Module 5: Individual Assignment Incoterms The Incoterm in a sales contract is used to allocate costs and risks that are included in the Sellers selling price to the buyer, and which the Buyer has to arrange and pay for. The following diagram illustrates the Costs (C) for Transportation (T) and Insurance (I), and the Risk (R) of loss arising from damage to the shipment. II represents the border between the country of departure and the country of arrival. D1 D2 D3 II A1 A2 A3 C T C I R R Locations (named places) in the above are as follows: D Departure: D1 place of origin; D2 terminal or airport of origin; D3 inland water or ocean port A Arrival: A1 inland water or ocean port; A2 terminal or airport; A3 place of destination II border between country of departure and country of arrival Shaded bars show Sellers Obligations Non-shaded bars show Buyers responsibility unless otherwise indicated (e.g., Insurance is an obligation for the Seller for only two Incoterms (CIF, CIP); see endnote on Insurance.) Diag. 1 Incoterm is EXW named place (Incoterms 2020) origin term D port D port A term A destination II C T C I Buyers Option R R Diag. 2 Incoterm is FCA named place. origin term D port D port A term A destination II C T C I Sellers Option R R Diag. 3 Incoterm is FOB/FAS named port (Incoterms 2020) origin term D port D port A term A destination II C T C I Sellers Option R R Diag. 4 Incoterm is CFR named PORT (Incoterms 2020) origin term D port D port A term A destination II C T C I Sellers Option R R Diag. 5 Incoterm is CIF named PORT (Incoterms 2020) origin term D port D port A term A destination II C T C I Sellers Obligation (Class C minimum cover only) R R Diag. 6 Incoterm is CPT named place (Incoterms 2020) origin term D port D port A term A destination II C T C I Sellers Option R R Diag. 7 Incoterm is CIP named place (Incoterms 2020) origin term D port D port A term A destination II C T C I Sellers Obligation (Class A all risk insurance) R R Diag. 8 Incoterm is DPU named place (Incoterms 2020) origin term D port D port A term A destination II C T C I Sellers Option R R Diag. 9 Incoterm is DAP named place (Incoterms 2020) origin term D port D port A term A destination II C T C I Sellers Option R R Diag. 10 Incoterm is DDP named place (Incoterms2020) origin term D port D port A term A destination II C T C I Sellers Option R R Insurance Two Incoterms CIF named port and CIP named place obligate the Seller to arrange and pay for insurance coverage in the Buyers name. Only minimum required coverage is extended only up to the named port or place. The insured value is 110% of the CIF or CIP value, including insurance premium. For all other Incoterms, there is no obligation for either party to provide insurance, but it is always a good idea. If any damage or loss of the shipment occurs before the Seller is able to complete his obligation for delivery to the named place or port under the Incoterm stated in the Sales Contract, the Buyer is justified in refusing to pay the Seller and the Seller is unable to recover his costs from the Buyer. As an option, the Seller can make sure that he has insurance coverage for the part of the trip in which he is at risk. When the damage or loss occurs, the Seller claims payment from the insurer, makes the necessary repairs, or replaces the loss. The Seller is able to complete his obligations (and be entitled to payment) if the Sales Contract is still valid. At the same time, the Buyer should ensure protection for the remainder of the trip for the risk of damage or loss to goods when the Buyer owns the risk. Additionally, all parties are encouraged to obtain sufficient contingency insurance to cover the risk associated with one party not meeting their obligations. Individual Assignment TOTAL MARK: /50 You are asked to manage the following two shipments of intermodal cargo going by TEU (sea) or ULD (air): SHIPMENT A SHIPMENT B Origin: Shippers Plant Budds BMW Canada, Oakville, ON, CA VW, Sao Bernardo do Campo, Brazil Terminal & customs Schenker Whse, Montreal, Quebec Sao Paulo International Airport Port sellers side Port of Halifax, NS Port of Santos, Brazil Port buyers side Port of Antwerp, Belgium Port of Miami, Florida Terminal & customs Schenker Whse, Munich, Germany YYZ, Toronto Destination: Buyers Warehouse BMW, Munich, Germany VW, 550 Adelaide St E., Toronto, Canada, 1. (8 mks) Use Shipments A and B (above) to completely label the diagram with locations of delivery and shade the sellers obligations for the following containerized shipments: a. Shipment B Incoterm is EXW II C T C I R R What is the complete Incoterm? ________________________ b. Shipment A Incoterm is CPT II C T C I R R What is the complete Incoterm? ______________ c. Shipment B Incoterm is CIF (port) II C T C I R R What is the complete Incoterm? ______________ d. Shipment A Incoterm is DPU port II C T C I R R What is the complete Incoterm? ______________ 2. (3 mks) DAP is best for a contract in which the buyer is a large international company? a. true, b. false Why? Or Why not? _________________________________________________________________ ___________________________________________________________________ What potential problem is there with EXW that makes FCA a better selection in most cases? ___________________________________________________________________ ___________________________________________________________________ 3. (5 mks) Complete the following a. Using FOB named port in your Sales Contract shows interested parties that (select all that apply): 1) The freight costs must be prepaid up to the port of arrival 2) The seller must arrange and pay for marine insurance 3) It is a marine bulk shipment 4) The seller must arrange and pay for any documentation or export declaration formalities in the country of origin 5) The seller must arrange and pay for main-carriage b. I am responsible for paying all the bills at my company. I notice that we, the buyers, have received a shipment for which the bill of lading says, freight prepaid. Am I correct that we will be receiving an invoice from a carrier or freight forwarder for the freight charges for this shipment? a) yes b) no c) sometimes d) I need more information c. List the Incoterm(s) acronyms used for shipments in which the truck bill of lading delivering the product to final destination is for the sellers account. ______________________________________________________________ d. List all the Incoterms in which responsibility for costs and risks are divided at two different places: ______________________________________________________________ e. Incoterms 2020 made a clarification about where delivery takes place. For the terms in d. above, which place is where the seller is considered to have completed delivery. a) where the costs divide b) where the risks transfer c) both places d) in this case, no named place is required 4. (6 mks) Compare and contrast the following two terms: CPT CIP a. mode(s) of transportation b. place of division of cost obligations c. Place of transfer of responsibility for risk of loss d. Insurance requirements 5. (2 mks) Sammy is a freight forwarder arranging shipping of goods via air from Place A to Place B. It is agreed that the seller will arrange pre-carriage and deliver the goods to Sammys warehouse. The rest of the costs and risks are for Sammys customer, the buyer. What is the FULL Incoterm? __________________________________________ 6. (6 mks) Excellent Exporters, in Brampton, Ontario sells products to Toys R US in Tehran, Iran under a clean, onboard bill of lading. Terms of sale: CPT, Designated Port, Incoterms 2020 Cargo: 22 wooden pallets of toys loaded in one 20-ft ocean container Terms of delivery: consolidated container, ocean freight Terms of payment: open account, net 60 days a. Who selects the freight forwarder and pays the ocean freight charges? Buyer Seller b. The place where the risk transfers from the seller to the buyer is the Designated Port True False c. There are goods of U.S. origin in the consignment and a general export permit is required. However, this GEP 12 was not entered on the export declaration (CAED). Who is responsible for paying the administrative penalty to the CBSA? Buyer Seller d. The shipment was delayed at the arrival port due to customs clearance problems. Storage charges were US $600.00. Who is responsible to pay for the storage? Buyer Seller e. When the container was unloaded at the consignees door, the contents of eight pallets were damaged. Who bears the loss? Buyer Seller f. What would be your recommendation about Incoterm named place in this problem? _____________________________________________________________ 7. (4 marks) You are shipping 5 skids of sulfuric acid from a Montreal Manufacturer, sold FCA Montreal (Incoterms 2020). This is an incorrect use of Incoterms because a specific named location is given. After the sulfuric acid was loaded into the Cartage company truck, at the plant, the driver on the way to the export terminal in Montreal has an accident on the expressway. His truck jackknifes, tips, and crashes against the steel guardrail, busting the trailer doors open and spilling sulfuric acid cans all over the highway, closing it for hours in both directions. This leaves us with two possible situations: Situation #1: If the buyers nominated carrier was moving the sulfuric acid to the export terminal Montreal, then the buyer bears the risk. Please note that nominated carrier may also mean local forwarder, or forwarders agent overseas giving instructions to their local agent to collect the freight. The proper Incoterm for this situation would be a. Full Incoterm: ____________________________________ Situation #2: The seller decides to use their own in-house trucks to deliver the cargo to the export terminal. The only information provided to the seller are the booking details for the move. In this situation the seller has yet to deliver the goods in accordance with the Incoterm used. Thus, the seller has the risk of loss. The proper Incoterm for this situation would be b. Full Incoterm: _____________________________________ 8. (10 mks) You are employed by YYJ Exports, Victoria, BC. Your company wants to export electrical supplies to Hotwire Electrical Inc. in Tokyo, Japan. Shipping instructions are as follows: The goods are to be shipped from YYJ Exports by PRO NORTH Trucking (175 Apple Ave., Victoria, B.C.) by truck on the ferry to Vancouver Airport and loaded onto a JL flight to Tokyo From Tokyo Airports Freight Terminal NIPPON Trucking will deliver the goods to Hotwire Electrical Inc. Main Warehouse, 123 ABC Street, Tokyo, Japan. The buyer has asked that you quote prices under various alternatives. What complete Incoterms would apply for the following scenarios? a. The buyer wants the goods delivered, insured, to Tokyo Terminal, but they are willing to assume risk for the goods once they are given to Pro North Trucking in Victoria. b. The buyer wants you to deliver the goods to the Freight Terminal HND Tokyo Airport. The buyer will make their own insurance arrangements, and is willing to assume risk for the goods once they are loaded on to PRO NORTH Truckings trailer. c. The buyer wants you to deliver the goods packed and loaded to PRO NORTH Trucking at your plant in Victoria. The buyer will accept the risk and cost for the goods once they are in the possession of PRO NORTH Trucking and will make all the necessary arrangements to bring them to Osaka., d. The buyer wants you to deliver the goods to JL at the Freight Terminal, Vancouver International where they will accept the risk and cost for the goods and make the necessary arrangements to transport the goods to Tokyo and beyond. e. The buyer wants you to deliver the goods to their agent, Schenker Logistics, Tokyo Airport where they will assume risk for the goods, account for them to customs, and pay duties and taxes and handle the final delivery. 9. (4 mks) List the two substantive changes that are in Incoterms 2020. a. Insurance: _______________________________________________________ b. New Term(s): _____________________________________________________ 10. (2 mks) Given that the Incoterm used in a contract is CIF (port of arrival), what advice would you, as a freight forwarder, give your client, the consignee with respect to insurance?