Robert Stein – Director of Entry Services “Incoterms 2000” Robert Stein – Director of Entry Services

Incoterms 2000 A quick quiz to see how much we already know.

Incoterms 2000 A. are internationally recognized commercial shipping terms B. are ocean navigational vectors derived from the Inca Empire of the Andes C. are federally mandated Insurance premiums and conditions on export transactions. D. dictate the type of ink and formatting used in International shipping contracts.

Answer: A. are internationally recognized commercial shipping terms

Incoterms 2000 were written A. under the United Nations Convention for the International Sale of Goods (Vienna Convention) B. by the International Chamber of Commerce C. under the Kyoto Protocols as adopted in 2000 D. under “fast track” authority granted by the U.S. Congress

Answer B. by the International Chamber of Commerce

To apply to the transaction, Incoterms 2000 must be incorporated into A. contract of carriage B. negotiable bill of lading C. sales contract D. the Shippers Export Declaration or AES form

Answer C. sales contract

Incoterms 2000 address A. ownership rights B. breaches of contract C. the risks of loss between the parties D. type of ship used

Answer C. the risks of loss between the parties

“FOB” is only appropriate when goods are shipped via A. truck B. rail C. ship D. air

Answer C. ship

A. EXW B. FCA C. FOB D. None of the above Which Incoterms can be used to transfer title to goods at the port of export? A. EXW B. FCA C. FOB D. None of the above

Answer D. None of the above Incoterms do NOT refer to the title of goods but rather to risks and costs.

The Import Transaction Request for quotation by the buyer Pro-forma invoice by the seller Purchase order created by the buyer Sales contract created using proper Incoterms Payment initiated (open terms, letter of credit) Documentation created by the seller Commercial invoice Packing list Other documents required by the buyer

Import Transaction Foreign Freight Forwarder – creates transport documents and other documents as required. Transportation (pre-carriage, main carriage) arranged based on Incoterms in sales contract or purchase order. Customs clearance performed on behalf of importer of record. Final delivery arranged based on Incoterms of sale.

Elements common on Request for Quote, Proforma Invoice, and P.O. Product Quantity Incoterms Method of payment Names of key players Buyer Seller Freight forwarder Customs broker Banks

Bill of Lading – NVOCC/OTI A contract for carriage with a common carrier via water Moves goods between named geographic points at an agreed rate Reflects the Incoterms agreed upon by the seller and buyer Can be a document of title for the merchandise named in NVOCC bill of lading

Incoterms EXW - Ex Works FCA - Free Carrier FAS - Free Along Side FOB - Free On Board CPT - Carriage Paid To CIP - Carriage and Insurance Paid CFR - Cost and Freight CIF - Cost, Insurance and Freight DAF - Delivered at Frontier DDU - Delivered Duty Unpaid DDP - Delivered Duty Paid DES - Delivered Ex Ship DEQ - Delivered Ex Quay

Four Groups of Incoterms Less Control Less Control More Control 1) “E” group - Departure 2) “F” group - Main carriage unpaid 3) “C” group - Main carriage paid 4) “D” group - Arrival Seller Seller Buyer More Control Less Control 20

E - Departure EXW – Ex Works: Usually the seller’s place

F – Main-Carriage Unpaid FCA – Free Carrier: can be the seller’s place with door/door transport, or a buyer-appointed carrier’s terminal on seller’s side. FAS – Free Along Side: a port on the seller’s side. FOB – Free On Board: a port on the seller’s side.

C – Main-Carriage Paid CPT – Carriage Paid To: somewhere on the buyer’s side. (suggested that the place be an arrival point on the buyer’s side.) CIP – Carriage and Insurance Paid: somewhere on the buyer’s side. CFR – Cost and Freight: a port on the buyer’s side. (Note: this term was formerly called C and F or C&F.) CIF – Cost, Insurance and Freight: a port on the buyer’s side.

D - Arrival DAF – Delivered at Frontier: a border location. DDU – Delivered Duty Unpaid: somewhere on the buyer’s side. DDP – Delivered Duty Paid: somewhere on the buyer’s side. DES – Delivered Ex Ship: a port on the buyer’s side. DEQ – Delivered Ex Quay: a pier on the buyer’s side.

Ex Works (EXW) Incoterm with minimum seller responsibility. Sellers responsibility is to have the goods suitably packed for export at the stipulated place and time. Buyer makes ALL transportation arrangements Buyer must make arrangements for export clearance Insurance is NOT required by this term, but should still be purchased by the buyer since the seller’s responsibility is discharged before transportation takes place. This works best when the buyer has “door to _____” contract of carriage with a transport company (forwarder, NVOCC, steamship line, or airline) that undertakes pre-carriage as well as main carriage. Buyer has maximum control of transportation and routing with accompanying risk and responsibility. Seller has minimum exposure but no say in transportation choices.

Issues with EXW As an Exporter As an Importer Foreign buyer is responsible for export clearance but who will the BIS or Customs Regulatory Audit visit if there are problems or violations? No control of freight routing. If there are problems with delivery or condition of freight you may be pulled in by the buyer even though you have no responsibility. As an Importer You are now the responsible party for the export Customs clearance with all of the attending liabilities. You are responsible for inland freight from the factory to the carrier.

EXW – Ex Works (named place) 27

Free Carrier (FCA) FCA is the most versatile of the F Incoterms. It can be used with any mode of transport, with two likely places on the seller’s side. The two normal delivery points for the seller would be: The seller’s premises and The terminal of the buyer appointed carrier, forwarder, or other buyer-appointed party. On FCA Seller’s Place, the seller must load the truck, container or other conveyance at the seller’s place On FCA Carrier Terminal seller must load conveyance but buyer must arrange unloading at carrier’s terminal Export clearance is a seller responsibility. Buyer is responsible for vessel loading, main carriage, import clearance, and on-carriage. Insurance is NOT required but buyer should consider coverage outside of the Incoterm.

FCA – Free Carrier (named place) 29

Free Alongside Ship (FAS) Under FAS, the seller is required to provide delivery at a point close enough to the carrying vessel to be within reach of its tackle (loading crane). FAS is restricted to vessel shipments This term is somewhat outdated now since cargoes are not normally brought alongside vessels but rather, to terminals for loading. Cargoes are now required days before vessel loading and the 24-hour rule for AMS has only increased this time. FAS is NOT possible unless cargo can be deposited alongside the vessel for loading. Loading or truck, container, or other conveyance is the seller’s responsibility. Pre-carriage is the seller’s responsibility. Export clearance is a now a seller obligation under Incoterms 2000. If buyer specifies a vessel loading at a certain port at a given time, risk can pass “prematurely” to the buyer if the vessel fails to show up on time, cannot take the goods, of closes for loading earlier than the time stipulated. FAS is currently used for charter and liner vessels, particularly when heavy lift or oversize charges are involved. In many cases today, FAS is used due to buyer-seller ignorance of more appropriate terms, such as FCA. The appropriate place for FAS is a port location on the seller’s side.

FAS – Free Alongside (named place) 31

Free on Board (FOB) FOB means loaded on board a vessel at port location on the seller’s side. Similar to FAS, problems occur since most modern terminals do not load cargo on board after it is delivered by the seller. It may take days after delivery to the terminal before the cargo is loaded “on board”. Again, the 24-hour rule has exacerbated this situation. Loading or truck, container, or other conveyance is the seller’s responsibility. Pre-carriage is the seller’s responsibility. Export clearance is a seller responsibility. Vessel loading is a seller responsibility. Main carriage is the buyer’s responsibility Insurance is NOT required but the buyer should consider it outside the Incoterms.

FOB – Free on Board (named port of shipment) 33

Carriage Paid To (CPT) CPT is a direct extension of the FCA Incoterm. It switches the contract of main-carriage task from the buyer to the seller. The stipulated place used for CPT is the place on the buyer’s side to which the freight is prepaid, however, the seller is not responsible for the goods beyond the point where they have been handed over to the first carrier. CPT can be used for all transportation modes. Loading or truck, container, or other conveyance is the seller’s responsibility. Pre-carriage is the seller’s responsibility. Export clearance is a seller responsibility. The seller pays for vessel loading as part of the contract of carriage, however, the seller is NOT responsible for the condition of the goods during vessel loading, since loading always takes place after the goods have been delivered to the carrier. The contract of main-carriage and the payment of freight costs are seller responsibilities. Remember that the seller is NOT responsible for the condition of the goods while they are in transit. Insurance is NOT required but the buyer should consider it outside the Incoterms

CPT - Carriage Paid To (named port of destination) 35

Carriage and Insurance Paid (CIP) CIP is the same as CPT except for insurance coverage. CIP obligates the seller to obtain cargo insurance “such that the buyer, or any other person having an insurable interest in the goods, shall be able to claim directly from the insurer”. Insurance is a seller obligation but only minimum cover (commonly called “free of particular average”) is required by the Incoterm. Since this is inadequate in most situations, the buyer and seller should agree to additional coverage outside of the Incoterm. “All risk” coverage provides excellent coverage for modest cost. It does not cover war or strikes & civil commotion. Coverage for those items is available separately.

CIP – Carriage and Insurance Paid to (named port of destination) 37

Cost and Freight (CFR) Cost and Freight (CFR, formerly abbreviated C&F) is a direct extension of the FOB Incoterm and switches the contract of main-carriage task from the buyer to the seller. CFR may only be used with vessel shipments. The seller is responsible for: Loading the truck, train, barge or other conveyance at the seller’s facility Pre-carriage Export clearance Vessel loading Main-carriage, however, the seller is NOT responsible for the condition of the goods while they are in main-carriage transit. As with FOB, the actual risk transfer point is the ship’s rail. Insurance is NOT required but the buyer should consider it outside the Incoterms. The stipulated place used for CFR is the port on the buyer’s side to which the freight is prepaid. (Note: CFR and CIF terms end with a port location on the buyer’s side. Do not stretch them by stipulating an inland location as the place. If an inland location is desired, consider CPT, DDU or DDP).

CFR – Cost and Freight (named port of destination) 39

Cost, Insurance and Freight (CIF) CIF is the same as CFR, except for the insurance coverage. Like CFR, CIF is a direct extension of the FOB Incoterm. CIF may only be used with vessel shipments. The seller is responsible for: Loading the truck, train, barge or other conveyance at the seller’s facility Pre-carriage Export clearance Vessel loading Main-carriage, however, the seller is NOT responsible for the condition of the goods while they are in main-carriage transit. As with FOB, the actual risk transfer point is the ship’s rail. Insurance is a seller obligation but only minimum cover (commonly called “free of particular average”) is required by the Incoterm. Since this is inadequate in most situations, the buyer and seller should agree to additional coverage outside of the Incoterm. “All risk” coverage provides excellent coverage for modest cost. It does not cover war or strikes & civil commotion. Coverage for those items is available separately.

CIF – Cost, Insurance and Freight (named port of destination) 41

Delivered Duty Unpaid (DDU) DDU removes all transport responsibilities up to the stipulated place from the buyer’s shoulders. All the buyer needs to do is arrange for import clearance and accept delivery at the stipulated place at the agreed time. The seller must arrange for delivery and is responsible for the condition of the goods until this happens. DDU may be used for all means of transportation. The seller is responsible for: Loading the truck, train, barge or other conveyance at the seller’s facility Pre-carriage Export clearance Vessel loading Main-carriage On-carriage (a seller responsibility unless the stipulated place is the arrival point on the buyer’s side). The buyer is responsible for import clearance. Neither party is required to insure under DDU, but keep in mind that the seller is responsible for the goods until they are delivered to the stipulated place. In other words, the seller bears the transit risk, usually right up to the buyer’s premises. For this reason, the seller should insist that adequate insurance be covered outside the Incoterm.

DDU – Delivered Duty Unpaid (named place of destination) 43

Delivered Duty Paid (DDP) DDP is the exact opposite of Ex Works (EXW). This term removes all transport and import clearance responsibility from the buyer’s shoulders. The stipulated place can be the arrival point or any other location on the buyer’s side, including the buyer’s own premises. DDP may be used for all means of transportation. The seller is responsible for: Loading the truck, train, barge or other conveyance at the seller’s facility Pre-carriage Export clearance Vessel loading Main-carriage On-carriage (a seller responsibility unless the stipulated place is the arrival point on the buyer’s side). Import clearance is a seller responsibility. The seller is also responsible for payment of import duty. Many countries impose a value added tax (VAT). Since VAT is not import duty, but is normally collected with the import duty, the seller and buyer should agree outside the Incoterm how this is to be handled. Neither party is required to insure under DDU, but keep in mind that the seller is responsible for the goods until they are delivered to the stipulated place. In other words, the seller bears the transit risk, usually right up to the buyer’s premises. For this reason, the seller should insist that adequate insurance be covered outside the Incoterm.

DDP – Delivered Duty Paid (named place of destination) 45

Delivered at Frontier (DAF) For DAF, the seller pays transportation costs and handles export clearance up to the stipulated place. The buyer handles the import clearance and transportation costs beyond the stipulated place. It is not necessary that the buyer’s and seller’s countries border each other, but when they do, DAF gets even better. DAF can be used for all modes of transportation, if the delivery point is a land border. The seller is responsible for: Loading the truck, train, barge or other conveyance at the seller’s facility Pre-carriage Export clearance There is usually no main-carriage involved. Pre-carriage gets the goods up to the border place on the seller’s side while on-carriage moves them from the border place on the buyer’s side. (There are exceptions such as multi-modal moves but DAF is not recommended for this type of situation.) The buyer is responsible for import clearance and on-carriage. Neither party is required to insure under DAF.

Delivered Ex Ship (DES) DES is restricted to vessel shipments. Since it deals with vessel unloading charges that are normally included in liner terms, it is almost always used with charter vessel movements. The stipulated place is on board a vessel at a specified port on the buyer’s side. The seller is responsible for: Loading the truck, train, barge or other conveyance at the seller’s facility Pre-carriage Export clearance Vessel loading. DES is used mainly for charter vessel shipments, where loading and unloading costs are not included in the cost of freight. Main-carriage The buyer is responsible for vessel unloading. DES is used mainly for charter vessel shipments, where loading and unloading costs are not included in the cost of freight. The buyer is responsible for import clearance. The buyer is responsible for on-carriage. Insurance is NOT required but the seller should consider it outside the Incoterms since they are responsible for the goods until arrival at the stipulated port.

Delivered Ex Quay (DEQ) DEQ is restricted to vessel shipments. The stipulated place is a quay (pier) at a specified port on the buyer’s side. Incoterms 2000 changed the import clearance responsibility to the buyer (it was formerly the seller’s responsibility under Incoterms 1990). The seller is responsible for: Loading the truck, train, barge or other conveyance at the seller’s facility Pre-carriage Export clearance Vessel loading Main-carriage Vessel unloading The buyer is responsible for import clearance and on-carriage. Insurance is NOT required but the seller should consider it outside the Incoterms since they are responsible for the goods until arrival at the stipulated port.

Resources Customs web site www.cbp.gov For books: Boskage Commerce Publications www.boskage.com (888) 880 - 4088 Customs attorneys Robert Stein – rstein@mohawkglobal.com