Logistically Speaking : Using Delivery Terms to Allocate Supply Chain Risks

2. Logistically Speaking: Using Delivery Terms to Allocate Supply Chain Risks Breakout Session Number: 713 Presenters: Allen L. Anderson; Attorney; Fees & Burgess, P.C. Jeffrey L. Roth; Attorney; Fees & Burgess, P.C. Date: Monday; July 21, 2010 Time: 9:30 a.m. – 10:45 a.m. 1

3. Terms of Sale a/k/a Trade Terms or Mercantile Symbols • Commercial contracts involving transportation customarily contain abbreviated terms or trader’s shorthand to describe: • When buyer takes delivery • Who arranges for transportation • Place of payment • Price • Time when risk of loss shifts from the seller to the buyer • Costs of freight and insurance • Who is responsible for export and import compliance

4. Existing Inconsistency Among Delivery Terms • Domestic law, specifically various state enactments of the Uniform Commercial Code (UCC), defines trade terms for domestic sales, including risk, delivery, and freight payment • Domestic delivery terms also derive, in part, from National Motor Freight Classification and industry practice • Some states also define trade terms for international sales

5. Existing Inconsistency Among Delivery Terms • Contracting parties may themselves define trade terms • By incorporating definitions from foreign legislation or private rules • Most widely used private trade terms are “Incoterms,” published by the International Chamber of Commerce

6. Uniform Commercial Code • Article Two of the UCC provides a model law for sale of tangible goods • Uniformity comes from incorporation in the laws of all of the United States, except Louisiana

7. New Uniform Commercial Code • BUT . . . on February 19, 2004, the American Law Institute and the National Conference of Commissioners on Uniform State Laws deleted from the newest proposed version of the UCC shipping and delivery provisions previously governing domestic commerce (i.e., former sections 2-319 through 2-324) • Deletes these terms as being out of synch with modern commercial practice!

8. New Uniform Commercial Code • No recommendation for substitutes • Some will respond by using old UCC terms • As legislatures ratify newest UCC, users of old UCC terms lose benefit of generally accepted definitions, and usages become increasingly vague, inviting misunderstanding, controversy, and worse • Many will seek a replacement for deleted UCC provisions (Incoterms)

9. Former/Existing UCC • Determines when title passes from seller to buyer • When title passes, so does risk • Freight usually paid by the person at risk • Statutory law of individual states • Governs sale and purchase of goods, not services

10. Former UCC“FOB” or “Free On Board” • FOB Origin: title and risk pass when goods are loaded (usually freight collect) • FOB Destination: title and risk pass when goods have arrived ready to be unloaded (usually freight prepaid) • Party paying freight has right to select carrier (trucker, railroad, airline)

11. Former UCC“FOB” or “Free On Board” • Fact that UCC addressed ownership “by default,” if not specifically covered in contract, resulted in even more variations of FOB • What if no place specified? Default is Seller’s place

12. Are UCC Delivery Terms Really Gone? • So far, no state legislature has adopted revision • However, American Bar Association endorsed revision, which may provide some impetus for action by state legislatures

13. United Nations Convention for the International Sale of Goods (UNCISG) • Applies when: • Buyer and Seller are both from countries who are signatories to the convention • They do not “opt out”, or choose another applicable law

14. Countries That Have Adopted the UNCISG include: Albania, Argentina, Australia, Austria, Belarus, Belgium, Bosnia-Herzegovina, Bulgaria, Burundi, Canada, Chile, China (PRC), Colombia, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Ecuador, Egypt, El Salvador, Estonia, Finland, France, Gabon, Georgia, Germany, Greece, Guinea, Honduras, Hungary, Iceland, Iraq, Israel, Italy, Japan, Republic of Korea, Kyrgystan, Latvia, Leanon, Lesotho, Lithuania, Luxembourg, Macedonia, Mauritania, Mexico, Moldovo, Mongolia, Montenegro, Netherlands, New Zealand, Norway, Paraguay, Peru, Poland, Romania, Russian Federation, Saint Vincent & Grenadines, Serbia, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Syria, Uganda, Ukraine, United States, Uruguay, Uzbekistan, Zambia, USSR (superseded)

15. UNCISG • Similar to the UCC in the United States, but not the same • Unlike the formerly existing UCC, it does not define or set forth explicit trade or delivery terms • As a result, applicable trade or delivery terms must come from somewhere

16. International Commercial Terms of Sale or Incoterms • Prepared by International Chamber of Commerce, but function merely as custom (not law) • While designed for international trade, have been used for domestic business within European Union for years • Should work well for U.S. domestic, too, if one simply ignores references to export and import clearance • Incoterms 2000 is the current edition and sixth revision of original version published in 1936

17. Incoterms 2000 • The 13 Incoterms describe: • Responsibility for arranging shipment • Who pays for shipment • How far goods will be shipped by one party before other party takes control • Where risk of loss passes • Responsibility for insurance • Responsibility for export/import customs • Do not determine when title passes • Do determine when delivery is made and risk passes

18. Incoterms 2000 Seller Responsibilities • Seller always bears responsibility to: • Have goods ready on time, packed for export • Meet quality assurance to sample or specification • Make delivery in accordance with Incoterm used • Seller always prepares: • Invoice • Packing list • Other documents at buyer’s “request, risk, and expense”

19. Incoterms 2000 Buyer’s Responsibilities & Rights • Buyer has responsibility to accept delivery in accordance with Incoterm used • Buyer always has the right to inspect goods to ensure conformance with specification or sample

20. Incoterms 2000 – Areas of Negotiation • Export clearance • Import clearance • Insurance • Carriage • Loading • Unloading

21. E-Terms a/k/a Departure Terms • Ex-Works: seller delivers goods at own place of business, responsibilities, costs, and risk pass to buyer from seller’s loading dock

22. EXW (Ex Works)EXW Huntsville, Alabama SELLER • Makes goods available to buyer BUYER • Loading • Export Clearance • Main Carriage • On Carriage • Import Clearance • Risk passes when goods are available to buyer • Buyer selects carrier and pays freight • Any mode of transportation

23. EXW • United States Principal Party in Interest is the U.S. party who benefits most from transaction • USPPI is responsible under U.S. Law for preparation of Electronic Export Information (EEI) and export clearance; generally cannot delegate the responsibility, except by power of attorney to forwarding, or other such agent

24. F-Terms a/k/a Main Carriage Unpaid Terms • “Free” Terms: • Several of the common trade terms begin with the word “free” (e.g., free on board, free alongside, free carrier) • “Free” means the seller has obligation to deliver goods to named place for transfer to carrier

25. Free Carrier or Free Carrier Alongside: requires seller to deliver goods to particular carrier at named terminal, depot, airport, or other place carrier operates Risks of loss and liability for cost of transportation shift to buyer upon seller making delivery FCA

26. FCA (Free Carrier) Seller’s DoorFCA San Jose, California SELLER • Export Clearance • Loading at “Works” BUYER • Carriage • Import Clearance • Risk passes when goods are loaded on buyer’s carrier • Buyer selects carrier and pays freight • Any mode of transportation

27. FCA (Free Carrier) Other PointFCA Los Angeles International (LAX) Cargo Terminal SELLER • Export Clearance • Pre Carriage to Other Point (other than “works”) BUYER • Unloading at Point • Main Carriage • On Carriage • Import Clearance • Risk passes when goods are available to unload at buyer’s carrier • Buyer selects carrier and pays freight from this point • Any mode of transportation

28. FAS • Free Alongside or Free Alongside Ship Contracts: requires seller to deliver goods to named port alongside a vessel to be designated by buyer and in manner customary to particular port • “Alongside” means goods be within reach of ship’s lifting tackle

29. FAS (Free Alongside Ship)FAS Panama City, Florida SELLER • Export Clearance • Pre Carriage to Point Alongside Ship BUYER • Loading on Board Ship • Main Carriage • On Carriage • Import Clearance • Risk passes when goods are alongside ship • Buyer selects main carrier and pays freight • Water only

30. FAS • Difficult to obtain a document that shows goods were brought alongside ship • FCA is better term (e.g., FCA Mobile, Alabama Container Yard or Container Freight Station)

31. FOB • Free On Board (port of shipment) contract: requires seller to deliver goods on board vessel that is to be designated by buyer in manner customary at particular port • “On board” means that goods: • Have been appropriated to the contracts • Have crossed rail

32. FOB • Use limited to seaborne commerce in most of world • Incoterms uses it only in connection with carriage of goods by sea • In common-law countries, also applies to inland carriage aboard any “vessel, car or other vehicle”

33. FOB (Free on Board)FOB Long Beach, California SELLER • Export Clearance • Pre Carriage to Ship • Loading on Board Ship BUYER • Main Carriage • On Carriage • Import Clearance • Risk passes when goods are on board ship • Buyer selects main carrier and pays freight • Water only

34. FOB • Easily confused with FOB under UCC • Cannot use FOB except from a seaport city • Difficult to obtain a document that shows goods were brought alongside ship • FCA is a better term (e.g., FCA Mobile, Alabama Container Yard or Container Freight Station)

35. C-Terms a/k/a Main Carriage Paid Terms • CIF or Cost, Insurance, and Freight (port of destination): requires seller to arrange for carriage of goods by sea to port of destination and to turn over to buyer documents necessary to obtain goods from carrier or to assert claim against insurer if goods are lost or damaged

36. CIF • Three documents represent the CIF contract: • Invoice • Insurance policy • Bill of lading • Seller’s duties: deliver document to buyer • Buyer’s duties: pay seller on delivery of documents

37. CIF (Cost, Insurance, and Freight)CIF Aberdeen Harbour, Scotland SELLER • Export Clearance • Pre Carriage • Pays Main Carriage to Seaport in Buyer’s Country BUYER • Unloading at Destination Port • On Carriage • Import Clearance • Risk passes when goods are on board ship • Seller selects main carrier and pays freight • Water only

38. CFR • Cost and Freight (port of destination): same as CIF contract, except seller does not have to procure marine insurance against risk of loss or damage to goods during transit

39. CFR (Cost and Freight (Paid)) CFR Aberdeen Harbour, Scotland SELLER • Export Clearance • Pre Carriage • Pays Main Carriage to Seaport in Buyer’s Country BUYER • Unloading at Destination Port • On Carriage • Import Clearance • Risk passes when goods are on board ship • Seller selects main carrier and pays freight • Water only

40. CPT (Carriage Paid To)Aberdeen Dyce (ABZ) Airport SELLER • Export Clearance • Pays Pre Carriage • Pays Main Carriage to Point in Buyer’s Country BUYER • Unloading at Destination Point • On Carriage • Import Clearance • Risk passes when goods are on board carrier • Seller selects carrier and pays freight to named point • Any mode of transportation

41. CIP (Cost and Insurance Paid To) Dundee, Scotland Airport SELLER • Export Clearance • Pays Pre Carriage • Pays Main Carriage to Point in Buyer’s Country • Arranges and Pays for Insurance BUYER • Unloading at Destination Point • On Carriage • Import Clearance • Risk passes when goods are on board carrier • Seller selects carrier and pays freight to named point • Any mode of transportation

42. CFR, CIF, CPT, CIP • Remember: • Seller pays freight to buyer’s country • But buyer is at risk during transit

43. D-Terms a/k/a Arrival Terms:DES (Delivered Ex-Ship) DES Port Veracruz, Mexico • Delivered Ex-Ship (arrival contract): requires seller to deliver goods to buyer at agreed port of destination • Seller remains responsible for goods until delivered • Seller is not obliged to obtain insurance for buyer's benefit • Water only

44. DDU (Delivered Duty Unpaid)DDU Mexico City International AirportDDU Mexico City, Mexico, Buyer’s Door SELLER • Export Clearance • Pays Pre Carriage • Pays Main Carriage to Point in Buyer’s Country BUYER • On Carriage • Import Clearance • Unloading • Risk passes when goods are unloaded at named point • Seller selects carrier and pays freight to named point • Any mode of transportation

45. DDP (Delivered Duty Paid) DDP Mexico City International Airport SELLER • Export Clearance • Pays Pre Carriage • Pays Main Carriage to Point in Buyer’s Country • Import Clearance BUYER • On Carriage • Unloading • Risk passes when goods are unloaded at named point, cleared customs, duty paid • Seller selects carrier and pays freight to named point • Any mode of transportation

46. DDP • It can be an excessive risk for seller to be responsible for customs clearance in buyer’s country

47. DEQ & DAF • Delivered Ex Quay (destination seaport) generally used only for ocean charter shipments • Seller delivers when goods placed at disposal of Buyer not cleared for import on the quay (wharf) at named port of destination • Seller bears all costs and risks involved in bringing goods to named port of destination and discharging goods on quay • DEQ requires Buyer to clear goods for import and to pay for all formalities, duties, taxes, and any other charges upon import

48. DEQ & DAF • Delivered at Frontier (border point) - FCA border point accomplishes same result • Buyer acquires title, risk, and responsibility for clearance with import customers • Any mode of transportation

49. Incoterms Impose Increasing burdens on Seller, in a Stepped Fashion, Going Down the List from EXW to DDP: