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INCOTERMS 2010:

Implications and Nuances

Presented by: Morgan, Lewis & Bockius LLP Margaret M. Gatti, Louis K. Rothberg Timothy M. Rolland
www.morganlewis.com

Outline of Presentation
I. II. III. IV. V. Introduction to INCOTERMS Definitions INCOTERMS Functions Explanation & Implications of INCOTERMS Tips for Using INCOTERMS
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Introduction to Incoterms 2010


International Commercial Terms 11 International Sales Terms (not sales law)
Standardized trade definitions 3 Letters Each
EXW, FOB, CFR

Devised and maintained by ICC More than 120 member countries Updated as required by commerce trends
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Introduction to Incoterms
Current Applicability of Incoterms Widely accepted / used worldwide U.S.: Automatically apply (default) in international trade transactions unless:
Alternative sales terms selected, or State law selected, or FMS (Delivery Trade Codes / DTC)

U.S.: can be applied to domestic sales on elective basis (recommended that companies master and use one set of terms for all sales)
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Key Definitions for Understanding INCOTERMS

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Key Definitions

Pre-carriage: Inland transportation on sellers side from shipment origin point to port of departure Main-carriage: Transportation from the seller's side to the buyer's side On-carriage: Transportation from the arrival point on the buyer's side to any other place (such as to the buyer's premises).

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Key Definitions
Omni-modal: Those terms that can be used for all transport modes.

Marine-restricted: Those terms that can be used only for vessel shipments. Shipment contract: A UCC-based sales contract holding the seller responsible for the condition of the goods until they are handed over / delivered to a carrier. (Legal delivery physical delivery)

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Key Definitions
Destination contract: A UCC-based sales contract holding the seller responsible for the condition of the goods until they arrive at an agreed place. (Legal delivery = physical delivery) Establishes when a sale becomes an account receivable. The Securities and Exchange Commission (SEC) has established revenue recognition guidelines for publicly traded companies. The SEC guidelines are based on the concept of shipment and destination contracts.
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Revenue recognition:

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Key Definitions
Minimum cover: Cargo insurance that covers only minimum perils (i.e. total loss, general average). Minimum cover is often called "free of particular average (FPA) in the US, and Institute of London Underwriters "Institute Cargo Clause C" internationally. All risk: Cargo insurance coverage that is adequate for most shipments when written on a warehouse-to-warehouse basis and enhanced with "war" and "strike and civil commotion" coverage. Additional cargo insurance coverage for war-related perils.
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War Risk:
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INCOTERMS Functions

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Incoterms Functions
1. Delegate shipping responsibilities and shipping costs between sellers & buyers
a. Export Packaging

Safe carriage for transport mode Excludes: Labeling / Marking and SWPM
b. Export Clearance
Obtain export license Apply Destination Control Statement Complete Electronic Export Information (EEI) Record in AES
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Incoterms Functions (Responsibilities and Costs) contd


c. Pre-carriage for Export

Inland transportation on sellers side


From shipment origin point To port of departure

Deals separately with:


Loading Unloading

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Incoterms Functions (Responsibilities and Costs) contd


d. Main Carriage for Export

International transportation
From sellers country To buyers country

Deals separately with:


Loading Unloading

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Incoterms Functions (Responsibilities and Costs) contd


e. On Carriage for Export

Inland transportation on buyers side


From import entry port To location designated by buyer

Deals separately with:


Loading Unloading

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Incoterms Functions (Responsibilities and Costs) contd


f. Import Clearance

Import licenses, when applicable Customs import formalities Possible payment of:
Import duties Import taxes, such as VAT Other fees / charges

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Incoterms Functions (Insurance)


2. Compel seller and buyer to deal separately with Insurance

Only two Incoterms deal with insurance


Hint: look for i in the Incoterm

Insurance required = minimum cover


London Clause C Coverage / Free
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Particular Average No All Risk No War Risk or SRCC Risk


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Incoterms Functions (Sellers Pricing)


3. Guide seller in setting export price and clarify for buyer buyers costs
Seller increases export price to include sellers costs under relevant Incoterm
Base export price Plus: Export Clearance Pre-Carriage Loading, etc.

Export price amount and Incoterm choice Buyer infers buyers costs
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Incoterms Functions (Contract Responsibilities)


4. Clarify subsidiary contract responsibilities of seller & buyer
Contract with freight forwarder
Export clearance

Contract with carriers


Pre, Main, On

Contract with insurer Contract with customs broker


Import clearance
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Incoterms Functions (Delivery & Risk of Loss)


5. Clarify when delivery occurs and risk of loss transfers Risk of loss transfers with Delivery
Shipment Term: Place on Sellers Side Legal Delivery Physical Delivery EXW, F terms, C terms Destination Term: Place on Buyers Side Legal Delivery = Physical Delivery D terms
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Incoterms Functions (Do Not Include Title Transfer)


Leave title transfer for parties agreement or for default determination Incoterms silent on title transfer
Look to parties agreement, or Make default determination Title passes when delivery made and risk of loss transferred!

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Incoterms Functions (Do Not Include Revenue Recognition)


Leave timing of revenue recognition to seller Under GAAP and Securities & Exchange Commission (SEC) Rules, revenue recognition requires that: 1) ownership or title must pass prior to recognizing revenue 2) delivery must occur

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Explanation of INCOTERMS

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Explanation of INCOTERMS

ExW

FCA FAS FOB

CFR CIF CPT CIP

DAT DAP DDP

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Explanation of INCOTERMS

Transport Mode Limitations Marine Restricted All Modes Individual INCOTERMS MUST Be used with Named Point
Sellers Side vs Buyers Side
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Well, maybe not in all cases

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Explanation of INCOTERMS

Marine Restricted FAS named shipment port FOB named shipment port CFR named destination port CIF named destination port

Omni-modal EXW Sellers premises FCA named place / Seller CPT named destination / Buyer CIP named destination / Buyer DAT named place / Buyer DAP named place / Buyer DDP named place / Buyer

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Explanation of INCOTERMS
Incoterms are grouped into four categories which reflect the breakdown of costs / responsibilities between Seller & Buyer: Group E: Group F: Group C: Group D:
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Departure Terms Main Carriage Unpaid Terms Main Carriage Paid Terms Arrival Terms
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Incoterms Explanation
EXW Available at sellers premises Rule for Any Mode(s) of Transport

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EXW Ex Works (Sellers Premises)


Cost / Responsibility 1. Export Packaging 2. Export Clearance 3. Pre-Carriage Loading Pre-Carriage Pre-Carriage Unloading Seller Yes No No No No Buyer No Yes Yes Yes Yes

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EXW Ex Works (Sellers Premises)


Cost / Responsibility
4. Main Carriage Loading Main Carriage Main Carriage Unloading

5. On Carriage Loading On Carriage On Carriage Unloading

Seller No No No No No No

Buyer Yes Yes Yes Yes Yes Yes

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EXW Ex Works (Sellers Premises)


Cost / Responsibility
6. Import Clearance

Seller No
No

Buyer Yes
No

7. Insurance

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EXW Ex Works (Sellers Premises)


Minimum obligation for seller Shipment Term Delivery occurs when seller places goods at buyers disposal at sellers premises for buyer to load! Risk of loss transfers from seller to buyer when seller delivers goods to buyer
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EXW Ex Works (Sellers Premises)


Appropriate for routed transactions Inappropriate for USML exports
Unless Foreign Buyer is an Embassy in the U.S., Foreign buyer cannot obtain DSP5 licenses Ineligible person under ITAR 120.1(c) US forwarders for foreign buyers cannot obtain DSP-5 export licenses for foreign buyers DDTC policy: applicant must be exporter
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EXW Ex Works (Sellers Premises)


Inappropriate for Haz Mat shipments Seller has no control over carriers performance Seller has no control over safety conditions during transport Despite lack of control, Seller: Shares responsibility for incidents that result in damages to 3rd parties or damages to the environment.
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Incoterms Explanation
FCA FAS FOB
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MAIN CARRIAGE UNPAID Free Carrier, Named Place Free Alongside Ship, Named Shipment Port Free on Board Named Shipment Port
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FCA / FAS / FOB


Cost / Responsibility
1. Export Packaging 2. Export Clearance 3. Pre-Carriage Loading Pre-Carriage Pre-Carriage Unloading
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Seller
Yes Yes Yes No No

Buyer
No No No Yes Yes

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FCA / FAS / FOB


Cost / Responsibility
4. Main Carriage Loading Main Carriage Main Carriage Unloading

5. On Carriage Loading On Carriage On Carriage Unloading

Seller No No No No No No

Buyer Yes Yes Yes Yes Yes Yes

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FCA / FAS / FOB


Cost / Responsibility
6. Import Clearance

Seller No
No

Buyer Yes
No

7. Insurance

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FCA / FAS / FOB


More obligations for seller than EXW Delivery occurs: FCA: When seller delivers goods to carrier or named place FAS: When seller places goods alongside vessel at shipment port FOB: When goods pass ships rail at shipment port

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FCA / FAS / FOB


Risk of Loss passes from seller to buyer when Delivery occurs:
FCA: Seller delivers goods to carrier or named place FAS: Seller places goods alongside vessel at shipment port FOB: Goods pass ships rail at shipment port FCA / FAS / FOB = Shipment Contracts
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FCA / FAS / FOB


Appropriate for routed transactions Inappropriate for USML exports
FCA / FAS / FOB: Export Clearance by Seller US seller = eligible person (ITAR 120.1(c)) US seller obtains DSP-5 export license DSP-5 export license requires end destination control Destination control requirements in ITAR 123.9
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FCA / FAS / FOB


Inappropriate for Haz Mat shipments Seller has no control over carriers performance Seller has no control over safety conditions during transport Despite lack of control, Seller: Shares responsibility for incidents that result in damages to 3rd parties or damages to the environment.
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Incoterms Explanation
MAIN CARRIAGE PAID CFR CIF CPT CIP Cost and freight destination port CFR + Insurance Carriage paid destination CPT + Insurance
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CFR / CIF / CPT / CIP


Cost / Responsibility 1. Export Packaging 2. Export Clearance 3. Pre-Carriage Loading Pre-Carriage Pre-Carriage Unloading Seller Yes Yes Yes Yes Yes Buyer No No No No No

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CFR / CIF / CPT / CIP


Cost / Responsibility
4. Main Carriage Loading Main Carriage Main Carriage Unloading

5. On Carriage Loading On Carriage On Carriage Unloading

Seller Yes Yes No No No No

Buyer No No Yes Yes Yes Yes

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CFR / CIF / CPT / CIP


Cost / Responsibility
6. Import Clearance

Seller No
CIF CIP

Buyer Yes
CFR CPT

7. Insurance

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CFR / CIF / CPT / CIP


Shipment Terms Delivery and Risk of Loss Transfer: CFR: when goods pass ships rail at shipment port CIF: same as CFR CPT: when seller delivers goods to first carrier CIP: same as CPT

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CFR / CIF / CPT / CIP


Inappropriate for routed transactions Appropriate for USML exports
CFR / CIF / CPT / CIP: Export Clearance by Seller US seller = eligible person (ITAR 120.1(c)) US seller obtains DSP5 export license DSP5 license requires end destination control Destination control requirements in ITAR 123.9
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CFR / CIF / CPT / CIP


Appropriate for Haz Mat shipments Seller has control over carriers performance Seller has control over safety conditions during transport Seller in better position because: Shares responsibility for incidents that result in damages to 3rd parties or damages to the environment.
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Incoterms Explanation
ARRIVAL TERMS

DAT DAP DDP

Delivered at terminal, named terminal or port Delivered at place, named place Delivered duty paid, named place
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DAT / DAP / DDP


Cost / Responsibility 1. Export Packaging 2. Export Clearance 3. Pre-Carriage Loading Pre-Carriage Pre-Carriage Unloading Seller Yes Yes Yes Yes Yes Buyer No No No No No

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DAT / DAP / DDP


Cost / Responsibility
4. Main Carriage Loading Main Carriage Main Carriage Unloading

5. On Carriage Loading On Carriage On Carriage Unloading

Seller Yes Yes Yes Yes Yes No

Buyer No No No No No Yes

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DAT / DAP / DDP


Cost / Responsibility
6. Import Clearance

Seller DDP
No

Buyer Yes
No

7. Insurance

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DAT / DAP / DDP


More obligations for seller than FAS, FOB, CFR, CIF, EXW, FCA, CPT & CIP Delivery and Risk of Loss Transfer: DAT: When Seller delivers goods to named destination terminal on Buyers side, packaged appropriately and unloaded DAP: When Seller delivers goods to Buyer at named place on Buyers side, appropriately packaged but not unloaded
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DAT / DAP / DDP


Delivery and Risk of Loss Transfer: (contd) DDP: when seller places goods at buyers disposal on transport arrival at destination place

Seller is not required to unload goods


but must clear goods for import

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DAT / DAP / DDP


Inappropriate for routed transactions (because Seller is controlling shipping) Appropriate for USML exports
DAT / DAT / DDP: Export Clearance by Seller US seller = eligible person (ITAR 120.1(c)) US seller can obtain DSP-5 export license DSP-5 license requires end destination control Destination control requirements in ITAR 123.9
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DAT / DAP / DDP


Appropriate for Haz Mat shipments Seller has control over carriers performance Seller has control over safety conditions during transport Seller in better position because: Shares responsibility for incidents that result in damages to 3rd parties or damages to the environment.
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INCOTERMS 2010
Seller / Exporter Tasks EXW FAS / FOB / FCA
Export Packaging Export Packaging Pre-Carriage Export Packaging Pre-Carriage Main Carriage (Insurance = I)

Costs in Pricing
$ $$

CFR / CIF CPT / CIP

$$$

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INCOTERMS 2010
Seller / Exporter Tasks
Export Packaging Pre-Carriage Main Carriage On Carriage Export Packaging Pre-Carriage Main Carriage On Carriage Foreign Import Duties (but NOT VAT / GST)
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Costs in Pricing

DAT / DAP

$$$$

DDP

$$$$$

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INCOTERMS 2010
All INCOTERMS require named place the more specific, the better
ExW and F terms, place is on sellers side of pond C terms and D terms, place is on buyers side of pond

Only two Incoterms deal with insurance look for I


CIF CIP

Only one INCOTERM makes export clearance a buyers responsibility (all others assign task to seller)
ExW
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INCOTERMS 2010
Only one INCOTERM makes import clearance a sellers responsibility (all others assign task to buyer)
DDP

Routed Transactions
Buyers control shipment & freight ExW All F Terms

INCOTERMS = International Standard / Default terms

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Tips for Using INCOTERMS

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Incoterms Tips
Tip #1
Understand Incoterm of choice and make sure you use properly
Stick with official meaning to the greatest extent possible Employ additional provisions sparingly

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Incoterms Tips
Tip #2
Use individual Incoterms with named point as required
Sellers side vs. Buyers side

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Incoterms Tips
Tip #3
Observe transport mode limitations
Marine restricted All modes

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Incoterms and Transport Modes


Marine Restricted
FAS named shipment port FOB named shipment port CFR named destination port CIF named destination port

Omni-Modal
EXW sellers premises FCA named place / seller CPT named destination place CIP named destination place DAT named place / buyer DAP named place / buyer DDP named place / buyer

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Incoterms Tips
Tip #4
For shipments subject to USML export license requirements and for HAZMAT shipments, use either Main Carriage Paid terms (CFR, CIF, CPT or CIP) or Arrival Terms (DAT, DAP, DDP)
Stay away from routed transactions Refrain from use of EXW, FAS, FOB, FCA
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Incoterms Tips
Tip #5
Be very careful in using DDP Incoterm
Recognize differing opinions on HTS codes and applicable duties If use, make sure to exclude VAT

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Incoterms Tips
Tip #6
Dont forget about insurance
Not just a concern for CIF and CIP Coordinate insurance with payment method and risk of loss

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Incoterms Tips
Tip #7
Shipment terms allow for earlier revenue recognition than delivery terms Based on recognition of revenue occurring with delivery and risk of loss transfer Shipment terms: Departure, Main Carriage Unpaid & Main Carriage Paid Terms Delivery terms: Arrival Terms
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Margaret M. Gatti
Philadelphia, PA tel. 215.963.5569 Washington, DC tel. 202.739.5409

Louis K. Rothberg
Washington, DC tel. 202.739.5281

Timothy M. Rolland
Washington, DC tel. 202.739.5829

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