Incoterms

Incoterms (International Commerce Terms) are a glossary of norms put together by the International Chamber of Commerce to assist international businesses in negotiating their rates and conducting business transactions in a similar manner.

The fundamental objective of the Incoterms consists in establishing standards for cost distribution and risk transfer between Buyer and Seller in an international purchase contract. Incoterms regulate four basic aspects of an international sales contract; delivery of merchandise, risk transmission, distribution of costs and management of Customs documents.

Delivery of Goods: The first obligation of the sales party is fulfillment. By direct delivery, when Incoterm defines that merchandise is delivered to the Buyer, the term E is denoted. D, or Indirect, when the merchandise is delivered to an intermediary used by the Buyer, a transporter or transit agent are indicated with term F and C.

Risk Transfer: An essential aspect of Incoterms not to be confused with property transfer regulated by contractual law. The fundamental concept is based on risk and in most cases, cost factors. Transfer occurs in the specific geographic point and at the chronological moment defined in the contract and the established Incoterm. The geographical site may be the factory site, the dock, at the ship’s loading deck etc. while the chronological moment is defined by the time frame for delivery of merchandise. The overlap of these two factors results in the risk and cost transfer. For example, in an FAS delivery (Free Alongside Ship, alongside the vessel) agreed to in Valencia between the 1st and 15th of April, if the merchandise is deposited March 27th and damaged on the 28th, risk is assumed by the Seller; if the incident occurs April 2nd, risk is assumed by the Buyer, even in the event that the ship has not arrived.

Distribution of costs: It is customary for the Seller to assume strictly precise costs in preparing the merchandise for delivery and that the Buyer assumes the other costs. There are four classifications. The “C” is when the Seller assumes payment for transportation costs (and the insurance, in certain cases) to the destination, despite the fact that the risk transfer is at origin; this is due to the traditional use of maritime transportation which allows sellout resale of merchandise during the ships crossing, resulting from the cargo’s change of ownership with the transfer of the bill of lading.

The Handling of Customs Declarations: In general, exportation is the responsibility of the Seller, an Incoterm is solely applicable in the absence of Customs Export Clearance: EXW (Ex Works, in factory) whereby the Buyer is responsible for the exportation and usually contracts the services of a transportation company or a customs agent in the county from where the merchandise is dispatched, in order to manage the exportation process. The remaining Incoterms are with dispatch, whereby the exportation is the responsibility of the seller, who at times also handles the importation process in the destination country. For example, DDP (Delivered Duty Paid, which refers to delivery with prepayment of duty).

Incoterms are grouped in four categories: E, F, C, D.

Term E: EXW

Terms in F: FCA, FAS and FOB

The Seller is instructed to deliver the merchandise to a transportation agent chosen by the buyer: this is an indirect delivery without payment of primary transportation.

Terms in C: CFR, CIF, CPT and CIP

The Seller contracts the transportation but does not assume risk for loss or damage of merchandise or additional costs after the cargo is dispatched; this is indirect delivery with payment of primary transportation.

Terms in D: DAT, DAP and DDP

The Seller covers all necessary costs and risk to take the merchandise to the country of destination; this is a direct delivery upon arrival. Costs and risks are transferred at the same point, as with terms in E and terms in F.
Terms in D are not proposed when the payment of the transaction is completed by means of documented credit, basically because financial entities do not accept this.

Definition of the 2010 Terms
Group E – Direct delivery at departure.

EXW
EXW principal article: Ex Works
ExWorks (named place) – in factory (agreed location)
The Seller makes the merchandise available to the Buyer at his facility; factory, warehouse, etc. All costs as of that point are assumed by the buyer.
The EXW Incoterm may be used with any type of transportation or combination thereof.

Group F – indirect delivery, without payment of principal transportation

FAS
Principal article
Free Alongside Ship (named loading port) –
The Seller delivers merchandise at the dock selected at the cargo port agreed upon.; alongside the ship. The incoterm FAS is customary with bulk cargo or large volume cargo deposits at a specialized port situated on the dock.
The Seller assumes arrangements and Customs and export costs (In the procedures for Incoterms prior to 2000, the buyer organized the Customs export clearance.)

Incoterm FAS is used solely for transportation by ship, whether by sea or river.

FOB principal article Free On Board
Free On Board (named loading port) – Free On Board (agreed cargo port)
Seller delivers merchandise onboard the ship. The seller contracts the transportation through a transportation agency or cosignatory, but the transportation cost is covered by the Buyer.

The FOB Incoterm FOB is one of the most frequently utilized in international commerce. it should be used for general cargo, drums, coils, containers) of merchandise, not used for bulk freight. Incoterm FOB is used exclusively for transportation by ship, whether by sea or river.

FCA
Free carrier
Principal article: Free Carrier – free carrier (agreed location)
The Seller agrees to deliver merchandise to a specific agreed location within the country of origin.This could be the facilities of the transportation company, a terminal…this agreed location for delivery is usually related to the transportation agency’s facilities. Costs are covered until the goods are situated at the agreed site; among other locations, the Customs of the country of origin.

The FCA Incoterm may be utilized with any form of transportation: air freight, train freight, road and multimodal container
transportation. It is however a rarely used Incoterm.

Group C – Indirect Delivery with payment of principal transportation

CFR
Principal Article: Cost and freight
Cost and Freight (named destination port) – cost and fright (agreed destination port).
The Seller assumes all costs, including principal transportation, until merchandise reaches destination port.

Nevertheless, the risk is transferred to the Buyer once the goods are loaded on the ship at the country of origin. Should be used for general cargo that is not shipped in containers, also the incoterm is not appropriate for bulk shipments.

The CFR Incoterm is only used for transportation on ships, whether by sea or river.

CIF
CIF Principal article:
Cost, insurance and freight(named destination port) – cost, insurance and freight (agreed destination port).
The Seller assumes all costs including principal transportation and insurance, until the merchandise arrives at destination port. Although the insurance is contracted by the Seller, the beneficiary of the insurance is the Buyer.
As with the previous Incoterm, CFR, the risk is transferred to the buyer at the moment the goods are loaded on the ship at the country of origin.CIF Incoterm is one of the most frequently used in international commerce because the conditions of CIF prices are those determined by Customs for an imported product. it should be used for general or conventional cargo, but not for goods transported in containers.
CIF Incoterm is used for any transportation but it is especially used in shipping, whether by sea or river.

CPT
Principal Article:
Carriage Paid To (named place of destination) → transportation paid to location of agreed destination.)
The Seller assumes all the costs, including principal transportation, up to delivery at the agreed location in the country of destination. Notwithstanding, the risk is transferred to the Buyer at the moment of delivery of the merchandise to the transporter at the country of origin.
The CPT Incoterm may be used with any mode of transportation, including multimodal (combination of various modes of transportation to reach destination).

CIP
Principal Article: Carriage and Insurance Paid
Carriage and Insurance Paid (To named place of destination). –
The Seller assumes all costs, including principal transportation and insurance, until the merchandise reaches the agreed location in the county of destination. Risk is transferred to the buyer at the moment the merchandise is delivered to the transportation agent within the country of origin. Although the insurance is contracted by the seller, the beneficiary of the insurance is the Buyer. Incoterm CIP can be used with any mode of transportation or combination thereof (intermodal transportation).

Group D – Direct Delivery At Arrival

DAT
Delivered At Terminal (named port): delivered to terminal agreed destination port.
DAT Incoterm is used by all modes of transportation. It is one of two new Incoterms 2010 with DAP. It replaces Incoterm DEQ.

The Seller assumes all costs, including principal transportation and insurance (not obligatory), until the merchandise is unloaded in a specific terminal. Risks are also assumed until that moment.

DEQ Incoterm is used basically of intentional bulk commerce because the point of entry coincides with the bulk terminals of those ports. In prior versions of Incoterms 2000 with Incoterm DEQ, Customs import duties were the responsibility of the Seller; currently these are the responsibility of the Buyer.

DAP
Delivered At Place (named destination place) → delivered at a point location(agreed place of destination).

The DAP Incoterm is used by all modes of transportation. It is one of two new Incoterms (2010) with DAT. It replaces the following Incoterms: DAF, DDU and DES.

The Seller assumes all costs, including principal transportation and insurance (not obligatory), but not costs related to importation, until the merchandise is delivered to the Buyer in a vehicle ready to be unloaded. The Seller also assumes the risks up to that moment.

DDP
Delivered Duty Paid (named destination place)

The Seller pays all costs until merchandise is delivered to the agreed point in the destination country. The Buyer does not handle any process. Customs duties ands import fees are the responsibility of the Seller.

Delivery Responsibility of the Seller

For a specified term, “YES” indicates the Seller is responsible to provide the service specified in the cost, whereas “NO” indicates this is the responsibility of the Buyer. If insurance is not included in the conditions (for example CFR) then the insurance for the freight transportation is the responsibility of the Buyer.