Incoterms 2010
The Incoterms 2010 rules are standard sets of trading terms and conditions designed to assist traders when goods are sold and transported.
Each Incoterms rule specifies:
- the obligations of each party (e.g. who is responsible for services such as transport; import and export clearance etc)
- the point in the journey where risk tranfers from the seller to the buyer
So by agreeing on an Incoterms rule and incorporating it into the sales contract, the buyer and seller can achieve a precise understanding of what each party is obliged to do, and where responsibility lies in event of loss, damage or other mishap.
The Incoterms rules are created and published by the International Chamber of Commerce (ICC) and are revised from time to time. The most recent revision is Incoterms 2010 which came into force on 1st January 2011.
The definitive publication on the Incoterms 2010 rules is the ICC publication number 715, which is available from various national bookshops.
This is essential reading for those with responsibility for setting a corporate policy or negotiating contracts with trading partners or service providers.
INCOTERMS - 11 rules in brief
Ex Works (EXW)
Can be used for any transport mode, or where there is more than one transport mode
This rule places minimum responsibility on the seller, who merely has to make the goods available, suitably packaged, at the specified place, usually the seller’s factory or depot.
The buyer is responsible for loading the goods onto a vehicle (even though the seller may be better placed to do this); for all export procedures; for onward transport and for all costs arising after collection of the goods.
In many cross-border transactions, this rule can present practical difficulties.
Specifically, the exporter may still need to be involved in export reporting and clearance processes, and cannot realistically leave these to the buyer. Consider Free Carrier (seller's premises) instead.
Other things to watch for. Although the seller is not obliged to load the goods, if the seller does so, this is at the buyer’s risk!
Free Carrier (FCA)
Can be used for any transport mode, or where there is more than one transport mode.
A very flexible rule that is suitable for all situations where the buyer arranges the main carriage
For example:
- Seller arranges pre-carriage from seller’s depot to the named place, which can be a terminal or transport hub, forwarder’s warehouse etc. Delivery and transfer of risk takes place when the truck or other vehicle arrives at this place, ready for unloading – in other words, the carrier is responsible for unloading the goods. (If there is more than one carrier, then risk transfers on delivery to the first carrier.)
- Where the named place is the seller’s premises, then the seller is responsible for loading the goods onto the truck etc. NB this is an important difference from Ex Works EXW
In all cases, the seller is responsible for export clearance; the buyer assumes all risks and costs after the goods have been delivered at the named place.
FCA is the rule of choice for containerised goods where the buyer arranges for the main carriage.
Carriage Paid To (CPT)
Can be used for any transport mode, or where there is more than one transport mode.
The seller is responsible for arranging carriage to the named place, but not for insuring the goods to the named place. However delivery of the goods takes place, and risk transfers from seller to buyer, before the main carriage, at the point where the goods are taken in charge by the first carrier.
Things to watch for.
Terminal Handling Charges (THC) are charges made by the terminal operator at either the beginning or the end of the transport operation, or at both ends. These charges may or may not be included by the carrier in their freight rates – the buyer should enquire whether the CPT price includes THC, so as to avoid surprises.
The buyer will need to arrange insurance cover for the main carriage, starting from the point where the goods are taken in charge by the carrier – NB this will not be the place referred to in the Incoterms rule, but will be specified elsewhere within the commercial agreement
See also “Carriage and Insurance Paid To CIP”
Carriage and Insurance Paid To (CIP)
Can be used for any transport mode, or where there is more than one transport mode. The seller is responsible for arranging carriage to the named place, and also for insuring the goods.
As with CPT, delivery of the goods takes place, and risk transfers from seller to buyer, before the main carriage, at the point where the goods are taken in charge by the first carrier.
Things to watch for. Terminal Handling Charges (THC) are charges made by the terminal operator at either the beginning or the end of the transport operation, or at both ends. These charges may or may not be included by the carrier in their freight rates – the buyer should enquire whether the CPT price includes THC, so as to avoid surprises.
Although the seller is obliged to arrange for insurance for the journey, the rule only requires a minimum level of cover, which may be commercially unrealistic. Therefore the level of cover may need to be addressed elsewhere in the commercial agreement
See also “Carriage Paid To CPT”
Delivered at Terminal (DAT)
Can be used for any transport mode, or where there is more than one transport mode. The seller is responsible for arranging carriage and for delivering the goods, unloaded from the arriving conveyance, at the named place.
Risk transfers from seller to buyer when the goods have been unloaded.
'Terminal' can be any place – a quay, container yard, warehouse or transport hub.
The buyer is responsible for import clearance and any applicable local taxes or import duties.
Things to watch for:
The place for delivery should be specified as precisely as possible, as many ports and transport hubs are very large.
Where Terminal Handling Charges may apply, the parties should clarify who should bear these.
A useful rule, well suited to container operations where the seller bears responsibility for the main carriage.
Delivered at Place (DAP)
Can be used for any transport mode, or where there is more than one transport mode.
The seller is responsible for arranging carriage and for delivering the goods, ready for unloading from the arriving conveyance, at the named place. (An important difference from Delivered At Terminal DAT, where the seller is responsible for unloading.)
Risk transfers from seller to buyer when the goods are available for unloading; so unloading is at the buyer's risk.
The buyer is responsible for import clearance and any applicable local taxes or import duties.
This rule can often be used to replace the Incoterms 2000 rules Delivered At Frontier (DAF), Delivered Ex Ship (DES) and Delivered Duty Unpaid (DDU)
Delivered Duty Paid (DDP)
Can be used for any transport mode, or where there is more than one transport mode.
The seller is responsible for arranging carriage and delivering the goods at the named place, cleared for import and all applicable taxes and duties paid (e.g. VAT, GST)
Risk transfers from seller to buyer when the goods are made available to the buyer, ready for unloading from the arriving conveyance
This rule places the maximum obligation on the seller, and is the only rule that requires the seller to take responsibility for import clearance and payment of taxes and/or import duty.
These last requirements can be highly problematical for the seller. In some countries, import clearance procedures are complex and bureaucratic, and so best left to the buyer who has local knowledge.
Some taxes such as VAT are only payable by a locally-registered business entity, so there may be no mechanism for the seller to make payment.
Free Alongside Ship (FAS)
Use of this rule is restricted to goods transported by sea or inland waterway.
In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos or non-containerised goods.
For containerised goods, consider “Free Carrier FCA” instead.
Seller delivers goods, cleared for export, alongside the vessel at a named port, at which point risk transfers to the buyer.
The buyer is responsible for loading the goods and all costs thereafter.
Free On Board (FOB)
Use of this rule is restricted to goods transported by sea or inland waterway.
In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos or non-containerised goods.
For containerised goods, consider “Free Carrier FCA” instead.
Seller delivers goods, cleared for export, loaded on board the vessel at the named port.
Once the goods have been loaded on board, risk transfers to the buyer, who bears all costs thereafter.
Cost and Freight (CFR)
Use of this rule is restricted to goods transported by sea or inland waterway.
In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos or non-containerised goods.
For containerised goods, consider 'Carriage Paid To CPT' instead.
Seller arranges and pays for transport to named port. Seller delivers goods, cleared for export, loaded on board the vessel.
However risk transfers from seller to buyer once the goods have been loaded on board, i.e. before the main carriage takes place.
NB seller is not responsible for insuring the goods for the main carriage.
See also "Cost Insurance and Freight CIF"
Cost Insurance and Freight (CIF)
Use of this rule is restricted to goods transported by sea or inland waterway.
In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos or non-containerised goods.
For containerised goods, consider 'Carriage and Insurance Paid CIP' instead.
Seller arranges and pays for transport to named port. Seller delivers goods, cleared for export, loaded on board the vessel.
However risk transfers from seller to buyer once the goods have been loaded on board, i.e. before the main carriage takes place.
Seller also arranges and pays for insurance for the goods for carriage to the named port.
However as with “Carriage and Insurance Paid To”, the rule only require a minimum level of cover, which may be commercially unrealistic. Therefore the level of cover may need to be addressed elsewhere in the commercial agreement.
* information available @ http://www.incotermsexplained.com
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