1 1 logistically speaking: using delivery terms to allocate supply chain risks breakout session...

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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.

• 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

Terms of Sale a/k/a Trade Terms or Mercantile Symbols

• 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

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

Existing Inconsistency Among Delivery Terms

• 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

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!

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)

New Uniform Commercial Code

• 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

• 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)

Former UCC“FOB” or “Free On Board”

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

• So far, no state legislature has adopted revision

• However, American Bar Association endorsed revision, which may provide some impetus for action by state legislatures

Are UCC Delivery Terms Really Gone?

• 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

United Nations Convention for the International Sale of Goods (UNCISG)

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)

Countries That Have Adopted the UNCISG include:

• 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

UNCISG

• 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

International Commercial Terms of Sale or Incoterms

• 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

Incoterms 2000

• 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”

Incoterms 2000 Seller Responsibilities

• 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

Incoterms 2000 Buyer’s Responsibilities & Rights

• Export clearance

• Import clearance

• Insurance

• Carriage

• Loading

• Unloading

Incoterms 2000 – Areas of Negotiation

• Ex-Works: seller delivers goods at own place of business, responsibilities, costs, and risk pass to buyer from seller’s loading dock

E-Terms a/k/a Departure Terms

SELLER• Makes goods available

to buyer

BUYER• Loading• Export Clearance• Main Carriage• On Carriage• Import Clearance

EXW (Ex Works)EXW Huntsville, Alabama

• Risk passes when goods are available to buyer• Buyer selects carrier and pays freight• Any mode of transportation

• 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

EXW

• “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

F-Terms a/k/a Main Carriage Unpaid Terms

• 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

SELLER• Export Clearance• Loading at “Works”

BUYER• Carriage• Import Clearance

FCA (Free Carrier) Seller’s DoorFCA San Jose, California

• Risk passes when goods are loaded on buyer’s carrier

• Buyer selects carrier and pays freight

• Any mode of transportation

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


• 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

FAS

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 main carrier and pays freight

• Water only

• 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)

FAS

• 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

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”

FOB

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 on board ship

• Buyer selects main carrier and pays freight

• Water only

• 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)

FOB

• 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

C-Terms a/k/a Main Carriage Paid Terms

• 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

CIF

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


• Seller selects main carrier and pays freight

• Water only

• 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

CFR

SELLER• Export Clearance• Pre Carriage• Pays Main Carriage to

Seaport in Buyer’s Country


Destination Port• On Carriage• Import Clearance

CFR (Cost and Freight (Paid)) CFR Aberdeen Harbour, Scotland


• Seller selects main carrier and pays freight

• Water only

SELLER• Export Clearance• Pays Pre Carriage• Pays Main Carriage to

Point in Buyer’s Country


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




• Arranges and Pays for Insurance


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

• Remember: Seller pays freight to buyer’s country

But buyer is at risk during transit

CFR, CIF, CPT, CIP

• 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

D-Terms a/k/a Arrival Terms:DES (Delivered Ex-Ship) DES Port Veracruz, Mexico



BUYER• On Carriage• Import Clearance• Unloading

DDU (Delivered Duty Unpaid)DDU Mexico City International Airport

DDU Mexico City, Mexico, Buyer’s Door

• Risk passes when goods are unloaded at named point

• Seller selects carrier and pays freight to named point




• Import Clearance

BUYER• On Carriage• Unloading

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

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

DDP

• 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

DEQ & DAF

• Delivered at Frontier (border point) - FCA border point accomplishes same result Buyer acquires title, risk, and responsibility for

clearance with import customers


DEQ & DAF

B = Buyer

S = Seller

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

Incoterm and

Service

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

Warehouselabor


Export packing


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

portB 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

Buyer

Seller

Buyer/Seller

• Supply Chain Management Organization should choose Incoterm that puts all responsibility on seller to deliver to buyer’s facility? Yes? No?

Choosing the Right Incoterm

• Shipping costs

• Political considerations

• How much is Shipper/Buyer willing to pay to minimize risk?

Choosing the Right Incoterm

• Unlike UCC, Incoterms distinguish among modes of shipping: FAS, FOB, CFR, CIF, DES, and DEQ applicable

only to water

If shipment involves intermodal transportation, especially in the supply management organization’s country

Or, if going to be entirely by land, stick to EXW, CPT, CIP, DAF, DDU, and DDP to avoid surprises when it comes time to pay for shipping, customs clearance, or insurance

Famous Last Words

• Beware of previous versions of Incoterms: Previous versions of FAS imposed responsibility on

buyer to arrange export customs clearance

• 2000 version puts burden on the seller

Previous versions of DEQ imposed burden on seller to arrange for import customs clearance

• 2000 version puts burden on buyer

Famous Last Words

Questions?

Michael L. Fees

[email protected]

C. Gregory [email protected]

Allen L. [email protected]

Jeffrey L. [email protected]

Stacy L. [email protected]

Leah M. [email protected]

Nori D. [email protected]

Ryan G. [email protected]

FEES & BURGESS, P.C.

213 Green Street

Huntsville, Alabama 35801

Telephone (256) 536-0095

Facsimile (256) 536-4440

www.feesburgess.com

These materials should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only. Anyone needing specific legal advice should consult an attorney..

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Fees & Burgess, P.C., provides speakers, programs, and seminars for various trade associations; business groups; and clients. For information regarding a program, contact us at [email protected].

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Fees & Burgess, P.C., publishes F&B Quarterly Bytes, focusing on multiple practice areas and F&B SCM Memo, focusing on the supply chain management industry. To receive any of these e-newsletters, please provide your contact information to [email protected].

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1 1 logistically speaking: using delivery terms to allocate supply chain risks breakout session...

Documents

abbreviated terms

risk formerexisting

ucc fob

private trade terms

users of old ucc terms

board slide

uniform commercial code

newest ucc