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International Commercial Terms (INCOTERMS)
By Joseph
Zaritski. Copyright © 2002 Joseph Zaritski.
Introduction
Group E - Departure
Group F - Main Carriage Not Paid By Seller
Group C - Main Carriage Paid By Seller
Group D – Arrival
Applicable Incoterms in Different Modes of Transportation
Transfer of Risks
Selecting the Incoterm
Recommended Reading
Legal Notice
In this tutorial I describe Incoterms – the essential
part of any export-import transaction, and will give you some suggestions
and recommendations on how to use these terms, why they are so important,
what risks are associated with them and how to minimise these risks.
The Incoterms (International Commercial Terms), also known as terms of delivery,
are standard trade definitions most commonly used in international sales
contracts. Developed and administered by the International Chamber of Commerce
in Paris (ICC), Incoterms are universally recognised and adhered to by the
major trading nations of the world.
The first version of Incoterms – Incoterms 1936 – was introduced
by ICC in 1936, and has been edited and updated six times since. The latest
edition of Incoterms, which came into force on 1 January 2000, is known
as Incoterms 2000.
There are currently 13 Incoterms in use and they are categorised in four
groups, designated by the first letter of the term (acronym), as follows:
- Group E - Departure
- Group F - Main Carriage Not Paid By Seller
- Group C - Main Carriage Paid By Seller
- Group D - Arrival
All the current Incoterms are described below. However, EXW, FOB, CIF and
CIP are the most frequently used in Australian exports.
I’m not going to copy ICC Incoterms Preambles and definitions in this
tutorial, so please refer to the
ICC web site and to the ”ICC Guide to Export - Import Basics”
(Publication No. 543)* to read them. I would rather underline the most important
factors of Incoterms and provide you with the practical interpretation of
their meaning.
Group E - Departure
Under EXW the Seller minimises the risk by only making the goods available
at his own premises.
EXW – Ex Works (... named place)
EXW represents your minimum involvement and the maximum involvement
of the buyer in the arrangement of the transportation of the goods from
your premises (factory, warehouse etc.)
Table 1. Obligations
under the EXW term (B - Buyer)
Inland freight in Australia; delivery to the carrier or frontier
|
B |
Export customs clearance
|
B |
Payment of customs charges and taxes in Australia
|
B |
Loading to the main carrier and port charges
|
B |
Main carriage/freight
|
B |
Cargo (marine) insurance
|
B |
Unloading from the main carrier and port charges
|
B |
Customs clearance in Buyer's country
|
B |
Payment of customs duties and taxes in Buyer's country
|
B |
Inland freight in Buyer's country
|
B |
Other costs and risks in Buyer's country
|
B |
|
When EXW is used, you should remember that:
- The export of the goods is NOT guaranteed and the buyer may, for example,
keep the goods in Australia and/or re-sell it to a third party.
- The actual point of manufacture might well vary from the place where
you operate your commercial undertaking.
It is common that you would load the goods on a truck without charging a
loading fee, although under EXW the buyer is responsible for the loading
costs.
Group F - Main Carriage Not Paid
By Seller
Under F Terms the Seller arranges and pays for the pre-carriage in the
country of export.
FCA - Free Carrier (...named place)
FCA requires you to take responsibility for all risks and costs until
the goods are delivered to the named place and collected by the carrier
nominated by the buyer. Under FCA you are responsible for the export
customs clearance.
Under FCA the carrier may be responsible for collecting the goods
from your premises or you may be responsible for delivering the goods to
the carrier, dependent on the agreed conditions. If your premises are the
“named place”, you must load the goods onto the truck;
otherwise, the buyer is responsible for loading the goods.
FAS - Free Alongside Ship (...named port of shipment)
Under FAS (formerly known as FOW – Free On Wharf (Incoterms
1990)), you must deliver the goods to the named port and place them alongside
the ship. You are responsible for the export customs clearance and the buyer
- for loading the goods onto the vessel.
FOB - Free On Board (...named port of shipment)
FOB is one of the most common terms used in international trade.
Under FOB you are responsible for delivering goods to the named port,
export customs clearance and loading them onto the vessel.
In Incoterms the point of transfer of responsibilities under FOB
is described as the point “when the goods pass the ship’s
rail” (Table 6). Literally, that means that if during the loading
onto the ship, the goods would fall on the wharf or into the water, you
are responsible for losses, but if the goods fall on the deck of the ship,
the losses are the buyer’s responsibility.
Table 2. Obligations under the F Terms (S –
Seller, B – Buyer)
|
FCA
|
FAS
|
FOB |
Inland
freight in Australia; delivery to the carrier or frontier
|
S
|
S
|
S |
Export customs clearance
|
S
|
S
|
S |
Payment of customs charges and taxes in Australia
|
S
|
S
|
S |
Loading to the main carrier and port charges
|
S
|
B
|
S |
Main carriage/freight
|
B
|
B
|
B |
Cargo (marine) insurance
|
B
|
B
|
B |
Unloading from the main carrier and port charges
|
B
|
B
|
B |
Customs clearance in Buyer's country
|
B
|
B
|
B |
Payment of customs duties and taxes in Buyer's country
|
B
|
B
|
B |
Inland freight in Buyer's country
|
B
|
B
|
B |
Other costs and risks in Buyer's country
|
B
|
B
|
B |
|
When the F Terms are used, you should remember that:
- FAS and FOB are mono-modal terms and can only be used
when the main carriage is by sea freight (Table 5). The term “FOB
Canberra”, meaning the delivery of the goods on board the
plane, is incorrect.
- Under FOB you are responsible for handling, loading, stowage
and other port charges, while under FCA, these charges are for
the buyer's account.
Group C - Main Carriage Paid By Seller
Under C Terms the Seller arranges and pays for the main carriage but
without assuming the risk of the main carriage.
CFR - Cost and Freight (...named port of destination)
CFR is formerly known as C&F and/or CAF (Incoterms
1990). Under CFR, you are responsible for export customs clearance,
delivering the goods to the named port of destination and unloading the
goods from the ship, including all port charges.
CIF - Cost, Insurance and Freight (...named port of
destination)
CIF is very similar to CFR with the addition of insurance
to your responsibilities.
CPT - Carriage Paid To (...named place of destination)
CPT represents your responsibilities to deliver the goods to any
place nominated by the buyer in the country of destination.
Although you are responsible for inland freight in the buyer’s country,
the buyer is responsible for the import customs clearance and all duties,
taxes and other costs in the country of destination.
CIP - Carriage & Insurance Paid to (...named place
of destination)
CIP is very similar to CPT with the addition of insurance
to your responsibilities.
Table 3. Obligations under the C
Terms (S – Seller, B – Buyer)
|
CFR
|
CIF
|
CPT
|
CIP |
Inland
freight in Australia; delivery to the carrier or frontier
|
S
|
S
|
S
|
S |
Export customs clearance
|
S
|
S
|
S
|
S |
Payment of customs charges and taxes in Australia
|
S
|
S
|
S
|
S |
Loading to the main carrier and port charges
|
S
|
S
|
S
|
S |
Main carriage/freight
|
S
|
S
|
S
|
S |
Cargo (marine) insurance
|
B
|
S
|
B
|
S |
Unloading from the main carrier and port charges
|
S
|
S
|
S
|
S |
Customs clearance in Buyer's country
|
B
|
B
|
B
|
B |
Payment of customs duties and taxes in Buyer's country
|
B
|
B
|
B
|
B |
Inland freight in Buyer's country
|
B
|
B
|
S
|
S |
Other costs and risks in Buyer's country
|
B
|
B
|
B
|
B |
|
CFR and CIF are mono-modal terms and can only be used when
the main carriage is by sea freight (Table 5). It is a common mistake when,
under these terms, the place located in a middle of continent is named as
a port of destination. Terms “CFR Vienna” and/or “CIF
Moscow” are incorrect terms.
CIF and CIP are the only two terms, under which you are compulsorily
responsible for insurance. Under all other terms, the buyer considers insurance
as an optional responsibility.
C Terms are quite different from other Incoterms. They are the only
terms when the point of transferring costs responsibilities and the point
of transferring risks are segregated. In other words, although you are responsible
for costs until the goods arrive to the named port or place of destination,
the risks shift to the buyer at the port of loading or even earlier, when
the goods are delivered to the carrier (Table 6). If it was agreed that
the carrier is collecting the goods from your premises then the risks transfer
to the buyer at that point.
From these perspectives, the C Terms are much more beneficial for
you than for your buyer, as you select the carrier and control the costs
and timing of the main carriage without undertaking any risks, while the
buyer takes all risks for a period of main carriage during which he has
no means of controlling or limiting those risks.
Group D – Arrival
Under D Terms the Seller’s cost/risk is maximised because he must
take the goods available upon arrival at the agreed destination.
DAF - Delivered At Frontier (...named place)
DAF is a mono-modal (land only) term and is not applicable for your
exports, as Australia has no inland borders.
DES - Delivered Ex Ship (...named port of destination)
DES by meaning and costs responsibilities involved is very similar
to CFR. However, unlike CFR, under DES you undertake
all risks until the goods arrive at the named port of destination.
DEQ - Delivered Ex Quay (...named port of destination)
Under DEQ, you must not only deliver the goods to the named port
of destination, but also unload them and place on the wharf (quay).
DDU - Delivered Duty Unpaid (...named place of destination)
DDU by meaning and costs responsibilities involved is very similar
to CPT. Similar to the comparison between DES and CFR,
under DDU you carry out all risks until the goods arrive at the
named place of destination.
DDP - Delivered Duty Paid (...named place of destination)
Under DDP you are responsible for all costs and risks involved in
delivering the goods to a named place of destination, import customs clearance
and other payments of domestic duties in the buyer's country.
Literally, you provide “door-to-door” delivery and bear the
entire risk of loss until goods are delivered to the buyer’s premises.
Table 4. Obligations
under the D Terms* (S – Seller, B – Buyer)
|
DES
|
DEQ
|
DDU
|
DDP |
Inland
freight in Australia; delivery to the carrier or frontier
|
S
|
S
|
S
|
S |
Export customs clearance
|
S
|
S
|
S
|
S |
Payment of customs charges and taxes in Australia
|
S
|
S
|
S
|
S |
Loading to the main carrier and port charges
|
S
|
S
|
S
|
S |
Main carriage/freight
|
S
|
S
|
S
|
S |
Cargo (marine) insurance
|
B
|
B
|
S
|
S |
Unloading from the main carrier and port charges
|
B
|
S
|
S
|
S |
Customs clearance in Buyer's country
|
B
|
S
|
B
|
S |
Payment of customs duties and taxes in Buyer's country
|
B
|
S
|
B
|
S |
Inland freight in Buyer's country
|
B
|
B
|
S
|
S |
Other costs and risks in Buyer's country
|
B
|
B
|
S
|
S |
|
DES and DEQ are mono-modal terms and can only be used when
the main carriage is by sea freight (Table 5).
Applicable Incoterms in
Different Modes of Transportation
Certain Incoterms are multi-modal and others are restricted to moves where
the main carriage is by sea or land transport only (Table 5). A common
mistake in trade negotiations is selecting the Incoterm, which is inappropriate
for the agreed mean of transport. The terms must be used for the correct
form of transport if they are to offer any protection to you or to the
buyer.
Table 5. Applicable Incoterms
in Different Modes of Transportation
|
Air
Freight
|
Road
Freight
|
Rail
Freight
|
Sea
Freight
|
| EXW |
|
|
|
|
FCA
|
|
|
|
|
FAS
|
|
|
|
|
FOB
|
|
|
|
|
CFR
|
|
|
|
|
CIF
|
|
|
|
|
CPT
|
|
|
|
|
CIP
|
|
|
|
|
DAF
|
|
|
|
|
DES
|
|
|
|
|
DEQ
|
|
|
|
|
DDU
|
|
|
|
|
DDP
|
|
|
|
|
|
Transfer of Risks
Incoterms not only describe your and the buyer’s obligations and specify
the point when the responsibilities for the transportation costs shift from
you to the buyer, but also nominate the point when the risks associated
with transportation transfer from you to the buyer (Table 6). This is one
of the most important issues you have to remember when negotiating Incoterms.
Table 6. Transfer of
Risks
| EXW |
When the goods are at the disposal of the buyer
|
FCA
|
When the goods have been delivered to the carrier at the named
place
|
FAS
|
When the goods have been placed alongside the ship
|
FOB
|
When the goods pass the ship’s rail
|
CFR
|
When the goods pass the ship’s rail
|
CIF
|
When the goods pass the ship’s rail
|
CPT
|
When the goods have been delivered to the carrier
|
CIP
|
When the goods have been delivered to the carrier
|
DAF
|
When the goods have been delivered to the carrier
|
DES
|
When the goods are placed at the disposal of the buyer on board
the ship
|
DEQ
|
When the goods are placed at the disposal of the buyer on the
quay
|
DDU
|
When the goods are placed at the disposal of the buyer
|
DDP
|
When the goods are placed at the disposal of the buyer
|
|
Selecting the Incoterm
In trade negotiation, documentation, contracts, etc., all Incoterms
must be expressed by the appropriate three-letter code and include the naming
of a physical place of handover. You should also use the expression “Incoterms
2000” to conclude the term, thereby clearly indicating Incoterms
2000 as the source of reference for definition. For example, “CIF
Hamburg Incoterms 2000”.
“Incoterms will not apply unless incorporated into the trade contract
by clearly specifying that the contract is governed by Incoterms 2000”.
Incoterms may be added to or modified so as to incorporate your and the
buyer specific needs, provided that such modification does not contradict
the basic INCOTERM itself. For example, if in addition to the EXW,
it was agreed that you are responsible for loading the goods on the truck,
you should include the following wording in the contract – “EXW
Mildura loaded on truck Incoterms 2000”.
It is very important to consider all aspects, including obligations, transfer
of costs and transfer of risks, when negotiating the Incoterms. Terms CFR
and DES, for example, have the same point of transfer of costs. However,
risks under CFR transfer to the buyer when the goods pass the ship’s
rail in the port of loading, and under DES - when the goods are placed
at the disposal of the buyer on board the ship in the port of destination.
In other words, under DES all risks are placed with you until the
goods arrive at the named port, while under CFR you are not responsible
for losses after the goods are loaded on the ship in Australia.
Avoid, wherever possible, dealing under Incoterms, such as DEQ and
DDP, that would hold you responsible for the import customs clearance,
payment of import customs duties and taxes and/or any other costs and risks
at the buyer's country.
Recommended Reading
- ICC Guide to Export - Import Basics, Publication No. 543
- ICC Incoterms 2000, Publication No. 560
- ICC Guide to Incoterms 2000, Publication No. 620
- ICC A to Z of International Trade, Publication No. 623
The above documents may be obtained from
*) ICC Australia
Chief Executive Officer: Martin Cox
Assistant: Christine Schmidt
Level 50 101 Collins Street
3000 Melbourne Victoria
Telephone: 03 965 39223
Fax: 03 965 39494
E-mail: publications@iccaustralia.org
or online from ICC Publishing SA
Legal Notice
This tutorial has been developed for information purposes only and shall
not be construed, implicitly or explicitly, as containing any legal, commercial
or financial advice. Under no circumstances shall the author, Newsta Pty.
Ltd. or its directors, employees, shareholders or affiliates be liable for
any direct, indirect, incidental, special or consequential damages. |
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