CPT (Carriage Paid To)

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The purpose of this article is provide a general background to one of the most important terms in international contract drafting, Incoterms 2010 CPT.

General Provisions of CPT

CPT (Carriage Paid To) means that the seller delivers the goods to the carrier of another person nominated by the seller at an agreed place and that the seller must contract and pay the costs of carriage necessary to bring the goods to the named place of destination.  This means that the seller fulfils his obligation to deliver at the point when he hands the goods over to the carrier, not when the goods reach the place of destination.

The most important issue here is to understand that the risk and costs are transferred at different places. The risk passes to the buyer at the point of delivery to the carrier, whereas the costs are covered by the seller up to the agreed place of destination.  This is why It is crucial for the parties to identify as precisely as possible in the contract both the place of deliver and the place of destination.

What if several carriers are used for the carriage to the agreed destination point and the parties failed to agree on a specific point of delivery?  The default position under the Incoterms rules is that the risk passes when the goods have been delivered to the first carrier at the place that the seller chooses (i.e. buyer has no control).   In order to override the default rule, the parties must specify in their contract the stage or place at which the risk should pass to the buyer.

Also, note that if the seller incurs costs under his contract of carriage related to unloading at the named place of destination, the seller cannot recover such costs form the buyer (unless otherwise agreed between the parties).

Seller’s Export Clearance Obligations

CPT requires the seller to clear the goods for export, but not import (including any import duty or paperwork).  The export clearance obligation means that the seller will have to obtain, at his own risk and expense, any export license and carry out all custom formalities necessary for the export of the goods as well as for their transport through any country prior to the point of delivery.

Seller is Obligated to Procure the Carriage Contract, but Not Insurance

While the seller is obligated to procure a contract for the carriage of the goods from the agreed point of delivery to the named place of destination at his own expense, no such obligation for the insurance contract exists.  The seller is not obligated to make a contract of insurance, but the seller must provide the buyer, at the buyer’s request (as well as the buyer’s risk and expense) with information that the buyer needs for obtaining insurance.

Other Seller’s Obligations

In addition to the obligations above, Incoterms 2010 spell out other obligations of the seller under the CPT, such as: delivery obligations, allocation of costs, notices to the buyers, delivery documents, packaging, assistance with information, et cetera.

Let’s look now at the buyer’s obligations.

Buyer’s Obligation to Pay

The buyer’s first and foremost obligation is to pay the price of the goods as provided in the contract of sale.

Buyer’s Import Clearance Obligations

One of the other principal obligations of the buyer is to obtain, at its own risk and expense, any import license or other official authorization and carry out all customs formalities for the import of the goods.

The buyer must also ensure that everything is done in order for the goods to pass through any third country after they have been shipped from the seller’s country.  The chief exception is if such obligation is for the seller’s account under the contract of carriage.

Other Buyer’s Obligations

In addition to the obligation’s above, Incoterms 2010 set forth other important obligations of the buyer under the CPT, including: taking delivery, inspection of goods, notices to the seller, assistance with information and other obligations.   Some of these obligations may have important consequences with respect to the allocation of costs and transfer of risk under the CPT.

Contact Sherayzen Law Office NOW for Help with International Contracts

Obviously, the article above only gives some broad background information on CPT and should not be relied upon to make a legal determination in your particular situation.  Rather, if you are about to engage in a transaction involving an international delivery of goods, contact Sherayzen Law Office for legal help.  Our experienced international contract firm can assist you at every stage of your contract: negotiation, drafting and enforcement. We will provide a rigorous representation of your interests, protect your contractual rights, and strive to ensure that the contemplated transaction goes as smoothly as planned.

Incoterms 2010 FCA

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In a previous essay, I already explained the importance of Incoterms to drafting of international contracts and discussed one of the Incoterms 2010 (EXW). In this article, I will provide a brief overview of another and more common Incoterms 2010 – FCA.

FCA (Free Carrier) means that the seller delivers (the Incoterms 2010 rules specify exactly when such even occurs) the goods to the carrier or another person designated by buyer at the seller’s premises or another named location. If FCA is used, the seller’s obligations are expanded to clearing the export license (where necessary) and otherwise comply with the customs requirements for exports in addition to providing the goods conforming with the contract specifications. There is no such requirements for securing an import license; rather, this is still the buyer’s obligation.

The buyer still makes the contracts of carriage and insurance under FCA. However, there are exceptions to this rule whether based on the buyer’s request or commercial practice. Furthermore, the buyer is not obligated to the seller to make such contract of insurance. If the buyer wishes to obtain the contract of insurance, the seller is obligated to supply the information necessary for the buyer to secure the contract of insurance.

There are fairly complex rules surrounding FCA with respect to the transfer of risk under FCA. Generally, the seller bears all risks of loss and damage up to the point of delivery of goods as specified by the Incoterms 2010 rules. However, there are important exceptions that may modify the main rule and force one of the parties (usually buyer) to bear the burden of risk from an earlier point.

Unlike EXW, the allocation of costs to the seller now explicitly includes all costs related to the customs formalities related to the export of the goods (inlcuding taxes, duties, and other export-related charges). The buyer’s obligation to pay costs is also expanded in certain circumstances, including the failure to provide certain notices to the seller. Likewise, there are specific exceptions to these rules.

It is also important to note here that Incoterms 2010 provide a number of specific requirements with respect to the notices that should be given by the parties to each other, packaging of goods, checking the goods, pre-shipment inspection, security-related information, and other numerous rules.

Whether you are a buyer or a seller, you are well-advised to consult an international contract attorney before you use any of the Incoterms 2010. The description of FCA provided in this essay is fairly basic and for general information only. It should not be relied upon in drafting the contract.

Contact Sherayzen Law Office NOW for Help with International Contracts

If you are about to engage in a transaction involving an international delivery of goods, contact Sherayzen Law Office for legal help. Our experienced international contract firm can assist you at every stage of your contract: negotiation, drafting and enforcement. We will provide a rigorous representation of your interests, protect your contractual rights, and strive to ensure that the contemplated transaction goes as smoothly as planned.

Incoterms 2010: EXW

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Incoterms (the ICC rules on the use of domestic and international trade terms) constitute a critical part of an international sales contract.  Their most important contribution to the contract consist of a clear delineation of the parties’ respective obligations, thereby reducing the risk of misunderstanding and litigation.  Moreover, Incoterms are regularly updated and, therefore, incorporate the recent developments in global trade.  The latest update occurred in 2010 and, today, Incoterms 2010 constitute an invaluable part of an international trade attorney’s vocabulary.

In this essay, I want to provide a very brief overview of one of the most unfamiliar Incoterms 2010 – EXW.

EXW (Ex Works) means that the seller delivers the goods to the buyer when the seller places the goods at the disposal of the buyer on the seller’s premises (or at another specific named location).  The seller does not need to load the goods on any collecting transport.  It also does not need to clear the goods for export.

If EXW is used, the buyer bears all costs and risks when it takes the goods from the agreed point (usually, the seller’s premises).

In other words, among all of the Incoterms 2010, the seller has minimum obligations if EXW is used.

While EXW may appeal to the seller, one should use this Incoterm very carefully.  In addition to the fact that it is not easy to get the buyer to agree to EXW, there are certain disadvantages to using EXW.  For example, the obligation of the buyer to supply to seller the information regarding exports is very limited even though the seller may actually need this information for tax or export control compliance purposes.

Moreover, Incoterms do spell out certain conditions that may actually broaden the seller’s obligations. For example, the seller is obligated to supply the buyer with certain information necessary for security-clearance purposes.

Thus, despite all of its apparent simplicity, EXW should be used only where the situation warrants its use.  It is well advised that a non-professional should not engage in using Incoterms, such as EXW.  Rather, such decisions should be left to an international contract attorney who will have a better understanding of when to utilize EXW.

Contact Sherayzen Law Office for Help with Contract Drafting

If you are about to engage in a transaction involving an international delivery of goods, contract Sherayzen Law Office for legal help.  Our experienced international contract firm can assist you at every stage of your contract: negotiation, drafting and enforcement. We will provide a rigorous representation of your interests, protect your contractual rights, and strive to ensure that the contemplated transaction goes as smoothly as planned.

Incoterms 2010: Most Prominent New Features

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The new Incoterms 2010 replace and update a number of various features of Incoterms 2000. The new rules took effect on January 1, 2011. The following is a very brief description of some of the most prominent changes.

1. Reduced Number of Incoterms

The number of Incoterms rules has been reduced from 13 to 11.  This reduction resulted from replacing four Incoterms 2000 rules with just two (see below).

2. New Incoterm Rules: DAT and DAP

Two new Incoterms rules – DAT and DAP – have replaced the Incoterms 2000 rules DAF, DES, DEQ and DDU

Under both new rules, DAT (Delivered at Terminal) and DAP (Delivered at Place), delivery occurs at a named destination.  In DAT,  at the buyer’s disposal unloaded from the arriving vehicle (as under the former DEQ rule); in DAP, also at the buyer’s disposal, but ready for unloading (as under the former DAF, DES and DDU rules).

The new rules makes DES and DEQ superfluous.  First, the named terminal in DAT may be a port, and, hence, DAT can be used in cases were DEQ once was.  Second, the arriving “vehicle” under DAP may be a ship and the named place of designation may be a port.  Therefore, DAP can be used in place where DES once was.

These new rules, like their predecessors, are “delivered”, with the seller bearing all the costs (with the exception of import clearance, where applicable) and risks involved in bringing the goods to the named place of destination.

3.    New Classification of the Incoterms 2010 rules

The eleven Incoterms 2010 rules are divided into two distinct classes.

a).  Rules of Any Mode(s) of Transport

The first class contains rules for any mode or modes of transport.  These are:

EXW – EX WORKS

FCA – FREE CARRIER

CPT – CARRIAGE PAID TO

CIP – CARRIAGE AND INSURANCE PAID TO

DAT – DELIVERED AT TERMINAL

DAP – DELIVERED AT PLACE

DDP – DELIVERED DUTY PAID

The first class rules can be used irrespective of the mode of transport selected and irrespective of whether one or more than one mode of transport is employed.  They can be used even when there is no maritime transport at all. It is important to remember, however, that these rules can be used in cases where a ship is used for part of the carriage.

b).  Rules for Sea and Inland Waterway transport

The second class contains only rules for sea and inland waterway transport.  These are:

FAS – FREE ALONGSIDE SHIP

FOB – FREE ON BOARD

CFR – COST AND FREIGHT

CIF – COST INSURANCE AND FREIGHT

In the second class of Incoterms 2010 rules, the point of delivery and the place to which the goods are carried to the buyer are both ports (hence the label “sea and inland waterway” rules). Under the FOB, CFR, and CIF, all mention of the ship’s rail as the point of delivery has been omitted in preference for the goods being delivered when they are “on board” the vessel. This more closely reflects modern commercial reality and avoids the rather dated image of the risk swinging to and fro across an imaginary perpendicular line.

3     Rules for domestic and international trade

Incoterms rules have traditionally been used in international sale contracts where goods pass across national borders. In various areas of the world, however, trade blocs, like the European Union, have made border formalities between different countries less significant. Consequently, the subtitle of the Incoterms 2010 rules formally recognizes that they are available for application to both international and domestic sale contracts. Therefore, the Incoterms 2010 rules clearly state in a number of places that the obligation to comply with export/import formalities exists only where applicable.

4     Guidance Notes

A “Guidance Note”has now been attached to each Incoterms 2010 rule. The Guidance Notes explain the fundamentals of each Incoterms rule, such as when it should be used, when risk passes, and how costs are allocated between seller and buyer. Remember – the Guidance Notes are not part of the actual Incoterms 2010 rules, but are intended to help the user accurately and efficiently steer towards the appropriate Incoterms rule for a particular transaction.

5    Electronic communication

Incoterms 2010 seeks to stand in line with the developments in the international commercial reality.  Articles A1/B1 of the Incoterms 2010 rules now give electronic means of communication the same effect as paper communication, as long as the parties so agree or where customary. This formulation facilitates the evolution of new electronic procedures throughout the lifetime of the Incoterms 2010 rules.

6      Insurance

The new Incoterms emphasizes the importance of the insurance coverage by moving the relevant provisions of carriage and insurance from more generic articles A10/B10 (Incoterms 2000) to articles A3/B3 (which deal directly with contracts of carriage and insurance). Furthermore, the language in articles A3/B3 relating to insurance has been altered with a view to clarifying the parties’ obligations in this regard.

7     Security-Related Clearances

In the modern world, the security concerns are ubiquitous.  Therefore, Incoterms 2010 rules have allocated obligations between the buyer and seller to obtain or to render assistance in obtaining security-related clearances, such as chain-of-custody information, in articles A2/B2 and A10/B10 of various Incoterm rules.

8     Terminal Handling Charges

Under Incoterms rules CPT, CIP, CFR, CIF, DAT, DAP, and DDP, the seller must make arrangements for the carriage of the goods to the agreed destination. Usually, while the freight is nominally paid by the seller, it is actually paid for by the buyer as freight costs are normally included by the seller in the total selling price.

Sometimes, the carriage costs will include the costs of handling and moving the goods within port or container terminal facilities and the carrier or terminal operator may well charge these costs to the buyer who receives the goods. In such cases, the buyer will want to avoid paying for the same service twice: once to the seller as part of the total selling price and once independently to the carrier or the terminal operator. The Incoterms 2010 rules seek to avoid this happening by clearly allocating such costs in articles A6/B6 of the relevant Incoterms rules.

9     String sales

String sales may arise in situation where there is a sale of commodities (as opposed to the sale of manufactured goods).  In these cases, the cargo sold several times during transit “down a string”. When this happens, a seller in the middle of the string does not “ship” the goods because these have already been shipped by the first seller in the string. Rather, the seller in the middle of the string performs its obligations towards its buyer by “procuring” goods that have been shipped. Incoterms 2010 rules clarify this situation and specifically state the obligation of the seller to “procure goods shipped” as an alternative to the obligation to ship goods in the relevant Incoterms rules.

Contact Sherayzen Law Office for Legal Help with International Contracts

If you are selling and/or buying goods overseas, you should contact Sherayzen Law Office immediately to get legal help in negotiating and drafting your international contacts.  Our experienced international contract firm will guide you every step of the way in the complex process of international trade, including tax consequences of your international business transactions.

LLC Membership Interest Purchase Agreement: Basic Structure

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This article deals with a situation where a person wishes to purchase a membership interest in the LLC and the agreement has been reached by all parties (i.e. the negotiations are over and there is an agreement with respect to main substantive issues, such as price, timing, assets, et cetera). In particular, I will focus on what an LLC Membership Interest Purchase Agreement (hereinafter “Agreement”) must contain (i.e. the minimum basic structure of the contract) in order to adequately protect the buyer, while providing necessary assurances to the seller.

A. Recitals

Almost every business contract should contain recitals stating who the parties are and what are their intentions with respect to this Agreement.

B. Definition of Terms and Rules of Interpretation

In order to avoid ambiguity, the relevant terms of the contract should be defined. For example, you can state: “ ‘Indemnified Buyer Liabilities’ has the meaning specified in Article V of the Agreement” or “ ‘Membership Interest’ shall mean all of the economic, financial, and governance rights and interests of a member of the Company.” I suggest that the description of parties should be restated in this section of the Agreement, even if the parties are already described in the recitals.

C. Description of the Purchase Price and the Interest Sold

This is one of the most crucial parts of the Agreement. Here, you describe the terms of sale: the purchase price, the interest sold, how the sale will proceed, and the closing terms. Do not forget to indicate the documents that should be presented at the closing, the location and time of the closing, and the form of payment. I also usually include an additional paragraph to describe the effect of the sale.

D. Seller’s Representations and Warranties

This is the article of the Agreement that provides main protections for the buyer. The seller’s representations and warranties vary greatly from contract to contract. At the very least, however, the buyer should make sure that the seller guarantees clear title of its interest, lack of conflict with other seller’s obligations, good standing of the LLC, the company’s compliance with laws, no pending litigation, and intellectual property protection. These protections should be clearly and comprehensively described in the Agreement.

Again, there are many more protections available. I just described the minimum basic that must be in the Agreement.

E. Buyer’s Representations and Warranties

This is the article of the Agreement that provides main protection for the sellers. Many issues are negotiable here, but, at the very minimum, the seller should make sure that the buyer guarantees: the payment and protection of the seller from post-sale litigation. Again, these protections should be clearly and comprehensively described in the Agreement.

F. Indemnification

Indemnification is a complex part of the Agreement. The main idea behind indemnification provisions is to provide relief for the buyer (the seller may also enclose indemnification provisions for limited purposes) in case a problem arises due to the seller’s breach of its obligations, representations, and warranties under the Agreement, misstatement of material fact and failure to adequately disclosure required information. The provision itself is highly complex and involves many other issues, such as litigation, insurance, subrogation, and so on.

G. Consent to Transfer

In order to avoid unnecessary conflicts, it is crucially important to coordinate this Purchase Agreement with other existing documents and contracts. The most frequent issue – the limitations on transfer of a Membership Interest imposed by other organization documents, such as Member Control Agreement or LLC Operating Agreement. Often, these documents require a unanimous consent of other Members to the transfer. This is why the documentation of such consent is indispensable. This is precisely what “Consent to Transfer” provisions are designed to do.

H. General Provisions

“General” does not mean “not important”. On the contrary, general provisions often contain crucial provisions such as: amendment of the Agreement, notification process, consent to jurisdiction and venue, governing law, denial of waivers, and so on. These provisions are significant not only to the operation of the Agreement, but also to dispute management and economics of subsequent litigation. This is why these provisions should be drafted with care.

Contact Sherayzen Law Office for Experienced and Aggressive Legal Representation

This article describes only the basic general structure of an LLC Membership Interest Purchase Agreement. In reality, drafting and negotiating of this type of agreements can be a very complex process that should only be handled by a contract attorney. This is why you should contact Sherayzen Law Office. Our experienced contract firm will represent you during the negotiations, draft the necessary contract provisions, assure adequate documentation and due diligence during closing, and protect your interests throughout this whole process.