INCOTERMS – The international commercial terminology - I

[Alok Rudra]

INCOTERMS:

International Commercial Terms (“INCOTERMS”) are pre-defined commercial terms published by International Chamber of Commerce (“ICC”). INCOTERMS are well recognized by governments, local authorities and business community worldwide and its wide use has reduced problems in relation to different interpretations in different countries. Thanks to three-letter INCOTERMS, the uncertainties in International –trade has almost been removed. USA is one of the countries using INCOTERMS for domestic sales in addition to International sale.

What purpose INCOTERMS serve:

INCOTERMS forms part and parcel of a sales contract, when used, by defining the respective obligations, costs and risk involved in the delivery of goods from the seller to buyer. For clear understanding of the application of INCOTERMS one has to understand clearly that:

1. INCOMTERMS are part and parcel of a contract, it does not constitute contract itself;
2. INCOTERMS does not supersede the law governing the contract;
3. INCOTERMS does not define “Where title transfers”;
4.  INCOTERMS does not address the issues viz., price payable, currency and credit terms

All items addressed in point (1) to (4) are defined in the contract itself in express terms as per the governing law.

Regular revision:

Person using INCOTERMS must assure himself, he is using the current version. INCOTERMS are being revised by ICC from time to time. The eighth and current version: INCOTERMS – 2010 is effective from 1^st January, 2011.

Striking feature of INCOTERMS -2010

1. Reduction in number of terms from 13 to 11.
2. The designations DAF, DES, DEQ and DDU have been eliminated while two new terms DAT and DAP have been added.
3. The new term attempts to take into account “roles of cargo security” and “electronic data interchange”.

INCOTERMS – 2010: The terminology

INCOTERMS – 2010 are grouped into two classes –

1. Terms for any transport mode; and
2. Terms for Sea and inland-waterway transport.

INCOTERMS for any transport mode:

1. 1.       EXW – EX WORKS (…..named place of delivery)

The seller’s only responsibility is to make the goods available at seller’s premises. The buyer is liable to bear full costs and risks of moving the goods from the seller’s premises to buyer’s desired destination.

1. 2.       FCA – FREE CARRIER (….named place of delivery)

The seller delivers the goods to the carrier selected by the buyer. Hence, expenditure in relation to carriage till point of delivery (i.e. handover to carrier selected by the buyer) is borne by the seller.

3.    CPT –CARRIAGE PAID TO (….named place of destination)

        The seller pays for carriage. The point of time when goods are delivered to the first carrier by the seller, the buyer bears the risks of loss and damage.

4.    CIP – CARRIAGE AND INSURANCE PAID TO (…..named place of destination)

        The seller pays for carriage and insurance up to the named destination. This term is equivalent to CIF. Risks passed to the buyer from the point of time when seller delivers the goods to first carrier.

5.    DAT – DELIVERED AT TERMINAL (…..named terminal at port or place of destination)  

        Seller pays for the carriage till agreed terminal point. Any import clearance related cost is borne by the buyer. The seller has the risk i.e., bears the risk till goods are unloaded at the agreed terminal. After unloading, risks get transferred to the buyer.

6.    DAP – DELIVERED AT PLACE (… named place of destination)

        Seller pays for the carriage till the agreed delivery place. Any import clearance related cost is borne by the buyer. The seller has the risk i.e., bears the risk till goods are unloaded at the agreed delivery place. After unloading, risks get transferred to the buyer.

7.    DDP – DELIVERY DUTY PAID (….named place of destination)

        This term places maximum obligation on the seller. Seller is responsible for almost everything, i.e., responsible for delivery of the goods to the specified destination, paying import-duties and applicable taxes. The risks get transferred on delivery to the buyer at the specified destination.

INCOTERMS  for sea and inland-waterway transport

1.    FAS – FREE ALONGSIDE SHIP (..named port of shipment)

        The seller delivers the goods to the specified origin port. The seller is also responsible for all export-clearance. The term is suggested suitable for maritime transportation and not for multi-model  sea transportation in containers. This is term is frequently used in agreements for bulk cargo / heavy-lift.

2.    FOB – FREE ON BOARD (…named port of shipment)

        The buyer must inform the port and vessel details to the seller. The seller is responsible for loading the goods on board of vessel nominated by the buyer. Cost and risks are divided when the goods are actually on board of the vessel. It is important to note that this term is only applicable for maritime and inland waterway transport only and also not for multi-model sea transport in containers.

3.    CFR – COST AND FREIGHT  (…named port of destination)

        The seller pays the cost and freight up to the port of destination. But important to note here the risk is transferred to the buyer once the goods are loaded on the vessel. Again another important point is cost insurance is not included and its liability of buyer not the seller.

4.    CIF – COST INSURANCE AND FREIGHT (….named place of destination)

        This term is similar to CFR with only difference is cost of insurance is also seller’s liability. The seller will also in addition to Cost and Freight arranges and pays for insurance.

To be continued …

[This article will continue with discussion of each INCOTERM-2010 terminology separately]