Master the 11 Incoterms Rules

The Incoterms® 2010 rules are an essential part of international trade. They are published by the International Chamber of Commerce (ICC). They have been incorporated into contracts for the sale of goods worldwide and provide rules and guidance to importers, exporters, lawyers, transporters, insurers and students of international trade.

Unfortunately, they can also be misused and misunderstood. As can be seen, the latest INCOTERMS® are dated 2010 - this date should always be included as the terms and their obligations can change over time.

Incoterms® 2010 stands for International Commercial terms. These cover a wide range of responsibilities and obligations for a seller and buyer in an international sales contract, including:

• Which party is responsible for the different costs during the whole process
• Where the goods should be picked up from and transported to
• Who bears the ‘risk’ in the case of any loss or damage to goods at any specific point in an international journey
• Which party is responsible for loading or unloading goods and for arranging and paying for inspections to the freight
• Who is responsible for producing documentation, submitting export and import customs entries, or arranging export and import licences, as well as a range of other contractual obligations

According to Mike Josypenko, Director of Special Projects, The Institute of Export, using Incoterms properly as part of a sales contract provides clarity for both parties, gives certainty over costs, and reduces the risk of disputes and disagreements with clients or suppliers. Using unsuitable terms, out of date terms or using the terms without understanding the implications of your choice, can lead to unexpected costs, delays and/or unhappy clients.

The importance of understanding these rules – from both a seller’s and buyer’s perspective, should not be underestimated. Without a clear knowledge of the features, obligations and responsibilities for each of the 11 terms within Incoterms 2010, traders may fail to choose the most suitable Incoterm for their transaction, which may end up being an expensive mistake.

One of the Incoterms® 2010 which can be rather confusing is “Ex Works”. Many buyers and suppliers, including their freight transportation partners are unaware that it is the buyer’s responsibility to load the vehicle at the location where the seller has made the goods available. The buyer is also responsible for clearing the goods for export which can sometimes prove difficult if they do not possess local knowledge of the originating country’s rules and regulations.

The following is a brief description of each of the 11 Incoterms® as provided by the ICC.

EXW - Ex Works

“Ex Works” means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e. manufacturing facility, works, factory, warehouse, etc.). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable.

FCA - Free Carrier

“Free Carrier” means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.

CPT - Carriage Paid To

“Carriage Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller and pays the costs of carriage necessary to bring the goods to the named place of destination. This named place needs to be accurate. i.e. the full address, not just the town or city.

CIP - Carriage And Insurance Paid To

“Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or another person nominated by the seller and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

DAT - Delivered At Terminal

“Delivered at Terminal” means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes a place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.

DAP - Delivered At Place

“Delivered at Place” means that 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. The seller bears all risks involved in bringing the goods to the named place.

DDP - Delivered Duty Paid

“Delivered Duty Paid” means that 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 the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

RULES FOR SEA AND INLAND WATERWAY TRANSPORT ONLY

FAS - Free Alongside Ship

“Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.

FOB - Free On Board

“Free On Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards. In this situation the seller pays the Terminal Handling Charge (THC).

CFR - Cost and Freight

“Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

CIF - Cost, Insurance and Freight

“Cost, Insurance and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. ‘The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. Under CIF the seller is required to obtain insurance only on minimum cover.

The above descriptions should be read in the context of the full official text of the rules which can be obtained from the ICC Business Bookstore which can be accessed at http://store.iccwbo.org/incoterms-2010.

A very handy chart detailing the responsibilities of the buyer and supplier under the specific Incoterms® 2010 can be found in  The Logistics and Supply Chain Toolkit.

The new edition of  The Logistics and Supply Chain Toolkitoffers a complete toolkit for warehouse, transport and inventory managers, covering all the techniques and processes they need to operate efficient logistics operations.