The International Commercial Terms – also known as Incoterms, were first issued back in 1923. Relating to international commercial law, they are a set of commercial terms which are used within international transactions and into the contracts for the sale of goods internationally. They provide guidance to many people including importers, exporters, freight forwarders and lawyers. The Incoterms are three letter abbreviations that advise who is responsible for specific areas of the shipping process. Incoterms are designed to take away any uncertainties in regards to obligations and responsibility so are often used in sales of contracts.
Since 1980 the Incoterms have been published at the beginning of each decade. In the latest edition of Incoterms devised in 2010, a big change took place with the removal of 4 previous terms and with the terms being split into two groups rather than the previous four. The two new groups are; Rules for any mode of transport and Rules for sea and inland waterway transport. On first glance these terms can appear quite confusing but once understanding is in place they can help ensure that you are aware of what responsibilities will be placed on you and the potential costs incurred on the movement of your goods you will have.
Rules for any mode of transport.
EXW – Ex Works; Ex Works places the maximum responsibility for the cargo onto the buyer of the goods, with little onus onto the seller. The buyer is responsible for the loading and collecting of the cargo all the way through to the unloading at the end delivery point. The seller has no responsibility to load the cargo onto the buyer’s vehicle, even if the cargo is available at the seller’s premises. However, if the buyer requests certain documents the seller has an obligation to provide them but these can be at the buyers cost. In reverse if the seller requests proof of export from the buyer then the waters become a little murky. The buyer has responsibility for all the export paperwork so if the goods are being delivered direct to a customer of theirs, it may not be in the buyers best interests to pass these on. On this basis, it maybe an idea to look at the FCA term and place it at the seller’s premises as this puts the onus back onto the shipper.
FCA – Free Carrier; The seller is responsible for clearing the goods for export plus making the goods available or delivering the goods to a named place by the buyer. This can be at the seller’s own premises and places the loading responsibility of the goods onto the seller, or it can be at the buyer’s carriers warehouse. Any risk transfers to the buyer at this point.
DAT – Delivered at Terminal; DAT requires the seller to send and unload the goods to a named terminal or place of destination. The seller must cover all costs to transport the goods including the export documentation fees, carriage to port of despatch, freight charges to named terminal as well as destination port charges. The terminal / port must have facilities to receive the shipment. If unloading for the seller is an issue, then DAP term must be considered.
DAP – Delivered at Place; When the seller delivers the goods to the named destination, upon arrival the buyer resumes responsibility and takes over to complete the unloading, customs formalities and final delivery to their premises or other. The seller however can still be responsible for any applicable demurrage.
CPT – Carriage Paid To; CPT replaces the C&F term. The seller has to pay and deliver the cargo to a named place of destination within the buyer’s country. For example, this could be to the buyer themselves or to the buyer’s carriers warehouse to which once delivered any risk will pass to the buyer. Origin costs incurred to that point are for the sellers account which would include the transport costs to take the goods to the the named place of destination. They exclude any customs formalities, cargo insurances and import duties and taxes.
CIP – Carriage and Insurance Paid To; Like CPT term the seller has to deliver the cargo to a named place of destination within the buyer’s country. In addition to this they also have to take out insurance to cover the goods during this transit period. CIP can be used for all types of transport, whereas CIF can only be used for ocean shipments which are non-containerized.
DDP – Delivered Duty Unpaid; DDP means the shipper is responsible for clearing and delivering the goods to a named place in the country where the buyer is based. This includes paying the local duties and completing all customs formalities. There is much confusion with this term as a lot of parties include the local tax whether that be VAT/GST etc. On the official ICC website there is no mention of tax to be included, so to avoid any confusion in the UK it is standard practice that the local tax is paid by the buyer due to the VAT reclaim scheme.
Rules for sea and inland waterway transport.
FAS – Free Alongside Ship; The goods are delivered to the port of export and unloaded by the seller. The seller is also responsible for the export customs formalities. Loading and local charges within the port along with the onward freight are all for the buyer’s account. The buyer takes responsibility for the cargo once the seller delivers the goods to the port.
FOB – Free on Board; The seller is responsible for the goods to the point they are loaded onto the vessel. The seller as per FAS term, also has in addition responsibility of the loading charges for the cargo onto the vessel and the terminal handling charges.
CFR – Cost and Freight; CFR means the shipper is responsible for transporting the cargo to the port of destination. The buyer has the risk transfer to them upon departure of the vessel to the destination country. They are responsible for the unloading of the cargo, customs formalities and onward carriage to the final delivery place.
CIF – Cost, Insurance & Freight; Like CFR the shipper is responsible for transporting the cargo to the port of destination. In addition to this the shipper also has to arrange insurance for the goods to the port of destination.
In 2010 the international Chamber of Commerce eliminated four terms which were in the previous Incoterms 2000. These terms are still used, in particular the DDU term. Care must be taken if using these however particularly in the use of contracts where thet must be referenced to the 2000 Incoterms.
DAF – Delivered to Frontier; Specific for goods transported by road and rail, the seller arranges and pays for the freight to a named delivery place at the frontier. The buyer then arranges customs clearance and the onwards delivery.
DES – Delivered Ex Ship; Like the current CFR and CIF terms the shipper is responsible for transporting the cargo to the port of destination. Unlike the current terms however the responsibility of the cargo does not transfer until the vessel arrives at the port of destination. This term is commonly used for chartered vessels.
DEQ – Delivered ex Quay; Delivered ex Quay is similar to DES term. The shipper is also responsible for the goods being unloaded at the port of destination.
DDU – Delivered Duty Unpaid; The shipper is responsible for arranging the freight transportation, customs clearance and delivery to the buyer. The buyer has to pay any of the local customs duties and taxes. In the Incoterms 2010, DDU was replaced by the DAP Term. The main difference being that the customs clearance formality within the destination country is now passed to the buyer instead of the shipper.
This explanation is provided as a guide only. The International Chamber of Commerce publishes the Incoterms and are available on their website and official publication “Incoterms 2010”. Please view the ICC website or publication for the full official narrative.