Incoterms
2010 is the eighth set of
pre-defined international contract terms published by the International Chamber
of Commerce, with the first set having been published in 1936. Incoterms 2010 defines 11 rules,
down from the 13 rules defined by Incoterms
2000. Four rules of the 2000 version ("Delivered at Frontier";
DAF, "Delivered Ex Ship"; DES, "Delivered Ex Quay"; DEQ,
"Delivered Duty Unpaid"; DDU) were removed, and are replaced by two
new rules ("Delivered at Terminal"; DAT, "Delivered at
Place"; DAP) in the 2010 rules.
In the prior version, the
rules were divided into four categories, but the 11 pre-defined terms of Incoterms 2010 are subdivided
into two categories based only on
method of delivery.
The larger group of seven
rules may be used regardless of the method of transport, with the smaller group
of four being applicable only to sales that solely involve transportation by
water where the condition of the goods can be verified at the point of loading
on board ship. They are therefore not to be used for containerized freight,
other combined transport methods, or for transport by road, air or rail.
Incoterms 2010 also formally
defined delivery. Before, the term has been defined informally but it is now
defined as the point in the transaction where "the risk of loss or damage
[to the goods] passes from the seller to the buyer.”
Incoterm
in Government Regulation
In some jurisdictions, the
duty costs of the goods may be calculated against a specific Incoterm: for
example in Nigeria, and in South Africa the duty is calculated against the FOB
value of the goods.
Because of this it is common for contracts for exports to these countries to
use these Incoterms, even when they are not suitable for the chosen mode of
transport. If this is the case then great care must be exercised to ensure that
the points at which costs and risks pass are clarified with the customer.
Defined Term in Incoterms
There are certain terms that
have special meaning within Incoterms, and some of the more important ones are
defined below;
·
Delivery:
The point in the transaction where the risk of loss or damage to the goods is
transferred from the seller to the buyer
·
Arrival:
The point named in the Incoterm to which carriage has been paid
·
Free:
Seller has an obligation to deliver the goods to a named place for transfer to
a carrier
·
Carrier:
Any person who, in a contract of carriage, undertakes to perform or to procure
the performance of transport by rail, road, air, sea, inland waterway or by a
combination of such modes
·
Freight
forwarder: A firm that makes or assists in the making of shipping arrangements;
·
Terminal:
Any place, whether covered or not, such as a dock, warehouse, container yard or
road, rail or air cargo terminal
·
To
clear for export: To file Shipper’s Export Declaration and get export permit
Variation of Incoterms
Parties adopting Incoterms
should be vary about their intention and variations. The desire of the parties
should be expressed clearly and casual adoption should be refrained. Also,
making additions or variations to the meaning of a certain term should be
carefully done as parties' failure to use any trade term at all can produce
unexpected results
Rules for any mode of transport
EXW – Ex Works
(named place of delivery)
The
seller makes the goods available at their premises, or at another named place.
This term places the maximum obligation on the buyer and minimum obligations on
the seller. The Ex Works term is often used while making an initial quotation
for the sale of goods without any costs included.
EXW
means that a buyer incurs the risks for bringing the goods to their final
destination. Either the seller does not load the goods on collecting vehicles
and does not clear them for export, or if the seller does load the goods, he
does so at buyer's risk and cost. If the parties agree that the seller should
be responsible for the loading of the goods on departure and to bear the risk
and all costs of such loading, this must be made clear by adding explicit
wording to this effect in the contract of sale.
There
is no obligation for the seller to make a contract of carriage, but there is
also no obligation for the buyer to arrange one either - the buyer may sell the
goods on to their own customer for collection from the original seller's
warehouse. However, in common practice the buyer arranges the collection of the
freight from the designated location, and is responsible for clearing the goods
through Customs. The buyer is also responsible for completing all the export
documentation, although the seller does have an obligation to obtain
information and documents at the buyer's request and cost.
These
documentary requirements may result in two principal issues. Firstly, the
stipulation for the buyer to complete the export declaration can be an issue in
certain jurisdictions (not least the European Union) where the customs
regulations require the declarant to be either an individual or corporation
resident within the jurisdiction. If the buyer is based outside of the customs
jurisdiction they will be unable to clear the goods for export, meaning that
the goods may be declared in the name of the seller by the buyer, even though
the export formalities are the buyer's responsibility under the EXW term
Secondly, most jurisdictions
require companies to provide proof of export for tax purposes. In an EXW
shipment, the buyer is under no obligation to provide such proof to the seller,
or indeed to even export the goods. In a customs jurisdiction such as the
European Union, this would leave the seller liable to a sales tax bill as if
the goods were sold to a domestic customer. It is therefore of utmost
importance that these matters are discussed with the buyer before the contract
is agreed. It may well be that another Incoterm, such as FCA seller's
premises, may be more suitable, since this puts the onus for declaring the
goods for export onto the seller, which provides for more control over the
export process.
FCA – Free
Carrier (named place of delivery)
The
seller delivers the goods, cleared for export, at a named place (possibly
including the seller's own premises). The goods can be delivered to a carrier nominated
by the buyer, or to another party nominated by the buyer.
In
many respects this Incoterm has replaced FOB in modern usage, although the
critical point at which the risk passes moves from loading aboard the vessel to
the named place. It should also be noted that the chosen place of delivery
affects the obligations of loading and unloading the goods at that place.
If
delivery occurs at the seller's premises, or at any other location that is
under the seller's control, the seller is responsible for loading the goods on
to the buyer's carrier. However, if delivery occurs at any other place, the
seller is deemed to have delivered the goods once their transport has arrived
at the named place; the buyer is responsible for both unloading the goods and
loading them onto their own carrier
CPT –
Carriage Paid To (named place of destination)
CPT
replaces the C&F (cost and freight) and CFR terms for all shipping modes
outside of non-containerized sea freight.
The
seller pays for the carriage of the goods up to the named place of destination.
However, the goods are considered to be delivered when the goods have been
handed over to the first or main carrier, so that the risk transfers to buyer
upon handing goods over to that carrier at the place of shipment in the country
of Export.
The
seller is responsible for origin costs including export clearance and freight
costs for carriage to the named place of destination (either the final
destination such as the buyer's facilities or a port of destination. This has
to be agreed to by seller and buyer, however).
If
the buyer requires the seller to obtain insurance, the Incoterm CIP should be
considered instead.
CIP –
Carriage and Insurance Paid to (named place of destination)
This
term is broadly similar to the above CPT term, with the exception that the
seller is required to obtain insurance for the goods while in transit. CIP
requires the seller to insure the goods for 110% of the contract value under at
least the minimum cover of the Institute Cargo Clauses of the Institute of
London Underwriters (which would be Institute Cargo Clauses (C)), or any
similar set of clauses. The policy should be in the same currency as the
contract, and should allow the buyer, the seller, and anyone else with an
insurable interest in the goods to be able to make a claim.
CIP
can be used for all modes of transport, whereas the Incoterm CIF should only be
used for sea-freight.
DAT –
Delivered At Terminal (named terminal at port or place of destination
This
Incoterm requires that the seller delivers the goods, unloaded, at the named
terminal. The seller covers all the costs of transport (export fees, carriage,
unloading from main carrier at destination port and destination port charges)
and assumes all risk until arrival at the destination port or terminal.
The
terminal can be a Port, Airport, or inland freight interchange, but must be a
facility with the capability to receive the shipment. If the seller is not able
to organize unloading, they should consider shipping under DAP terms instead.
All
charges after unloading (for example, Import duty, taxes, customs and
on-carriage) are to be borne by buyer. However, it is important to note that
any delay or demurrage charges at the terminal will generally be for the
seller's account.
DAP –
Delivered At Place (named place of destination)
Incoterms
2010 defines DAP as 'Delivered at Place' – the seller delivers when the goods
are placed at the disposal of the buyer on the arriving means of transport
ready for unloading at the named place of destination. Under DAP terms, the
risk passes from seller to buyer from the point of destination mentioned in the
contract of delivery.
Once
goods are ready for shipment, the necessary packing is carried out by the
seller at his own cost, so that the goods reach their final destination safely.
All necessary legal formalities in the exporting country are completed by the
seller at his own cost and risk to clear the goods for export.
After
arrival of the goods in the country of destination, the customs clearance in
the importing country needs to be completed by the buyer, e.g. import permit,
documents required by customs and etc., including all customs duties and taxes.
Under
DAP terms, all carriage expenses with any terminal expenses are paid by seller
up to the agreed destination point. The necessary unloading cost at final
destination has to be borne by buyer under DAP terms.
DDP –
Delivered Duty Paid (named place of destination)
Seller is responsible for
delivering the goods to the named place in the country of the buyer, and pays
all costs in bringing the goods to the destination including import duties and
taxes. The seller is not responsible for unloading. This term is often used in
place of the non-Incoterm "Free In Store (FIS)". This term places the
maximum obligations on the seller and minimum obligations on the buyer. No risk
or responsibility is transferred to the buyer until delivery of the goods at
the named place of destination
The most important
consideration for DDP terms is that the seller is responsible for clearing the
goods through customs in the buyer's country, including both paying the duties,
and obtaining the necessary authorizations and registrations from the authorities
in that country. Unless the rules and regulations in the buyer's country are
very well understood, DDP terms can be a very big risk both in terms of delays
and in unforeseen extra costs, and should be used with caution.
Rules for see and inland waterway transport
To determine if a location
qualifies for these four rules, please refer to 'United Nations Code for Trade
and Transport Locations
The
four rules defined by Incoterms 2010 for international trade where
transportation is entirely conducted by water are as per the below. It is
important to note that these terms are generally not suitable for shipments in
shipping containers; the point at which risk and responsibility for the goods
passes is when the goods are loaded on board the ship, and if the goods are
sealed into a shipping container it is impossible to verify the condition of
the goods at this point.
Also
of note is that the point at which risk passes under these terms has shifted
from previous editions of Incoterms, where the risk passed at the ship's rail.
FAS – Free
Alongside Ship (named port of shipment)
The seller delivers when the
goods are placed alongside the buyer's vessel at the named port of shipment.
This means that the buyer has to bear all costs and risks of loss of or damage
to the goods from that moment. The FAS term requires the seller to clear the
goods for export, which is a reversal from previous Incoterms versions that
required the buyer to arrange for export clearance. However, if the parties
wish the buyer to clear the goods for export, this should be made clear by
adding explicit wording to this effect in the contract of sale. This term
should be used only for non-containerized sea freight and inland waterway
transport.
FOB – Free
on Board (named port of shipment)
Under FOB terms the seller
bears all costs and risks up to the point the goods are loaded on board the
vessel. The seller's responsibility does not end at that point unless the goods
are "appropriated to the contract" that is, they are "clearly
set aside or otherwise identified as the contract goods"
Therefore, FOB contract requires
a seller to deliver goods on board a vessel that is to be designated by the
buyer in a manner customary at the particular port. In this case, the seller
must also arrange for export clearance. On the other hand, the buyer pays cost
of marine freight transportation, bill of lading fees, insurance, unloading and
transportation cost from the arrival port to destination. Since Incoterms 1980
introduced the Incoterm FCA, FOB should only be used for non-containerized sea
freight and inland waterway transport. However, FOB is commonly used
incorrectly for all modes of transport despite the contractual risks that this
can introduce. In some common law countries such as the United State of
America, FOB is not only connected with the carriage of goods by sea but also
used for inland carriage aboard any "vessel, car or other vehicle.
CFR – Cost
and Freight (named port of destination)
The seller pays for the
carriage of the goods up to the named port of destination. Risk transfers to
buyer when the goods have been loaded on board the ship in the country of
Export. The Shipper is responsible for origin costs including export clearance
and freight costs for carriage to named port. The shipper is not responsible
for delivery to the final destination from the port (generally the buyer's
facilities), or for buying insurance. If the buyer does require the seller to
obtain insurance, the Incoterm CIF should be considered. CFR should only be
used for non-containerized sea freight and inland waterway transport; for all
other modes of transport it should be replaced with CPT.
CIF –
Cost, Insurance & Freight (named port of destination)
This term is broadly similar
to the above CFR term, with the exception that the seller is required to obtain
insurance for the goods while in transit to the named port of destination. CIF
requires the seller to insure the goods for 110% of their value under at least
the minimum cover of the Institute Cargo Clauses of the Institute of London
Underwriters (which would be Institute Cargo Clauses (C)), or any similar set
of clauses. The policy should be in the same currency as the contract. The
seller must also turn over documents necessary, to obtain the goods from the
carrier or to assert claim against an insurer to the buyer. The documents
include (as a minimum) the invoice, the insurance policy, and the bill of lading. These three documents represent the cost, insurance, and
freight of CIF. The seller's obligation ends when the documents are handed over
to the buyer. Then, the buyer has to pay at the agreed price. Another point to
consider is that CIF should only be used for non-containerized sea freight; for
all other modes of transport it should be replaced with CIP.
For more information, feel free to contact BOWAGATE GLOBAL LIMITED on www.bowagateglobal.com , Email: Info@bowagateglobal.com, Whatapp’s no : 08147068472.
