The Incoterms rules or International Commercial terms are a series of pre-defined commercial terms published by theInternational Chamber of Commerce (ICC) widely used in international commercial transactions. A series of three-letter trade terms related to common sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods. The Incoterms rules are accepted by governments, legal authorities and practitioners worldwide for the interpretation of most commonly used terms in international trade. As noted at the beginning of this Module, a contract is an allocation of risks and rewards for a given transaction, This Unit will focus on the point at which certain risks pass from the supplier to the buyer. Based on the Incoterms (International Commercial Terms), we will highlight the options that have been developed to address the process of transfer of risks. Class 1 : TERMS FOR ANY MODES OF TRANSPORT, INCLUDING OMNIMODAL TRANSPORT (EXW, FCA, CPT, CIP, DAT, DDP) EXW «EX WORKS» (named place of delivery)
The buyer bears all costs and risks involved in taking the goods from the seller's premises to the desired destination. The seller's obligation is to make the goods available at his premises (works, factory, warehouse). This term represents minimum obligation for the seller. This term can be used across all modes of transport. Ex-works is the term that places minimum responsibility on the seller and maximum responsibility on the buyer.FCA «FREE CARRIER» (named place of delivery)
The seller's obligation is to hand over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place or point. If no precise point is indicated by the buyer, the seller may choose within the place or range stipulated where the carrier shall take the goods into his charge. When the seller's assistance is required in making the contract with the carrier the seller may act at the buyers risk and expense. This term can be used across all modes of transport. CPT «CARRIAGE PAID TO» (named place of destination)
The seller pays the freight for the carriage of goods to the named destination. The risk of loss or damage to the goods occurring after the delivery has been made to the carrier is transferred from the seller to the buyer. This term requires the seller to clear the goods for export and can be used across all modes of transport.CIP «CARRIAGE AND INSURANCE PAID TO» (named place of destination)
The seller has the same obligations as under CPT but has the responsibility of obtaining insurance against the buyer's risk of loss or damage of goods during the carriage. The seller is required to clear the goods for export however is only required to obtain insurance on minimum coverage. This term requires the seller to clear the goods for export and can be used across all modes of transport. Incoterms 2010: CPT and CIP The Incoterms CPT (Cost Paid to) and CIP (Cost and Insurance Paid to) oblige the seller to arrange transport and pay all freight charges to bring the goods to a specified location. Sellers required to pay for freight under CPT and CIP terms (also insurance under CIP), importers sometimes mistakenly believe that the seller is responsible for the goods in transit in the care of the transport operators that they have employed. In CPT and CIP risk passesfrom the seller to the buyer when products are handed over to the first carrier, which means that the buyer bears all risks from then onwards, as well as any other costs occurring after the goods have been delivered at the named destination. The seller is only responsible for the goods up to the point where they are handed over to the first carrier. These terms are suitable for any form of transport, but particularly multimodal transport where several changes of transporter take place during the journey to the buyer’s premises.Under the Incoterms CPT and CIP, the supplier must arrange carriage and, in CIP, insurance.DAP «DELIVERED AT PLACE» (named place of destination)
Seller delivers the goods when they are placed at the disposal of the buyer on the arriving means of transport ready for unloading at thenamed place of destination. Parties are advised to specify as clearly as possible the point within the agreed place of destination, because riskstransfer at this point from seller to buyer. If the seller is responsible for clearing the goods, paying duties etc., consideration should be given to using the DDP term.
- Seller bears the responsibility and risks to deliver the goods to the named place
- Seller is advised to obtain contracts of carriage that match the contract of sale
- Seller is required to clear the goods for export
- If the seller incurs unloading costs at place of destination, unless previously agreed they are not entitled
to recover any such costs Importer is responsible for effecting customs clearance, and paying any customs duties DAT «DELIVERED AT TERMINAL» (named place of destination)
Seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. "Terminal" includes quay, warehouse, container yard or road, rail or air terminal. Both parties should agree the terminal and if possible a point within the terminal at which point the risks will transfer from the seller to the buyer of the goods. If it is intended that the seller is to bear all the costs and responsibilities from the terminal to another point, DAP or DDP may apply.DDP «DELIVERED DUTY PAID» (named place of destination)
The seller is responsible for delivering the goods to the named place in the country of importation, including all costs and risks in bringing the goods to import destination. This includes duties, taxes and customs formalities. This term may be used irrespective of the mode of transport. Incoterms 2010: DAP, DAT and DDP Under these three Incoterms 2010, the seller is obliged to provide or organise all transport and related services, pay export duties and arrange export clearance of the goods and bear all costs and risks to make the goods available for delivery to the buyer at a nominated destination.
Under the DAP, DAT and DDP terms, the supplier must deliver the goods at the designated point at the end of the journeyClass 2: TERMS for SEA AND INLAND WATERWAYS (FAS, FOB, CFR and CIF)Some precautions have to be taken when transport has to be done by sea or inland waterways. A buyer should carefully examine whether the transport routing provided by the supplier, the carrier's equipment and method of unloading, andthe number of shipments to complete delivery of the full contract conforms to his requirements and standards. The type of vessel nominated and chartered becomes particularly important if the buyer wishes to be able to sell the cargo to a third party before it arrives, or alternatively, change the final destination port.A final point to remember under these four Incoterms is that the buyer may incur additional costs if he fails to give prompt notice of the time of shipping or the port of destination to the supplier. FAS «FREE ALONGSIDE SHIP» (named place 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 place of shipment)
The seller must load themselves 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 place of destination)
The seller must pay the costs and freight required in bringing the goods to the named port of destination. The risk of loss or damage is transferred from seller to buyer when the goods pass over the ship's rail in the port of shipment. The seller is required to clear the goods for export. This term should only be used for sea or inland waterway transport.CIF «COST INSURANCE AND FREIGHT» (named place of destination)
The seller has the same obligations as under CFR however he is also required to provide insurance against the buyer's risk of loss or damage to the goods during transit. The seller is required to clear the goods for export. This term should only be used for sea or inland waterway transport Incoterms 2010: CFR and CIF 6.2 Transfer of RiskAs we have seen, Incoterms not only describe seller’s and buyer’s obligations and specify the point when the responsibilities for the transportation costs shift from the seller to the buyer, but also specify the point when the risk associated with transportation transfers from the seller to the buyer. Foreseeing the transfer of risk is a key aspect of preparing the contract. Through the use of Incoterms the risk of loss and damage can be shifted in different ways between the supplier and the buyer.When products are damaged or lost that are “at the seller’s risk”, the seller may be prevented from completing its obligation to deliver according to the terms of the sales contract. In this situation, the buyer will not have to pay the purchase price and may appeal to legal remedies available to recover any losses incurred because of the default.
When damage or destruction occurs to products “at the buyer’s risk”, the buyer will have to bear the loss. The buyer must still fulfill its obligations to pay the seller. It will be up to the buyer to claim for damages withinsurance companies or transport operators, as appropriate. Such claims may involve both contracts for sale and carriage as well as mandatory international legal.