Incoterms

Incoterms 2010 are internationally accepted freight rules defining the respective responsibilities of the buyer and seller in the arrangement of transportation and other responsibilities and clarify when the ownership of the merchandise takes place. They are used in conjunction with a sales agreement or other method of transacting the sale.

Effective January 2010, the ICC once again updated Incoterms to follow the modern trends in international trade. They should now be incorporated under the reference “Incoterms 2010” into contracts that are effective after January 2010.

Provided that the Incoterms themselves are correctly used, the risk of costly misunderstandings and legal disputes is greatly reduced.

Main features of the Incoterms® 2010 rules

1     Two new Incoterms rules – DAT and DAP – have replaced the Incoterms 2000 rules DAF, DES, DEQ and DDU

The number of Incoterms® rules has been reduced from 13 to 11. This has been achieved by substituting two new rules that may be used irrespective of the agreed mode of transport DAT, Delivered at Terminal, and DAP, Delivered at Place for the Incoterms® 2000 rules DAF, DES, DEQ and DDU.

Under both new rules, delivery occurs at a named destination: in DAT, at the buyer’s disposal unloaded from the arriving vehicle (as under the former DEQ rule); in DAP, likewise at the buyer’s disposal, but ready for unloading (as under the former DAF, DES and DDU rules).

The new rules make the Incoterms® 2000 rules DES and DEQ superfluous. The named terminal in DAT may well be in a port, and DAT can therefore safely be used in cases where the Incoterms® 2000 rule DEQ once was. Likewise, the arriving “vehicle” under DAP may well be a ship and the named place of destination may well be a port: consequently, DAP can safely be used in cases where the Incoterms® 2000 rule DES once was. These new rules, like their predecessors, are “delivered”, with the seller bearing all the costs (other than those related to import clearance, where applicable) and risks involved in bringing the goods to the named place of destination. 

2     Classification of the 11 Incoterms® 2010 rules 

The 11 Incoterms® 2010 rules are presented in two distinct classes:

RULES FOR ANY MODE OR MODES OF TRANSPORT

EXW          EX WORKS

FCA           FREE CARRIER 

CPT           CARRIAGE PAID TO

CIP            CARRIAGE AND INSURANCE PAID TO

DAT           DELIVERED AT TERMINAL

DAP           DELIVERED AT PLACE

DDP           DELIVERED DUTY PAID

RULES FOR SEA AND INLAND WATERWAY TRANSPORT

FAS            FREE ALONGSIDE SHIP

FOB            FREE ON BOARD

CFR            COST AND FREIGHT

CIF             COST INSURANCE AND FREIGHT

The first class includes the seven Incoterms® 2010 rules that can be used regardless of the mode of transport selected and regardless of whether one or more than one mode of transport is employed. EXW, FCA, CPT, CIP, DAT, DAP and DDP belong to this class. They can be used even when there is no maritime transport at all. It is important to remember, however, that these rules can be used in cases where a ship is used for part of the carriage.

In the second class of Incoterms® 2010 rules, the point of delivery and the place to which the goods are carried to the buyer are both ports, hence the label “sea and inland waterway” rules. FAS, FOB, CFR and CIF belong to this class. Under the last three Incoterms rules, all mention of the ship’s rail as the point of delivery has been omitted in preference for the goods being delivered when they are “on board” the vessel. This more closely reflects modern commercial reality and avoids the rather dated image of the risk swinging to and fro across an imaginary perpendicular line.

3     Rules for domestic and international trade

Incoterms® rules have traditionally been used in international sale contracts where goods pass across national borders. In various areas of the world, however, trade blocs, like the European Union, have made border formalities between different countries less significant. Consequently, the subtitle of the Incoterms® 2010 rules formally recognizes that they are available for application to both international and domestic sale contracts. As a result, the Incoterms® 2010 rules clearly state in a number of places that the obligation to comply with export/import formalities exists only where applicable.

Two developments have persuaded the ICC that a movement in this direction is timely. Firstly, traders commonly use Incoterms® rules for purely domestic sale contracts. The second reason is the greater willingness in the United States to use Incoterms® rules in domestic trade rather than the former Uniform Commercial Code shipment and delivery terms.

4     Guidance Notes

Before each Incoterms® 2010 rule you will find a Guidance Note. The Guidance Notes explain the fundamentals of each Incoterms® rule, such as when it should be used, when risk passes, and how costs are allocated between seller and buyer. The Guidance Notes are not part of the actual Incoterms® 2010 rules, but are intended to help the user accurately and efficiently steer towards the appropriate Incoterms® rule for a particular transaction.

5    Electronic communication

Previous versions of Incoterms® rules have specified those documents that could be replaced by EDI messages. Articles A1/B1 of the Incoterms® 2010 rules, however, now give electronic means of communication the same effect as paper communication, as long as the parties so agree or where customary. This formulation facilitates the evolution of new electronic procedures throughout the lifetime of the Incoterms® 2010 rules.   

6      Insurance coverThe Incoterms® 2010 rules are the first version of the Incoterms® rules since the revision of the Institute Cargo Clauses and take account of alterations made to those clauses. The Incoterms® 2010 rules place information duties relating to insurance in articles A3/B3, which deal with contracts of carriage and insurance. These provisions have been moved from the more generic articles found in articles A10/B10 of the Incoterms® 2000 rules. The language in articles A3/B3 relating to insurance has also been altered with a view to clarifying the parties’ obligations in this regard.

7     Security-related clearances and information required for such clearances

There is heightened concern nowadays about security in the movement of goods, requiring verification that the goods do not pose a threat to life or property for reasons other than their inherent nature. Therefore, the Incoterms® 2010 rules have allocated obligations between the buyer and seller to obtain or to render assistance in obtaining security-related clearances, such as chain-of-custody information, in articles A2/B2 and A10/B10 of various Incoterms® rules.

8     Terminal Handling Charges

Under Incoterms® rules CPT, CIP, CFR, CIF, DAT, DAP, and DDP, the seller must make arrangements for the carriage of the goods to the agreed destination. While the freight is paid by the seller, it is actually paid for by the buyer as freight costs are normally included by the seller in the total selling price. The carriage costs will sometimes include the costs of handling and moving the goods within port or container terminal facilities and the carrier or terminal operator may well charge these costs to the buyer who receives the goods. In these circumstances, the buyer will want to avoid paying for the same service twice: once to the seller as part of the total selling price and once independently to the carrier or the terminal operator. The Incoterms® 2010 rules seek to avoid this happening by clearly allocating such costs in articles A6/B6 of the relevant Incoterms rules.

9     String sales

In the sale of commodities, as opposed to the sale of manufactured goods, cargo is frequently sold several times during transit “down a string”. When this happens, a seller in the middle of the string does not “ship” the goods because these have already been shipped by the first seller in the string. The seller in the middle of the string therefore performs its obligations towards its buyer not by shipping the goods, but by “procuring” goods that have been shipped. For clarification purposes, Incoterms® 2010 rules include the obligation to “procure goods shipped” as an alternative to the obligation to ship goods in the relevant Incoterms rules.

Among the best known Incoterms are EXW (Ex works), FOB (Free on Board), CIF (Cost, Insurance and Freight), DDU (Delivered Duty Unpaid), and CPT (Carriage Paid To).

The 2000 edition takes account of the increased use of intermodal transport by providing for the delivery of goods from seller to buyer at any point in the transport chain instead of concentrating as in the past on the moment the goods cross the ship’s rail. The term FCA (Free Carrier) gives a clear definition of the seller’s delivery obligation in the country of export, irrespective of the mode of transport.

INCOTERMS 2000 AT A GLANCE:

GROUP ‘C’

Under the “C” group, the seller is required to contract for carriage on usual terms at his own expense. Therefor, a point up to which he would have to pay transport costs must necessarily be indicated. Seller is also responsible for export customs clearance formalities.

CFR – Cost and Freight 

Title, risk and insurance cost pass to buyer when delivered on board the ship by seller who pays the transportation cost to the destination port. Used for sea or inland waterway transportation.

CIF – Cost, Insurance and Freight

Title and risk pass to buyer when delivered on board the ship by seller who pays transportation and insurance cost to destination port. Used for sea or inland waterway transportation.

CIP – Carriage and Insurance Paid To

Title and risk pass to buyer when delivered to carrier by seller who pays transportation and insurance cost to destination. Used for any mode of transportation.

CPT – Carriage Paid To

Title, risk and insurance cost pass to buyer when delivered to carrier by seller who pays transportation cost to destination. Used for any mode of transportation.

GROUP ‘D’

Under the “D” group, the seller is responsible for the arrival of the goods at the agreed place or point of destination at the border or within the country of import. The seller must bear all risks and costs in bringing the goods thereto.

DAF – Delivered at Frontier

Title, risk and responsibility for import clearance pass to buyer when delivered to named border point by seller. Used for any mode of transportation.

DDP – Delivered Duty Paid

Title and risk pass to buyer when seller delivers goods to named destination point cleared for import. Used for any mode of transportation.

DDU – Delivered Duty Unpaid 

Title, risk and responsibility of import clearance pass to buyer when seller delivers goods to named destination point. Used for any mode of transportation. Buyer is obligated for import clearance.

DDU – Delivered Duty Unpaid

Seller fulfills his obligation when goods have been made available at the named place in the country of importation

DES – Delivered Ex Ship

Title, risk, responsibility for vessel discharge and import clearance pass to buyer when seller delivers goods on board the ship to destination port. Used for sea or inland waterway transportation.

DEQ – Delivered Ex Quay (Duty Paid) 

Title and risk pass to buyer when delivered on board the ship at the destination point by the seller who delivers goods on dock at destination point cleared for import. Used for sea or inland waterway transportation.

Note: EXW, CPT, CIP, DAF, DDU and DDP are commonly used for any mode of transportation. FAS, FOB, CFR, CIF, DES, and DEQ are used for sea and inland waterway.

GROUP ‘E’

Under group ” E ” the seller delivers when he or she places the goods at the disposal of the buyer at the seller’s premises or another named place such as factory, warehouse etc…If your cargo required special type of loading and handling such as crane or heavy equipment rental, bracing and blocking or special support such as air bags to prevent damage during transportation, the seller can require the buyer to pay for the additional costs.

EXW – Ex Works 

Title and risk pass to buyer including payment of all transportation and insurance cost from the seller’s door. Used for any mode of transportation.

GROUP ‘F’

Under Group ” F ” the seller is required to delivered the goods for carriage as instructed by the buyer. All export clearance charges are for the account of the seller.

FAS – Free Alongside Ship 

Title and risk pass to buyer including payment of all transportation and insurance cost once delivered alongside ship by the seller. Used for sea or inland waterway transportation. The export clearance obligation rests with the seller.

FCA – Free Carrier 

Title and risk pass to buyer including transportation and insurance cost when the seller delivers goods cleared for export to the carrier. Seller is obligated to load the goods on the Buyer’s collecting vehicle; it is the Buyer’s obligation to receive the Seller’s arriving vehicle unloaded.

FOB – Free On Board 

and risk pass to buyer including payment of all transportation and insurance cost once delivered on board the ship by the seller. Used for sea or inland waterway transportation.