April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 2 Breakout Session # 1305 Phillip Poland April 11, :30-2:30 INCOTERMS – The Profit is in the Details

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 3 INCOTERMS – The Profit is in the Details This information is provided as a general summary of requirements and information that may be applicable to international sales. While the information may assist in the identification of matters to consider, it should not be construed as a comprehensive representation of all controls. Nor should this information be used as conclusive guidance for any specific transaction. Coordination with appropriate legal counsel is advised. Effective use of the most common terms for international sales!

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 4 Background - Introduction Incoterms are the most commonly accepted terms of sale in international business Published and developed by the International Chamber of Commerce (ICC) Incoterms have been adopted by most countries Defines the responsibilities and risks for transactions. First established in 1936, updated periodically with the latest version being “Incoterms 2000” They are used as part of the overall sales agreement.

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 5 Commercial terms defining the roles of the buyer and seller in the arrangement of international transportation and other responsibilities related to the international shipment of tangible goods. Provides a set of international rules for the interpretation of the most commonly used trade terms in foreign trade Limited to matters relating to the obligations of the parties with respect to the delivery of the goods sold Incoterms deal only with the relation between the sellers and buyers under the contract of sale Scope and Purpose

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 6 Scope and Purpose Incoterms deal with a number of identified obligations imposed on the parties such as –Seller’s obligation to place the goods at the disposal of the buyer, or –Hand them over for carriage, or –Deliver them at a destination, and –The distribution of risk between the parties –Obligations to clear the goods for export and import –Packing of the goods –Buyer’s obligation to take delivery

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 7 Why Incoterms? Incoterms are international rules accepted by governments, legal authorities and practitioners worldwide Reduces or removes uncertainties arising from differing interpretations of shipping terms in different countries. Reference to a proper Incoterm in a contract clearly defines each party ’ s obligations, costs and risks in the international transaction and reduces the risk of legal complications. They can assist in defining what costs the purchase price includes (e.g. prepaid international freight, prepaid duties, insurance, etc.), and clarify the risks & liabilities.

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 8 Main Functions Eliminate barriers caused by distance, language, and local business practices Eliminate uncertainties and different interpretations of trade terms on a world-wide scale Provide universally accepted vocabulary Reduce risk of misunderstanding, disputes, and litigation Facilitate international commercial exchanges Define the importer ’ s and exporter ’ s costs, risk and obligations regarding delivery of the goods

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 9 What Incoterms Does Not Cover How or when title to the goods transfers Protect a party from his/her own risk of loss for all segments of the shipment Cover the goods before or after delivery Define the remedies for breach of contract Terms of payment that dictate when you get paid Specify details of the transfer, transport, and delivery of goods Intangible goods like computer software Incoterms applies to the contract of sale and not the contract of carriage (transportation)

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 10 Responsibilities Affected The terms allocate responsibilities and costs between the parties for: –Licenses and government imposed formalities for import & export –Packing and marking for international transport –Documentation required for the transport, transfer and Customs clearance of goods –Proof of delivery –Taxes, duties, consular fees, terminal charges, arrival & destination charges –Insurance, when elected –Loading and unloading –International and inland transport –Risk of loss or damage

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 11 Common Terms Pre-carriage: – Initial transport of goods from the seller to the main carrier – Usually by truck, rail, or inland waterway Main carriage: – Primary transport of goods – Longest part of the journey & from one country to another – Usually by sea or air, but may be by truck, or rail On-carriage: – Transportation from arrival point in the destination country to buyer, which can be by any mode Carrier: – Any party who arranges for the primary transportation by truck, plane, ship, rail, etc.

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 12 Common Terms Delivery: The term delivery is used in two contexts in Incoterms: –The seller bringing the goods to the named point –Traditional sense of the buyer receiving the goods Customs clearance: Clearing the goods for export or import means –Paying the duties, taxes and administrative costs –Performing administrative matters related to: Clearance and Customs formalities Import and/or export regulations Typically, the Shipper (exporter) clears the goods for export the Buyer (importer) clears the goods for import

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 13 Organization of Incoterms 2000 Incoterms are divided into four (4) categories: “E” term – Seller makes the goods available to the buyer at the seller’s premises or other place named by the seller “F” terms – Seller is responsible to deliver the goods to the export shipment point and carrier designated by the buyer “C” terms – Seller is responsible for contracting carriage of goods to the place of destination, but does not assume risk of loss or damage to goods, or additional costs due to events occurring after shipment “D” terms – Seller is responsible for all costs and risks associated with delivering goods to the named place in the country of destination

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 14 The Thirteen Incoterms All modes of transport including multi-modal EXW – Ex Works FCA – Free Carrier CPT – Carriage Paid To DAF – Delivered at Frontier DDU – Delivered Duty Unpaid DDP – Delivered Duty Paid Sea and inland waterway transport only CIP – Carriage and Insurance Paid To DES – Delivered Ex Ship DEQ – Delivered Ex Quay FAS – Free Alongside Ship FOB – Free Onboard CFR – Cost and Freight CIF – Cost, Insurance, and Freight

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 15 Notes on Responsibilities For all Incoterms, the Seller packs, verifies contents and marks the goods for export. Seller always has responsibility to provide these documents: –Commercial Invoice –Packing List –Certificate of Origin The Seller also is obligated to assist the Buyer (at buyer ’ s expense) in obtaining documentation required for export or import.

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 16 Notes on Responsibilities & Costs The Buyer is responsible for the costs of any formal pre-shipment inspection of goods that may be required by the authorities of either the exporting or importing country. Each party must provide Proofs of Delivery and timely notifications to the other when goods are delivered and/or received. Costs that are the Seller ’ s obligation could be billed to the Buyer but does not change the risks & responsibilities of Incoterms.

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 17 EXW – Ex Works (Named Place) Seller: –Informs the Buyer when and where the goods will be available –Provides Commercial Invoice, Packing List & Certificate of Origin Buyer: –Obtains the Export License –Arranges all carriers –Loads goods onto the carrier at the point of departure –Obtains import licenses and arranges import formalities Risk of loss or damage passes to the buyer from the seller's door Difficult to use with ITAR controlled items due to license issues

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 18 FCA – Free Carrier (Named Place) Seller: –Obtains the Export License –Arranges delivery of the goods to the buyer’s carrier If delivery point is at the Seller’s facility, the Seller must load the goods onto the Buyer's collecting carrier. If not delivering at the Seller’s facility, there is no obligation to load. Buyer: –Gives sufficient notice to the Seller of the carrier & delivery point –Arranges the main carriage and the on-carriage –Obtains import licenses and arranges import formalities Risk of loss or damage passes to the buyer when the seller delivers the goods to the carrier

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 19 DDU – Delivered Duty Unpaid (Named Place) Seller: –Obtains the Export License –Arranges for and pays freight costs of carriage to the named point of destination Buyer: –Accepts and unloads the goods –Obtains import licenses and pays for import clearance Risk and responsibility of import clearance pass to buyer when seller delivers goods to named destination point. Often can be used to lower duties or taxes when foreign buyer can receive a voucher for any cost incurred

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 20 The EVIL FOB Term - Comparison Incoterms, FAR, and UCC use FOB FOB covers all modes of delivery under FAR and UCC, but only water shipping under the Incoterms FAR and UCC relate primarily to domestic sales, and should not be used for international commercial sales Under FAR and UCC must state whether delivery occurs at origin/source or destination Incoterms delivery occurs only at the port where the ship is departing

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 21 Incoterms FOB – Free On Board (Named Shipping Port) Seller: –Obtains the Export License –Arranges delivery of goods to & loads the buyer’s carrier –Places goods on board the ocean vessel at the port of export designated by the Buyer Buyer: –Gives sufficient notice to the Seller of the carrier & delivery point –Arranges the main carriage and the on-carriage –Obtains import licenses and arranges import formalities Risk & responsibility passes to the buyer when the goods pass the rail of the vessel Used for sea or inland waterway transportation only

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 22 FAR or UCC FOB – Free On Board (Named Place) The FAR requires that shipments outside of the Contiguous United States (CONUS) are made only under F.O.B. terms –Exceptions may be negotiated Exact equivalents to Incoterms may not exist in all cases but there are close equivalents Specify as part of the term origin/source verses destination, method of transportation, and if cost paid Important FAR clauses and Used for any mode of transportation

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 23 Keys to Effective Use of Incoterms EX Works is not a method to avoid obtaining export licenses or to avoid export compliance Always think about taxes and duty issues when selecting a term of sale Assess who is in the best position to assess risk of loss and carrier Understand your liability as a potential USPPI based on the term of sale selected

April 10–12, 2006 Hyatt Regency Atlanta Atlanta, GA NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management 24 Important website Contact Information Phillip Poland Questions