The Logistics & Law of Exporting from The United States Presented by: Trade Facilitators, Inc. April 3, 2014.

The Logistics & Law of Exporting from The United States Presented by: Trade Facilitators, Inc. April 3, 2014

April 17 Presentation Outline Review of critical contract or sales agreement clauses for agricultural exporters Summary of Incoterms 2010 rules Letter of Credit essentials

DISCLAIMER The prose, graphics and examples provided in this training module are for educational purposes only. Under no circumstances should any of its content be construed as legal advice or counsel. “Incoterms” is a registered trademark of the International Chamber of Commerce, registered in several countries. Copyright 2014, Trade Facilitators, Inc.

The Formation of International Sales Agreements
April 17 The Formation of International Sales Agreements

The Formation of International Sales Agreements
April 17 The Formation of International Sales Agreements Technically, a “contract” is not required for two or more parties to do business internationally (although it’s a good idea….) The key is to have written proof of the terms of the agreement, intent of the parties and required actions International Sales Agreement Export Price Quote & Purchase order The “cocktail napkin” approach Business transactions can be conducted without a written contract, but should be supported by documentation that demonstrates Offer, Acceptance and Consideration Formation of a “contract” is based on the documentation trail, intent of the parties and/or practices of the trade

International Sales Agreements: Key Content & (Potential) Clauses
April 17 International Sales Agreements: Key Content & (Potential) Clauses Agreement date Identification of the parties Authority to enter into contracts Applicable law Severability Dispute resolution Incoterms® 2010 rule Description of the goods Quality, grade, size & condition Weights & quantities Substitution Delivery of the goods by the seller* Price of the goods Payment terms Currently of sale Warranty & repair of goods Receipt of the goods by the buyer* Country of origin of the goods Export packaging* Notice to the buyer or seller* Mode of transport Transportation costs* *Covered by Incoterms® 2010 rules

International Sales Agreements: Key Content & (Potential) Clauses
April 17 International Sales Agreements: Key Content & (Potential) Clauses Contract of carriage* Provision of commercial documents* Provision of transport documents* E-commerce* Inspection of the goods* Diversion clause Transfer of risk* Cargo insurance* Claims Transfer of title Penalty clause for late shipments Customs clearance* Payment of customs duties & taxes* Amendments Assignment Force majeure *Covered by Incoterms® 2010 rules

International Sales Agreements: “Must-Haves”
April 17 International Sales Agreements: “Must-Haves” DESCRIPTION OF THE GOODS: Prose-based description of the goods Description should be consistent with product classification in the Harmonized System (H.S.) If possible, provide 6-digit HS number per the World Customs Organization Quantity with proper unit of measure (grams, dozen, liters, pairs, pounds)

International Sales Agreements: Clauses & Considerations
April 17 International Sales Agreements: Clauses & Considerations PRICE: For one-off transactions, list both unit and total price (show discounts) Spell out the currency ($ should be stated as USD) For long-term, multi-transaction contracts list clause for price adjustments Beware buying or selling in foreign currencies (if you do, need clause for bands of fluctuation) CAVAET: The negotiated Incoterms® may impact the final price of the goods Unit versus landed cost

International Sales Contracts: Clauses & Considerations
April 17 International Sales Contracts: Clauses & Considerations TYPE & TERMS OF PAYMENT: Cash in advance Open account (30, 60, 90 days) When does the clock start ticking? (invoice date, transport document date, arrival date) Documentary collections Cash against Documents Documentary credits Letter of credit

International Sales Contracts Clauses & Considerations
April 17 International Sales Contracts Clauses & Considerations INCOTERMS® RULE: Incoterms® 2010 rules specify the division of delivery-related cost and risk between a seller and buyer In terms of scope, the negotiated Incoterms® rule is the single most important component of a contract and all ensuing documents ALWAYS specify an Incoterms® rule in a contract and list it on all documents ALWAYS add a clause in contracts that states “Incoterms® rules will be interpreted pursuant to the ICC publication, Incoterms® 2010” Incoterms rules carry a stipulation for delivery date or range of acceptable time frame

International Sales Contracts: Clauses Covered by Incoterms® Rules
April 17 International Sales Contracts: Clauses Covered by Incoterms® Rules Delivery of the goods by the seller Receipt of the goods by the buyer Export packaging Notice to the buyer or seller Transportation costs Contract of carriage Provision of commercial documents Provision of transport documents E-commerce Inspection of the goods Conditions precedent (import and/or export licenses) Conditions precedent (supply chain security) Transfer of risk Cargo insurance Customs clearance Payment of customs duties & taxes

April 17 International Sales Contracts Clauses & Considerations COUNTRY OF ORIGIN OF THE GOODS Country of growth, assembly or manufacture of goods (not necessarily the country of export) Whether you are the buyer or seller, country of origin will impact the landed costs of the goods (customs duties are driven by this factor) C.O. is an important point, particularly if the States of the buyer and seller are party to a bi-lateral or multi-lateral trade agreement (NAFTA, KORUS, US/Colombia)

April 17 International Sales Contracts Clauses & Considerations TRANSFER OF TITLE TO THE GOODS There is a big difference between the transfer of risk and transfer of title Contrary to popular myth, Incoterms do NOT deal with transfer of title International contract law does not do a very good job of addressing transfer of title Be explicit in your Agreements about transfer of title

Incoterms® 2010: Understanding & Application
Welcome to the Incoterms 2010: Understanding & Application training module, the premier learning tool for the understanding and application of international trade terms. Incoterms® are the cornerstone of any supply chain strategy and impact performance in areas as diverse as purchasing, sales, logistics, cost accounting and production planning. Sometimes forgotten and often overlooked, it is impossible for an organization to effectively manage global supply chains without a full understanding of the implications inherent to Incoterms. Every ten years the publishers of Incoterms® (The International Chamber of Commerce in Paris, France) update their official Incoterms® publication. Now known as Incoterms 2010: ICC rules for the use of domestic and international trade terms, this most recent version will go into effect on January 1, It is important to note that the following training session includes all of the changes between 2000 and 2010, and includes up-to-date explanations, comparisons and real world examples of how to utilize all of the trade terms. Whether you work as a buyer, export sales executive, materials planner, accountant or logistics professional this training will not only provide you with the Incoterms® 2010 updates, but a comprehensive understanding of shipping terms that will make you more effective in your day to day work. Good luck and enjoy the training module!!!

Incoterms® Defined By focusing on the seller’s delivery obligations within an international sales contract Incoterms® govern three critically important considerations: At what physical point in a supply chain the risk of loss or damage to the goods shifts from seller to buyer At what physical point in a supply chain the responsibility for all transportation, customs clearance, duties and related charges shift from the seller to the buyer Responsibility between seller and buyer for execution of certain functional activities If you learn one thing from this entire module it should be that Incoterms® deal exclusively with the seller’s delivery obligation under an international sales contract. In the world of Incoterms®, the word “obligation” focuses on three areas; risk of loss or damage to the goods, transportation and customs related costs, and functional responsibilities between the seller and buyer. The specifics on functional responsibilities between seller and buyer are covered in upcoming slides.

The Incoterms® Were Updated on 1/1/2011
Although it’s been mentioned a couple of times already, it is very important to point out that the Incoterms® 2010 revisions go into effect on January 1, The next five slides will guide you through the change process in the following manner: First, the complete list of the thirteen Incoterms® that appeared in the 2000 version will be shown. Second, the Incoterms® that will not be a part of the 2010 update will be displayed in red. Next, the two new Incoterms® that will be added to the 2010 revision will be listed in green. Finally, the eleven newly revised Incoterms® 2010 trade terms will be provided.

Incoterms® That Ceased To Exist 1/1/2011
Delivered At Frontier (DAF) Delivered Ex Ship (DES) Delivered Ex Quay (DEQ) Delivered Duty Unpaid (DDU) After much consideration, the ICC decided to remove four Incoterms® from the 2010 version. They are: Delivered At Frontier (DAF), Delivered Ex Ship (DES), Delivered Ex Quay (DEQ) and Delivered Duty Unpaid (DDU). As of January 1, 2011 each of these four terms will cease to exist and should no longer be used.

Incoterms® That Were Added on 1/1/2011
Delivered At Terminal (DAT) Delivered At Place (DAP) The four Incoterms® that were eliminated from the 2010 publication will be replaced by two entirely new terms, Delivered At Terminal (DAT) and Delivered At Place (DAP). The nuances associated with each of the two new terms will be explained shortly.

The 11 Official ICC 2010 Incoterms® As of 1/1/2011
EXW Ex Works (named place of delivery) FCA Free Carrier (named place of delivery) FAS Free Alongside Ship (named port of shipment) FOB Free On Board (named port of shipment) CFR Cost & Freight (named port of destination) CIF Cost, Insurance & Freight (named port of destination) CPT Carriage Paid To (named place of destination) CIP Carriage & Insurance Paid To (named place of destination) DAT Delivered At Terminal (named terminal at port or place of destination) DAP Delivered At Place (named place of destination) DDP Delivered Duty Paid (named place of destination) You will note that the Incoterms 2010 ICC rules for the use of domestic and international trade terms has been reduced from thirteen terms in 2000 to eleven in Basically, DAF, DES, DEQ and DDU have been removed and DAT and DAP have been added. It is worthy of mention that not unlike the 2000 version of Incoterms®, the 2010 publication requires that each term reference a port, place or terminal at either origin or destination. THIS SLIDE PORTRAYS THE ELEVEN OFFICIAL INCOTERMS® THAT WILL BE USED FROM 2010 TO 2020.

Incoterms® Use by Mode of Transport As of 1/1/2011
Any mode of transport: EXW Ex Works (named place of delivery) FCA Free Carrier (named place of delivery) CPT Carriage Paid To (named place of destination) CIP Carriage & Insurance Paid To (named place of destination) DAT Delivered At Terminal (named terminal at port or place of destination) DAP Delivered At Place (named place of destination) DDP Delivered Duty Paid (named place of destination) Ocean or inland water transport only: FAS Free Alongside Ship (named port of shipment) FOB Free On Board (named port of shipment) CFR Cost & Freight (named port of destination) CIF Cost, Insurance & Freight (named port of destination) You will note that the Incoterms 2010 ICC rules for the use of domestic and international trade terms has been reduced from thirteen terms in 2000 to eleven in Basically, DAF, DES, DEQ and DDU have been removed and DAT and DAP have been added. It is worthy of mention that not unlike the 2000 version of Incoterms®, the 2010 publication requires that each term reference a port, place or terminal at either origin or destination. THIS SLIDE PORTRAYS THE ELEVEN OFFICIAL INCOTERMS® THAT WILL BE USED FROM 2010 TO 2020.

Incoterms® are Rules, not Laws
Incoterms® were established as a standard set of rules for determining a seller’s delivery obligations, they are not laws Incoterms® have the force of law, however, when they are referenced in a valid and binding sales contract or agreement As part of a binding contract any questions on the seller’s delivery obligations are answered pursuant to the Incoterms® 2010 publication The terminology used to define Incoterms® states that they are rules, not laws. This is a seemingly innocuous point, but it carries serious implications around the proper interpretation and application of Incoterms®. The issue around Incoterms® as rules raises an interesting question with regard to the trade laws that individual countries use as part of their own Commercial Code (business law). If every trading country around the world employs their own sovereign law and Incoterms® are merely rules, how can they be enforced globally? The answer is that if a specific Incoterm is properly referenced in a valid sales contract, any problems that arise concerning the seller’s delivery obligation (costs and risk of loss or damage) will be resolved by using the Incoterms® 2010 definitions. It is for this reason that it is so important to include reference to a specific Incoterm(s) in a sales contract, as well as state that the interpretation of Incoterms® will be pursuant to the Incoterms® 2010 publication.

Meaning of the Term “Delivery”
Sellers and buyers should never assume they understand the Incoterms® definition of the term “delivery” Within the context of Incoterms® delivery does not necessarily mean up to the final destination Under Incoterms® 2010 delivery can occur in either origin or destination It has been stated on several occasions that Incoterms® focus on the seller’s delivery responsibility under an international sales contract. It must be emphasized at this time that seller or buyer should never assume that they understand the meaning of the phrase “delivery obligation.” It is not uncommon for the parties to a contract to believe that the seller’s responsibility ends only when the goods are delivered to the buyer at destination. Under Incoterms®, nothing could be further from the truth. The fact is that depending on the Incoterm selected, the seller’s delivery responsibility can end at her own facility (plant or warehouse) at origin, an ocean port at origin, an ocean port or terminal at destination, or an inland location in the country of destination (the buyer’s facility).

What Incoterms® Do & Don’t Do
In a contract for sale between a seller and buyer Incoterms® cover: Risk of loss or damage to the goods Responsibility for transportation, customs and related expenses Certain functional responsibilities related to the delivery of the goods (listed in the next slide) In a contract for sale between a seller and buyer Incoterms® do not explicitly cover: Title transfer Revenue recognition Remedies for breach of contract Payment terms Any other non-delivery related clause in a comprehensive sales contract At this juncture of the training module it should be evident that Incoterms® focus on issues around the seller’s delivery responsibility as part of a valid sales contract. In addition to the specific explanations provided throughout the program, this slide is intended to provide you with a quick list of Incoterms® “Do’s” and “Don’t Do’s.”

Functional Obligations Between Seller & Buyer
Because Incoterms® deal with the risks and costs associated with the seller’s delivery responsibility, they clearly define the division of functional obligations relevant to that delivery activity. They are: Proper packaging of merchandise Securing of licenses, permits or special government requirements (including security related information) Inspection of goods at origin Export customs clearance Provision of commercial invoices Placing goods at disposal of the buyer at origin Handing goods over for transport to a designated carrier or forwarder at origin Procurement of Contracts of Carriage (bill of lading or airway bill) Pre-Alerts and Proof of Delivery Customs clearance at destination Delivering goods at destination The above is intended to elaborate upon the meaning of the phrase “certain functional responsibilities” between the seller and buyer. Discussed in greater detail during the section that reviews the layout of the ICC Incoterms® 2010 publication, the enclosed list summarizes the functional obligations that may arise when preparing goods for “delivery” under a sales contract.

The 11 Official ICC 2010 Incoterms® As of 1/1/2011
EXW Ex Works (named place of delivery) FCA Free Carrier (named place of delivery) FAS Free Alongside Ship (named port of shipment) FOB Free On Board (named port of shipment) CFR Cost & Freight (named port of destination) CIF Cost, Insurance & Freight (named port of destination) CPT Carriage Paid To (named place of destination) CIP Carriage & Insurance Paid To (named place of destination) DAT Delivered At Terminal (named terminal at port or place of destination) DAP Delivered At Place (named place of destination) DDP Delivered Duty Paid (named place of destination) You will note that the Incoterms 2010 ICC rules for the use of domestic and international trade terms has been reduced from thirteen terms in 2000 to eleven in Basically, DAF, DES, DEQ and DDU have been removed and DAT and DAP have been added. It is worthy of mention that not unlike the 2000 version of Incoterms®, the 2010 publication requires that each term reference a port, place or terminal at either origin or destination. THIS SLIDE PORTRAYS THE ELEVEN OFFICIAL INCOTERMS® THAT WILL BE USED FROM 2010 TO 2020.

Review Of The 11 Updated Incoterms® (Partial List)
By now, you must be shocked at the level of detailed knowledge that is required to use Incoterms® effectively. Additionally, you should be completely convinced of just how important Incoterms® are and how they can be used to the strategic and tactical advantage of your organization. Section V of this module represents the “home stretch” of your Incoterms® training. To that end, we will utilize the remaining time to point out the key points of each individual Incoterm, once again supporting those points with real world examples. You’ve done a great job thus far, so hang in there and come in with a strong finish!

FCA Free Carrier (named place of delivery)
There can be more than one delivery point at origin (seller’s facility, forwarder’s facility, port or airport) Delivery occurs when goods are presented to the carrier nominated by the buyer at the named place or port, cleared for export, from there all transport/customs related costs are for the buyer If delivery is at seller’s facility, the seller must load the collecting vehicle Can be used with any mode of transport Destination plant or warehouse Origin The seller’s delivery responsibility can end at his works, at a forwarder’s facility or at a port/airport. Under each scenario goods must be cleared for export. Destination

FOB Free On Board (named port of shipment)
Delivery occurs in the port of shipment when goods are loaded on board the vessel and all costs/risks beyond that point are for the buyer Export clearance and inland freight charges up to the delivery point are for the seller’s account Not suitable for containerized cargo (use FCA in this case) Intended for ocean or inland waterway transportation only Origin Origin plant or warehouse Delivery occurs at the origin port, cleared for export and loaded on board the vessel Port at origin Vessel at origin Inland freight

Group C Shipment Contracts: Delivery vs. Transportation Obligations
Origin Destination Mode of Origin port or Seller transport airport port or airport Customs Buyer Delivery is completed at origin Transportation extends to destination The above graphic is a visual representation of the content from the previous six slides. The horizontal arrows and red font at the bottom clearly delineate both the delivery and transportation transfer points for the seller. As you can see, the seller’s delivery obligations end at a named place or port at origin, while his transportation responsibility extends to a named port or place at destination.

CFR Cost & Freight (named port of destination)
Delivery occurs in the port of shipment when goods are loaded on board the vessel, but seller pays transport costs to port of arrival Per above, risk shifts to the buyer at the port of shipment Not meant for containerized cargo (consider CPT as an alternative) Intended for ocean or inland waterway transport only Origin Delivery occurs at the origin port, cleared for export and loaded on board the vessel Port at origin Vessel at origin Vessel at destination Seller pays for ocean transport up to named port at destination Destination

CPT Carriage Paid To (named place of destination)
Risk shifts with the first carrier at origin (normally the collecting vehicle at the seller’s facility), but seller pays transport costs to the named place at destination Can be used for any mode of transportation or combination thereof Origin Any mode of Seller Inland carrier transport Destination port or airport Buyer Delivery is completed at origin Transportation extends to a named port or with first carrier (trucker) place at destination

DAT Delivered At Terminal (named terminal at port or place of destination)
Delivery is complete when the goods are placed at the disposal of the buyer at a named terminal at the named port or place of destination, off-loaded, & seller pays transport costs to that place (does not include clearance or duties) Can be used with any mode of transport Destination Seller is responsible for risk of loss or damage and transportation up to a named terminal at a port or place at destination, off-loaded Origin

DAP Delivered At Place (named place of destination)
Seller delivers when goods are made available to the buyer at the named place in destination, not unloaded from the delivering vehicle, and seller must pay all transport costs to that delivery point (does not include clearance, duties or taxes) Can be used for any mode of transport Destination Seller is responsible for risk of loss or damage and transportation up to named place at destination, but is not responsible for off-loading, customs clearance, duties or taxes Origin

Understanding Export Letters of Credit

Documentary Credits (Letters of Credit)
In essence, a letter of credit is used to replace the creditworthiness (or lack thereof) of an international buyer with that of a bank A bank undertakes to pay the seller based on performance Not a guarantee of payment, but rather a promise of payment based on performance (documents-driven) There are several different types of letters of credit In all instances, bank(s) charge a series of fees for engaging in an L/C transaction

Documentary Credits (Letters of Credit)
IMPORTANT: Payment of the L/C is 100% dependent on the seller’s (exporter’s) timely presentation of Complete, Correct and Consistent documents to the bank (The “Three C’s of Documentation”) The true meaning of “performance” under an L/C is related to documentation Banks do not concern themselves with the physical movement of goods L/C transactions are governed by the Uniform Customs & Practice for Documentary Credits (UCP 600)

Important Terminology & Definitions: Letters of Credit
Applicant: The buyer or the party who requests a letter of credit to be issued Beneficiary: The seller or the party to whom the letter of credit is payable Issuing Bank: The bank which opens a letter of credit on behalf of the applicant Advising Bank: A branch or correspondent bank in the country of the beneficiary that “advises” of the issuance of an L/C, without engagement Confirming Bank: Normally in the country of the seller, a bank that undertakes to pay contingent upon presentation of stipulated documents (performance) Amendment: A mutually approved change, addition or deletion to the terms of an L/C after its original issuance Discrepancy: Any error, omission or inconsistency associated with the documents stipulated by an L/C Sight draft: A “check” (bill of exchange) prepared by and payable to the beneficiary upon presentation of stipulated documents Time Draft: A “check” (bill of exchange) prepared by and payable to the beneficiary on a specified date beyond that of presentation of documents (30, 60, 90 days)

A Quick Look at an Export Letter of Credit Confirmation

A Quick Look at Export L/C

Basic Process for Issuing a Letter of Credit

Key Elements to Be Included In a Letter of Credit
Type of L/C (confirmed irrevocable) L/C number Name(s) of issuing, advising and confirming bank Applicant/Beneficiary details Description & quantity of the goods Amount of credit (currency) Percentage of variance allowed for final credit amount (if at all)

Type of payment mechanism (sight or time draft) Negotiated shipping term (Incoterms® 2010) Documentation requirements (type and number) Designation of freight forwarder Instructions for preparing ocean bill of lading or airway bill Transshipment allowed (Y/N)

Partial shipments allowed (Y/N) Latest ship date (or time range) Last date for presentation of documents Bank upon which drafts are to be drawn Location for document presentation Responsibility for bank charges Expiration date of L/C L/C subject to UCP 600

A More Detailed Look at an Export Letter of Credit Confirmation

A More Detailed Look at Export L/C

U.S. Export Letter of Credit: Players & Process Flow
BUYER (Applicant) SELLER (Beneficiary) ADVISING/ NEGOTIATING/ CONFIRMING BANK ISSUING BANK L/C APP 1 2 3 GOODS 4 DOX 6 7 5

Typical Documents Required For Payment Under an L/C
Proviso: Payment of a Documentary Letter of Credit has nothing to do with the physical movement of the goods Remember: Banks only care about the timely presentation of designated documents at a specified place Original L/C Commercial invoice Airway bill or ocean bill of lading Packing List Insurance policy or certificate Certificate of origin Phyto sanitary certificate Inspection certificate Sight/time draft

Tips for Working With Export Letters of Credit
Take the lead in the negotiation process Be the first to present your preferred terms (send a checklist to the buyer before he/she applies for the credit) Currency always in USD Minimize the number of banks involved State your preferred bank for advice, confirmation and/or negotiation Stipulate that the credit is available at the counters of your bank Don’t use overly complex product descriptions

Only agree to documents that your customer really needs (originals & copies) Allow for transshipments Allow for partial shipments Select the Incoterm that makes the most operational and financial sense for your company Use the banking system to make sure you get paid before your customer gets the documents “To Order” for ocean shipments Consigned to a bank for air shipments Use F.F. to control copies of docs at destination Draw drafts on a bank, not your customer

Don’t stipulate too much time for expiration of the L/C (no more than 4 months) When considering expiration, shipment and last presentation dates, make sure there are no holidays that may delay activities Have a central point of contact for the handling of all L/C’s Logistics or finance Work with a bank that has strong on-line capabilities Visibility into all L/C activity

The Logistics & Law of Exporting from The United States Presented by: Trade Facilitators, Inc. April 3, 2014.

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The Logistics & Law of Exporting from The United States Presented by: Trade Facilitators, Inc. April 3, 2014.

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