the logistics & law of exporting from the united states · pdf filethe logistics & law...

The Logistics & Law of Exporting from

The United States

Presented by:

Trade Facilitators, Inc. April 3, 2014

Presentation Outline

•  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 •  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

•  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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•  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*

•  Agreement date •  Identification of the parties •  Authority to enter into contracts •  Applicable law •  Severability •  Dispute resolution •  Incoterms® 2010 rule •  Description of the goods •  Quality, grade, size & condition •  Weights & quantities •  Substitution

*Covered by Incoterms® 2010 rules

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*

•  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

•  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:

“Must-Haves”

•  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 Agreements:

Clauses & Considerations

•  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

International Sales Contracts Clauses & Considerations

•  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

•  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

•  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

•  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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•  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

•  Delivered At Frontier (DAF) •  Delivered Ex Ship (DES) •  Delivered Ex Quay (DEQ) •  Delivered Duty Unpaid (DDU)

Incoterms® That Were Added on 1/1/2011

•  Delivered At Terminal (DAT) •  Delivered At Place (DAP)

The 11 Official ICC 2010 Incoterms® As of 1/1/2011

•  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)

•  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

•  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)



•  Ocean or inland water transport only:





Incoterms® are Rules, not Laws

•  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

•  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)

•  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

•  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)



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)

•  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

Origin

Origin plant or warehouse

Delivery occurs at the origin port, cleared for export and loaded on board the vessel

Port at origin Vessel at origin Inland freight

Group C Shipment Contracts: Delivery vs. Transportation Obligations

Origin Destination

Mode of Origin port or Seller transport airport

Destination port or airport Customs Buyer

Delivery is completed at origin Transportation extends to destination

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

Origin

Delivery occurs at the origin port, cleared for export and loaded on board the vessel

Port at origin Vessel at origin Vessel at destination

Seller pays for ocean transport up to named port 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

Origin

Any mode of Seller Inland carrier transport

Destination

Destination port or airport Buyer

Delivery is completed at origin Transportation extends to a named port or with first carrier (trucker) 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

Destination

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

DAP Delivered At Place (named place of destination)

•  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

Destination

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

Understanding Export Letters of Credit

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Documentary Credits (Letters of Credit)

•  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)

•  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)

•  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

•  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

•  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)

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

•  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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•  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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•  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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BUYER (Applicant)

SELLER (Beneficiary)

ADVISING/ NEGOTIATING/

CONFIRMING BANK

ISSUING BANK

L/C APP

1

2

L/C

L/C

3

GOODS

4

BANK DOX

BANK DOX

6BANK DOX

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Typical Documents Required For Payment Under an L/C

•  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

•  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)

•  Currency always in USD •  Minimize the number of banks

involved –  State your preferred bank for advice,

confirmation and/or negotiation •  Stipulate that the credit is available at

the counters of your bank •  Don’t use overly complex product

descriptions

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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 •  Draw drafts on a bank, not your

customer

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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 •  Work with a bank that has strong on-

line capabilities –  Visibility into all L/C activity

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