The set of rules for delivery terms – INCOTERMS – is a useful tool for all traders engaged in international transactions. They allow the exact definition of the extent of the parties’ obligations in relation to one of the essential components of the performance of the contract: DELIVERY.
INCOTERMS have been created to avoid misunderstandings and confusion between companies and represent international trade terms what defines and states the framework in which the buyer and seller perform their role in the transport of goods, ownership of goods and goods insurance. The first set of INCOTERMS rules was published by the International Chamber of Commerce (ICC) in 1936, followed by changes and updates in 1953, 1967, 1990, 2000, the last set of rules being published in January 2011 and named INCOTERMS 2010. The International Chamber of Commerce has already begun consultations for a revised edition, which will be called INCOTERMS 2020.
The INCOTERMS rules focus on two key aspects of the transaction:
1) Which party – buyer or seller – is responsible for organizing and paying for transportation (and associated activities such as loading or unloading), import and export procedures, goods insurance, etc.
2) In which point of the transportation is happening the transfer of responsibility from seller to buyer? This becomes important if the goods are lost or damaged during transport.
By accepting the use of an Incoterms regulation, the buyer and the seller obtain precision and clarity in defining the reciprocity of the obligations and responsibilities for delivering the goods. It is also important to understand that the Incoterms rules do not attempt to cover all aspects of the commercial agreement – there are important issues such as the transfer of the title and the way the goods are paid, for which the Incoterms rules do not have explicit rules.
INCOTERMS DO NOT…
- determine ownership or transfer title to the goods, nor evoke payment terms.
- apply to service contracts, nor define contractual rights or obligations (except for delivery) or breach of contract remedies.
- protect parties from their own risk or loss, nor cover the goods before or after delivery.
- specify details of the transfer, transport, and delivery of the goods. Container loading is NOT considered packaging, and must be addressed in the sales contract.
- represent a law, and there is NO default Incoterm!
The clauses applicable to all modes of transport (irrespective of the mode of transport and their number)
EXW (Ex Works): the merchandise is made available to the buyer at the seller’s premises; the buyer is responsible for the payment of the transport and the cost of the insurance;
FCA (Free Carrier): the seller deliver the goods to the carrier called by the buyer, in a predetermined place, with the clearance for export;
CPT (Carriage Paid To): the seller pays the cost of carriage to the agreed destination; the risks of loss or damage to the goods, or any other risks, pass to the seller at the time of delivery of the goods to the first carriage; the seller has the obligation to ensure the export clearance;
CIP (Carriage and Insurance Paid To): the seller has the same obligations as the CPT clause and in addition, covers and secures the goods for loss or damage during transport; the seller has the obligation to ensure the export clearance;
DAT (Delivered at Terminal): the seller assures the delivery and unloading of the goods in the destination terminal agreed with the buyer, where the destination terminal can be: quay, warehouse, terminal or yard; the seller has the obligation to cover the export clearance as well as the delivery and unloading costs at the agreed destination terminal; demurrage or detention charges may apply to seller;
DAP (Delivered at Place): the seller delivers the goods at the place agreed with the buyer; the seller has the obligation for export clearance and covers all transportation, delivery and unloading costs at the agreed destination; DAP replace old terms DAF and DDU;
DDP (Delivered Duty Paid): delivery is considered done when the goods was shipped at the buyer’s agreed destination place; the seller is responsible to cover all costs and risks associated with the delivery of the goods in the agreed place, including customs duties, both export and import at the place of destination, as well as other legal import clearance, duties and taxes;
Clauses applicable for sea and inland waterway transport
FAS (Free Alongside Ship): the seller has fulfilled his delivery obligation when the goods are alongside the ship (on quay or barges), at the named port terminal of loading; seller is responsible for export clearance;
FOB (Free On Board): the seller has fulfilled his delivery obligation when the goods passes the ship’s rail at the named port terminal of loading;
CFR (Cost and Freight): the seller is responsible for paying the costs necessary to bring the goods to the agreed port of destination, but the risk of loss or deterioration of the goods is taken over by the seller when the goods pass the ship’s rail at the named port terminal of loading;
CIF (Cost, Insurance and Freight): the seller has the same obligations as the CFR clause and in addition covers also the insurance of goods for loss or damage during transport; also implies the seller’s obligation to cover the export clearance;