In their sales contract buyer and seller agree on the conditions of sale : payment on the one hand and delivery on the other. These terms determine at what precise location the ownership of the goods is transferred from seller to buyer and when/how payment will be done. In international trade a universal set of rules on delivery has been developed over the years. It is called INCOTEMRS.
Initially created in 1936 by the International Chamber of Commerce (ICC) and have been periodically revised (Incoterms 2010 is the 8th revision)
Incoterms reflect world-wide trade practices, as practices change, Incoterms are revised
The Incoterms rules are a perfect example of an efficient standardization of an international business tool. Their day-to-day use in international sales contracts brings legal certainty to business transaction while simplifying the drafting of international contracts.
PurposeClarity in interpretation of terms and rulesMinimization of lossesBase of contract of saleDocumentary evidenceSolid base to the contract
Key DefinitionsWhat is Delivery?
It is not always:When the goods arrive in your customers hands orWhen the goods leave your dockDefined the same in all countriesYou must know your contract and your IncotermNote: A Purchase Order and a matching Acknowledgement will constitute a contract if there isnt a separate stand-alone contract related to the transaction.
As defined in Incoterms 2010, it is used to indicate where the risk of loss of or damage to the goods passes from the seller to the buyer.
Transportation DefinitionsPre-carriage: inland transportation on the sellers sideDomestic: from the place where the shipment starts to any subsequent transportation carriageInternational: from the place where the shipment starts to the departure point on the sellers side
Main Carriage: Domestic: subsequent transportation beyond pre-carriageInternational: transportation from the point of departure on the sellers side to the arrival pint on the buyers sideOn-carriage:Domestic: subsequent transportation beyond main carriageInternational: transportation from the arrival pint on the buyers side
Transportation DefinitionsDoor to Door Contract of carriage that includes pre-carriage, main-carriage and on-carriage by the same carrier
Door to (Air) Port:Contract of carriage including pre-carriage and main-carriage to airport or ocean port or truck terminal port or rail port
(Air) Port to (Air) Port:Contract of carriage for main carriage only
(Air) Port to Door:Contract of carriage including main carriage and on-carriage
Type of Transportation?Company A
Company BDoor to Door one contract for all carriage (pre-, main, and on-carriage)
Type of Transportation?Company A
Door to Port contract for pre-carriage and main-carriage Company B responsible for arranging pick up at Arrival Airport
A Few More Definitions..Omni-modal: Used with terms that use all modes of transportation (truck, airplane, vessel, train)
Marine-restricted: Terms that only apply to carriage by vessel
Shipment Contract: sales/purchase contract where the sellers responsibility ends when goods are handed over to the first carrier
Arrival Contract: sales/purchase contract where sellers responsibility ends when goods have arrived at agreed place
The packaging of the goods to comply with any requirements under the contract of sale.
The packaging of goods so that they are fit for transportation.
The contents of the packaged goods within a container or other means of transport.Only Definition 1 & 2 are addressed in Incoterms 2010. Definition 3 must be addressed within the contract between the parties.
What Questions to Ask?Who furnishes the goods?Who packages the goods in a manner suitable for shipment (export)?Who moves the goods from the sellers factory to a port, airport, or border crossing in the sellers country?Who arranges for export clearance in the sellers country (if applicable)?Who arranges for main carriage (international transportation) from the departure port to the arrival port?Who pays for main carriage?Who insures the shipment?Who arranges for import clearance?Who pays import duties?Who pays for on-carriage from the arrival port to the delivery destination?Who arranges and pays for country-specific documentation (e.g., consular invoices, inspection reports, licenses)?
Incoterms 2000Group E Departure EXW Ex WorksGroup F Main carriage unpaid FCAFASFOBFree Carrier Free alongside shipFree on boardGroup C Main carriage paidCFRCIFCPTCIPCost and FreightCost, Insurance, FreightCarriage Paid toCarriage and Insurance Paid toGroup DArrivalDAFDESDEQDDUDDPDelivered at FrontierDelivered Ex ShipDelivered Ex QuayDelivered Duty UnpaidDelivered Duty Paid
The Incoterms divide costs and risksThe Incoterms of trade have been designed to clarify obligations of both parties, the buyer and the seller. Principally, these are:The seller must: Provide the goods according to the contractThe buyer must: Pay the price as agreed upon
In order to finalise the transaction, both parties will have to perform certain tasks, like:
Arrange for licences, Arrange for licences,Authorisation and formalities Authorisation and formalitiesArrange for shipment Arrange for shipment Arrange for delivery Accept deliveryBear the risks for his activities Bear the risks involved in his contractual activities.
EXW = EX WORKS ( named place) Cost of Goods plus cost of Export packing and markingIn this term the seller delivers the goods by keeping it ready in deliverable state at the seller's place or another named place. This named place can be factory/godown or manufacturing unit. In this term seller does not clear the goods for exports nor goods are loaded on vehicle.
FCA = FREE CARRIER ( named place) Cost of Goods plus cost of Getting goods to railway station or truck for transportation to portThis term refers to seller's responsibility to deliver the goods, cleared for export, to the carrier appointed by the buyer at the named place. In this term the place of delivery is very important. If the delivery is at sellers place's then he is responsible for loading. If the delivery occurred at any other place, the seller is not responsible for unloading. This term can be used for all modes of transport as well as multimodal.
FAS = FREE ALONGSIDE SHIP (named port of shipment)Cost of Goods plus cost of Transport to port and getting goods alongside ship In this term when the goods are placed alongside the vessel at the named port of shipment it will be considered that the seller has completed the delivery. The buyer has to bear all risks of loss or damage to the goods and all costs from this point of time. However the seller must clear the goods for the purpose of export. This term can be used only for inland waterway transport or shipment by sea. It is not used when it is air shipment.
FOB = FREE ON BOARD ( named port of shipment)Cost of Goods plus cost of Getting goods on board and preparing shipping documents This is the most popular term and is widely in use. FOB means that the seller delivers when the goods pass the ship's rail at the named port of shipment. Under this term the buyer has to bear all costs and risk of loss of damage to the goods from that point. This term requires the seller to clear the goods for exports. This term is used only for sea or inland waterway transport. It is not suitable for shipment by air.
CFR = COST AND FREIGHT ( named port of destination)Cost of Goods plus cost of Freight cost (port to port) Earlier this term was popularly known as C&F or CNF. CFR means the seller must pay the cost and the freight necessary for the goods to reach at the named destination. However, the risks of loss or damage to the goods after the time of the delivery is on buyers account. The seller is required to clear the goods for exports. This term can be used only for sea and inland waterway transport.
CIF = COST INSURANCE AND FREIGHT ( named port of destination)Cost of Goods plus cost of Marine Insurance Cost, Insurance and Freight means that the seller, delivers when the goods pass the ships rail in the port of shipment. The CIF price refers that it covers the cost of the goods, freight necessary to bring the goods to the named port of destination and also marine insurance. Compared to the previous term, CFR the seller contracts for the insurance and pay the insurance premium. It will be essential for the buyer to know that under the CIF term the seller is required to obtain the insurance only on minimum cover. If the buyer wishes to have more protection then he should make his own insurance arrangement extra or should specify to the seller at the time of contract.In this term the seller must clear the goods for exports and the buyer must arrange necessary clearance for import. This term can be used only for sea and inland water transport.
CPT = CARRIAGE PAID TO ( named place destination)Carriage Paid To means the seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This refers to the fact that all the risks and any other cost occurring after the goods have been delivered will be on buyers account. This term is used for all modes of transport including multimodal transport.
CIP = CARRIAGE AND INSURANCE PA