Tooling

In manufacturing, tooling means things like cutting tools, dies, fixtures, gauges, jigs, molds or patterns that are for use in producing a specific product creating the specific form of the item. In procurement the most frequent reference to tooling means a metal die that is used in conjunction with an injection molding piece of equipment or metal stamping piece of equipment to produce an item of a specific form and size that will be unique to the item being produced where the buyer’s payment for such tooling may be required. There are also CNC (Computer Numerical Control) tools. CNC tools are used in a machining process where computers are used to control machining tools such as lathes, mills, routers and grinders. Since these tools are not unique to a specific product most of the time they buyer would not be paying for such equipment unless they were required for additional capacity. It is the first type of tooling that this blog is about.

Tools may be described as soft tools or hard tools. Soft tools are usually lower cost. They are good for medium-low volumes with a high mix of production. They lead to a higher piece part cost. They provide faster lead time and response. They are more flexible to change design. They will result in increased product variances over time. Hard tooling is usually higher cost because of the materials and processes used to make the tool. It will produce a lower piece part cost. When you use hard tooling there is no flexibility in the design, a change in design requires a new hard tooling is usually higher cost. There is no flexibility in design. Hard tooling result in a longer lead time because of the time needed to build the hard tool. It provides for repeatability of the product and results in less product variances. It is used for high volumes. The physical difference between hard tooling and soft tooling is the materials used to make the tools. A hard tool is usually made of hardened steel that is machined to the exact size needed. A soft tool is made of other materials such as silicon, epoxy resin, and lower temperature melting materials such as zinc alloys, and aluminum, etc.

Whether its hard tooled or soft tooled, a tool will have a useful life (a certain number of “hits” or stampings) before it will no longer be able to produce within acceptable tolerances. From an accounting perspective for tooling you probably have several ways to depreciate the cost of the tool. Depreciation can be done as:
1. Straight line (cost minus salvage value divided by the number of years of useful life).
2. Unit of production depreciation basis (cost minus salvage value divided by estimated number of production units).
3. Sum of years (cost – salvage value, where the total number of years are added (a five year life would total 15 (1+2+3+4+5) and year 1 would be 5/15ths, year 2 would be 4/15ths, etc).
4. Double declining balance (cost minus salvage value where the useful life (say 5 years) has 2/5ths of the current book value is depreciated each year so as the years go out the depreciation amount decreases as it’s based on that year’s book value that reflects prior depreciation.
5. Another accelerated method may spread the depreciation cost over the term of the contract if the tool cannot be used elsewhere.

As a buyer if you pay for tooling it can affect future sourcing decisions. The tooling you purchase and own may not compatible with a different supplier's equipment. That can potentially lock you into the supplier because to switch to a new supplier you have two costs. The cost to write off any remaining amount to be depreciated on the old tool as it's now obsolete and the cost of the new tool. One way to protect against that without getting locked into long term contracts with the supplier would be to negotiate options to extend the contract with a pre-agreed pricing formula at the same time you sign the initial contract. That allows you to determine what the best option is for you.

If the supplier agrees to pay for tooling and amortize the cost into the purchase price, you need to agree upon the number of units it will be amortized over, the per unit amount being charged and have an automatic price reduction once the cost has been fully amortized. Otherwise you will be paying for tooling cost well after the item has been fully paid for. Doing that also helps establish what your cost would be if you needed to terminate the agreement or let the agreement lapse without having met the amortized quantity agreed.

There are a number of factors to consider with tooling:
Who owns the responsibility to replace the tool if it breaks?
Is the tool for your sole use or can the supplier use it with other customers?
The set-up and tear down cost for the tool are costs that don't affect the tooling cost. They affect your piece part cost. Those along with your run rate affects your piece part cost as those costs apply each time you don't have continuous production. Depending upon what those costs are it may pay to order and inventory more than you need to reduce the number of times you incur those costs.

When you purchase something that requires tooling that you have to purchase you would normally have a separate tooling agreement or tooling purchase order. There are a number of terms that you would want in such an agreement. For example:
1. You want them to insure the tool against normal perils such as theft, and damage or loss due to fire, floods, etc. and have you named as a loss payee.
2. You want the tool to marked with your inventory control sticker showing the fact that your company owns the tool so you could retrieve it in the event the supplier went bankrupt.
3. You want them to perform maintenance and calibration of the tool to keep it in good working order.
4.You want them to be liable for the replacement of tool in the event of negligent set up, operation, or tear down of the tool that damages or destroy the tool.
5.You want the use of the tool restricted solely to your company unless you otherwise agree and are compensated.
6.You want the right to enter their premises if necessary remove the toll that you own.
7.You want language where they agree that they will not financially encumber the tool.
8.You want the tool to not to be moved without your agreement.
9.You want the supplier to not alter or modify the tool.
10. You want the right to inspect the tool.
11.You want the right to remove the tool at any time.
12. In most situations the buyer wants to own both the design of the tool and the tool itself. Owning the design of the tool makes it your intellectual property that the Supplier couldn’t use to have tools made for others without infringing your intellectual property rights. If you own the tool ,unless you have another commitment with the supplier that locks you into using the supplier (like a firm quantity commitment), you have the flexibility to move the tool at any time to another supplier. That helps keep competition in the equation for future negotiations.

Bills of Lading

In a separate blog post I wrote about Incoterms. Since shipments require bills of lading I decided to do a post on them. A bill of lading has multiple functions. The principal use of the bill of lading is as a receipt issued by the carrier to the seller once the goods have been loaded onto the carrier or vessel. The receipt can be used as proof of shipment for customs and insurance purposes. It can also and be proof of completing a contractual obligations such as when Incoterms are CFR (Cost and freight), EXW (Ex-Works), or FOB (Free on Board). The bill of lading can also function as evidence of the contract of carriage. It is not a contract of carriage per se, but can be made one if the Hague-Visby rules were annexed to the Bill of Lading or other terms creating a contract of carriage are printed on the reverse side. Normally there will be a separate agreement between the seller (or buyer) and carrier.

Legally the carrier is a legal consignee of the goods. A bill of lading may also list the buyer of the goods as the consignee. The two are different. Thw freight forwarder is named by the seller (or Buyer depending upon the delivery term) for delivery to a specific point. The take possession or arrange for the carrier to take possession. The freight forwarder is considered to be the owner of the consigned goods for the purpose of filing the customs declaration and for paying any export duties, taxes or fees. The freight forwarder will further consign the shipment to the carrier. The consignee is listed on a Bill of Lading is the Buyer or a third party designated by the Buyer. If you use the FIATA bill of lading the parties to the transaction would be defined as follows:
a. Freight Forwarder is the company that issues the Bill of Lading
b. Merchant is used to identify the shipper
c. Consignor is the seller of the goods.
d. Consignee (is the buyer of the goods

The freight forwarder and the merchant have certain rights and obligations in conjunction with the consignment that are listed on terms on the reverse side of the bill of lading. There are multiple types of bills of lading. An ocean bill of lading is a document required for the transportation of goods overseas. An ocean bill of lading serves as both the carrier's receipt to the shipper and as a collection document if payment by the consignee is required. Ocean bills of lading may be negotiable or non-negotiable. A non-negotiable ocean bill of lading allows the buyer to receive the goods upon showing identification. If the bill is deemed negotiable, then the buyer will be required to pay the shipper for the products and meet any of the seller's other conditions established on the bill of lading. If the goods are to be initially shipped over land, an additional document, known as an "inland bill of lading", will be required. The inland bill only allows the materials to reach the shore, while the ocean bill allows them to be transported overseas.

Bills of lading need to be consistent with the Incoterms rule selected. For example, if the sale was ex-works the seller’s dock, the seller would not create a bill of lading as it is the buyer’s responsibility to arrange for shipment from that point forward. If the sale was FAS or FOB the seller would only complete an inland bill of lading to get it to the port and the buyer would need generate an ocean bill of lading or a multimodal bill of lading. If the delivery point was after the port of export but prior to the port of import the seller needs to complete the ocean bill of lading. Once the goods are at the port of import, the buyer would need to generate an inland bill of lading to get the goods to the point of delivery. The exception to that would be if the seller sold the items DDP wherein the seller would be responsible for generate the inland bill of lading in the export country, the ocean bill of lading, and an inland bill of lading for the import country.

In most international transactions you would use a multimodal bill of lading. The information provided on that bill of lading includes the following.
1. The ship from address
2. The ship to address
3. The bill of lading number and bar code
4. The carrier name, trailer number and serial number
5. Who and third party freight charges are to be billed to.
6. The SCAC (Standard Carrier Alpha Code) that identifies the specific carrier and pro number (a progressive number used to track shipments
7. Any special instructions..
8. Whether the freight is prepaid, collect or will be paid by a third party.
9. Customer order information
a. Customer order number.
b. Number of packages.
c. Weight
d. Whether its in a pallet
e. Any additional shipper information
10. Carrier Information
a. Handling unit quantity and type
b. Package quantity and type
c. Weight
d. Whether the shipment contains HM (Hazardous Materials)
e. Commodities requiring special care
f. NMFC Number and class code that defines the National Motor Freight Code and class for the materials shipped.
g. If the goods are being shipped independent of value, the declared value of the goods.
h. The COD amount is shipped COD.
i. The fee terms (whether prepaid, COD or customer check is acceptable)
11. A limitation of liability on the shipment.
12. A signature of the shipper if they do not want delivery without payment.
13. Shipper and Carrier signatures and dates.
14. Responsibility for loading the goods on the carrier (shipped or carrier)
15. How freight is counted (by shipper, by driver pallets or by driver pieces)

If you used the FIATA negotiable multimodal transport bill of lading there are terms on the reverse side that contain the following sections:
Definitions
e. Freight forwarder who issues the B/L
f. Merchant (the shipper)
g. Consignor (the seller)
h. Consignee (the Buyer
i. Taken in charge (hand over by consignees and accepted by freight forwarder)
j. Goods

Titles of the specific terms are:
Applicability (makes terms apply even if only one mode of transport is used)
Issuance of FBL (Once issued Freight Forwarder assumes responsibility to delivery and liability)
Responsibilities of freight forwarder
Negotiability and Title to Goods (see below)
Dangerous goods and liability (requirement of notice of and liability if not described_
Description of goods and merchant’s packing (Consignor guarantee Goods are as decribed)
Freight forwarders liability (Limitation of Liability)
Paramount Clauses (incorporates laws (the Hague Rules, the US Carriage of Goods by Sea)
Limitation of Freight Forwarders Liability (limits liability to value of the goods)
Applicability of actions in tort (terms of the contract apply whether action under contact or tort)
Liability of servants and other persons (
Method and route of transportation (provides freight forwarder right to make changes to these)
Delivery (delivered when handed over or made available to the consignee)
Freight and charges
Liens (Provides the freight forwarder with a right to place a lien on the goods)
General average (Actually an indemnity the Merchant provides to the freight forwarder)
Notice (Require notice of loss or damage. If no notice prima facie evidence delivered as described)
Time bar (Period in which to bring suit under the BoL
Partial invalidity (the same as severability where if one part is invalid the remaining will apply)
Jurisdiction and applicable law (based upon the Freight Forwarders place of business)

One of the key things within the Multimodal a bill of lading is the negotiability and title section that reads as follows:
3.1 This FBL is issued in negotiable form unless marked non-negotiable. It shall be constitute title to the goods and the holder, by endorsement of this FBL, shall be entitled to receive or transfer the goods herein mentioned,
3.2 The information in this FBI, shall be prima facie evidence of the taking charge by the Freight Forwarder of the goods as described by such information unless contrary indication, such as shippers weight, load, and count, shipper packed container, or similar expressions has been made in the printed text or superimposed on this FBL. However proof to the contrary shall not be admissible when the FBL has been transferred to the consignee for valuable consideration who in good faith acted thereon.

What does that mean with respect to title in the goods. It means is when you use a negotiable bill of lading the freight forwarder is given title to the goods and can transfer title to the consignee as long as the consignee 1) has paid for the goods and 2) acted in good faith. What it would also mean is seller would be prevented from submitting proof under contract that title did not transfer under their contract with the buyer until payment or that a security interest existing in the goods.

If you use a non-negotiable bill of lading, the bill of lading confers what is called a prima facie title over the goods to the named consignee listed on the Bill of Lading. Prima facie means “accepted as correct until proved otherwise”. This means that under the "nemo dat quod non habet" rule the freight forwarder and subsequently the Merchant (carrier) cannot transfer to the consignee better title than the freight forwarder has. This means that the seller may legally retain title until they are paid. The seller could also retain title until a specific point in the delivery process where there is delivery to the buyer in accordance with the agreed Incoterms rule. The seller could also retain a security interest in the goods.

In getting a prima facie title the carrier may place an encumbrance or have security interest against the goods. If the full title is not granted to the freight forwarder who delivers them to the consignee, the consignee has rights but the seller’s rights in the goods have priority over the consignee’s rights. The prima facie title would allow the consignee to have certain rights in the material. For example they would have the right to withhold releasing the goods to the named consignee (buyer) if they are owed monies. The freight forwarder or carrier also can’t simply sell the goods to recover what they are owed as they don’t have full title to make the sale. In many jurisdictions there is a legal process they would need to follow in which they would need to notify the owner of the title to allow them to make payment before selling the goods.

The UCC makes a slight distinction about the title when it comes to creditors rights with respect to the consigned materials. In those situations the consignee is deemed to have rights and title to the goods identical to those the consignor had or had power to transfer. It also goes on to say that if the consignor had perfected a security interest in the goods, that interest has priority over the rights of the consignee.
Negotiable bills of lading may function as negotiable instrument and be traded in much the same way as the cargo, and even borrowed against if desired. A non-negotiable bill of lading can’t be borrowed against because the freight forwarder and Merchant (carrier) only have prima facie title and the Consignor’s title in the product takes precedence over their rights.

One main point to take away from this post is when making a shipment always make it clear whether the Bill of Lading is negotiable or non-negotiable. The way the FIATA multimodal Bill of Lading, the default is that it is negotiable unless you specifically mark it otherwise. If you fail to make what should be non-negotiable, as non-negotiable you will lose the right to introduce evidence to the contrary if you where you could seek to recover the goods for non-payment by the buyer. Personally, I would never sell under credit terms and use a negotiable bill of lading.

Liability versus providing an Indemnity

In a LinkedIN group a participant asked about the difference between someone accepting liability for their negligent acts versus providing an indemnity. I thought my response should be shared with my readers.

In some jurisdictions around the world the buyer / seller relationship is viewed as principal / agent. Under a principal / agent relationship the principal can be sued for the actions of the agent. If those actions are negligent the buyer can be sued under tort law for that negligence. That results in potential liability to the buyer.

If you have language that says that the supplier will be responsible to you for such liability you have a contract commitment that would be enforceable to recover the damages the injured party was awarded. If you have an indemnification, the seller is agreeing to be responsible for that potential liability and you have protection based upon the scope of that indemnification,

If the injured party sued the seller directly and not the buyer there would be no need for an indemnity. What frequently happens is the injured party will either sue the buyer (as the buyer may have more assets (deeper pockets) or they will sue both parties. An indemnification without the obligation of defense simply means that the seller is agreeing to only pay the damages awarded. If the indemnification also included the responsibility to defend, the seller would need to pay for the defense of the claim, or defend against that claim in court with them bearing the costs of the defense or settlement. If you have the obligation to defend and indemnify the seller (indemnitor) has agreed to effectively "stand in your shoes" and manage the process, pay the costs of the defense and pay any damages awarded or settlement amounts.

The value of either language to accept liability or or indemnify is based upon the assets of the party providing that commitment. When you are dealing with small companies it is best to require them to carry certain levels of insurance as additional financial protection such as comprehensive general liability and vehicle liability. Then if there is a claim the insurance company may be involved in the defense and you have the protection of both the insurance amounts and the sellers assets as protection.

The value of either agreeing to accept liability or agreeing to indemnify can be limited by the limitation of liability section as to both the types of damage that may be claimed and the amounts. I would carve either of these commitments out of limitation of liability for that reason. My rationale is simple, if the third party were to sue them directly they would not have a limit on that potential liability.

One last comment from a buyer's perspective you need to be concerned about the language in the section further limiting the value of what they will provide. You see under tort law a third party can sue for negligence. It doesn't require gross negligence or willful misconduct. Ordinary negligence will do. When a seller wants to be liable or indemnify only for "gross negligence or willful misconduct" they are setting a much higher standard that significantly limits the value of their commitment. What that is effectively saying is you need to be responsible for all ordinary negligence claims and I will only be responsible if the claims meet these much higher standards. As a buyer I would want the liability or indemnity to apply to any negligent act, error or omission. Your company didn't cause the injury or damage, they did, so why should you have to be responsible for anything.

Selecting The Right Incoterms Rule (delivery term)

For those individuals who may not be familiar with Incoterms®, they are a set of rules published by the International Chamber of Commerce in which responsibilities of the parties are established based upon the specific rule (delivery term) selected and the delivery point. Each Incoterms® rule (delivery term) addresses which party (the buyer of seller) has the responsibility for certain costs or tasks:
• Loading on truck at origin
• Export Customs declaration form completion
• Carriage to port of export
• Export clearance
• Unloading at port of export
• Loading onto vessel at the port of export
• Carriage to port of import
• Unloading charges at port of import
• Import customs clearance
• Import taxes and duties
• Loading on carrier at port of import
• Carriage to place of destination
• Responsibility for insurance

Incoterms® are silent as to title transfer, and title transfer can be an important consideration in shipment of goods. Normally ownership is directly tied to risk of loss or damage. The party that owns the goods has the risk of loss or damage in the goods. The exception is that when you use Incoterms they define the point where the risk of loss passes from the seller to buyer. If there is no transfer of title or ownership there is no sale. For example the Uniform Commercial Code that has been adopted by all states in the U.S. presumes that title transfers at the specified delivery point unless there is language in the agreement to the contrary. CISG makes no reference to title transfer and looks to the Incoterms® to establish where the risk of loss transfers.

There are two different groups of Incoterms. The following Incoterms apply to any mode of transportation: EXW (Ex Works), FCA (Free Carrier At), CPT (Carriage Paid To). CIP (Carriage and Insurance Paid To), DAT (Delivered at Terminal), DAP (Delivered at Place), DDP (Delivered Duty Paid). Incoterms that only apply to sea and inland waterway transport are: FAS (Free Alongside Ship). FOB (Free on Board), CFR (Cost and Freight), CIF (Cost, Insurance, and Freight).

If you negotiate contracts involving international trade you should own a copy of the Incoterms. They can be ordered at http://www.iccwbo.org/products-and-services/trade-facilitation/incoterms-2010/. For a very good description of all the individual rules (delivery terms) you can also visit: http://www.inhouseblog.com/international-shipping-terms/.

In negotiating contracts deciding which Incoterms® rule to accept there are many things to take into consideration. The first thing to remember is only the owner of the goods or their representative (a customs broker) can apply for an export license and clear export customs. In some locations like the EEU, non-resident companies cannot clear customs. In the U.S. non-resident companies can apply for export licenses and clear export customs. They are responsible for complying with U.S. export regulations. The U.S. export restrictions may limit some classifications of goods to a limited number of countries. There are also countries where restrictions apply to export all goods to those named countries. Similarly, only the owner of the goods or their representative, are able to apply for an import license and clear import customs.

When goods are shipped a Bill of Lading is completed. A bill of lading could is clearly stated transfer ownership. In most cases what the bill of lading does is transfer possession of the goods. The goods are consigned to the carrier or freight forwarder. The carrier or freight forwarder has certain rights with respect to the goods, but they do not have title or ownership in the goods. For a bill of lading to transfer title/ownership in the goods either the contract or bill of lading would need to clearly show the intent to transfer title/ownership. Otherwise the recipient of the goods has only the legal right to possess the goods subject to the terms of the consignment.

The point at which title or ownership transfers is an important consideration and is not controlled by the specific Incoterms® rule selected. Ownership is tied to the risk of loss or damage. If you fail to specify where title / ownership passes in the contract or other document, applicable laws may do that for you. If you had a contract that specified any state in the United States as the applicable law, the Uniform Commercial Code UCC Section 2-401 would apply. Under the UCC title transfers upon delivery at the agreed delivery point that is defined by the delivery term and delivery point selected. For examples Ex-Works Seller’s dock in New York, New York would mean that title transfers at the point the seller makes the goods available for delivery at their loading dock in New York, New York. That means that from that point onward the risk of loss or damage belongs to the buyer. It would also mean that it becomes the the buyer’s responsibility to either assume that risk or purchase insurance to cover that risk from that point forward. There are only two Incoterms rules that require the seller to provide insurance to protect against loss or damage. Those two are CIF (Cost insurance freight) and CIP (Carriage Insurance Paid to). For all other Incoterms® rules the risk of loss is with the owner of the goods.

Some companies watt to retain title / ownership of the goods until they are paid. They do that to allow them to recover the goods if not paid under what is called replevin. One problem with that is unless the specific Incoterms rule selected transfers the risk of loss, by continuing to own the goods they also continue to own the risk of loss or damage. Other companies choose to transfer title (and risk of loss or damage) to the buyer at an earlier point subject to a security interest in the goods (a lien against the title / ownership). Each approach has their advantages or disadvantages. In many sales the goods may be consumed or converted quickly so retaining ownership rights in the goods may not provide any protection. The specific type of Bill of Lading can also impact title. For example, if you used a negotiable intermodal bill of lading you are agreeing that title is transferred to the freight forwarder and are also agreeing that proof to the contrary shall not be admissible when the FBL has been transferred to the consignee for valuable consideration who in good faith acted thereon. For non-negotiable bills of lading the freight forwarder gets prima facie title in which, you could introduce evidence of title (such as retained title conditioned upon payment or a security interest.

Whether the buyer or seller manages the transportation is also a consideration. There are good and bad carriers. Some shipping lanes carry higher risks due to weather and piracy and theft. One question to ask is which is more important for me, getting the goods when I need them or getting compensated for the loss or damage? The more you want or need the products to be delivered when you need them the more you either want to control or approve the carrier and shipping lanes.

In working for large companies with very competitive shipping costs we always felt that our costs would be less than our Sellers so the majority of our purchases were made under delivery terms where the bulk of the transportation expense was under our control. There can be times when it may make sense to buy an item delivered to the destination such as with an DAP term or have delivery be from a Seller’s local subsidiary. That occurs mostly when you are importing it into a country with high duties. If you buy and import a product your duties will be based upon your purchase price and transportation costs. If the Seller subsidiary purchases it, their duty will not be based upon the purchase price. It will be based upon what’s called the “transfer price” or the amount the company sells the product to the subsidiary for which is less than your purchase price. That means the duty they will pay will be less. The same would apply to buying from a distributor as the distributor is buying it less their discount, but then you need to take into consideration that your contract would then be with the distributor and not the Seller. The one thing you never want to do is leave the cost of transportation totally open ended to the Seller. Either get a price that includes all cost or manage the transportation yourself.

Revenue recognition is another consideration. Revenue recognition is when under the accounting rules for the jurisdiction the seller can classify it as a sale. In the U.S. there are strict rules (Sarbanes-Oxley) issued by the Security and Exchange commission that prevents companies from taking credit for a sale if it can be returned to the seller. Most U.S. Sellers will want terms where title transfer is early so they don’t have to wait for deliver at some other location to occur before they can count it as revenue. They also try to avoid any right of the buyer to return the product and want to only be responsible to either repair or replace they product so it can be considered sales revenue. Revenue recognition is important to companies balance sheets and to sales organizations that are measured and compensated based upon meeting sales goals within a financial period.

Another thing you need to consider is the specific delivery point. INCOTERMS® doesn’t establish the actual delivery point and the parties are free to also establish a deliver point that makes sense between them. Even though a product may be made in one location, it may also be stocked in another. For example many company supply chains want the Seller to have stocking points close to the point of use so they can operate under a pull replenishment program. If the Seller has those, you use them. If the Seller doesn’t have local stocking points you could have stocking at different locations such as a third party warehouse or even a stockroom on the buyer’s site. In doing that you need to select the right INCOTERM and delivery point. Pull replenishment types of arrangements require additional terms regarding pull, replenishment and loss or damage to the product while stored. When I talk about selecting the right delivery point you need to take other things into consideration. For example I’ve written contracts where delivery was to a third party warehouse in a free trade zone prior to import customs clearance because the supplier refused to sell the product within the country of import. If the seller wanted to assume all costs and risks to get it to that point they could sell the product ex-works at that point. The could also select CIP, CIF or DAP to that warehouse but have the title and risk of loss transfer at an earlier point When the buyer wanted to make a “pull” that was the location they pulled from. The buyer then had to arrange for import and transportation from that point. An additional advantage for the Seller was if the materials weren’t pulled, they could have them shipped anywhere. Since the goods were never imported into that country they would not need to do any export clearance or get export licenses.

There can be tax and other implications depending upon which rule you select. Except for situations where ownership/title is transferred “on the high seas” or in a free trade zone, the transfer of title/ownership constitutes a sale at the point of delivery. Deliver point that are between the export and import frontiers are considered international sales. Deliveries within a free trade zone are also considered international sales. For international sales the seller does not have to be registered to do business in the country of import. The seller is not subjected to the laws of the country of import. The seller is also not subject to taxes on the sale of the goods. If you were to agree to sell on a DDP basis that means that the seller is responsible for preparation of the import license and import. The seller is responsible for payment of any applicable duties. From a legal perspective doing those actions within that country means that you are conducting business within that country. To conduct business within a country you must be legally registered to do business within that country. The sale within that country becomes a local sale. As a local sale, that subjects the seller to the import country’s laws and income taxes on that sale. Free trade zones are controlled areas prior to import clearance where warehouses are built and materials may be shipped. As part of tax management many companies want to avoid having sales occur within the country of import because of the tax impact.

There can be liability considerations depending upon the term that’s selected. For example in the U.S. the Patriot Act and the Trade Act of 2002, makes the importer liable if the container contains any illicit goods.

The point of sale can subject the party to the laws of the country of sale as the sale is occurring within that location. The exception to that is when delivery occurs and the sale is completed after the export customs frontier and prior to the import customs frontier. In that situation it would become an international sale and the transaction would be governed by only the applicable law and jurisdiction stated in the contract.

The last thing to consider is your knowledge of the laws of the importing country. There are two general types of laws to be concerned with respect to import. One is environmental laws and does the product comply with local environmental laws which will be a condition on import. The second set of laws are homologation laws. Homologation laws deal with compatibility of a product with local systems or networks it may be connected to. For example, a telecommunications product being imported into a country may need to compatible with local communications systems. If you sell on a delivered term within the import country it is your responsibility to ensure compliance so it can be imported. If you sell on a term where the responsibility for import is passed to the buyer before import, it is their responsibility to ensure that what they buy meets both environmental laws and homologation laws.

The advantages of using Incoterms® and specifying the specific Incoterms delivery rule (delivery term) and date of the Incoterms® publication is:

1. In comparing quotes from different Sellers, if they quote a different delivery terms or points, you should take any cost differences into account in deciding who to award the business to as you want the Seller with the lowest landed cost. One thing I also like to do was to have Sellers quote or bid based upon multiple delivery points and have those costs included in their price. That way I can see how competitive their transportation costs would be which may help decide what’s going to create the lowest landed cost for me.

2. From a contracts perspective, when you incorporate them by reference into the contract the responsibilities of each party from the Sellers dock to the buyers dock for all the activities involved such as loading, transport, preparation of paperwork, export, import, customs clearance, payment of duties and insurance are defined for you. If you didn't use them, you would need to address all of the applicable portions of those in your agreement’s delivery section.

3. Each of the responsibilities has a cost involved. Some costs of those costs may be small (such as completing the export declaration). Other responsibilities such as shipping and duties can be significant. When you use the INCOTERM and specify the delivery point it's clear which party is bearing those costs. That way you know what the true cost of the purchase or sale is and who is insuring the shipment against risk of loss or damage while in transit.

I use the 2010 version. When I use them, I do it by including language such as: “The delivery term shall be Ex-Works (as defined in Incoterms 2010) Seller’s Dock in Taipei, Taiwan”. The ICC periodically updates Incoterms and sometimes eliminates or changes definitions as occurred when Incoterms 2010
replaced Incoterms 2000. While Incoterms 2000 is no longer the current Incoterms rule parties to a contract are still free to use whichever version they want. The key in using prior versions or terms that may have been deleted or changed is you need to refer to the specific Incoterms date. For example, "For example delivery shall be DDU as defined in Incoterms 2000" would correctly create a DDU term. If you said DDU Incoterms or DDU Incoterms 2010 you have a problem as DDU (Delivered Duty Unpaid) doesn't exist in Incoterms 2010. New terms of DAP (delivered at place) or DAT (delivered at terminal) exist. In drafting it's best to refer to the specific date of the Incoterms you want to use to eliminate any confusion.

Like anything else, there may be a number of times where a specific INCOTERM does not match your exact needs. INCOTERMS are not fixed in stone so if none of them fit exactly what you need you can still incorporate the closest one to what you need and then modify it to meet your needs. For example:
“The delivery term shall be Ex-Works (as defined in INCOTERMS 2010 except as modified below) Seller’s Dock in Taipei, Taiwan. The modifications to INCOTERMS 2010 shall be ......” An example of a modification is the buyer could agree to pay insurance to a specific point.

There may be times when you are purchasing capital equipment where you want the Seller to manage the installation and start up of the equipment. In those situations you probably need to separate delivery from installation. You can always have title, risk of loss and the delivery point be outside of the country from a sales perspective, and still have the responsibility to install, test and accept be a separate contract. If you did that the sales agreement should have monies retained, a bond or bank guarantee linked to successful installation, test and acceptance.

The selection of the INCOTERM isn’t just about who is responsible for certain actions, you need to consider all the costs and risks in selecting your term and have those and these other factors drive your selection. For example, as a Seller I would never want to agree upon a delivered term at any place other than a free trade zone prior to the import frontier without having title pass far before that. You see I don’t want to be waiting for a product to clear customs before I can invoice and get paid for the product and I don’t want the buyers inability to import the product to impact their obligation to make payment. As a seller if they cannot import a product I might help them sell the product to a customer in another location where it can be imported. As a Buyer, unless I had a legal presence in the country of export that could manage it, I would avoid EXW (ex-works) delivery terms and would want the seller to be responsible for export clearance.

One final comment, your agreement needs to address when title transfers and payment terms as Incoterms does not address those issues.