INTERNATIONAL COMMERCIAL TERMS (INCOTERMS)
Trade terms are key elements of international contracts of sale,
since they explain to the buyer, seller and other parties what to
do with respect to;
1) Shipment of the goods from the seller to the buyer, and
2) Customs clearance.
They also explain the division of costs and risks between the
parties such as:
1) Who should pay the costs of loading and unloading the goods.
2) Who is responsible for the risk of loss or damage to the
goods and who should take out insurance as a protection against
these risks?
The Incoterms were first published by the International Chamber
of Commerce (ICC) in 1936. Periodically, these rules are
amended to bring them in line with current trade practices. All
buyers and sllers in international contracts want their deals to be
completed successfully. Sending merchandise from one country
to another, as part of a commercial transaction, can be a risky
business. When negotiating a sales contract it is always
advisable that the buyer and seller specifically refer to the
Incoterms; this is so they can be sure of defining their respective
responsibilities, thus mitigating a significant portion of the risk.
While Incoterms specifically deal with questions of division of risk
of loss or of damage of the goods between the seller and buyer,
they do not involve questions relating to title or ownership of the
goods. Therefore, the contract between the buyer and seller
should addionally address when title or ownership transfer occurs.
Incoterms do not deal with a breach of contract and its
consequences. A breach of contract should be resolved by
specific contract provisions in a contract. However, there is
obviously an relationship between the trade terms and a breach
of contract, since the trade terms will often determine when the
merchandise is considered to have been delivered from the seller
to the buyer.
The Incoterms range from the minimum obligation of the seller
(Ex-Works) to the maximum obligation of Delivered terms. The
complete range of terms is listed below:
Group E
Departure
EXW - Ex Works
Group F
Main Carriage Unpaid
FCA - Free Carrier
FAS - Free Along Ship
FOB - Free On Board
Group C
Main Carriage Paid
CFR - Cost and Freight
CIF - Cost, Insurance and Freight
CPT - Carriage Paid To
CIP - Carriage and Insurance Paid To
Group D
Arrival
DAF - Delivered at Frontier
DES - Delivered Ex Ship
DEQ - Delivered Ex Quay
DDU - Delivered Duty Unpaid
DDP - Delivered Duty Paid
The Abbreviations: E-, F-, C- and D- terms
There are four (4) categories of trade terms with the first letter of
the term indicating the category. The first group has only one
trade term; namely Ex - Works (EXW). In the other three groups
there are multiple terms. EXW represents the seller’s minimum
obligation, since the exporter only has to make the goods
available at its premises.
The letter F signifies that the seller must hand over the goods to
a nominated carrier Free of risk and expense to the buyer. Under
the F- terms the seller has to arrange any necessary pre-
carriage to reach the agreed point for handing the goods to the
carrier. It is the buyer’s responsibility to arrange and pay for the
main carriage and associated costs.
The letter C signifies that the seller must bear certain Costs even
after the critical point where title or ownership has passed. Under
the C-Terms the seller arranges and pays for the main contract
of carriage and in some instances associated costs including
insurance coverage.
The letter D signifies that the goods must arrive at a stated
Destination. Under the D-Terms the seller undertakes to arrange
and pay for the main contract of carriage and associated costs
including insurance coverage.
C-Terms differs from D-Terms as the seller fulfills its obligation by
shipping the goods from its Country under the C-Terms. Under
the D-Terms the seller fulfills its obligation only when the goods
reach a stated Destination.
Example of a specific Intercom
One of the most common terms of sale on international
transactions is CFR or "Cost and Freight". Under this term the
seller must arrange and pay the costs and freight necessary to
bring the goods to the named port of destination and load them
on board. The risk of loss or damage to the goods after the time
the goods have been loaded on the vessel is thereafter with the
buyer.
For example, under the CFR -Term the seller must:
1) Provide the merchandise and a commercial invoice
conforming to the contract of sales.
2) Arrange and pay for the carriage of the goods to the named
port of destination on or before the agreed date.
3) Arrange and pay for the loading and unloading of the goods
on and off the vessel.
4) Pay the necessary costs associated with Customers in order
to export the goods.
5) Give notice to the buyer of the shipment and provide
transportation documentation.
6) Pay any costs associated with checking, packaging and
marking the goods in accordance with the contract of sale.
Under the same CFR-Term the buyer must:
1) Pay the price stated in the contract of sale.
2) Obtain and pay for any import licenses and duties.
3) Accept delivery of the goods from the carrier at the named
port of destination.
4) Bear all risks of loss after the goods have been loaded on the
vessel.
Key elements of the CFR term are:
1) The CFR term can only be used for sea and inland waterway
transport.
2. Since the point of destination is mentioned after the CFR term
(port of shipment) the critical point where the seller fulfills its
obligation is usually omitted (receiving port).
3. In order to be consistent with the CFR term, the sales contract
should not specify that delivery should take place not later than a
specified date of destination. The seller has fulfilled its contract
upon shipment, not upon arrival.
4. All Incoterms are based on the same principle that the risk of
loss or damage to the goods is transferred from seller to buyer
when the seller has fulfilled its delivery obligation. The CFR term
specifies that the risk is transferred when the goods have passed
the ship’s rail at the named port of shipment.
THE GUIDE TO INCOTERMS 2000 is available from:
ICC Books USA
1212 Avenue of Americas
New York, NY 10036
Tel: (212) 703-5066
Fax: (212) 944-0012
The “Guide” is a detailed examination of each Incoterm and
should be required reading for any business that is engaged in
international trade.
