Breakout Session # 209 Jeffrey L. Roth & Allen L. Anderson FEES & BURGESS, P.C. 213 Green St.

2. Delivery Terms and Allocation of Risk in Commercial Contracts Under the UCC, UNCISG, and Incoterms 2000 Breakout Session #209 Jeffrey L. Roth & Allen L. Anderson FEES & BURGESS, P.C. 213 Green St. Huntsville, Alabama 35801 jroth@feesburgess.com anderson@feesburgess.com www.feesburgess.com April 12, 2006 1:20 p.m.-2:20 p.m. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

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; • and • place of payment; • price; • time when risk of loss shifts from the seller to the buyer; • costs of freight and insurance; and • who is responsible for export and import compliance. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

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. • 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 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

5. Uniform Commercial Code • Article 2 of the Uniform Commercial Code (UCC) provides model law for sale of tangible goods. • Uniformity comes from incorporation in the laws of all U.S. states, except Louisiana. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

6. 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 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! NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

7. 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). NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

8. Statutory law of individual states. Governs sale and purchase of goods, not services. Determines when title passes from seller to buyer. When title passes, so does risk. Freight usually paid by the person at risk Former/Existing UCC NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

9. 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). NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

10. 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. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

11. Are UCC Delivery Terms Really Gone? • So far, no state legislature has • adopted revision—not • surprising in an election year! • However, American Bar • Association endorsed revision, • which may provide some • impetus for action by state • legislatures. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

12. United Nations Convention for the International Sale of Goods (CISG) Applies when: • Buyer and seller are both from countries who are signatories to the convention; and • They do not “opt out,” or choose another applicable law. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

13. Countries That Have Adopted the CISG include: Argentina, Australia, Austria, Belarus, Belgium, Bosnia, Bulgaria, Burundi, Canada, Chile, China, Croatia, Cuba, The Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Georgia, Germany, Ghana, Greece, Guinea, Herzegovina, Holland, Hungary, Iraq, Italy, Kirghizstan, Latvia, Lesotho, Lithuania, Luxembourg, Mauritania, Mexico, Moldova, Mongolia, New Zealand, Netherlands, Norway, Peru, Poland, Romania, Russia, Switzerland, Slovakia, Slovenia, Singapore, Spain, Sweden, Syria, Uganda, Ukraine, United States of America, Uruguay, Uzbekistan, Venezuela, Zambia NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

14. CISG • Similar to the UCC in the United States, but not the same. • Is a convention or set of rules, but not actual law. • Unlike the formerly existing UCC, does not define or set forth explicit trade or delivery terms. • As a result, applicable trade or delivery terms must come from somewhere. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

15. International Commercial Terms of Sale or Incoterms • Prepared by International Chamber of Commerce, but function merely as custom (not law). • While designated 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. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

16. 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; responsibility for insurance; and responsibility for export/import customs. Do not determine when title passes. Do determine when delivery is made and risk passes. Incoterms 2000 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

17. 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.” NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

18. 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. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

19. Export Clearance Import Clearance Insurance Carriage Loading Unloading Incoterms 2000 – Areas of Negotiation NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

20. 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. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

21. SELLER Makes goods available to buyer Risk passes when goods are available to buyer. Buyer selects carrier and pays freight. Any mode of transportation. BUYER Loading Export Clearance Main Carriage On Carriage Import Clearance EXW (Ex Works)EXW Atlanta, Georgia NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

22. EXW • United States Principal Party in Interest (USPPI) is the U.S. party who benefits most from transaction. • USPPI is responsible under U.S. Law for export clearance’ generally cannot delegate the responsibility. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

23. 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: seller has obligation to deliver goods to named place for transfer to carrier. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

24. FCA 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. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

25. 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. FCA (Free Carrier) Seller’s DoorFCA San Jose, California NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

26. SELLER Export Clearance Pre-carriage to Other Point (other than “works”) BUYER Unloading at Point Main Carriage On Carriage Import Clearance FCA (Free Carrier) Other PointFCA Los Angeles International (LAX)Cargo Terminal 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. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

27. 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 to be within reach of ship’s lifting tackle. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

28. SELLER Export Clearance Pre Carriage to Point Alongside Ship BUYER Loading on Board Ship Main Carriage On Carriage Import Clearance FAS (Free Alongside Ship)FAS Panama City, Florida Risk passes when goods are alongside ship. Buyer selects carrier and pays freight. Water only. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

29. FAS • Difficult to obtain a document that shows goods were brought alongside ship. • FCA is a better term (e.g. FCA Charleston, South Carolina Container Yard or Container Freight Station. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

30. 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. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

31. 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.” NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

32. SELLER Export Clearance Pre Carriage to Ship Loading on Board Ship. BUYER Main Carriage On Carriage Import Clearance FOB (Free on Board)FOB Long Beach, California Risk passes when goods are onboard ship. Buyer selects main carrier and pays freight. Water only. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

33. 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 Charleston, South Carolina Container Yard or Container Freight Station). NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

34. 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. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

35. CIF • Three documents represent the CIF Contract: • Invoice; • Insurance policy; and • Bill of lading. • Seller’s duties: deliver documents to buyer. • Buyer’s duties: pay seller on delivery of documents. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

36. SELLER Export Clearance Pre Carriage Pays Main Carriage to Seaport in Buyer’s Country BUYER Unloading at Destination Port On Carriage Import Clearance CIF (Cost, Insurance, and Freight)CIF Aberdeen Harbour, Scotland Risk passes when goods are on board ship. Seller selects main carrier and pays freight. Water only. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

37. 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. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

38. SELLER Export Clearance Pre Carriage Pays Main Carriage to Seaport in Buyer’s Country BUYER Unloading at Destination Port On Carriage Import Clearance CFR (Cost and Freight (Paid)) CFR Aberdeen Harbour, Scotland Risk passes when goods are on board ship. Seller selects main carrier and pays freight. Water only. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

39. SELLER Export Clearance Pays Pre Carriage Pays Main Carriage to Point in Buyer’s Country BUYER Unloading at Destination Point On Carriage Import Clearance CPT (Carriage Paid To)Aberdeen Dyce (ABZ) Airport Risk passes when goods are on board carrier. Seller selects carrier and pays freight to named point. Any mode of transportation. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

40. 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 CIP (Cost and Insurance Paid To)Dundee, Scotland Airport Risk passes when goods are on board carrier. Seller selects carrier and pays freight to named point. Any mode of transportation. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

41. CFR, CIF, CPT, CIP Remember: • Seller pays freight to buyer’s country; • But buyer is at risk during transit. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

42. 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. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

43. SELLER Export Clearance Pays Pre Carriage Pays Main Carriage to Point in Buyer’s Country Unloading BUYER On Carriage Import Clearance DDU (Delivered Duty Unpaid)DDU Mexico City International AirportDDU Mexico City, Mexico, Buyer's Door Risk passes when goods are unloaded at named point. Seller selects carrier and pays freight to named point. Any mode of transportation. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

44. SELLER Export Clearance Pays Pre Carriage Pays Main Carriage to Point in Buyer’s Country Unloading Import Clearance BUYER On Carriage DDP (Delivered Duty Paid) DDP Mexico City International Airport 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. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

45. DDP • It can be an excessive risk for seller to be responsible for customs clearance in buyer’s country. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

46. 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. • Delivered at Frontier (border point) - FCA border point accomplishes the same result. • Buyer acquires title, risk, and responsibility for clearance with impact customers. • Any mode of transportation NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

47. Incoterms Impose Increasing Burdens on Seller, in a Stepped Fashion, from EXW to DDP: NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

48. Incoterm and Services EXW FCA FAS FOB CFR CIF CPT CIP DAF DES DEQ DDU DDP warehouse storage S S S S S S S S S S S S S warehouse labor S S S S S S S S S S S S S export packing S S S S S S S S S S S S S loading charges B S S S S S S S S S S S S inland freight B B/S S S S S S S S S S S S terminal charges B B S S S S S S S S S S S forwarder fees B B B B S S S S S S S S S loading on vessel B B B S S S S S S S S S S ocean/air freight B B B B S S S S S S S S S charges in foreign port B B B B B B S S B B S S S delivery charges to final destination B B B B B B B B B B B S S customs clearance, duties, taxes B B B B B B B B B B B B S NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

49. Choosing the Right Incoterm • Supply Chain Management Organization should choose Incoterm that puts all responsibility on seller to deliver to buyer’s facility? Yes? No? NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

50. Shipping costs; Political considerations; How much is Shipper/Buyer willing to pay to minimize risk? www.ponl.com: click on “shipping info,” then on “incoterms,” for interactive surveys for buyers and sellers to sort through various options (provided by shipping line and logistics service provider P&O Nedlloyd). Choosing the Right Incoterm NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management