INCOTERMS: The duties of the buyer and the seller in Export & Import procedures.

Trade Terms are key elements of international contracts of sale. They tell the parties what to do with respect to carriage of the goods from buyer to seller, and export & import clearance. They also explain the division of costs and risks between the parties. The Incoterms, International Commercial Terms, are a series of commercial terms published by the International Chamber of Commerce (ICC). The International commercial transactions are accepted by governments, legal authorities, and practitioners worldwide. The rules were published in 1936 a set of international rules for the international rules for the interpretation of trade terms and since then they have been updated regularly. The current version is their eight - Incoterms 2010 having been published on January 1, 2011. The ICC has begun consultations on a new revision of Incoterms, to be called Incoterms 2020. Incoterms are used in contracts in a 3-letter format followed by the place specified in the contract such as the port or where goods are to be picked up.

In the contract between the seller and the buyer, the following is determined:

1.     The duties of the buyer and the seller

2.     Who is responsible for arranging and paying for transport and associated activities such as loading or unloading, import and export procedures, insuring the goods etc.?

3.     The point where the costs and risks pass on from the seller to the buyer if the goods are lost or damaged in transit

11 TYPES OF INCOTERMS 2010:

There are eleven different incoterms in Incoterms 2010. These incoterms take care of the international rights and duties of the buyer and the seller. It’s a very important subject that helps not only traders but lawyers, transporters, and insurers.

1.     Four of the eleven incoterms are used for sea and inland waterway transport like FAS, FOB, CFR, and CIF.

2.     The remaining seven incoterms are regarding all transport modalities like EXS, FCA, CPT, CIP, DAT, DAP, and DDP.

EXW (Ex Works)

This term places the maximum obligation on the buyer and minimum obligations on the seller - a buyer incurs the risks for bringing the goods to their final destination. The seller fulfills his obligation to deliver when he has made the goods available at his premises to the buyer. In particular, he is not responsible for loading the goods on the vehicle provided by the buyer or for clearing the goods for export, unless otherwise agreed. The buyer bears all costs and risks involved in taking the goods from the seller's premises to the desired destination.

FCA (Free Carrier)

The seller delivers the goods, cleared for export, at a named by the buyer place. If no precise point is indicated by the buyer, the seller may choose within the place or range stipulated where the carrier shall take the goods into his charge. When, according to commercial practice, the seller's assistance is required in making the contract with the carrier the seller may act at the buyer's risk and expense.

FAS (Free Alongside Ship)

The seller delivers when the goods are placed alongside the buyer's vessel at the named port of shipment and the buyer has to bear all costs and risks of loss of or damage to the goods from that moment.

FOB (Free on Board)

The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. The seller bears all costs and risks up to the point the goods are loaded on board the vessel and the buyer pays the cost of marine freight transportation, bill of lading fees, insurance, unloading, and transportation cost from the arrival port to destination. 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.

CFR (Cost and Freight) 

The seller pays for the carriage of the goods up to the named port of destination and the risk transfers to the buyer when the goods have been loaded on board the ship in the country of Export. 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 the goods have been delivered on board the vessel is transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment.

CIF (Cost, Insurance and Freight)

Similar to CFR, but the seller is required to obtain insurance for the goods while in transit to the named port of destination. 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 buyer should wish to have more insurance protection with its own extra insurance arrangements.

CPT (Carriage Paid to)

The seller pays the freight for the carriage of the goods to the named destination. The risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier, is transferred from the seller to the buyer when the goods have been delivered into the custody of the carrier. The CPT term requires the seller to clear the goods for export. 

CIP (Carriage and Insurance Paid To)

Similar to CPT, but the seller is required to obtain insurance for the goods while in transit. The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place 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. Under CIP, the seller is required to obtain insurance only on minimum cover. The buyer should wish to have more insurance protection with its own extra insurance arrangements.

 DAT (Delivered at Terminal)

The seller delivers the goods, unloaded, at the named terminal, covering all the costs of transport (export fees, carriage, unloading from main carrier at destination port and destination port charges) and 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)

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)

The seller is responsible for delivering the goods to the named place in the country of the buyer and pays all costs in bringing the goods to the destination including import duties and taxes. 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.

To end, the use of Incoterms eliminates inconsistencies in language by giving all parties the same definition of specific terms within a business agreement. Consequently, the risk of problems during shipment is reduced since all parties clearly understand their responsibilities in performing trade under the given contract. 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.