There are number of common sale or trade terms used in International trade to express the sale price and the corresponding rights and responsibilities of the seller and the buyer. These are terms defined by the International Chamber of Commerce and in short Inco terms.
The purpose of Inco terms is to provide a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. Thus, the uncertainties of different interpretations of such terms in different countries can be avoided or at least reduced to a considerable degree.
Frequently, parties to a contract are unaware of the different trading practices in their respective countries. This can give rise to misunderstandings, disputes and litigation with all the waste of time and money that this entails. In order to remedy these problems the International Chamber of Commerce first published in 1936 a set of international rules for the interpretation of trade terms. These rules were known as â€œIncoterms 1936â€ Amendments and additions were later in 1953, 1967, 1990 and 2000 in order to bring the rules inline with current international trade practices.
When exporter and importer agree on terms of delivery, they are legally binding themselves to four legal aspects of the transaction.
Which costs are paid by the exporter, which by the importer?
Which document the exporter will obtain at whose expense?
When the title to the goods and the responsibility for them passes from the exporter to the importer?
Where and when the goods are delivered?
The key factors of each of the Inco terms commonly used are given below. There may be some minor modifications possible because there are some changes incorporated every year.
EXW â€“ EX Works
The sellerâ€™s obligation to deliver the goods under this term is complete when he places the goods at the disposal of the buyer at his own (sellerâ€™s) premises or another place named therein i.e. works, factory, warehouse etc., not cleared for export and not loaded on any collecting vehicle. This term thus enjoins the minimum obligation for the seller. The buyer has to bear all costs and risks. This term should therefore not be used if the buyer can not carryout the export formalities himself. The FCA term (given in the next para) will be the best option. If parties, however, agree in the contract of sale by their explicit wording, the seller could be made responsible for the loading of the goods on departure and bear the risk and the cost of such loading.
FCA â€“ Free carrier
Here the sellerâ€™s obligation to deliver the goods is complete when he delivers to the carrier nominated by the buyer at the named place cleared for export. If a person other than the carrier is nominated the sellerâ€™s obligation is deemed to have been fulfilled when the goods are delivered to that person. If the chosen place of delivery is the sellerâ€™s premises then he is responsible for loading. If it occurs at any other place the seller is not responsible for unloading. This term can be used for any mode of transport including multimodal transport.
FAS â€“ Free Alongside Ship
The term FAS has been modified in Incoterms 2000.Under the new terms the seller clears the goods for export which is reversal from the previous Incoterms version requiring the buyer to arrange for export clearance. Under the term FAS the seller delivers the goods by placing them alongside the vessel at the named port of shipment. The buyer bears all costs and risks of loss or damage to the goods from that moment. This term can be used only for sea or inland waterway transport.
FOB â€“ Free on Board
Under this term, the seller fulfils his obligation of delivery when the goods pass the shipâ€™s rail at the named port of shipment. From that point onwards the buyer bears all costs and risks. The seller clears the goods for exports. If the intention is not to deliver the goods across the shipâ€™s rail, the FCA term should be used. This term can be used only for sea or inland waterway transport.
CFR â€“ Cost and Freight
In CFR also, obligation of delivery is fulfilled when the goods pass, just as in FOB, the shipâ€™s rail in the port of shipment. The only addition is that the seller also pays freight necessary to bring the goods to the named port of destination but the risk of loss or damage to the goods as also any additional costs occurring after the time of delivery are transferred from the seller to the buyer. Under this term the seller clears the goods for export. This term can be used only for Sea or inland waterway transport. If the parties do not intend to deliver the goods across the shipâ€™s rail, the CPT term should be used. CPT â€“ Carriage Paid To
CIF â€“ Cost, Insurance and Freight
Here again the delivery point is the goods passing the shipâ€™s rail in the port of shipment. The seller, however, pays the cost and freight necessary to the named port of destination and contracts for insurance and pays the insurance premium and the risk of loss of or damage to the goods and additional costs occurring after the time of delivery are transferred from the seller to the buyer. The seller obtains insurance only for minimum cover. If the buyer wishes to have a greater cover he would either need to agree with the seller expressly or to make his own extra insurance payment. Clearance of goods for export is the responsibility of the seller under this term as well. It can be used for sea and inland waterway transport. If the parties do not intend to deliver the goods across the shipâ€™s rail, the CIP (Carriage and Insurance Paid to..) term should be used.
DDU â€“ Delivered Duty Unpaid
This term can be used irrespective of the mode of transport. Under this term the seller delivers the goods to the buyer not cleared for import but not unloaded from any arriving means of transport at the named place of destination. The seller bears the costs and risks involved in bringing the goods there to other than, where applicable, any duty for import in the country of destination. The term duty includes the responsibility for and the risk of the carrying out of the customs formalities the payment of such formalities, customs duties, taxes and other charges. Such duty has to be borne by the buyer, so also any costs and risks caused by his failure to clear the goods for import in time. If the intention is to make the seller carry out customs formalities and bear the cost and risk resulting there from as well as some of the costs payable upon import of goods, this should be made clear by adding explicit wording to this affecting the contact of sale. The responsibility, risk and cost for unloading or reloading will depend on whether the chosen place of delivery is under the control of the buyer or the seller.
DDP â€“ Delivered Duty Paid
Under this term the seller delivers the goods to the buyer cleared for import but not unloaded from any arriving means of transport at the named place of destination. Thus, all the costs and risks involved in bringing the goods thereto including, where applicable, any duty for import in the country of destination .Thus this term represents the minimum obligation to the buyer and the maximum obligation to the seller. It should, therefore, not be used if the seller is unable to obtain the import clearance. If the parties wish the buyer to bear all risks and costs of the import, the DDU term should be used.