Basic Transport Contract Terms (INCOTERMS)
The meaning of trade terms vary from country to country. To avoid confusion, standard terms called Incoterms have been derived & published by the International Chamber of Commerce (ICC) to make the terms of sale clear and precise. Incoterms provide a set of international rules for the interpretation of the most commonly used trade terms between buyer and seller, in foreign trade.
These Terms describe in detail the rights, responsibilities, obligations and costs of the sellers and buyers in international trade, with particular reference to the transportation of goods. Some terms were designed with sea vessels in mind while others were designed to be applicable to all modes.
The basic specifics that these terms address are
Who is responsible for the expenses involved in a shipment at a given point in a shipment's journey
Who owns the goods at a given point in the journey
Who is responsible for paying damage to goods at a given point in a shipment transit
Types of Incoterms
There are 13 different terms divided into 4 categories. Each of these terms deals with different situations involving the movement of goods.
The categories are:
Departure Terms where sellers responsibilities are fulfilled when goods are ready to depart from facilities. It has minimum seller obligation. Here the seller makes the goods available to the buyer at the seller's own premises.
It has only one category EXW (Ex-Works)
(i.) Ex Works - EXW
Ex means from. Work means factory, mill or warehouse, which are the sellers premises. Ex- Works means the seller's only responsibility is to make the goods available at the seller's premises, ie., the works or factory. The seller is not responsible for loading the goods on the vehicle provided by the buyer unless otherwise agreed. The buyer bears the full costs and risk involved in bringing the goods from there to the desired destination. The buyer is responsible for all transportation costs, duties, and insurance, and accepts risk of loss of goods immediately after the goods are purchased and placed outside the factory door. Ex-Works represents the minimum obligation of the seller. Some manufacturers may use the term Ex Factory, which means the same as Ex Works. The term is applicable to all modes of transport including multimodal.
Terms beginning with F refer to shipments where the primary cost of shipping is not paid for by the seller. Seller has to deliver goods to a carrier appointed by buyer.
The main characteristics of the F terms are that the main carriage is not paid by the seller.
The terms in this category include:
(i.) Free Carrier - FCA
The Seller fulfills his/her obligations when the goods are delivered to carrier at a named point specified by buyer. The risk of loss or damage to the goods is transferred from seller to buyer at that time. If the place chosen is the seller's place of business, the seller must load the goods onto the transport vehicle; otherwise, the buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks. Has been designed to meet the requirements of multi-modal transport such as containers, traffic by trailers and ferries.
(ii.) Free Alongside - FAS
Seller transports the goods from his place of business, clears goods for export and places goods alongside ship on quay. The risk of loss then shifts to the buyer. Buyer is responsible for loading the goods onto the vessel and for paying all costs involved in shipping the goods to the final destination. Applicable only to sea and inland waterway.
(iii.) Free on Board - FOB
FOB states that the seller is responsible for delivering the goods from his place of business and loading them onto the vessel at the port of shipment named in the sales agreement as well as clearing customs in the country of export. As soon as the goods cross the ship's threshold the risk of loss is transferred to the buyer. The buyer is responsible for all transportation and insurance costs from that point, and also for clearing customs in the country of import. The seller pays the cost of loading the goods. Applicable only to sea and inland waterway transport.
Terms beginning with C deal with the shipments where the seller pays for shipping, but without assuming the risk of loss or damage to the goods or additional costs due to events occurring after shipment and dispatch. The seller is also responsible for export customs clearance. Seller is not liable for risk/loss/damage to the goods during shipping.
For the C terms, the main carriage is paid by the seller.
These terms include:
(i.) Cost and Freight - CFR
Requires the seller to pay the costs and freight necessary to bring the goods to the named destination, but the risk of loss or damage to the goods as well as any cost increases are transferred to the buyer when the good pass the ship's rail in the port of shipment. Insurance is the buyer's responsibility. The buyer is responsible for the import customs clearance and other costs and risks.Applicable only to sea and inland waterway
(ii.) Cost, Insurance & Freight - CIF
Seller is responsible for delivering the goods onto the vessel of transport and clearing customs in the country of export. He is also responsible for purchasing insurance with the buyer named as the beneficiary.Risk of loss transfers to buyer as the goods cross the ship's rail. If these goods are damaged or stolen during international transport, the buyer owns the goods and must file a claim based on insurance procured by the seller.
Applicable only to sea and inland waterway.
(iii.) Cost Paid To - CPT
Seller clears the goods for export, delivers them to the carrier and is responsible for carriage costs to the named place of destination. Risk of loss or damage to the goods transfers to the buyer when the goods have been delivered to the custody of the final carrier. Applicable to all modes of transport.
(iv.) Carriage and Insurance paid - CIP
Delivery of goods and cargo insurance to the named place of destination at seller's expense. Applicable to all modes of transport.
Shipper/seller responsibility ends when goods arrive at some specific point. Seller has to bear all costs and risks needed to bring the goods to the country of destination. These are essentially arrival/delivery terms.
The D terms are:
(i.) Delivered at frontier - DAF
The seller is responsible for all costs involved in delivering the goods to the named point and place at the frontier. The sellers obligations are fulfilled when the goods have arrived at the frontier but before the customs border of the country named in the sales contract. Risk of loss transfers from seller to buyer at the frontier. The buyer pays the cost and bears the risk of unloading the goods, clearing customs and transporting the goods to the final destination. This term is applicable to all modes of transport.
(ii.) Delivered Ex-Ship - DES
The seller makes the goods available to the buyer on board the ship at the destination named in the sales contract. Seller is responsible for all costs and risks involved in delivering the goods to a named port of destination. Upon arrival, the goods are made available to buyer on board the vessel. The buyer must pay the cost of unloading the goods and any customs duties. Applicable only to sea and inland waterway transport.
(iii.) Delivered Ex-Quay - DEQ
The seller makes the goods available to the buyer on the quay or wharf at the destination named in the sales contract. Seller bears all costs and risks in transporting to the wharf (quay) at the port of destination. The buyer must pay duties, clear customs, and pay cost/bear risk from that point onward. Applicable only to sea and inland waterway transport.
(iv.) Delivery Duty Unpaid - DDU
The seller is responsible for all costs involved in delivering the goods to a named place of destination where the goods are placed at the disposal of the buyer. The buyer assumes risks of loss at that point and must clear customs, pay duties and provide inland transportation and insurance to the final destination. The term is applicable to all modes of transport.
(v.) Delivery Duty Paid - DDP
Seller bears costs up to named point of destination including customs clearance at the country of import. Under DDP, the seller literally provides door to door delivery, including customs clearance in the port of export and the port of destination. Thus the seller bears the entire risk of loss until goods are delivered to the buyer's premises. The term is applicable to all modes of transport. Here, the seller is responsible for most of the expenses, which include the cargo insurance,import customs clearance, and payment of customs duties and taxes at the buyer's end, and the delivery of goods to the final point of destination, which is often the project site or buyer's premises. The seller may opt not to insure the goods at his/her own risk.
Incoterms Classification Based on Transporation
1. Rules for Any Mode(s) of Transport
(i.) EXW – Ex Works (named place of delivery)
(ii.) FCA – Free Carrier (named place of delivery)
(iii.) CPT - Carriage Paid To (named place of destination)
(iv.) CIP – Carriage and Insurance Paid to (named place of destination)
(v.) DAT – Delivered at Terminal (named terminal at port or place of destination)
(vi.) DAP – Delivered at Place (named place of destination)
(vii.) DDP – Delivered Duty Paid (named place of destination)
2. Rules for Sea and Inland Waterway Transport
(i.) FAS – Free Alongside Ship (named port of shipment)
(ii.) FOB – Free on Board (named port of shipment)
(iii.) CFR – Cost and Freight (named port of destination)
(iv.) CIF – Cost, Insurance and Freight (named port of destination)