INCOTERMS2010 Implications-Nuances 27sept12

8/14/2019 INCOTERMS2010 Implications-Nuances 27sept12

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www.morganlewis.com

INCOTERMS 2010:INCOTERMS 2010:Im pl i c at i ons and Nuanc es Im pl i c at i ons and Nuanc es

Presented by:Morgan, Lewis & Bockius LLPMargaret M. Gatti,

Louis K. Rothberg

Timothy M. Rolland


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Morgan, Lewis & BockiusLLP

Outline of PresentationOutline of Presentation

I. Introduction to INCOTERMS

II. Definitions

III. INCOTERMS FunctionsIV. Explanation & Implications of

INCOTERMS

V. Tips for Using INCOTERMS

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Introduction to Incoterms 2010Introduction to Incoterms 2010

InternationalCommercialTerms

11 International Sales Terms (not sales law)

Standardized trade definitions

3 Letters Each

EXW, FOB, CFR

Devised and maintained by ICC

More than 120 member countriesUpdated as required by commerce trends

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Introduction to IncotermsIntroduction to Incoterms

Current Applicability of Incoterms

Widely accepted / used worldwide

U.S.:Automatically apply(default)in

international trade transactionsunless:Alternative sales terms selected, or

State law selected, or

FMS (Delivery Trade Codes / DTC)

U.S.:can be applied to domestic sales onelective basis (recommended that companiesmaster and use one set of terms for all sales)

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Morgan, Lewis & BockiusLLP 5

Key Definitions

for

Understanding

INCOTERMS


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Key Definitions

Omni-modal: Those terms that can be used for alltransport modes.

Marine-restricted: Those terms that can be used onlyfor vessel shipments.

Shipment contract:A UCC-based sales contract holdingthe seller responsible for thecondition of the goods until they arehanded over / delivered to a carrier.

(Legal delivery physical delivery)


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Key Definitions

Destination contract: A UCC-based sales contractholding the seller responsible forthe condition of the goods untilthey arrive at an agreed place.(Legal delivery = physical

delivery)Revenue recognition: Establishes when a sale becomes

an account receivable. TheSecurities and ExchangeCommission (SEC) has establishedrevenue recognition guidelines for

publicly traded companies. TheSEC guidelines are based on theconcept of shipment anddestination contracts.


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Key Definitions

Minimum cover: Cargo insurance that covers onlyminimum perils (i.e. total loss,general average). Minimum cover isoften called "free of particular average(FPA) in the US, and Institute of London

Underwriters "Institute Cargo Clause C"internationally.

All risk: Cargo insurance coverage that isadequate for most shipments when writtenon a warehouse-to-warehouse basis andenhanced with "war" and "strike and civil

commotion" coverage.

War Risk: Additional cargo insurance coverage forwar-related perils.


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INCOTERMSFunctions


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Incoterms FunctionsIncoterms Functions

1. Delegate shipping responsibilities andshipping costs between sellers & buyers

a. Export Packaging

S af e c a r ri ag e f o r t r an s p o r t m o d e E xclu d e s: L a b e l in g / Markin g a n d S WP M

b. Export Clearance

O b t ai n e x p o r t l i c e n s e

A p p l y D es t i n a t io n C o n t r o l S t at em e n t

Co m p le te E lectro n ic E xp o rt In fo rm a tio n (E EI)

R ec o r d i n A E S 11


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Incoterms FunctionsIncoterms Functions(Responsibilities and Costs) contd(Responsibilities and Costs) contd

c. Pre-carriage for Export

In la n d tra n sp o rta t io n o n se l le r s s id e

From shipment origin point

To port of departureDea ls se p a rate ly w i th :

Loading

Unloading

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d. Main Carriage for Export

In te rn a t io n a l t ra n sp o rta t io n

From sellers country

To buyers countryDea ls se p a rate ly w i th :

Loading

Unloading

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e. On Carriage for Export

In l a n d t r an s p o r t a t io n o n b u y e r s s i d e

From import entry port

To location designated by buyerDea ls se p a rate ly w i th :

Loading

Unloading

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f. Import Clearance

Im p o r t l i c en s e s , w h en a p p l i c ab l e

C u s t o m s i m p o r t f o r m a l i t i e s

P o s s i b l e p ay m en t o f : Import duties Import taxes, such as VAT Other fees / charges

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Incoterms FunctionsIncoterms Functions(Insurance)(Insurance)

2. Compel seller and buyer to dealseparately with Insurance

O n l y t w o In c o t er m s d e al w i t h i n s u r a n c e

Hint: look for i in the Incoterm In s u r an c e r eq u i r e d = m i n i m u m c o v e r

London Clause C Coverage / FreeParticular Average

No All Risk No War Risk or SRCC Risk

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Incoterms FunctionsIncoterms Functions(Contract Responsibilities)(Contract Responsibilities)

4. Clarify subsidiary contract responsibilitiesof seller & buyer

Contract with freight forwarder

Export clearance Contract with carriers

Pre, Main, On

Contract with insurer

Contract with customs brokerImport clearance

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Incoterms FunctionsIncoterms Functions(Delivery & Risk of Loss)(Delivery & Risk of Loss)

5. Clarify when delivery occursandriskof loss transfers

Risk of loss transfers with Delivery

Shipment Term:Place on Sellers SideLegal Delivery Physical Delivery

EXW, F terms, C terms

Destination Term:Place on Buyers Side

Legal Delivery=Physical DeliveryD terms

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Incoterms FunctionsIncoterms Functions(Do Not Include Title Transfer)(Do Not Include Title Transfer)

Leave title transfer for parties agreement or

for default determination

Incoterms silent on title transfer

Look to parties agreement,orMake default determination

Title passes when delivery made and

risk of loss transferred!

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Explanation ofINCOTERMS


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Explanation of INCOTERMS

FCA

FASFOB

CFRCIFCPTCIP

DAT

DAPDDPExW


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Transport Mode LimitationsMarine Restricted

All ModesIndividual INCOTERMS MUSTBe used with Named Point

Sellers Side vs Buyers Side


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Well, maybe not in all cases


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Marine Restricted Omni-modal

FASnamed shipment port

FOBnamed shipment port

CFRnamed destination port

CIF named destination port

EXWSellers premises

FCAnamed place / Seller

CPTnamed destination / Buyer

CIPnamed destination / Buyer

DATnamed place / BuyerDAPnamed place / Buyer

DDPnamed place / Buyer


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Incoterms are grouped into four categorieswhich reflect the breakdown of costs /responsibilities between Seller & Buyer:

Group E: Departure TermsGroup F: Main Carriage Unpaid TermsGroup C: Main Carriage Paid Terms

Group D: Arrival Terms


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Incoterms ExplanationIncoterms Explanation

EXW

Available at sellers premises

Rule for Any Mode(s) of Transport

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EXWEXW Ex WorksEx Works(Sellers Premises)(Sellers Premises)

Cost / Responsibility Seller Buyer

1. Export Packaging Yes No

2. Export Clearance No Yes3. Pre-Carriage Loading

Pre-CarriagePre-Carriage Unloading

NoNoNo

YesYesYes

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4. Main Carriage LoadingMain Carriage

Main Carriage Unloading

NoNoNo

YesYesYes

5. On Carriage LoadingOn CarriageOn Carriage Unloading

NoNoNo

YesYesYes

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6. Import Clearance No Yes

7. Insurance No No

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Minimum obligation for seller

Shipment Term

Deliveryoccurs when seller placesgoods at buyers disposal at sellerspremises for buyer to load!

Risk of losstransfers from seller to buyer

when seller delivers goods to buyer


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Appropriate for routed transactions

Inappropriate for USML exports

Unless Foreign Buyer is an Embassy in the U.S.,Foreign buyer cannot obtain DSP5 licenses

Ineligible person under ITAR 120.1(c)

US forwarders for foreign buyers cannot obtain

DSP-5 export licenses for foreign buyersDDTC policy: applicant must be exporter


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Inappropriate for Haz Mat shipments

Seller has no control over carriersperformance

Seller has no control over safety conditionsduring transport

Despite lack of control, Seller:

Shares responsibility for incidents thatresult in damages to 3rd parties or damagesto the environment.


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MAIN CARRIAGE UNPAID

FCA Free Carrier, Named Place

FAS Free Alongside Ship,Named Shipment Port

FOB Free on BoardNamed Shipment Port



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FCA / FAS / FOBFCA / FAS / FOB



2. Export Clearance Yes No

3. Pre-Carriage LoadingPre-Carriage

Pre-Carriage Unloading

YesNo

No

NoYes

Yes

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NoNoNo

YesYesYes


NoNoNo

YesYesYes

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7. Insurance No No

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More obligations for seller than EXW

Delivery occurs:

FCA: When seller delivers goods tocarrier or named place

FAS: When seller places goodsalongside vessel at shipment port

FOB: When goods pass ships rail atshipment port


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Risk of Losspasses from seller to buyer

whenDelivery occurs:

FCA: Seller delivers goods to carrier or namedplace

FAS: Seller places goods alongside vessel atshipment port

FOB: Goods pass ships rail at shipment portFCA / FAS / FOB = Shipment Contracts


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Appropriate for routed transactions

Inappropriate for USML exports

FCA / FAS / FOB: Export Clearance by Seller

US seller = eligible person (ITAR 120.1(c))US seller obtains DSP-5 export license

DSP-5 export license requires end

destination controlDestination control requirements in ITAR

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Inappropriate for Haz Mat shipments

Seller has no control over carriersperformance

Seller has no control over safety conditionsduring transport

Despite lack of control, Seller:



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MAIN CARRIAGE PAID

CFR Cost and freight destination port

CIF CFR + Insurance

CPT Carriage paid destination

CIP CPT + Insurance



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CFR / CIF / CPT / CIPCFR / CIF / CPT / CIP




3. Pre-Carriage LoadingPre-CarriagePre-Carriage Unloading

YesYesYes

NoNoNo

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YesYes

No

NoNo

Yes


NoNoNo

YesYesYes

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7. Insurance CIFCIP

CFRCPT

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Shipment Terms

Delivery and Risk of Loss Transfer:

CFR: when goods pass ships rail at shipment

portCIF: same as CFR

CPT: when seller delivers goods to first carrier

CIP: same as CPT


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Inappropriate for routed transactions

Appropriate for USML exports

CFR / CIF / CPT / CIP: Export Clearance by Seller

US seller = eligible person (ITAR 120.1(c))US seller obtains DSP5 export license

DSP5 license requires end destination control

Destination control requirements in ITAR 123.9


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Appropriate for Haz Mat shipments

Seller has control over carriersperformance

Seller has control over safety conditionsduring transport

Seller in better position because:



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DAT / DAP / DDPDAT / DAP / DDP




3. Pre-Carriage LoadingPre-CarriagePre-Carriage Unloading

YesYesYes

NoNoNo

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YesYes

Yes

NoNo

No


YesYesNo

NoNo

Yes

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6. Import Clearance DDP Yes

7. Insurance No No

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Morgan, Lewis & BockiusLLP54

More obligations for seller than FAS, FOB, CFR, CIF,EXW, FCA, CPT & CIP

Delivery and Risk of Loss Transfer:

DAT: When Seller delivers goods to nameddestinationterm in a l on Buyers side, packagedappropriately andu n lo a d ed

DAP: When Seller delivers goods to Buyer atnamed place on Buyers side, appropriatelypackaged butn o t u n l o a d ed



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Delivery and Risk of Loss Transfer: (contd)DDP: when seller places goods at

buyers disposal on transport arrival

at destination placeSeller is not required to unload goodsbut must clear goods for import



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Inappropriate for routed transactions

(because Seller is controlling shipping)

Appropriate for USML exports

DAT / DAT / DDP: Export Clearance by SellerUS seller = eligible person (ITAR 120.1(c))

US seller can obtain DSP-5 export license

DSP-5 license requires end destination controlDestination control requirements in ITAR

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Appropriate for Haz Mat shipments

Seller has control over carriersperformance

Seller has control over safety conditionsduring transport

Seller in better position because:



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Seller / ExporterTasks

Costs inPricing

EXW Export Packaging $

FAS / FOB / FCA Export PackagingPre-Carriage $$

CFR / CIF

CPT / CIP

Export Packaging

Pre-Carriage

Main Carriage

(Insurance = I)

$$$

INCOTERMS 2010INCOTERMS 2010

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Seller / ExporterTasks

Costs inPricing

DAT / DAP

Export Packaging

Pre-Carriage

Main Carriage

On Carriage

$$$$

DDP

Export Packaging

Pre-Carriage

Main Carriage

On Carriage

Foreign ImportDuties

(but NOT VAT / GST)

$$$$$


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All INCOTERMS require named place the morespecific, the better

ExW and F terms, place is on sellers side of pond

C terms and D terms, place is on buyers side of pond

Only two Incoterms deal with insurance look for I

CIF

CIP

Only one INCOTERM makes export clearance a buyersresponsibility (all others assign task to seller)

ExW

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Only one INCOTERM makes import clearance asellers responsibility (all others assign task to buyer)

DDP

Routed Transactions Buyers control shipment & freight

ExW

All F Terms

INCOTERMS = International Standard / Default terms

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Tips for Using

INCOTERMS


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Incoterms TipsIncoterms Tips

Tip #1 Understand Incoterm of choice and

make sure you use properly Stick with official meaning to the

greatest extent possible

Employ additional provisions sparingly

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Tip #2 Use individual Incoterms with named

point as required

Sellers side vs. Buyers side

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Incoterms and Transport ModesIncoterms and Transport Modes

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Marine Restricted Omni-Modal

FAS named shipment port EXW sellers premises

FOB named shipment port FCA named place / seller

CFR named destination port CPT named destination place

CIF named destination port CIP named destination place

DAT named place / buyer

DAP named place / buyer

DDP named place / buyer


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Tip #4 For shipments subject to USML export

license requirements and for HAZMAT

shipments, use either Main Carriage Paidterms (CFR, CIF, CPT or CIP) or ArrivalTerms (DAT, DAP, DDP)

Stay away from routed transactions Refrain from use of EXW, FAS, FOB, FCA

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Tip #5 Be very careful in using DDP Incoterm

Recognize differing opinions on HTScodes and applicable duties

If use, make sure to exclude VAT

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Tip #6 Dont forget about insurance

Not just a concern for CIF and CIP

Coordinate insurance with paymentmethod and risk of loss

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Tip #7

Shipment terms allow for earlier revenuerecognition than delivery terms

Based on recognition of revenue occurringwith delivery and risk of loss transfer

Shipment terms:Departure, Main CarriageUnpaid & Main Carriage Paid Terms

Delivery terms: Arrival Terms

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Morgan, Lewis & BockiusMorgan, Lewis & Bockius

Margaret M. Gatti

Philadelphia, PA

tel. 215.963.5569

Washington, DC

tel. 202.739.5409

Louis K. Rothberg

Washington, DC

tel. 202.739.5281

Timothy M. Rolland

Washington, DC

tel. 202.739.5829


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Morgan Lewis & Bockius LLP

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