2010 Incoterms: Important Developments that Businesses and Professionals Should Note Gary P. Tober

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1 2010 Incoterms: Imant Developments that Businesses and Professionals Should Note Gary P. Tober Garvey Schubert Barer Seattle, Washington

2 Introduction International commercial terms, or Incoterms, are a series of internationally recognized and standardized trade terms that allocate the costs and responsibilities of a buyer and seller for the delivery of goods under sales contracts. Incoterms reflect current transation practices. Incoterms correspond to international sales law established by the U.N. Convention on Contracts for the International Sale of Goods ( CISG ). CISG is applicable to international contracts of U.S. entities unless excluded by a choice of law clause. Incoterms 2010 is the first revision since Incoterms 2000 and incorporate a number of changes including reducing the Incoterms rules to 11 from 13. The Incoterms were developed by the International Chamber of Commerce and first published in Incoterms 2010 is the eighth edition and has effect as of January gsblaw.com 2

3 Generally The Incoterms 2010, effective January 1, 2011, consist of 11 rules. They are listed here in order of increasing responsibility on the seller with respect to costs, risks, and obligations for the trans of goods: Ex-Works (EXW) goods available at seller s premises. Free Carrier (FCA) goods, cleared for ex, in custody of carrier. Free Alongside Ship (FAS) goods, cleared for ex, placed alongside ship. Free On Board (FOB) goods, cleared for ex, on board ship. Cost and Freight (CFR) goods delivered to destination at seller s cost. Cost Insurance and Freight (CIF) same as CFR with seller paying insurance. Carriage Paid To (CPT) container/multimodal equivalent of CFR. Carriage and Insurance Paid To (CIP) container/multimodal equivalent of CIF. Delivery At Terminal (DAT) goods delivered to terminal (unloaded). Delivery At Place (DAP) goods delivered to destination (loaded but ready). Delivery Duty Paid (DDP) goods delivered and cleared for im. gsblaw.com 3

4 Replacement and Reclassification of Rules Replacement Incoterms 2010 includes two new rules: DAT and DAP. DAT and DAP replace four rules that are eliminated under Incoterms 2010 DDU - Delivered Duty Unpaid, DES - Delivered Ex Ship, DEQ - Delivered Ex Quay, and DAF - Delivered At Frontier. Reclassification Earlier Incoterms version grouped rules into four categories in order of increasing obligations for the seller (E, F, C, and D): Ex Free Carriage Delivery New classification groups rules are based on mode of trans; with one set of rules suitable for any mode of trans, including multiple modes; and the other set only for trans by sea or inland waterway. Any mode or multi-modal: EXW, FCA, CPT, CIP, DAP, DAT, DDP Sea or inland waterway: FAS, FOB, CFR, CIF gsblaw.com 4

5 Some Terminology Incoterms use several terms of art, which are defined below: Delivery For purposes of Incoterms 2010 delivery is the point at which risk of loss passes to the buyer. Free When used in Incoterms 2010, Free means that cost of primary trans, or carriage, is borne by the buyer. Carriage Pre-carriage or first carriage. Trans to the main carrier, generally the obligation of the seller (with the exception of EXW). Main Carriage. The primary transation of the purchased goods. On-carriage. Trans from the place of delivery to the premises of the buyer, generally the buyer s responsibility. gsblaw.com 5

6 Use of Incoterms in Domestic Transactions While Incoterms have historically been used primarily in international commerce, Incoterms have increasingly been used for domestic commerce. Incoterms 2010 formally recognizes that the Incoterms rules can be used in purely domestic contracts as well. Incoterms 2010 are specifically drafted to serve both domestic and international trade. The provisions of each Incoterm 2010 rule include qualifying language that imposes an obligation on one party or the other only if applicable. Example. Most Incoterms require the seller to ensure goods are cleared for ex. However, Incoterms 2010 expressly provide that the obligation is imposed only where applicable, such that if the seller is in Washington and the buyer is in Oregon, it is clear there is no need for the seller to perform ex clearance formalities. gsblaw.com 6

7 Translation of UCC to Incoterms 2010 Buyers and sellers in the United States familiar with terms defined in Uniform Commercial Code ( UCC ) Article 2 and 2A should pay attention to the overlap of rules between Incoterms and the UCC. FOB, FAS, and CIF are all terms used both by the UCC and Incoterms, but their use and definitions are different under the UCC and Incoterms Example. FOB, FAS, and CIF are all single mode rules under Incoterms, while only FAS is limited to trans by sea/inland waterway under the UCC. How might one make a translation of a UCC term into an Incoterms First it is necessary to think about the critical elements of the agreement: At what point or place will risk of loss shift to the buyer? Which party is obligated to arrange and pay for the contract of carriage? Then, locate the Incoterms rule that associates the established elements within a particular rule. gsblaw.com 7

8 Translation of UCC to Incoterms 2010 Example. A domestic seller often negotiates FOB origin, freight collect. If we look at Incoterms 2010, the provisions for FCA, place of delivery spell out exactly the desired arrangement: seller makes the goods available at their premises, buyer arranges and pays for trans and bears risk of loss while goods are in transit. Where goods are in containers, it is typical for the seller to hand the goods over to the carrier at a terminal and not alongside or on board a vessel. In such situations, the FAS or FOB rule would be inappropriate, and the FCA rule should be used. gsblaw.com 8

9 Risk of Loss and Title Passage Transfer of title is not covered by any of the Incoterms and must be separately specified by the parties. For purposes of Incoterms, delivery occurs, and risk of loss transfers, at the point designated by the term selected. This may or may not be where title passes. Must look to applicable law as specified in the parties agreement. For some purposes, title passage may be deemed to occur when risk of loss transfers. This is true for U.S. federal income tax purposes for determining the source of income. For source of income purposes, income from the sale of inventory property is sourced based on where title passes and title passage is deemed to occur where risk of loss passes. gsblaw.com 9

10 Electronic Records Previous versions of Incoterms allowed for use of electronic communications in place of required paper documents only as specifically agreed to by the parties. Incoterms 2010 provides that electronic communications have the same effect as paper documentation where the parties so agree, or where customary. Incoterms 2010 make express reference to use of equivalent electronic records, if the parties agree or such use is customary. gsblaw.com 10

11 Im / Ex Clearance Ex Almost all Incoterms 2010 require the seller to obtain ex clearance, where applicable, and pay associated costs. Exception is EXW. Im With one exception, none of the Incoterms 2010 require the seller to obtain im clearance, where applicable, and pay associated costs. Exception is DDP. gsblaw.com 11

12 Carriage, Delivery, and Insurance Under Incoterms 2010 CPT, CIP, CFR, and CIF, the seller must make arrangements for the carriage of goods to the agreed destination; however, risk of loss passes to the buyer upon delivery of the goods to the carrier. These rules have two critical points because risk of loss and responsibility for costs are transferred at different places. While the contract will always specify a destination, it may not specify the of shipment which is where risk of loss passes to the buyer. While CIP and CIF require the seller to make arrangements for insurance, the risk of loss still passes to the buyer upon delivery to the carrier at the of shipment, protected by seller s insurance. Under CIP and CIF the seller is required to obtain insurance only on minimum cover. If a buyer wants or needs additional insurance, it must make its own arrangements or make specific arrangements with the seller for such additional insurance. gsblaw.com 12

13 Procurement If the transaction involves the sale of commodities, cargo may be sold several times during transit through a string of contracts. A seller in the middle of the string does not ship the goods because they have already been shipped by the first seller in the string. The seller in the middle of the string therefore performs its obligations to the buyer by procuring goods that have been shipped. Incoterms 2010 have been amended to address this practice, with the sellers having either the obligation to ship the goods if they are the initial seller, or to procure goods shipped if they are a seller in the middle of a string of contracts. gsblaw.com 13

14 Incoterms 2010 impose increasing burden on seller from EXW DDP CIF CFR FAS FOB Seller Precarriage Im clearance Buyer FCA EXW CPT CIP DDP DAT DAP gsblaw.com 14

15 Summary of Terms Multi Modal Load to Truck Ex Duty Incoterm Trans to origin Unload at origin Land charges at origin Trans to dest. Land charges at dest. Unload at dest. Trans to destination Im Duty EXW Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer FCA Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer FAS Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer FOB Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer CFR Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer gsblaw.com 15

16 Summary of Terms Multi Modal Load to Truck Ex Duty Incoterm Trans to origin Unload at originp ort Land charges at origin Trans to destin. Land charges at dest. Port Unload at dest. Port Trans to destination Im Duty CIF Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer CPT Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer CIP Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer DAT Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer DAP Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer DDP Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller gsblaw.com 16

17 Questions?

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