Transcript Understanding & Negotiating International Sales Contracts

The Logistics & Law of Exporting
from
The United States
Presented by:
Trade Facilitators, Inc.
April 3, 2014
Presentation Outline
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Review of critical contract or sales
agreement clauses for agricultural
exporters
Summary of Incoterms 2010 rules
Letter of Credit essentials
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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
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The Formation of International Sales Agreements
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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
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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
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International Sales Agreements:
Key Content & (Potential) Clauses
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Agreement date
Identification of the parties
Authority to enter into contracts
Applicable law
Severability
Dispute resolution
Incoterms® 2010 rule
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Description of the goods
Quality, grade, size & condition
Weights & quantities
Substitution
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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
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International Sales Agreements:
Key Content & (Potential) Clauses
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Contract of carriage*
Provision of commercial documents*
Provision of transport documents*
E-commerce*
Inspection of the goods*
Diversion clause
Transfer of risk*
Cargo insurance*
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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
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International Sales Agreements:
“Must-Haves”
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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)
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International Sales Agreements:
Clauses & Considerations
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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
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International Sales Contracts:
Clauses & Considerations
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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
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International Sales Contracts
Clauses & Considerations
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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
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International Sales Contracts:
Clauses Covered by Incoterms® Rules
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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
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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
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International Sales Contracts
Clauses & Considerations
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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)
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International Sales Contracts
Clauses & Considerations
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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
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Incoterms® 2010:
Understanding & Application
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
The Incoterms® Were
Updated on 1/1/2011
Incoterms® That Ceased
To Exist 1/1/2011
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Delivered At Frontier (DAF)
Delivered Ex Ship (DES)
Delivered Ex Quay (DEQ)
Delivered Duty Unpaid (DDU)
Incoterms® That Were
Added on 1/1/2011
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Delivered At Terminal (DAT)
Delivered At Place (DAP)
The 11 Official ICC 2010 Incoterms®
As of 1/1/2011
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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)
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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)
Incoterms® Use by Mode of Transport
As of 1/1/2011
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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)
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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)
Incoterms® are Rules, not Laws
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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
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
What Incoterms® Do & Don’t Do
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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)
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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
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 11 Official ICC 2010 Incoterms®
As of 1/1/2011
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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)
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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)
Review Of The 11 Updated Incoterms®
(Partial List)
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)
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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
Delivery occurs at the origin
port, cleared for export and loaded
on board the vessel
Origin plant
or warehouse
Inland freight
Port at origin Vessel at origin
Origin
Group C Shipment Contracts:
Delivery vs. Transportation Obligations
Seller
Mode of
transport
Origin port or
airport
Origin
Delivery is completed at origin
Destination
port or airport
Customs
Destination
Transportation extends to destination
Buyer
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
Delivery occurs at the origin
port, cleared for export and loaded
on board the vessel
Port at origin
Vessel at origin
Origin
Seller pays for ocean transport up
to named port at destination
Vessel 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
Seller
Any mode of
Inland carrier
transport
Origin
Delivery is completed at origin
with first carrier (trucker)
Destination
port or airport
Buyer
Destination
Transportation extends to a named port or
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
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
Destination
DAP Delivered At Place
(named place of destination)
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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
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
Destination
Understanding Export
Letters of Credit
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Documentary Credits
(Letters of Credit)
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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)
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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
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Documentary Credits
(Letters of Credit)
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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
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L/C transactions are governed by the
Uniform Customs & Practice for
Documentary Credits (UCP 600)
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Important Terminology & Definitions:
Letters of Credit
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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)
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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)
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A Quick Look at an Export
Letter of Credit Confirmation
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A Quick Look at Export L/C
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Basic Process for Issuing a Letter of Credit
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Key Elements to Be Included
In a Letter of Credit
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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)
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Key Elements to Be Included
In a Letter of Credit
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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)
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Key Elements to Be Included
In a Letter of Credit
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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
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A More Detailed Look at an Export
Letter of Credit Confirmation
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A More Detailed Look at Export L/C
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U.S. Export Letter of Credit:
Players & Process Flow
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GOODS
SELLER
(Beneficiary)
BUYER
(Applicant)
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L/C
APP
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BANK
DOX
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6
3
BANK
DOX
L/C
BANK
DOX
ISSUING
BANK
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ADVISING/
NEGOTIATING/
CONFIRMING BANK
L/C
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Typical Documents Required
For Payment Under an L/C
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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
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Tips for Working With
Export Letters of Credit
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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)
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Currency always in USD
Minimize the number of banks
involved
– State your preferred bank for advice,
confirmation and/or negotiation
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Stipulate that the credit is available at
the counters of your bank
Don’t use overly complex product
descriptions
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Tips for Working With
Export Letters of Credit
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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
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Draw drafts on a bank, not your
customer
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Tips for Working With
Export Letters of Credit
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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
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Work with a bank that has strong online capabilities
– Visibility into all L/C activity
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Thank You Very Much!!!
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Copyright 2014