Incoterms, Exploring International Commercial Terms
INCOTERMS (International Commercial Terms) are internationally recognized trade terms used by buyers and sellers for prevention of confusion in foreign trade contracts. ICC (International Chamber of Commerce) developed them in 1936 and updates them periodically.
The latest version was published in 2010 and referred to as INCOTERMS 2010.
Incoterms 2010 is the eighth pre-defined set of international contract terms. There are 11 pre-defined terms subdivided into two categories based on method of delivery. The categories are:
|Rules for any transport mode||Rules for sea & inland waterway|
Terminology and the rules and duties are explained in detail below.
An entity which places an order to purchase goods. In international trade, a buyer is usually the importer of goods. Hereafter, Buyer and Importer will be used interchangeably.
An entity which accepts an order and supplies goods to complete the order in exchange for money. In international trade, a seller is usually the exporter of goods. Hereafter, Seller and Exporter will be used interchangeably.
Any place used for transferring goods between vehicles or other transportation modes – a quay, warehouse, container yard or transport hub.
Duties of buyer/seller according to Incoterms:
EXW – Ex Works:
The seller produces the goods and hands them to the buyer. The buyer is responsible for loading them onto a vehicle (even if the seller is in a better position to do this); for all arising costs after collection of goods; for all export clearances and onward transport.
When using EXW, the exporter/seller has the least responsibility, as the exporter only has to ensure the goods are available and packaged, at (usually) the seller’s depot or factory.
Although, the seller may be involved in completing the export declaration and clearance processes, and genuinely cannot leave these to the buyer. This rule places the highest risk and responsibility on the buyer’s side.
FCA – Free Carrier:
The seller clears the goods for export, pays for carriage to the point of delivery, hands them over to the first carrier (chosen by the buyer) at the named place. The risk transfers from seller to buyer when the goods are transported to the first carrier. The buyer assumes all risks and costs after the goods have been delivered at the agreed delivery point.
FCA is the rule used for containerized goods in which the buyer arranges for the main carriage.
When the named place is the premises of the seller, then the seller loads the goods onto the truck. This is a key distinction from EXW (Ex Works) wherein the buyer is responsible for loading the goods.
FAS – Free Alongside Ship:
The seller is responsible for placing the goods alongside the ship at the named port and clear the goods for export, at which point risk transfers to the buyer. The buyer is responsible for loading the goods and all costs thereafter.
FAS is ideal only for maritime transport but not for containerized multimodal sea transport. It is widely used for heavy-lift or bulk cargo. For containerized goods, FCA (Free Carrier) is suitable.
FOB – Free On Board:
The seller is responsible for loading the goods on board a vessel chosen by the buyer. The seller obtains export clearance for the goods, loads them on board. At this stage, the risk passes to the buyer (who bears all costs thereafter).
The term is applicable only for maritime and inland waterway transport and should not be used for multimodal sea transport in containers.
CFR – Cost and Freight:
It is used for situations where the seller has direct access to the vessel for loading, e.g, non-containerized goods or bulk cargo. Seller is responsible for bringing the goods to the port of destination and pays the costs and freight. However, the risk is transferred to the buyer after the goods are loaded onto the vessel.
It is for maritime transport only and Insurance for the goods is not included in the rule. For containerized goods, look into ‘Carriage Paid to CPT’ instead.
CIF – Cost, Insurance and Freight:
Similar to CFR and the only addition is the seller has to procure and pay for the insurance. Seller organizes and pays for the transportation to named port, delivers goods, clears them for export and loads them on board the vessel. Once the goods are loaded on board, before the main carriage takes place, the risk transfers from seller to the buyer.
Seller also insures the goods and pays for the carriage to the named port. However, the rule only requires a minimum level of coverage, which in some cases may be commercially unrealistic. Therefore the level of coverage may need to be addressed elsewhere in the commercial agreement.
DAT – Delivered at Terminal:
Seller pays for carriage to the terminal, except for costs towards import clearance, and is responsible until for unloading the goods at the terminal. Risk transfers from seller to buyer once the goods have been unloaded. The buyer is responsible for import clearance procedures and pays any applicable local taxes or import duties.
CPT – Carriage Paid To:
The seller is responsible for arranging carriage to the named place, but does not have to insure the goods to the named place. Risk transfers from seller to buyer at the point where delivery of the goods is done and the goods are taken in charge by a carrier. The buyer has to arrange insurance cover for the main carriage, from the point where the goods are taken in charge by the carrier.
DAP – Delivered At Place:
Seller pays for carriage to a place chosen by the buyer, except for costs related to import clearance, and assumes all risks up to the point that the goods are delivered at the place. The buyer is responsible for unloading the goods. A critical difference from DAT (Delivered At Terminal) DAT, where the seller is responsible for unloading.
CIP – Carriage and Insurance Paid to:
The containerized transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are passed over to the first carrier.
Although the seller has to arrange for insurance for the journey, the rule only requires a minimum coverage level, which in some cases may be commercially unrealistic. Hence the level of cover has to be addressed elsewhere in the commercial agreement.
DDP – Delivered Duty Paid:
Seller is responsible for the delivery of goods to the destination in the country of the buyer. In this case, the seller pays for all expenses till goods reach the destination, including import duties and taxes. This rule places the utmost responsibilities on the seller and least responsibilities on the buyer.
This is the only rule that obliges the seller to obtain import clearance and pay taxes and/or import duties. These requirements can be highly problematical for the seller as the risk is highest.
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