INCOTERMS AND THE EXPORTER
International Commercial Terms, known as “INCOTERMS”, are internationally accepted terms defining the responsibilities of exporters and importers in the arrangement of shipments and the transfer of liability involved at various stages of the transaction. INCOTERMS do not cover ownership or the transfer of title of goods. It is crucial to agree on an INCOTERM at the start of a negotiation/quotation of a sale, as it will affect the costs and responsibilities involved in shipping, insurance and tariffs. The new INCOTERMS 2010 rules were revised by the International Chamber of Commerce and will become effective January 1, 2011. Four terms were eliminated (DAF, DEQ, DES, DDU) and two were added: Delivered at Place (DAP) and Delivered at Terminal (DAT). The modifications affect obligations, risk transfer, and cost sharing for the seller and buyer, resulting in better clarification and application of the eleven (11) INCOTERMS, and consistent with the way global trade is actually conducted since the last update in 2000.
WHAT INCOTERMS ARE – INCOTERMS are a set of three-letter standard trade terms most commonly used in international contracts for the sale of goods. First published in 1936, INCOTERMS provide internationally accepted definitions and rules of interpretation for most common commercial terms. In the US, INCOTERMS are increasingly used in domestic sales contracts rather than UCC shipment and delivery terms.
WHAT INCOTERMS DO – INCOTERMS inform the sales contract by defining the respective obligations, costs and risks involved in the delivery of goods from the Seller to the Buyer.
WHAT INCOTERMS DO NOT DO:
♦ 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.
♦ Remember, INCOTERMS are not law and there is NO default INCOTERM!
The 11 INCOTERMS consist of two groups and are listed below in order of increasing risk/liability to the exporter. Under the revised terms, buyers and sellers are being urged to contract precisely where delivery is made and what charges are covered. This should avoid double-billing of terminal handling charges at the port of discharge. References to “ship’s rail” were taken out to clarify that delivery means “on-board” the vessel. Insurance, electronic documentation, and supply chain security are addressed in more detail, and gender-neutral language is now used.
RULES FOR ANY MODE OR MODES OF TRANSPORTATION:
♦ EXW – EX WORKS (… named place of delivery)
Δ Seller’s only responsibility is to make the goods available at Seller’s premises. Buyer bears full costs and risks of moving the goods from there to destination.
♦ FCA – FREE CARRIER (… named place of delivery)
Δ Seller delivers the goods to the carrier and may be responsible for clearing the goods for export (filing the EEI). More realistic than EXW because it includes loading at pick-up, which is commonly expected, and sellers are more concerned about export violations . From that point, Buyer bears the costs and risks of moving the goods to destination.
♦ CPT – CARRIAGE PAID TO (… named place of destination)
Δ Seller pays for moving the goods to destination. From the time the goods are transferred to the first carrier, Buyer bears the risks of loss or damage.
♦ CIP – CARRIAGE AND INSURANCE PAID TO (… named place of destination)
Δ Seller delivers goods to the carrier at an agreed place, Buyer bears the risks of loss or damage, but Seller pays carriage and cargo insurance to the named place of destination.
♦ DAT – DELIVERED AT TERMINAL (… named terminal at port or place of destination) —New
Δ Seller bears cost, risk and responsibility until goods are unloaded (delivered) at named terminal at destination. “Terminal” includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. Seller clears goods for export, not import. DAT replaces DEQ, DES.
♦ DAP – DELIVERED AT PLACE (… named place of destination) —New
Δ Seller bears cost, risk and responsibility for goods until made available to Buyer at named place of destination. Seller clears goods for export, not import. DAP replaces DAF, DDU.
♦ DDP – DELIVERED DUTY PAID (… named place)
Δ Seller bears cost, risk and responsibility for cleared goods at named place of destination at Buyer’s disposal. Buyer is responsible for unloading. Seller is responsible for import clearance, duties and taxes so Buyer is not “importer of record”.
RULES FOR SEA AND INLAND WATERWAY TRANSPORT:
♦ FAS – FREE ALONGSIDE SHIP (… named port of shipment)
Δ Seller delivers the goods to the origin port, risk passes to Buyer, including payment of all transportation and insurance costs. The export clearance obligation rests with the Seller.
♦ FOB – FREE ON BOARD (… named port of shipment)
Δ Seller delivers the goods on board the ship and clears the goods for export. Buyer bears all costs and risks of loss or damage. A step further than FAS.
♦ CFR – COST AND FREIGHT (… named port of destination)
Δ Seller clears the goods for export and pays the costs of moving the goods to the port of destination. Risks passes to Buyer when on board the vessel. A step further than FOB.
♦ CIF – COST, INSURANCE AND FREIGHT (… named port of destination)
Δ Seller clears the goods for export and pays the cost, freight and insurance to destination port. Adds insurance costs to CFR.
♦ BE SPECIFIC:
Δ If you use INCOTERMS in the Sales Contract or Purchase Order, you should identify the appropriate INCOTERM Rule [e.g. FCA, CPT, etc.], state “INCOTERMS 2010” and specify the place or port as precisely as possible.
♦ RECOGNIZE WHERE THE RISK OF LOSS TRANSFERS:
Δ A common misconception when the Seller pays the freight is that the Seller has the risk of loss until the goods are delivered to the place or port specified on the bill of lading or airway bill. Actually, when using INCOTERMS CPT, CIP, CFR or CIF, risk transfers to the Buyer when the Seller hands the goods over to the carrier at origin, not when the goods reach the place or port of destination.
Δ Understand that under CIP and CIF, the Seller is only obliged to obtain.
♦ UNDERSTAND WHO HAS RESPONSIBILITY FOR LOADING AND UNLOADING CHARGES. FOR EXAMPLE:
Δ DAT obliges the Seller to place the goods at the Buyer’s disposal after unloading at the named terminal at port or place of destination.
Δ DAP obliges the Seller to place the goods at the Buyer’s disposal on the delivering carrier ready for unloading at the named place of destination.
Δ CPT, CIP, CFR or CIF on the other hand, require the parties to identify as precisely as possible the point at the agreed port of destination because the costs up to that point are for the account of the Seller.
♦ UNDERSTAND WHO HAS RESPONSIBILITY FOR U.S.CUSTOMS ENTRY DECLARATIONS:
Δ DDP is the only INCOTERM where the Seller has responsibility for U.S. Customs entry declarations.
Δ IMPORTANT NOTE: An important factor to be considered when asking the Seller to be responsible for international carriage, is if the goods ship by Ocean Freight, an Importer Security Filing (ISF) must be electronically submitted to Customs 24 hours before the cargo is laden on the vessel bringing the cargo to the U.S. The Buyer should specify in the contract either (a) the shipper is responsible for the ISF or (b) the Seller is responsible for providing the required data in a timely manner (i.e. 72 hrs before lading) to the Buyer’s appointed agent (e.g. Customs Broker). In our experience, when the broker and the international forwarder are unrelated parties, this requirement is honored more in the breach than in the observance. The Buyer should indemnify against the penalties (US$5,000) for filing a late, inaccurate or incomplete ISF. The ISF does not apply at this time to airfreight shipments.
♦ DETERMINE THE IMPORTANCE OF SUPPLY CHAIN VISIBILITY:
Δ When CPT, CIP, CFR or CIF are used the Seller fulfills its obligation to deliver when it hands the goods over to the carrier, not when the goods reach the place of destination.
*Information provided by Newtrans Overseas is intended as advice and guidance only. The information is in no way exhaustive and Newtrans Overseas is not a licensed broker, banker, shipper or customs agency. Newtrans Overseas shall not be liable for any damages or costs of any type arising out of, or in any way connected with the used of, these Facts.