International Contract Terms ( INCOTERMS 2000 )

By | October 17, 2016

In international transactions, traders are from diverse nations, the specific term should be interpreted in a similar way by all parties concerned. Otherwise, disputes are bound to arise. To solve this problem the International Chamber of Commerce (ICC) Paris has developed Incoterms. These terms are commonly used in export-import transactions. These terms have been revised several times since they have been introduced to incorporate new commercial practices. The current version of Incoterms has been an issue in 2000. Incoterms have been almost universally adopted by many exporters and importers. Let us discuss them briefly.

1. Ex Works (Ex-W):

‘Ex Works’ means that the seller delivers when he places the goods at the disposal of the buyers at the seller’s premises or another named place (i.e. works, factory, warehouses, etc.) not cleared for export and not loaded on any collecting vehicle.

This term thus represents the minimum obligation for the seller, and the buyer has to bear all the costs and risks involved in taking the goods from  the seller’s premises.

However, if the parties wish the seller to be responsible for the loading of the goods on departure and to bear the risks and all the costs of such  loading, this should be made clear by adding explicit wording this effect in the contract of sale. This term should not be used when the buyer cannot carry out the export formalities directly or indirectly. In such circumstances, the FCA term should be used, provided the seller agrees that he will load at his cost and risk.

2. Free Carrier (FCA):

‘Free carrier’ means that the seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place. It should be noted that the chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place. If delivery occurs at the seller’s premises, the seller is responsible for loading. If delivery occurs at any other place, the seller is not responsible for unloading, which is on account of an importer.

This term may be used irrespective of the mode of transport, including multimodal transport.

“Carrier” means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, air, sea, inland waterway or by a combination of such modes.

If the buyer nominates a person other than a carrier to receive the goods, the seller is deemed to have fulfilled his obligation t deliver the goods when they are delivered to that person.

3. Free Alongside ship (FAS):

‘Free Alongside Ship’ means that the seller delivers when the goods are placed alongside the vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment.

4. Free On Board (FOB):

‘Free on Board’ means that the seller delivers when the goods pass the ship’s rail at the named port of the shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export. This term can be used only or sea or inland waterway transport. If the parties do not intend to deliver the goods across the ship’s rail then only FOB term should be used otherwise the FCA term should be used.

5. Cost and Freight (CIF):

‘Cost and Freight’ means that the seller delivers when the goods pass the ship’s rail in the port of shipment.

The seller must pay the costs and freight necessary to bring the goods to the named port of destination. But the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer.

The CFR term requires the seller to clear the goods for export.

This term can be used only for sea and inland waterway transport. If the parties do not intend to deliver the goods across the ship’s rail, the CPT term should be used.

6. Cost Insurance and Freight (CIF):

‘Cost, Insurance and Freight’ means that the seller delivers when the goods pass the ship’s rail in the port of shipment.

The seller must pay the costs and freight necessary to bring the goods to the named port of destination. But the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer.

However, in CIF the seller contracts for insurance and pays the insurance premium. The buyer should note that under the CIF terms the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have the protection of the greatest cover, he should either need to agree as much expressly with the seller or to make his own extra insurance arrangements.

The CIF term requires the seller to clear the goods for export.

This term can be used only for sea and inland waterway transport. If the parties do not intend to deliver the goods across the ship’s rail, the CIP term should be used.

7. Carriage Paid to (CPT):

‘Carriage paid to’ means that the seller delivers the goods to the carrier nominated by him but the seller must, in addition, pay the cost of carriage necessary to bring the goods to the named destination. This means that the buyers all risks and any other costs occurring after the goods have been so delivered.

‘Carrier’ means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport, by rail, road, air, sea, inland waterway or by a combination of such modes.

The CPT term requires the seller to clear the goods for export.

This term may be used irrespective of the modes of transport including multimodal transport.

8. Carriage and Insurance paid to (CIP):

‘Carriage and Insurance paid to’ means that the seller delivers the goods to the carrier nominated by him, but the seller must, in addition, pay the cost of carriage necessary to bring the goods to the named destination, This means that the buyer bears all risks and any additional costs occurring after the goods have been so delivered. However, in CIP the seller also has to insurance against the buyer’s risk of loss of or damage to the goods during the carriage.

Consequently, the seller contracts for insurance and pays the insurance premium.

The buyer should note that under the CIP term the seller is required to get insurance only on minimum cover. Should the buyer wish to have the protection of greater cover, he would either need to agree as much expressly with the seller or to make his own extra insurance arrangements.

‘Carrier’ means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea, inland waterway or by a combination of different modes of transportation.

In subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier.

The CIP term requires the seller to clear the goods for export.

This term may be used irrespective of the mode of transport, including multimodal transport.

9. Delivered at Frontier (DAF):

‘Delivered at Frontier’ means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport not unloaded, cleared for export, but not cleared for import at the named point and place at the frontier, but before the customs border of the adjoining country. The term ‘frontier’ may be used for any frontier including that of the country of export. Therefore, it is of vital importance that the frontier in question be defined precisely by always naming the point and place in the term.

However, if the parties wish the seller to be responsible for the unloading of the goods from the arriving means of transport and to bear the risks and costs of unloading, this should be made clear by adding explicit wording to his effect in the contract of sale.

This term may be used irrespective of the mode of transport when goods are to be delivered at a land frontier. When delivery is to take place at the port of destination, on board a vessel or on the quay (Wharf), the DES or DEQ terms should be used.

10. Delivered Ex-Ship (DES):

‘Delivered Ex Ship’ means that seller delivers when the goods are placed at the disposal of the buyer on board the ship not cleared for import at the named port of destination. The seller has to bear all the costs risks involved in bringing the goods to the named port of destination before discharging. If the parties wish the seller to bear the costs and risks of discharging the goods, then the DEQ term should be used.

DES term can be used only when the goods are to be delivered by sea or inland waterway or multimodal transport on a vessel in the port of destination.

11. Delivered Ex-quay (DEQ):

‘Delivery Ex Quay’ means that the seller delivers when the goods are placed at the disposal of the buyer not cleared for import on the quay (Wharf) at the named port of destination. The seller has to bear all the costs and risks involved in bringing the goods to be named port of destination and discharging the goods on the quay (Wharf). The DEQ term requires the buyer to clear the goods for import and to pay for all formalities, duties, taxes and other charges upon import.

This is a reversal from earlier incoterms version which required the seller to arrange for import clearance.

If the parties wish to include in the seller’s obligations all or part of the costs payable upon import of the goods, this should be made clear by adding explicit wording to this effect in the contract of sale.

This term can be used only when the goods are to be delivered by sea or inland waterway or multimodal transport on discharging from a vessel onto the quay (Wharf) in the port of destination. However, if the parties wish to include in the seller’s obligation the risks and costs of the handling of the goods from the quay to another place (warehouse, terminal, transport station, etc.) in or outside the port, the DDU or DDP terms should be used.

12. Delivered Duty Unpaid:

‘Delivery duty unpaid’ means that the seller delivers the goods to the buyer, not cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller has to bear the costs and risks involved in bringing the goods to the buyer, not cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller has to bear the costs and risks involved in bringing the goods thereto, other than, where applicable; any ‘duty’ (which term includes the responsibility for and the risk of the carrying out of customs formalities, and the payment of formalities, customs duties, taxes and other charges) for import in the country of destination. Such ‘duty’ has to be borne by the buyer as well as any costs and risks caused by his failure to clear the goods for import in time.

However, if the parties wish the seller to carry out customs formalities and bear the costs and risks resulting therefrom as well as some of the costs payable upon import of the goods, this should be made clear by adding explicit wording to this effect in the contract of sale.

This term may be used irrespective of the mode of transport but when delivery is to take place at the port of destination on board the vessel or on the quay (Wharf), the DES or DEQ terms should be used.

13. Delivered Duty Paid (DDP):

‘Delivery duty paid’ means that the seller delivers the good to the buyers, cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller has to bear all the costs and risks involved in bringing the goods thereto including, where applicable, any ‘duty’ (which term includes the responsibility for and the risks of carrying out of customs formalities and the payment of formalities, customs duties, taxes and other charges) for import in the country of destination.

Whilst the EXW term represents the least obligation for the seller, DDP represents the maximum obligation.

The term should not be used if the seller is unable directly or indirectly get an import license.

However, if the parties wish to exclude from the seller’s obligation some of the costs payable upon import of the goods (such as value-added tax; VAT), this should be made clear by adding explicit wording to this effect in the contract of sale.

If the parties wish the buyer to bear all risks and costs of the import, the DDU term should be used.

This term may be used irrespective of the mode of transport but when delivery is to take place at the port of destination on board the vessel or on the quay (Wharf) the DES or DEQ terms should be used.

Incoterms set out the rights and the obligations of the buyer and the seller for the reach of the terms. Therefore, each party has known precisely what he is supposed to do and in turn what he can expect from the other party, Consequently, the scope of misunderstanding and dispute becomes less. There is, however, one point that you must note. Incoterms is not a treaty or a convention which has been adopted by the trading nations. This is only a document prepared by as business organization.

Therefore, to make Incoterms applicable to an export contract, the parties must specifically mention that they would like their contract to be interpreted as per Incoterms.