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By the 1920s, commercial traders had developed a set of trade
terms to describe their rights and liabilities with regard to
the sale and transport of goods. These trade terms consisted of
short abbreviations for lengthy contract provisions. Unfortunately,
there was no uniform interpretation of them in all countries,
and therefore misunderstandings often arose in cross-border transactions.
To improve this aspect of international trade, the International
Chamber of Commerce (ICC) in Paris developed INCOTERMS (INternational
COmmercial TERMS), a set of uniform rules for the interpretation
of international commercial terms defining the costs, risks, and
obligations of buyers and sellers in international transactions.
First published in 1936, these rules have been periodically revised
to account for changing modes of transport and document delivery.
The current version is Incoterms 2000.
Use
of Incoterms
Incoterms are not implied into contracts for the sale of goods.
If you desire to use Incoterms, you must specifically include
them in your contract. Further, your contract should expressly
refer to the rules of interpretation as defined in the latest
revision of Incoterms, for example, Incoterms 2000, and
you should ensure the proper application of the terms by additional
contract provisions. Also, Incoterms are not "laws."
In case of a dispute, courts and arbitrators will look at: 1)
the sales contract, 2) who has possession of the goods, and 3)
what payment, if any, has been made. See International Contracts,
also by World Trade Press.
Incoterms Do . . .
Incoterms
2000 may be included in a sales contract if the parties desire
the following:
| 1. |
To
complete a sale of goods. |
| 2. |
To
indicate each contracting party’s costs, risks, and obligations
with regard to delivery of the goods as follows: |
| |
| a. |
When
is the delivery completed? |
| b. |
How
does a party ensure that the other party has met that
standard of conduct? |
| c. |
Which
party must comply with requisite licenses and government-imposed
formalities? |
| d. |
What
are the mode and terms of carriage? |
| e. |
What
are the delivery terms and what is required as proof
of delivery? |
| f. |
When
is the risk of loss transferred from the seller to the
buyer? |
| g. |
How
will transport costs be divided between the parties?
|
| h. |
What
notices are the parties required to give to each other
regarding the transport and transfer of the goods? |
|
| 3. |
To
establish basic terms of transport and delivery in a short
format. |
Incoterms
Do Not . . .
Incoterms
2000 are not sufficient on their own to express the full intent
of the parties. They will not:
1.
Apply to contracts for services.
2.
Define contractual rights and obligations other than for delivery.
3.
Specify details of the transfer, transport, and delivery of the
goods.
4.
Determine how title to the goods will be transferred.
5.
Protect a party from his/her own risk of loss.
6.
Cover the goods before or after delivery.
7.
Define the remedies for breach of contract.
Tip:
Incoterms can be quite useful, but their use has limitations.
If you use them incorrectly, your contract may be ambiguous, if
not impossible to perform. It is therefore important to understand
the scope and purpose of Incoterms–when and why you might
use them–before you rely on them to define such important
terms as mode of delivery, customs clearance, passage of title,
and transfer of risk.
Organization of Incoterms
Incoterms
are grouped into four categories:
1. The
"E" term (EXW)
– The
only term where the seller/exporter makes the goods available
at his or her own premises to the buyer/importer.
2. The
"F" terms (FCA, FAS and FOB) – Terms where the seller/exporter
is responsible to deliver the goods to a carrier named by the
buyer.
3. The
"C" terms (CFR, CIF, CPT and CIP)
– Terms
where the seller/exporter/manufacturer is responsible for contracting
and paying for carriage of the goods, but not responsible for
additional costs or risk of loss or damage to the goods once they
have been shipped. C terms evidence "shipment" (as opposed to
"arrival") contracts.
4. The
"D" terms (DAF, DES, DEQ, DDU and DDP)
– Terms
where the seller/exporter/manufacturer is responsible for all
costs and risks associated with bringing the goods to the place
of destination. D terms evidence "arrival" contracts.
The following table sets out these categories.
GROUP E
Departure
|
EXW |
Ex Works |
(...named
place) |
GROUP F
MainCarriage
Unpaid |
FCA |
Free Carrier |
(...named
place) |
| FAS |
Free
Alongside Ship |
(...named
port of shipment) |
| FOB |
Free
On Board |
(...named
port of shipment) |
GROUP C
MainCarriage
Paid |
CFR |
Cost
and Freight |
(...named
port of destination) |
| CIF
|
Cost,
Insurance and Freight |
(...named
port of destination) |
| CPT
|
Carriage
Paid To |
(...named
port of destination) |
| CIP
|
Carriage
and Insurance Paid To |
(...named
port of destination) |
GROUP D
Arrival
|
DAF |
Delivered
at Frontier |
(a
named place) |
| DES |
Delivered
Ex Ship |
(...named
port of destination) |
| DEQ |
Delivered
Ex Quay |
(...named
port of destination) |
| DDU
|
Delivered
Duty Unpaid |
(...named
port of destination) |
| DDP
|
Delivered
Duty Paid |
(...named
port of destination) |
Mode of Transport
Not all Incoterms are appropriate for all modes of transport.
Some terms were designed with sea vessels in mind while others
were designed to be applicable to all modes. The following table
sets out which terms are appropriate for each mode of transport.
ALL MODES OF TRANSPORT INCLUDING MULTIMODAL
| EXW |
Ex
Works |
(...named
place) |
| FCA |
Free
Carrier |
(...named
place) |
| CPT |
Carriage
Paid To |
(...named
port of destination) |
| CIP |
Carriage
and Insurance Paid To |
(...named
port of destination) |
| DAF |
Delivered
at Frontier |
(...named
place) |
| DDU
|
Delivered
Duty Unpaid |
|
| DDP
|
Delivered
Duty Paid |
|
SEA
AND INLAND WATERWAY TRANSPORT
| FAS |
Free
Alongside Ship |
(...named
port of shipment) |
| FOB
|
Free
On Board |
(...named
port of shipment) |
| CFR
|
Cost
and Freight |
(...named
port of destination) |
| CIF |
Cost,
Insurance and Freight |
(...named
port of destination) |
| DES |
Delivered
Ex Ship |
(...named
port of destination) |
| DEQ |
Delivered
Ex Quay |
(...named
port of destination) |
Helpful
Definitions
Pre-carriage
– The initial transport
of goods from the seller's premises to the main port of shipment.
Usually by truck, rail or on inland waterways.
Main
carriage – The primary
transport of goods, generally for the longest part of the journey
and generally from one country to another. Usually by sea vessel
or by airplane, but can be by truck or rail as well.
On-carriage
– Transport from the port
of arrival in the country of destination to the buyer's premises.
Usually by truck, rail or on inland waterways.
Notes on Incoterms
1. Underlying
Contract –
Incoterms
were designed to be used within the context of a written contract
for the sale of goods. Incoterms, therefore, refer to the contract
of sale, rather than the contract of carriage of the goods. Buyers
and sellers should specify that their contract be governed by
Incoterms 2000.
2. EXW
and FCA –
If you buy Ex Works or Free Carrier you will need to arrange for
the contract of carriage. Also, since the shipper will not receive
a bill of lading, using a letter of credit requiring a bill of
lading will not be possible.
3. EDI:
Electronic Data Interchange – It is increasingly
common for sellers to prepare and transmit documents electronically.
Incoterms provides for EDI so long as buyers and sellers agree
on their use in the sales contract.
4. Insurable
Interest –
Note that in many cases either the buyer or the seller is
not obligated to provide insurance. In a number of cases
neither party is obligated to provide insurance. However, both
the seller and buyer should be aware that they may have insurableinterest
in the goods and prudence dictates purchase of insurance coverage.
5. Customs
of the Port or Trade –
Incoterms are an attempt to standardize trade terms for all
nations and all trades. However, different ports and different
trades have their own customs and practices. It is best if specific
customs and practices are specified in the sales contract.
6. Precise
Point of Delivery –
In some cases it may not be possible for the buyer to name the
precise point of delivery at contract. However, if the buyer does
not do so in a timely manner, it may give the seller the option
to make delivery within a range of places that is within the terms
of the contract. For example, the original terms of sale may state
CFR Port of Rotterdam. The Port of Rotterdam is huge and the buyer
may find that a particular point within the port is best and should
so state in the sales contract and in the trade term. Also, since
the buyer becomes liable for the goods once they arrive, he or
she may be responsible for unloading, storage and other charges
once the goods have been made available at the place named.
7. Export
and Import Customs Clearance – It is usually desirable
that export customs formalities be handled by the seller and import
customs formalities be handled by the buyer. However, some trade
terms require that the buyer handle export formalities and others
require that the seller handle import formalities. In each case
the buyer and seller will have to assume risk from export and
import restrictions and prohibitions. In some cases foreign exporters
may not be able to obtain import licenses in the country of import.
This should be researched before accepting final terms.
8. Added
Wording – It is possible, and in many cases desirable,
that the seller and buyer agree to additional wording to an Incoterm.
For example, if the seller agrees to DDP terms, agreeing to pay
for customs formalities and import duties, but not for VAT (Value
Added Taxes) the term "DDP VAT Unpaid" may be used.
9. Packing
– It is the responsibility of the seller to provide
packaging unless the goods shipped are customarily shipped in
bulk (usually commodities such as oil or grain). In most situations
it is best if the buyer and seller agree in the sales contract
on the type and extent of packing required. However, it may not
be possible to know beforehand the type or duration of transport.
As a result, it is the responsibility of the seller to provide
for safe and appropriate packaging, but only to the extent that
the buyer has made the circumstances of the transport known to
the seller beforehand.
If
the seller is responsible for packing goods in an ocean or air
freight container it is also his responsibility to pack the container
properly to withstand shipment.
10. Inspection
– These are several issues related to inspections:
a) the seller is responsible for costs of inspection to make certain
the quantity and quality of the shipment is in conformity with
the sales contract, b) pre-shipment inspections as required by
the export authority are the responsibility of the party responsible
for export formalities, c) import inspections as required by the
import authority are the responsibility of the party responsible
for import formalities, and d) third-party inspections for independent
verification of quality and quantity (if required) are generally
the responsibility of the buyer. The buyer may require such an
inspection and inspection document as a condition of payment.
11. Passing
of Risks and Costs – The general rule is that
risks and costs pass from the seller to the buyer once the buyer
has delivered the goods to the point and place named in the trade
term.
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