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 seller’s side from
shipment origin point to port of departure
Main-carriage: Transportation from the seller's side
to the buyer's side
On-carriage:
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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)
Revenue recognition:
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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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.
War Risk:
Additional cargo insurance coverage for
war-related perils.
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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) cont’d
c. Pre-carriage for Export
 Inland transportation on seller’s side
From shipment origin point
To port of departure
 Deals separately with:
Loading
Unloading
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Incoterms’ Functions
(Responsibilities and Costs) cont’d
d. Main Carriage for Export
 International transportation
From seller’s country
To buyer’s country
 Deals separately with:
Loading
Unloading
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Incoterms’ Functions
(Responsibilities and Costs) cont’d
e. On Carriage for Export
 Inland transportation on buyer’s side
From import entry port
To location designated by buyer
 Deals separately with:
Loading
Unloading
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Incoterms’ Functions
(Responsibilities and Costs) cont’d
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
(Seller’s Pricing)
3. Guide seller in setting export price and
clarify for buyer “buyer’s costs”
Seller increases export price to include
seller’s costs under relevant Incoterm
Base export price
Plus:
Export Clearance
Pre-Carriage Loading, etc.
Export price amount and Incoterm choice
Buyer infers “buyer’s 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 Seller’s Side
Legal Delivery ≠ Physical Delivery
EXW, F terms, C terms
Destination Term: Place on Buyer’s 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
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DAT
DAP
DDP
Explanation of INCOTERMS
Transport Mode Limitations
Marine Restricted
All Modes
Individual INCOTERMS MUST
Be used with Named Point
Seller’s Side vs Buyer’s Side
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Well, maybe not in all cases…
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Explanation of INCOTERMS
Marine Restricted
Omni-modal
FAS named shipment port
EXW Seller’s premises
FOB named shipment port
FCA named place / Seller
CFR named destination port
CPT named destination / Buyer
CIP named destination / Buyer
CIF named destination port
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 seller’s premises
Rule for Any Mode(s) of Transport
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EXW – Ex Works
(Seller’s Premises)
Cost / Responsibility
1. Export Packaging
2. Export Clearance
3. Pre-Carriage Loading
Pre-Carriage
Pre-Carriage Unloading
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Seller
Yes
No
No
No
No
Buyer
No
Yes
Yes
Yes
Yes
EXW – Ex Works
(Seller’s Premises)
Cost / Responsibility
4. Main Carriage Loading
Main Carriage
Main Carriage Unloading
5. On Carriage Loading
On Carriage
On Carriage Unloading
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Seller
No
No
No
No
No
No
Buyer
Yes
Yes
Yes
Yes
Yes
Yes
EXW – Ex Works
(Seller’s Premises)
Cost / Responsibility
6. Import Clearance
7. Insurance
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Seller
No
Buyer
Yes
No
No
EXW – Ex Works
(Seller’s Premises)
Minimum obligation for seller
Shipment Term
“Delivery” occurs when seller places
goods at buyer’s disposal at seller’s
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
(Seller’s 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
(Seller’s Premises)
Inappropriate for Haz Mat shipments
 Seller has no control over carrier’s
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
MAIN CARRIAGE UNPAID
Free Carrier, Named Place
FAS
Free Alongside Ship,
Named Shipment Port
FOB
Free on Board
Named Shipment Port
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FCA / FAS / FOB
Cost / Responsibility
Seller
Buyer
1. Export Packaging
Yes
No
2. Export Clearance
Yes
No
3. Pre-Carriage Loading
Pre-Carriage
Pre-Carriage Unloading
Yes
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
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Seller
No
No
No
No
No
No
Buyer
Yes
Yes
Yes
Yes
Yes
Yes
FCA / FAS / FOB
Cost / Responsibility
6. Import Clearance
7. Insurance
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Seller
No
Buyer
Yes
No
No
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 ship’s 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 ship’s 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 carrier’s
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
Cost and freight destination port
CIF
CFR + Insurance
CPT
Carriage paid destination
CIP
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
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Seller
Yes
Yes
Yes
Yes
Yes
Buyer
No
No
No
No
No
CFR / CIF / CPT / CIP
Cost / Responsibility
4. Main Carriage Loading
Main Carriage
Main Carriage Unloading
5. On Carriage Loading
On Carriage
On Carriage Unloading
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Seller
Yes
Yes
No
No
No
No
Buyer
No
No
Yes
Yes
Yes
Yes
CFR / CIF / CPT / CIP
Cost / Responsibility
6. Import Clearance
7. Insurance
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Seller
No
Buyer
Yes
CIF
CIP
CFR
CPT
CFR / CIF / CPT / CIP
Shipment Terms
“Delivery” and Risk of Loss Transfer:
 CFR: when goods pass ship’s 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 carrier’s
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
Delivered at terminal, named
terminal or port
DAP
Delivered at place, named place
DDP
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
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Seller
Yes
Yes
Yes
Yes
Yes
Buyer
No
No
No
No
No
DAT / DAP / DDP
Cost / Responsibility
4. Main Carriage Loading
Main Carriage
Main Carriage Unloading
5. On Carriage Loading
On Carriage
On Carriage Unloading
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Seller
Yes
Yes
Yes
Yes
Yes
No
Buyer
No
No
No
No
No
Yes
DAT / DAP / DDP
Cost / Responsibility
6. Import Clearance
7. Insurance
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Seller
DDP
Buyer
Yes
No
No
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 Buyer’s side, packaged
appropriately and unloaded
 DAP: When Seller delivers goods to Buyer at
named place on Buyer’s side, appropriately
packaged but not unloaded
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DAT / DAP / DDP
“Delivery” and Risk of Loss Transfer: (cont’d)
 DDP:
when seller places goods at
buyer’s 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 carrier’s
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
Costs in
Pricing
EXW
Export Packaging
$
FAS / FOB / FCA
Export Packaging
Pre-Carriage
$$
CFR / CIF
CPT / CIP
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Export Packaging
Pre-Carriage
Main Carriage
(Insurance = I)
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$$$
INCOTERMS 2010
DAT / DAP
DDP
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Seller / Exporter
Tasks
Costs in
Pricing
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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INCOTERMS 2010
• All INCOTERMS require “named place” – the more
specific, the better
– ExW and “F” terms, place is on seller’s side of pond
– “C” terms and “D” terms, place is on buyer’s side of pond
• Only two Incoterms deal with insurance – look for “I”
– CIF
– CIP
• Only one INCOTERM makes export clearance a buyer’s
responsibility (all others assign task to seller)
– ExW
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INCOTERMS 2010
• Only one INCOTERM makes import clearance a
seller’s 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
– Seller’s side vs. Buyer’s 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
Omni-Modal
FAS named shipment port
EXW seller’s premises
FOB named shipment port
FCA named place / seller
CFR named destination port
CPT named destination place
CIF named destination port
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
• Don’t 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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Morgan, Lewis & Bockius
Margaret M. Gatti
Louis K. Rothberg
Philadelphia, PA
tel. 215.963.5569
Washington, DC
tel. 202.739.5281
Washington, DC
tel. 202.739.5409
Timothy M. Rolland
Washington, DC
tel. 202.739.5829
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