incoterms 2000 lecture

INCOTERMS 2000

1

THE HORROR STORIES!

Incoterms? That’s that FOB thing, innit?

The export price list shows ‘FOB £5.00 per Unit’ and ‘CFR £5.00 per Unit’!

We use FOB Birmingham or CIF Cairo!

3

INCOTERMS

the point at which risk passes;

the delivery point;

the division of costs;

the division of functions;

the division of responsibilities.

define

4

INCOTERMS GROUP ‘E’

The goods are made available to the buyer at the seller’s premises.

5

INCOTERMS GROUP ‘F’

The seller must deliver the goods to a

carrier appointed by the buyer.

6

INCOTERMS GROUP ‘C’

The seller must contract for the carriage of the goods

without assuming risk of loss of or damage to the goods

or additional costs due to events occurring after shipment.

7

INCOTERMS GROUP ‘D’

The seller must bear all costs and risks

required to bring the goods to the place of destination.

8

EX WORKS - EXW

May be used for any mode of transport.

The seller must place the goods at the

disposal of the buyer at the seller’s

premises or another named place not

cleared for export and not loaded on any collecting vehicle.

9

FREE CARRIER - FCA

May be used for any mode of transport.

The seller must deliver the goods, cleared for export, to the carrier nominated by the buyer at the place nominated by the buyer.

10

FREE ALONGSIDE SHIP - FAS

Maritime and inland waterway transport only.

The seller must place the goods, cleared for export, alongside the vessel at the named port of shipment.

11

FREE ON BOARD - FOB

Maritime and inland waterway transport only.

The seller delivers the goods, cleared for export, when they pass the ship’s rail at the named port of shipment.

12

COST AND FREIGHT - CFR

Maritime and inland waterway transport only.

The seller delivers when the goods pass the ship’s rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination BUT the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer.

The seller must clear the goods for export. If the parties do not intend to deliver the goods across the ship’s rail the CPT term should be used.

13

COST INSURANCE AND FREIGHT - CIF

Maritime and inland waterway transport only.

The obligations are the same as under CFR with the addition that the seller must procure insurance against the buyer’s risk of loss or damage to the goods during carriage. 14

CARRIAGE PAID TO - CPT

May be used for any mode of transport.

The seller delivers the goods to the nominated carrier and must also pay the cost of carriage necessary to bring the goods to the named destination. The buyer bears all additional costs and risks after the goods have been delivered to the nominated carrier.

15

CARRIAGE & INSURANCE PAID TO - CIP

May be used for any mode of transport.

The obligations are the same as under CPT with the addition that the seller must procure insurance against the buyer’s risk of loss of or damage to the goods during carriage.

16

DELIVERED AT FRONTIER - DAF

May be used for any mode of transport.

The seller must place the goods at the

disposal of the buyer on the arriving means of transport not unloaded, cleared for export but not cleared for import, at the named point and place at the frontier.

17

DELIVERED EX SHIP - DES

Maritime and inland waterway transport only.

The seller delivers when the goods are

placed at the disposal of the buyer on board the ship, not cleared for import, at the named port of destination.

18

DELIVERED EX QUAY - DEQ

Maritime and inland waterway transport only.

The seller delivers when the goods are

placed at the disposal of the buyer on the quay, not cleared for import, at the named port of destination.

19

DELIVERED DUTY UNPAID - DDU

May be used for any mode of transport.

The seller must deliver the goods to the buyer, not cleared for import, and not unloaded at the named place of destination.

20

DELIVERED DUTY PAID - DDP

May be used for any mode of transport.

The seller must deliver the goods to the buyer, cleared for import, and not unloaded at the named place of destination. The seller pays the import duties.

21

WHICH INCOTERMS TO USE?

The buyer’s stipulation.

The regulations of the country of

importation.

Standard practice for the country of

importation.

Exporter’s policy. 22

WHICH INCOTERM TO USE?

The mode of transport used Availability of information Customer service Economy

INCOTERMS 2000 – Major Changes

FAS / DEQ customs clearance obligations.

FCA loading and unloading obligations.

The expression ‘ No Obligation’.

Consistency of language

Customs clearance in free trade areas.

23

INCOTERMS AND INSURANCE

Only affects CIF / CIP.

Seller procures insurance for the benefit of the buyer.

Minimum cover of Institute Cargo Clause.

Contract price plus 10%.

24

INCOTERMS AND ELECTRONIC COMMERCE

Incoterms 2000 includes provision for

specified documents or ‘equivalent

electronic message’.

25

PLEASE REMEMBER!

Documents must refer to Incoterms 2000 (or current version)

Always use the 3 letter code Always suffix with a named place

CIF Aqaba Port Incoterms 2000

FOB Immingham Docks Incoterms 2000

CPT Queen Alia Airport Incoterms 2000

The Incoterms Revision

Incoterms review underway Reduction from 13 to 10 terms Clarification of maritime / non-maritime terms Security regimes addressed Publication due 2010 Probably effective from Jan 2011

The Incoterrms Revision

Incoterms 2011 EXW v FCA The Maritime Terms The D Terms – in general The D Terms – and Letters of Credit

Incoterms 2000 – Responsibility Chart

SERVICES

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

Warehouse Handling

S S S S S S S S S S S S S

Export Packing

S S S S S S S S S S S S S

Loading Charges

B S S S S S S S S S S S S

Inland Freight

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’s 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

Sea/Air Freight

B B B B S S S S S S S S S

Charges on arrival

B B B B B B S S S S S S S

Duty, Taxes & Customs clearance

B B B B B B B B B B B B S

Delivery to destination

B B B B B B B B B B B S S

S = SellerB = Buyer

• If terms are FCA Seller’s Premises, Seller is responsible only for loading goods and not for inland freight. 27

Customs Formalities

Customs Formalities

Legal Obligations: Declarations of cargoes Payment of duties / Taxes Compliance with import regulations including

controls and prohibitions

Impact upon time scales in the supply chain

Why is Customs Clearance needed? Revenue collection or waiver Anti-Smuggling Net Counterfeit goods / IPR protection Enforce import controls Assure integrity of declarations Inspection / quality assurance Identify over-pricing and under-pricing issues

Documentary Requirements - Imports Invoices showing CIF / CIP value Packing Lists Certificates of Origin Import Licence Certificates of Free Sale Test Certificates Import declaration Inspection Certificates / CRIs / IDFs

Typical Clearance Routes

Customs Entry Processing

Unit

No ChecksDocumentary

ChecksCargo Examination

Customs Valuations

Duties / Taxes are usually calculated on the basis of the CIF / CIP value of the goods.

Valuation is on the basis of the transactional value

If the transactional value cannot be determined Customs Authorities may base their calculations on the value of identical or similar goods.

Most countries use the Harmonised System (HS) of classification for their customs tariffs.

Types of Customs Duty

Import Duty Excise Duty Anti-Dumping Duties Countervailing Duties

Exercise!

CPT Value of the consignment US$10,000 Insurance premium estimated as US$100.00 Import Duty Rate is 3%

How much Import Duty would be payable?

Topical Issues

Single Window Environment WCO Safe Framework Trusted Trader environments – The Golden List Use of Scanners One Stop Border Posts Integrated Border Management Trade / Transit Corridors

Inefficiency of trade procedures - Kenya

BankImporter /Exporter Transporter

ClearingAgent

Ship Agent

Kenya AirportAuthority

KRA CustomsKenya Ports

Authority Other Control

Agencies

Expected Business Solution

PCBS

Revenue Authority( Tradex)

Port & Airport Authority

Railways

CFS & ICD OGA

Importer /Exporter

E- Permit

ShipAgents

Freight Forwarders

The World Customs Organisation’s (WCO) SAFE Framework of Standards (FoS)

A set of recommended international supply-chain security standards and supporting principles adopted by the WCO in June 2005 to secure and facilitate international trade.

17 Standards arranged under the two Pillars of:

Pillar 1: Customs to Customs co-operation (11 standards)

Pillar 2: Customs to business partnerships (6 standards)

Aims of SAFE FoS:

To establish international supply-chain security and trade facilitation standards to promote certainty and predictability.

To enable integrated supply-chain management across all transport modes.

To enhance the role, functions and capabilities of Customs administrations.

To strengthen co-operation between Customs administrations to improve their capability to detect high risk consignments.

To strengthen Customs / Business co-operation.

To promote the seamless movement of goods through secure international trade supply-chains.

Lessons Learned

SAFE’s 4 Core Elements:-

Harmonization of cargo information, required electronically in advance for inbound, outbound and transit shipments.

The adoption of a Risk Management approach in addressing

security threats.

Mutual Customs co-operation in the inspection of outbound consignments considered high risk.

The conferral of benefits to businesses meeting minimum supply-chain security standards and demonstrating good practice (e.g. Authorised Economic Operator (AEO) and similar ‘trusted trader’ schemes).

Methods of Shipment

Seafreight – Liner shipping

1. Containerised

2. Break Bulk / Conventional Seafreight – Charter Road Rail Air – Sea / Air Multi Modal solutions

Cargo Insurance

Responsibilities in relation to Incoterms Types of cover – Open Cover / Specific Premium Elements – Marine / War Risks Institute Cargo Clauses A, B & C

Cargo Insurances

Claims Prompt action by the insured Complete and accurate documentation Do not sign clean receipt Advise insurers immediately Hold last carrier responsible

Documentation

Movement: Bills of lading Electronic Bills of Lading Airwaybills CMR Notes CIM Notes Forwarders Certificate of Receipt

Original Bill of Lading

Combined Transport Bill of Lading

Non-negotiable Copy of Bill of Lading

Another Example of a Bill of Lading

A Charter Party Bill of Lading

Documentation

Certificates of Origin Inspection Certificates Test Certificates / traceability Packing Lists Commercial Invoices (indicating CIF value for

customs) Insurance Certificates

customs security carrier security customs

CARGO

EXPORTERS BANK

IMPORTERS BANK

DOCUMENTS (DIRECT OR THROUGH BANK)

$ PAYMENT

SALES CONTRACT

PURCHASE ORDER

EXPORTERIMPORTER

Methods of Payment for Exports / Imports

Cash in Advance Confirmed Irrevocable Letter of Credit Unconfirmed Irrevocable Letter of Credit Avalised Bill of Exchange Bank collections Cash against Documents Open Account

Principle of Documentary Exchange

Selection of Payment Term and MethodSellers Criteria: Minimise credit risk Exporters need for funds Usual terms sales to country of importation What competitors are offering Effect of bank charges

Seller will Assess both Commercial and Country Risks

Letters of Credit

A guarantee of payment by the issuing bank to the seller, conditional upon presentation of documents, to a nominated bank, which strictly comply with all the terms and conditions of the letter of credit.

Letters of Credit

The parties involved: The Opener – Buyer or Importer Opening Bank – Issues the L/C Nominated Bank – Advises and may ‘confirm’ the

L/C The Beneficiary – Seller or Exporter

Letters of Credit

Types: Confirmed / Unconfirmed Irrevocable / revocable (UCP 600 Revision) Revolving Transferable Back to Back Standby Red Clause / Green Clause

Letters of Credit

The Rules: Uniform Customs and Practice for Documentary

Credits – ICC Publication No 600 eUCP International Standard Banking Practice

Why revise the rules?

Rejection rate under UCP 500 consistently high at 50-70% of presentations

Requirement to reflect changes in banking / international transportation and insurance since UCP 500 was published in 1993

ICC Task Force Recommendations

Review should be technical rather than line by line revision ICC opinions, decisions, DOCDEX and court cases should

be considered 7 articles of UCP 500 account for 58% of all Opinions, these

require scrutiny 17 articles have resulted in none, one or two opinions. Consider incorporation of URR 525, ISP98 and eUCP.

What are the key changes?

Leaner set of rules – reduced from 49 to 39 articles Easier to read therefore easier to translate Rules more robust due to removal of terminology ‘Unless

otherwise stipulated’ – openers must ‘Expressly modify’ New fundamental article on ‘definitions’

UCP 600 New Articles

2 - Definitions 3 - Interpretations 9 - Advising of credits and

amendments

12 - Nomination 15 - Complying

presentation 17 - Original documents

and copies

UCP 500 Articles not Included

5 - Instructions to issue / amend 6 (part) - Revocable 8 - Revocation 12 – Incomplete or Unclear instructions 38 – Other documents

Article 2 - Definitions

Applicant Banking Day Complying presentation Honour – Issuing bank must ‘honour’ Negotiation – Bank uses own funds Paying – Using issuing banks funds

Article 3 Interpretations

Words in the singular include the plural and vice-versa Credits are Irrevocable even if un-stated Branches of banks in different countries are considered

separate banks Words such as prompt, immediately, as soon as possible

will be disregarded The words from / after in relation to maturity date exclude

the date mentioned

Article 3 Interpretations

A document may be signed by

handwriting / facsimilie signature / perforated signature / stamp / symbol or mechanical / electronic method of authentication

A requirement for certification / legalisation is satisfied by any signature / mark / stamp / label

Article 3 Interpretations

First half of month – 1-15th Second half of month – 16th -last day Beginning – 1-10th Middle - 11-20th End – 20th – last day

Article 4 Credits v contracts

The credit is a separate transaction from the underlying sales contract

Copies of the contract or proforma invoice should not be included as an integral part of the letter of credit

Article 5 – Documents V Goods, Services and Performances

Banks deal with documents and not with goods, services or performances to which the documents may relate

Deletion of ‘all parties’ Banks only deal in documents

Article 6 Availabilty, Expiry Date and Date for Presentation

Combines 3 articles from UCO 500 Sets minimum requirements be be set in each

credit on these issues Cross reference to Articles 2 and 29 Credits are always available with the issuing

bank Prohibition of drafts drawn on applicant

Articles 9 & 10 Advising Credits & Amendments New article Bank must satisfy itself of authenticity of credit Clarifying partial acceptance is deemed rejection Time limits on amendments disregarded

Article 14 Standard for Examination of Documents

Fundamental to exporters – one of longest articles Incorporates some of ISBP Maximum period of time for bank to determine compliance

reduced to 5 banking days. Such period not subject to other event, for example expiry Removal of concept of reasonable time

Article 14 Standard for Examination of Documents

Default presentation period 21 calendar days connected to original transport document

Concept of not in conflict / read in context introduced to reduce misuse of inconsistency rule. Requires case by case interpretation

Requirement that a document must appear to fulfil its function

Article 14 Standard for Examination of Documents

Any date of issuance of a document on or prior to date of presentation is acceptable

Addresses of beneficiary and applicant may differ within their respective country / contact details transferred from ISBP (notify party exempted)

Issuer of transport document requirement allows NVOCC and freight forwarders documents

Article 15 Complying Presentation

New article Actions to be taken by the bank after

determining presentation is compliant. Honour or negotiation must follow Clarification that documents have to be

forwarded

Article 16 Discrepant documents

Structure of refusal notice Additional possibilities – holding documents until

receipt and acceptance of waiver Latest date for notice of refusal links with 14 (b)

Article 17 Original Documents and Copies Interpretation of requirement At least one original of each document must be presented Originals instead of copies acceptable Focus on definition of originals rather than copies Signing in original makes a document original 17 (b) Reflects ICC Decision on Original Documents

Article 18 Commercial Invoices

Invoice must be in same currency as the credit New emphasis that banks may accept invoices

showing a greater value than allowed by the credit provided they do not honour or negotiate for an amount in excess of the credit

Articles 19 Transport document covering at least two different modes of transport If a through document is used this article applies For example multi-modal bill of lading or sea /

airwaybill No requirement to show name of master Must indicate the name of the carrier Must be signed by the carrier or a named agent, or

the master or a named agent (on behalf of the carrier or master)

Must indicate that the goods have been despatched, taken in charge or shipped on board at the place stated in the letter of credit.

Article 20 Bill of LadingArticle 21 Non-negotiable waybill

No requirement to show name of master No reference to vessels propelled by sail Updated transhipment provisions Must indicate the name of the carrier Must be signed by the carrier or a named agent, or the master

or a named agent (on behalf of the carrier or master) Must indicate that the goods have been shipped on board a

named vessel at the place stated in the letter of credit. Shipped on Board relates to the port of loading shown in the

credit not a feeder port (pre-printed wording or dated notation)

Must contain conditions of carriage or linked to email address giving conditions – new UNCTRAD rule.

Article 22 Charter Party Bill of Lading Banks will not examine charter party contracts

even if they are presented as a requirement of the letter of credit

May be signed by the master, owner or charterer (or a named agent on their behalf)

Must indicate that the goods have been Shipped on Board

Article 23 Air Transport Document

Flight date in a notation is treated as the date of shipment whether it is called for in the credit or not – over-rides ISBP.

Updated transhipment provision Banks will ignore information in ‘For Carriers Use Only’ box Must indicate the name of the carrier Must be signed by the carrier or a named agent for and on

behalf of the carrier Must indicate that the goods have been accepted for

carriage

Article 24 Road, Rail or Inland Waterway Documents

New combined article A rail waybill titled ‘Duplicate Rail Waybill’ is

acceptable. Transhipment is acceptable even if prohibited by

the credit Must indicate the name of the carrier Must be signed by the carrier or a named agent

on behalf of the carrier Must indicate receipt of the goods by signature,

stamp or notation

Article 25 Courier Receipts……

Refers to goods for transportation under the letter of credit, no document transmittal

Article 26 On Deck……

If loading on deck is required the applicant must expressly modify the requirements of this article when opening the letter of credit otherwise loading on deck is not permitted

A clause stating that goods may be loaded on deck is acceptable

Article 27 – Clean Transport Document

Claused transport documents are not acceptable. For example, if steel is being shipped, the opener

must modify the clause by stating ‘Rust on the steel is acceptable’

The word ‘clean’ is not required to appear on the transport document.

Article 28 – Insurance Document and Coverage Amalgamated to one article Incorporates ISBP provision concerning minimum cover An insurance document may contain reference to any

exclusion clause. As a result of ‘millennium clauses’ and ‘acts of terrorism (after 9/11)’

Cover notes not allowed Insurance policy acceptable instead of a certificate

Article 33 Hours of Presentation

No change for UCP 500 However – Banks may manage this differently

to mitigate the reduction to five (from seven) banking days allowed to check documents

Article 36 Force Majeure

Addition of Acts of Terrorism as a specified Force Majeure event.

Transhipment provisions

In general, even if the Letter of Credit prohibits transhipment, transport documents indicating that goods may or will be transhipped are acceptable as long as the whole transit is covered by a single document.

How is it for the Exporter?

A liberalised regime Should see a reduction in the 70% discrepancy

rate Reduction in time allowed for banks to check

documents from 7 to 5 banking days Prescriptive rules for banks in handling

complying presentations

But will the customer be happy?

How is it for the Importer?

Documents presented need to be fit for purpose:

1. Customs

2. Regulatory / conformity

3. Title and delivery

4. Insurance Need to ‘expressly modify’ requirements

Letters of Credit

Opening a Letter of Credit: Timing and facilities Opener’s responsibilities Control of the transaction – linkage with sales

contract / purchase order Requirement for advance documents

Letters of Credit

Discrepant documents: Completeness Compliance Correctness Consistency

Should you accept or reject the documents?Remember: Consequences of delay in

documentation

Letters of Credit

Accept or Reject? Right goods at the right price Quality of goods Marketable Documents required for clearance Claused transport documents Profitability / viability of transaction