORT (pay duty and VAT) Place the goods at the disposal of the buyer on the arriving means of transport ready for unloading. for all of above Risk Risk passes at the time of delivery. Delivery occurs when the goods are at the disposal of the buyer on the arriving means of transport ready for unloading. * If the buyer fails to provided assistance regarding import clearance, the buyer bears all resulting risks. If the buyer fails to give notice of the time of delivery, the risk of loss transfers on the agreed date or on the expiry date of the agreed period. Task Risk Everything else Unload the arriving means of transport* Provide assistance regarding import clearance Inland transportation to the buyer s premises for all of above The risk of loss transfer at the time goods are delivered (when the goods are ready for unloading). *If the seller incurs costs under its contract of carriage related to unloading at the place of destination, the seller is not entitled to recover the costs unless agreed otherwise. Unloading is at the buyer s risk. Often highly problematic because import clearance become a challenge to the seller! For example, some taxes such as VAT are only payable by a locally-registered business entity, so there may be no mechanism for the seller to make the payment.

28 8. FAS (Free Alongside Ship) The seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards. Task CLEAR THE GOODS FOR EXPORT Place the goods alongside the ship nominated by the buyer at the loading point for all of above Risk Risk passes at the time of delivery. Delivery occurs when the goods are placed alongside the ship. Task Risk Everything else Arrange the marine transportation Obtain insurance Load the vessel Unload the vessel Import clearance (pay duties and taxes) Inland transportation to the buyer s premises for all of above The risk of loss transfer at the time goods are delivered (when the goods are placed alongside the ship). Containerized Cargos Where the goods are in containers, it is typical for the seller to hand the goods over to the carrier at a terminal and not alongside the vessel. In such situations, the FAS rule would be inappropriate, and the FCA (Free Carrier) rule should be used.

29 9. FOB (Free On Board) The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onward. Task CLEAR THE GOODS FOR EXPORT Place the goods on board the vessel nominated by the buyer for all of above Risk Risk passes at the time of delivery. Delivery occurs when the goods are placed on board the vessel. Task Risk Everything else Arrange the marine transportation Obtain insurance Unload the vessel Import clearance (pay duties and taxes) Inland transportation to the buyer s premises for all of above The risk of loss transfer at the time goods are delivered (when the goods are placed on board the vessel). Containerized Cargos FOB may not be appropriate where good are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such situations, the FCA (Free Carrier) should be used. Let s revisit the tsunami example

30 Tsunami Example Example) In March 2011, tsunami wrecked the Sendai container terminal in Japan damaging hundreds of containers awaiting dispatch. Many had delivery term of FOB Port of Sendai. FCA vs. FOB

31 10. CFR ( and Freight) The seller delivers the goods on board the vessel. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. Task Clear the goods for export Contract for the carriage of the goods from the agreed place of delivery, if any, to the named port of destination (usual terms, usual route) NO NEED TO OBTAIN INSURANCE Place the goods Place the goods on board the vessel for all of above Risk Risk passes at the time of delivery. Delivery occurs when the goods are placed on board the vessel. Task Risk Everything else Obtain insurance Unload the vessel Import clearance (pay duties and taxes) Inland transportation to the buyer s premises for all of above The risk of loss transfer at the time goods are delivered (when the goods are placed on board the vessel). Containerized Cargos CFR may not be appropriate where good are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such situations, the CPT (Carriage Paid To) should be used.

32 11. CIF ( Insurance and Freight) The seller delivers the goods on board the vessel. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. The seller also contracts for insurance cover against the buyer s risk of loss of or damage to the goods during the carriage. Task Clear the goods for export Contract for the carriage of the goods from the agreed place of delivery, if any, to the named port of destination (usual terms, usual route) OBTAIN INSURANCE (minimum cover) Place the goods Place the goods on board the vessel for all of above Risk Risk passes at the time of delivery. Delivery occurs when the goods are placed on board the vessel. Task Risk Everything else Unload the vessel Import clearance (pay duties and taxes) Inland transportation to the buyer s premises for all of above The risk of loss transfer at the time goods are delivered (when the goods are placed on board the vessel). Containerized Cargos CIF may not be appropriate where good are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such situations, the CIP (Carriage Paid To) should be used.

33 Final Tips 1. Never rely on shorthand. Use the full ICC texts! 2. If still confused, loop up the official guide or the Q&A book. 3. Use different Incoterms depending on the mode of transportation. 4. Use different Incoterms depending on the type of cargo bulk vs. containerized 5. Be clear! Name specific point at the delivery place or destination. Example) DAT Terminal 3, Port Bell, Uganda Incoterms Remember your price should reflect your Incoterm! 7. Consider your tasks, costs and risks before choosing an Incoterm! 8. Qualify your Incoterm if you need to. Just be VERY VERY clear! Example) DDP (VAT unpaid) Port of Betio, Kiribati

34 THANK YOU! Any Questions? Pierce Lee International Trade Analyst Direct: Mobile: Crowell & Moring LLP Pennsylvania Avenue NW Washington, DC 20004

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