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International Trade Terms

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International Commercial Terms (INCOTERMS)
By Joseph Zaritski. Copyright © 2002 Joseph Zaritski.

Introduction

Group E - Departure

?   EXW

?   Obligations under the EXW term

Group F - Main Carriage Not Paid By Seller

?   FCA

?   FAS

?   FOB

?   Obligations under the F Terms

Group C - Main Carriage Paid By Seller

?   CFR

?   CIF

?   CPT

?   CIP

?   Obligations under the C Terms

Group D ? Arrival

?   DAF

?   DES

?   DEQ

?   DDU

?   DDP

?   Obligations under the D Terms

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)

 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)

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 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 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

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

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.