Differing international trading practices, and the varying legal interpretations thereof, necessitated a common set of rules and guidelines to reduce confusion between buyers and sellers in international trade agreements.Recognizing this need the International Chamber of Commerce (“ICC”) first codified the responsibilities of buyers and sellers for the delivery of goods under sales contracts in international trade by creating the International Commercial Terms (“Incoterms”) in 1936. These three letters predefined commercial terms and inform sales contracts by clarifying the risks, responsibilities, costs and logistical aspects such as delivery points of transactions between importer and exporters in order to mitigate confusion between buyers and sellers.
Whilst Incoterms themselves do not constitute a contract, or govern law, they are internationally accepted by governments, legal authorities, and logisticians and are frequently incorporated into international sales agreements.
Incoterms 2020 came into force on 1 January 2020 with the effect that contracts entered into after 1 January 2020 will be bound by the Incoterms 2020 unless the contract between the parties states otherwise.
Whilst Incoterms serve to clarify contractual provisions and inform international trade agreements they do not determine ownership, transfer title to the goods, nor invoke payment terms. They do not define contractual rights and/or obligations (except for delivery) and do not address remedies for breach of contract. These aspects, as well as the specific details of the transfer, transport and delivery of goods must be addressed in the contract between the parties.
Incoterms assist parties to international trade agreements by shedding light on crucial aspects of the supply chain, such as specifying the following:
- which party is responsible for arranging for import and export formalities;
- who is responsible for payment of transportation (regardless of what type of transportation is required);
- the point at which the goods change hands from seller to buyer;
- when the seller’s costs and risks are transferred to the buyer;
- which party is responsible for the insurance costs.
It is important to bear in mind that not all of the rules apply in all instances, in this regard Incoterms can be separated into two categories as follows:
Incoterms for any mode(s) of Transportation
EXW– (Ex Works or Ex Warehouse):
- is the most preferable term for parties who are new-to-export because it represents the minimum obligations and liability to the Seller.
- the Buyer is responsible for all of the transportation costs and bears the risks of bringing the goods to their final destination.
- the Seller merely makes the goods available at its location (or at an alternative location of the Seller’s choice) for the Buyer.
- the Seller has no obligations in terms of loading the goods on any collecting vehicle or clearing the goods for export, where clearance is applicable.
- as a result the Buyer has limited obligation to provide export information to the Seller.
FCA– (Free Carrier):
- the Seller is responsible for delivering the goods to the first carrier or another person nominated by the Buyer, and may be responsible for clearing the goods for export (filing the electronic export information).
- the risk passes to the Buyer when the goods are handed over to the first carrier.
CPT– (Carriage Paid To):
- the Seller delivers goods to the carrier, or another person nominated by the Seller, at an agreed place.
- the risk passes to the Buyer when the goods are delivered to the carrier, but Seller must pay cost of carriage to the named place of destination.
CIP– (Carriage and Insurance Paid To):
- in addition to the Seller’s responsibilities as set out in CPT above, the Seller must also contract for insurance cover against the Buyer’s risk of loss or damage to the goods during the carriage.
DPU– (Delivered at Place Unloaded) (Replaces 2010 Incoterm DAT):
- the Seller delivers when the goods, once loaded are placed at the disposal of the Buyer at a named place of destination.
- the Seller bears all the risks involved in bringing the goods to, and unloading the goods at, the named place of destination.
DAP– (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.
- Seller bears all of the costs, risk and responsibility for the goods until the goods are made available to Buyer at the named place of destination.
DDP– (Delivered Duty Paid):
- the Seller delivers the goods when the goods are placed at the disposal of the Buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination.
- the Seller bears all of the costs, risks and responsibility for bringing the goods to the place of destination.
- in addition, the Seller must clear the goods not only for export but also for import, pay any duties for both the export and import of the goods, and must carry out all customs formalities.
- the Buyer is responsible for unloading.
Incoterms for Sea and inland Waterway Transport
FAS– (Free Alongside Ship):
- the Seller is responsible for placing the goods alongside the ship nominated by the Buyer at the named port of shipment.
- the risk, including payment of all transportation and insurance costs, passes to Buyer once the goods are delivered alongside the ship by the Seller.
FOB– (Free On Board):
- the Seller is responsible for delivering the goods on board the ship nominated by the Buyer at the named port of shipment, or procures the goods already so delivered.
- the risk, including payment of all transportation and insurance costs, passes to Buyer once the goods are delivered on board the ship by the Seller.
CFR– (Cost and Freight):
- Seller is responsible for delivering goods on board the ship nominated by the Buyer at the named port of shipment.
- the Seller arranges and pays cost and freight to the named destination port.
- the risk, including payment of all transportation and insurance costs, passes to Buyer once the goods are delivered on board the ship by the Seller.
CIF– (Cost, Insurance and Freight):
- exactly like CFR above, but in addition, the Seller is responsible for contracting insurance cover against the Buyer’s risk of loss of or damage to the goods during the carriage.
- the Seller is only required to obtain minimum insurance cover. Should a Buyer desire greater insurance protection the parties must either expressly agree to this, or the Buyer must procure its own additional insurance cover.
The latest edition of the Incoterms rules can be purchased directly from the ICC website: https://2go.iccwbo.org/incoterms-2020-eng-config+book_version-Book/
*** Please note that this article (and the information contained herein) is to be used to inform members of the public. This article (and the information contained herein) should not be construed as being legal advice, and members of the public are advised to consult their legal practitioner where possible. Harris Billings Incorporated will not be held liable for any damages suffered as a result of reliance on this article (or the information contained herein). ***
