INTRODUCTION
When getting started with global trading & sourcing
there are a couple of key terms you need to know related to logistics &
shipping, today we're explaining the concept of Incoterms (International
Commercial Terms) and the meaning of these terms:
Incoterms short for "International Commercial
Terms" are standard trade definitions devised and published by the
International Chamber of Commerce (ICC). These terms are used in international
sales contracts to clearly establish the basis on which the seller will invoice
the buyer. The terms identify the additional costs, over and above the cost of
the goods, that the seller can include in their invoice. Their use in sales
contracts act as a form of legal shorthand to clearly identify the
responsibilities of both parties.
The ICC introduced the first version of Incoterms in 1936.
Since then, ICC expert lawyers and trade practitioners have updated them 8 times,
the most recent being the eighth version—Incoterms 2010—having been published
on January 1, 2011. "Incoterms" is a registered trademark of the ICC.
Everybody involved in international trade needs to be familiar with Incoterms
if they are to be successful.
THE VALUE OF USING INCOTERMS IN INTERNATIONAL TRADE
Incoterms define the buyer's and seller's responsibility for
arranging and paying for transportation, documentation, custom's clearance and
transport insurance.
Incoterms are an internationally recognised code that makes
it easier for traders in different countries to conduct business with one
another.
The correct use of Incoterms provides the legal certainty
upon which mutual confidence between business partners can be based.
ELEVEN INCOTERMS YOU NEED TO KNOW (INCOTERMS-2010)
Rules for Any Mode(s) of Transport
The seven rules defined by Incoterms 2010 for any mode(s) of
transportation are:
EXW – Ex Works (named place of delivery)
The seller makes the goods available at its premises. This
term places the maximum obligation on the buyer and minimum obligations on the
seller. The Ex Works term is often used when making an initial quotation for
the sale of goods without any costs included. EXW means that a seller has the
goods ready for collection at his premises (works, factory, warehouse, plant)
on the date agreed upon. The buyer pays all transportation costs and also bears
the risks for bringing the goods to their final destination. The seller doesn't
load the goods on collecting vehicles and doesn't clear them for export. If the
seller does load the good, he does so at buyer's risk and cost. If parties wish
seller to be responsible for the loading of the goods on departure and to bear
the risk and all costs of such loading, this must be made clear by adding
explicit wording to this effect in the contract of sale.
FCA – Free Carrier (named place of delivery)
The seller hands over the goods, cleared for export, into
the disposal of the first carrier (named by the buyer) at the named place. The
seller pays for carriage to the named point of delivery, and risk passes when
the goods are handed over to the first carrier.
CPT - Carriage Paid To (named place of destination)
The seller pays for carriage. Risk transfers to buyer upon
handing goods over to the first carrier.
CIP – Carriage and Insurance Paid to (named place of
destination)
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 handed over to the first carrier.
DAT – Delivered at Terminal (named terminal at port or place
of destination)
Seller pays for carriage to the terminal, except for costs
related to import clearance, and assumes all risks up to the point that the
goods are unloaded at the terminal.
DAP – Delivered at Place (named place of destination)
Seller pays for carriage to the named place, except for
costs related to import clearance, and assumes all risks prior to the point
that the goods are ready for unloading by the buyer.
DDP – Delivered Duty Paid (named place of destination)
Seller is responsible for delivering the goods to the named
place in the country of the buyer, and pays all costs in bringing the goods to
the destination including import duties and taxes. This term places the maximum
obligations on the seller and minimum obligations on the buyer.
RULES FOR SEA AND INLAND WATERWAY TRANSPORT
The four rules defined by Incoterms 2010 for international trade
where transportation is entirely conducted by water are:
FAS – Free Alongside Ship (named port of shipment)
The seller must place the goods alongside the ship at the
named port. The seller must clear the goods for export. Suitable only for
maritime transport but NOT for multimodal sea transport in containers (see
Incoterms 2010, ICC publication 715). This term is typically used for
heavy-lift or bulk cargo.
FOB – Free on Board (named port of shipment)
The seller must load the goods on board the vessel nominated
by the buyer. Cost and risk are divided when the goods are actually on board of
the vessel (this rule is new!). The seller must clear the goods for export. The
term is applicable for maritime and inland waterway transport only but NOT for
multimodal sea transport in containers (see Incoterms 2010, ICC publication
715). The buyer must instruct the seller the details of the vessel and the port
where the goods are to be loaded, and there is no reference to, or provision
for, the use of a carrier or forwarder. This term has been greatly misused over
the last three decades ever since Incoterms 1980 explained that FCA should be
used for container shipments.
CFR – Cost and Freight (named port of destination)
Seller must pay the costs and freight to bring the goods to
the port of destination. However, risk is transferred to the buyer once the
goods are loaded on the vessel (this rule is new!). Maritime transport only and
Insurance for the goods is NOT included. This term is formerly known as CNF
(C&F).
CIF – Cost, Insurance and Freight (named port of
destination)
Exactly the same as CFR except that the seller must in
addition procure and pay for the insurance. Maritime transport only.
DUTIES OF BUYER/SELLER ACCORDING TO INCOTERMS 2010
PREVIOUS TERMS FROM INCOTERMS 2000 THAT WERE ELIMINATED FROM
INCOTERMS 2010
DAF – Delivered At Frontier (named place of delivery)
This term can be used when the goods are transported by rail
and road. The seller pays for transportation to the named place of delivery at
the frontier. The buyer arranges for customs clearance and pays for
transportation from the frontier to his factory. The passing of risk occurs at
the frontier.
DES – Delivered Ex Ship (named port of delivery)
Where goods are delivered ex ship, the passing of risk does
not occur until the ship has arrived at the named port of destination and the
goods made available for unloading to the buyer. The seller pays the same
freight and insurance costs as he would under a CIF arrangement. Unlike CFR and
CIF terms, the seller has agreed to bear not just cost, but also Risk and Title
up to the arrival of the vessel at the named port. Costs for unloading the
goods and any duties, taxes, etc… are for the Buyer. A commonly used term in
shipping bulk commodities, such as coal, grain, dry chemicals - - - and where
the seller either owns or has chartered, their own vessel.
DEQ – Delivered Ex Quay (named port of delivery)
This is similar to DES, but the passing of risk does not occur
until the goods have been unloaded at the port of destination.
DDU – Delivered Duty Unpaid (named place of destination)
This term means that the seller delivers the goods to the
buyer to the named place of destination in the contract of sale. The goods are
not cleared for import or unloaded from any form of transport at the place of
destination. The buyer is responsible for the costs and risks for the
unloading, duty and any subsequent delivery beyond the place of destination.
However, if the buyer wishes the seller to bear cost and risks associated with
the import clearance, duty, unloading and subsequent delivery beyond the place
of destination, then this all needs to be explicitly agreed upon in the
contract of sale.
