Wednesday, October 26, 2011

Title and Risk of loss

Title means that legal ownership in the item purchased.Risk of loss describes whose responsibility it is if purchase is lost or damaged in transit.When you use INCOTERMS each different term defines the specific point at which the risk of loss transfers. There is a new version of INCOTERMs that became effective in 2011. Like previous INCOTERMS it does not describe the responsibility for insurance unless a term requiring insurance is specified such as CIF. Buyers should know that insurance coverage under CIF is very limited. It only covers major casualties, so if you want to protect the shipment you should specify your own limits for coverage.

Title is different from risk of loss as the parties can specify a different time and place for title to transfer. For example, a supplier that sold a major piece of equipment to a customer may want to specify that title doesn’t transfer until they receive payment from the Buyer, or they could transfer title subject to a security interest in the product (a lien) that would be released upon payment. A supplier could specify that title will transfer at some point while the item is in transit. For example, A supplier in Country A could specify that title transfers while the item is on the high-seas before it arrives at Country B irrespective of the delivery term.

The reason why a supplier or buyer might want to have title transfer at some other point is the sale legally occurs at the location where the title transfers. Where the sale occurs can be very important. The supplier in Country A with a customer in Country B may not want the sale to occur in Country B. That would make that a local sale within Country B. Being a local sale would subject the supplier to needing to be registered to do business within country B. It would make the supplier also subject to the laws and taxes of Country B,which may not be favorable.

A buyer that was purchasing a product for resale could have a similar concern. For example a Buyer may want to have a simultaneous purchase and sale of the items while it’s on the high seas. They buy the item from the supplier in Country A. The delivery terms will cover the delivery and they will specify that title transfers to them on the high-seas while it is in-transit.So when they get title passed to them while it’s on the high-seas, they may also transfer title to the customer from Country C simultaneously so their sale is not occurring in Country C. That makes it an international sale and the customer in Country C would need to import the product into Country C.

In addition to having title transfer on the high-seas, you could also specify that title will transfer in a free trade zone. A free trade zone is an area located in the country (in our case Country C) that is prior to customs clearance. Since it is prior to customs clearance, a sale there is not considered to be a sale within that country. If you look for Supplier to maintain stocking areas in another country, the use of free trade zones with title transferring in the free trade zone is something you should consider. It allows you to get the material closer to your point of use without subjecting the Supplier to having to register to do business in that country. It avoids having it be a local sale where payment in local currency would be made and the supplier would then need to figure out how to repatriate the funds. It avoids the supplier having to pay taxes on the proceeds of that sale in that country. Lastly, it keeps the Supplier from being responsible to comply with those local laws.

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