Last determined by the ICC in 1994. There is also a 1936
American version.
Used by all parties to an international trade transaction: buyer, seller, banks,
financial institutions, agents, forwarders, insurance companies, carriers,
government authorities, lawyers and courts.
See Appendix for detailed analyses of all 13 Incoterms
EXW (Ex Works) – Seller provides goods in his factory yard. Buyer is
responsible for all the rest, including loading the goods onto trucks in the
seller’s yards. Best to add: “loaded upon departing vehicle”.
FCA (Free Carrier) – Seller provides export licenses, customs clearances
and port documents to first carrier (determined by buyer) in an agreed location
within the export country. Useful for Multi Modal Transport (MMT) in land, air,
or sea. Seller pays all port and customs inspection expenses. Seller’s
responsibility ends with delivery to carrier. Buyer pays all expenses from point
of delivery (transport, insurance, special inspections).
FAS (Free Alongside Ship) – Seller delivers goods to a loading quay,
alongside a ship, in an agreed port in export country. Buyer obliged to clear
goods for export after having received loading documents from seller. Buyer pays
all port expenses and expenses related to required documentation. Use only for
marine freight.
FOB (Free On Board) – Seller delivers customs-cleared goods with bill of
lading, export license, all taxes and duties paid clean (unharmed) on board a
vessel. Seller pays all expenses until goods are clean on board. Buyer
determines carrier and pays the carriage (including loading expenses if part of
the transport costs). Marine freight only. Best to add: “stowed and trimmed”.
Buyer must insure itself when using an “F” Incoterm.
CFR (Cost and Freight) – Seller pays all expenses and transport costs to
port of discharge. But responsibility for damage or loss or additional expenses
is buyer’s after goods loaded and stowed under deck. Seller obtains customs and
port clearances, licenses, contracts with the carrier and with the insurance
company regarding transport of goods to the point of loading. Buyer must obtain
the import licenses, release the goods in port of discharge, issue insurance and
pay for transit and inspection of goods. Marine freight only.
CIF (Cost, Insurance, Freight) – Seller arranges marine freight insurance
for buyer and provides buyer with valid insurance policy in addition to
obligations under CFR. Unless otherwise agreed, seller buys a limited “C”
policy. Best to add: “free out”. It is important to mention the type of
insurance and coverage sought by buyer.
CPT (Carriage Paid To) – Similar to CFR but when MMT involved (car,
train, ship and then airplane, for instance). Instead of On Board – use First
Carrier.
CIP (Carriage and Insurance Paid To) – Similar to CIF but when MMT is
involved. Responsibility reverts to buyer when goods delivered to First Carrier.
DAF (Delivered At Frontier) – Seller to deliver export cleared goods at a
precise point at the border of either import or export country. Buyer obliged to
clear goods through customs terminal, to obtain import license and to bear all
import related duties, fees and charges. Seller must inform buyer ETD (Expected
Time of Delivery) and precise location of delivery.
If preceded by international marine or air transport, point of delivery will
follow the Main Carriage (used in train transport).
DES (Delivered Ex Ship) – Marine freight only. Seller must deliver export
cleared goods to buyer on board a ship in port of discharge but has no
responsibility to clear the goods for import in the destination country, to
unload them and to ship them to final destination within the buyer’s country.
DEQ (Delivered Ex Quay) – Marine freight only. Seller must deliver goods
buyer outside the quay after unloading them from the ship and clearing them for
import through port authorities and customs. Seller pays import taxes and port
expenses. Seller must provide buyer with bill of lading and gate pass. Buyer
must transport goods to his yards and if he does not must pay demurrage and
warehousing.
DDU (Delivered Duty Unpaid) – Seller must deliver goods to buyer in a
location within the destination country but buyer must clear them for import
through the port and customs authorities. Buyers must pay all taxes and expenses
related to the clearance.
DDP (Delivered Duty Paid) – Seller must deliver goods directly to buyer’s
location (or to any other address) after having fully cleared them for import
and fully paid all taxes and expenditures related to such clearance. Best to
add: “DDP-VAT unpaid” in case seller does not agree to pay the VAT.
IMPORTANT!!!
The buyer and the seller must include all special conditions, not covered by the
Incoterms – in their sale contract or order or commercial invoice.
Even if you include an Incoterm in a contract it is advised, to remove doubt, to
also include a detailed list of rights obligations of the parties (=an agreed
interpretation of the Incoterm). Always mention the version of Incoterms used
(for instance: “FOB – Incoterms 1990”).
The transfer of responsibility to the goods from seller to buyer does NOT
constitute a transfer of title (ownership) to the goods.
There are Exit Contracts (seller delivers to buyer’s carrier in country of
origin of the goods and such a delivery ends the seller’s responsibility) – All
the Incoterms which start with the letters E, F and C. For example: CIF does NOT
mean that the seller is responsible to deliver the goods in a port in the
destination country – only that it has to pay for the voyage and for the
insurance.
There are Delivery Contracts (seller delivers to buyer in country of destination
and is responsible to them until they are delivered there) – All the Incoterms,
which start with the letter D.
Insurance
This is why insurance is critical (policy types A, B, or C).
It must include:
Location in which the policy becomes valid
Location at which the policy expires
Extensions to the basic policy
Political risks
Value of coverage and types of coverage (replacement value, damages, etc.)
Insurance of loss of profits
The policy’s currency
Currency hedging
Important –
The buyer must provide full specifications of packing of goods
If the parties use a C Incoterm, the buyer is usually responsible for costs
associated with an inspection of the goods by the authorities of the country of
origin (PSI – Pre Shipment Inspection). If the buyer demands an inspection
(quality and quantity controls) – it must be stated clearly who will bear the
cost. If not specified – the buyer shall bear it.
It is recommended to use FCA when goods are not delivered to the carrier on quay
or on board. Buyer must arrange the transport and provide the seller with exact
instructions.
“FOB Airport” should not be used. FOB is ONLY for marine transportation.
For air transport use FCA.
Incoterms in conjunction with Bill of Lading (BL)
When CIF or CFR is used, use “on board BL” (goods have been
loaded on board ship).
If goods shipped in containers, carrier may issue “Received for Shipment” (when
he receives the goods and prior to their loading on board) – instead of BL.
It is preferable to use CPT or CIP if BL not required to conclude the
transaction.
If goods arrive prior to original BL – they are delivered to buyer against a
bank guarantee. Avoid it as it negates the function of the BL.
Non Negotiable Waybills and Receipts
If a waybill is non-negotiable, there is no need to present
its original to obtain delivery of the goods.
All air waybills are non-negotiable. Only the seller can instruct the carrier
(not the buyer or his bank). Importers dislike non-negotiable waybills (unless
explicitly stated that they are irrevocable). The names of the parties in the
waybill must be irrevocable – otherwise, the seller can change them.
BLs, Receipts and Waybills
Let us call all waybills and receipts – as well as bills of
lading – transport documents (TD).
TDs are delivered to the buyer or to the seller according to instructions given
to the carrier (never mind who paid for the carriage). The seller might get them
to prove delivery. The buyer needs them to release the goods (to instruct the
carrier).
TDs can be divisible (article A8 of Incoterms) in case one TD covers goods
deliverable to many buyers.
Buyers responsible to release the goods and accept delivery – or to compensate
seller for any damages.
Buyer is liable for damages to the goods after the transfer of responsibility
from seller to buyer (“Price Risk”).
It is recommended to use “Force Majeure” articles in sales contracts.
Some countries oblige exporters and importers to insure the goods in their own
countries (to minimize foreign exchange outlays).
Rules of Use of Incoterms
1) Use DEQ, DES, CIF, FOB and
FAS only in marine carriage and for marine freight.
2) Use CPT, CIP, FCA universally except if goods are in
bulk of carried in chartered vessels.
3) Be clear: how are the goods to be transported, who has the obligation to have
them loaded, who pays for what, who is responsible to clear the goods, to
release them and to unload them and so on.
4) Be clear: how much insurance you require and what type (A, B,
C)
5) What restrictions and special demands would you like to impose on the
carriage and the carrier.
6) Include “Force Majeure” and validity, expiry and termination clauses
7) Indicate which Incoterms version is used (example: FOB-Incoterms 1990).
8) The Incoterms CPT, CIP, CFR and CIF deal only
with the transport aspect of the transaction – not with the transfer of
responsibility or ownership.
