Trade compliance : Incoterms

What are Incoterms and its importance in detail ??

"Incoterms are the language you’ll need when you’re trading abroad, defining the trade contract responsibilities and liabilities between a buyer and a seller. They cover who is responsible for paying freight costs, insuring goods in transit and covering any import/export duties"

Here is a list of the commonly used INCOTERMS you'll need when trading internationally. Full details of all the INCOTERMS and their definitions are available from the International Chamber of Commerce ?

EXW - Ex Works

The seller makes the goods available at his or her premises. The buyer is responsible for loading. This applies to any mode of transport, but should only be used for domestic transactions, because the seller only has to 'provide the buyer' assistance in obtaining any export licence, or other official authorisation. The seller also has no obligation to load the goods. In addition the buyer has limited obligations to provide the seller with proof of export. For international trade, FCA, below, is more appropriate.

FCA - Free Carrier

The seller must 'deliver the goods to the carrier ... nominated by the buyer ... at the named place'. This term is suited for international sales with minimum obligations for the seller. Its advantage over EXW is that the seller is responsible for any export licensing and Customs export clearance, which eases the problem of proof of export, and the seller must load the goods (which is usually the case).

There is a new focus on 'FCA ... seller's premises' as the appropriate term for international sales when the seller wants to limit their obligations to the loading of the goods and export clearance.

CPT Carriage Paid To

(… named place of destination). The seller pays for carriage. This term is used for all kinds of shipments. Risk is transferred from the seller to the buyer upon handing over of the goods to the first carrier at the place of shipment in the country of export.

CIP - Carriage and Insurance Paid

(named place of destination) - any mode of transport. The seller must 'deliver to the first carrier at the named place'. It’s strongly recommended that the parties define the place of delivery (in the seller's country) as well as the place of destination (in the buyer's country) due to the fact that risk passes to the buyer at the named place of delivery in the seller's country.

When CPT or CIP terms are used, the seller fulfils their obligation to deliver when they hand the goods over to the carrier, and not when the goods reach the place of destination. So these are 'shipment contracts' not 'arrival contracts'. Therefore, it is strongly recommended that the place of delivery, in the seller's country, is identified as precisely as possible in the contract.

DAT - Delivered at Terminal

(…named terminal at destination). The seller pays for carriage to a nominated ‘terminal’ or ‘point’, except for costs related to import clearance. The seller also assumes all risks up to the point that the goods are unloaded at the terminal.

DAP would be inappropriate in these circumstances as the seller has only to place the goods 'ready for unloading’.

DAP - Delivered At Place

(…named place of destination). This is appropriate for both domestic and international sales.

The seller delivers when 'the goods are placed at the disposal of the buyer ready for unloading by the buyer ... at the named place'. All import Customs formalities and costs are the responsibility of the buyer.

DDP - Delivered Duty Paid

(…named place of destination). This applies to any mode of transport. The seller must deliver the goods to the buyer, cleared for import, and not unloaded at the named place of destination.

Maritime-only terms - These are only used for conventional sea or inland waterway transport:

• FAS - Free Alongside Ship (named port of shipment). If the goods are containerised, use the FCA term.
• FOB - Free On Board (…named port of shipment). The seller must deliver the goods by 'placing them on board the vessel ... at the loading point'. The FCA term should be used where the goods are handed over to the carrier before they are on board the vessel – goods in containers, for example.
• CFR - Cost and Freight (…named port of destination).
• CIF - Cost Insurance and Freight (…named port of destination).

What Do Incoterms Not Cover?

There are specific instances that Incoterms will not cover. Incoterms do not:

• Address?all the conditions of a sale?
• Identify the goods being sold nor?list the contract price
• Reference the method?or timing of?payment?negotiated between the seller and buyer???
• Determine when the title, or ownership of the goods, passes from the seller to the buyer??
• Specify which documents must be?provided by the seller to the buyer to facilitate the customs clearance process?in the buyer’s country??
• Address liability for the failure?to provide the goods in conformity?with the contract of sale, delayed delivery, or?dispute resolution mechanisms

Advantages and Disadvantages of Incoterms

The single greatest advantage of using Incoterms is the standardization and specificity of complicated international trade aspects. Having a system that eliminates ambiguity between nations has made trading much simpler, especially when negotiating terms. This saves time and money that would have previously been spent on lawyers, who would draft terms basically breaking down Incoterms into different languages.

A notable disadvantage of Incoterms is that buyers and sellers often have different preferences when using them. Sellers, for example, may choose CIF because they understand their shipments better than buyers do. Buyers, in contrast, may prefer FOB for the same reasons. However, the terms themselves are not the issue, and it becomes more a matter of negotiation over which terms to use vs. the clarity of the terms themselves.