explicate the cost and risks to buyer and seller involved under various delivery terms incoterms in...

8/6/2019 Explicate the Cost and Risks to Buyer and Seller Involved Under Various Delivery Terms INCOTERMS in an Internati…

http://slidepdf.com/reader/full/explicate-the-cost-and-risks-to-buyer-and-seller-involved-under-various-delivery 1/25

What are INCOTERMS?

INCOTERMS (International Commercial Terms) are widely accepted

international rules applying to the tasks, costs, and risks involved in the delivery

of goods.

According to Emmanuel Jolivet, General Counsel of the International Court of

Arbitration:

"The INCOTERMS are a perfect example of an efficient standardization of

an international business tool. Their day-to-day use in international sales

contracts brings legal certainty to business transactions while simplifying

the drafting of international contracts.”

INCOTERMS were devised to facilitate global trade by providing clear

definitions of each party’s obligations, thus reducing the potential for legal

complications.

INCOTERMS cover the "who, what, and when" of international goods sales and

delivery, including:

• Who does what

• Who pays for what

• When does risk pass from seller to buyer

• When does delivery occur

In addition, the rules address insurance, export and import clearance, and the

division of other costs pertaining to the delivery of goods between buyer and

seller.

INCOTERMS do not cover ownership or title to goods, details of payment

obligations, vessel requirements, termination, insolvency, etc. They do not

constitute a complete contract of sale. Yet they are incorporated by express

reference, or referred to in most international and many domestic sales contracts.



INCOTERMS are primarily relevant for companies involved in buying and

selling goods (not services) internationally. The rules, however, are beginning to

be incorporated into many domestic sales contracts as well.

Types of businesses which utilize INCOTERMS include:

• Trading companies, especially exporters and importers

• Marine and multimodal transport firms

• Logistics companies

• Financial services providing funding for trading companies

Purpose and Scope of Incoterms

a) Purpose

The purpose of Incoterms is, as stated by ICC “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”.

Since international sales contracts are generally realized between the non-present parties from

different nationalities, it is very important how the parties interpret the terms and the

abbreviations commonly used in foreign trade. By this regulation of Incoterms, at least the

confusions and the differences of interpretation will be overcome and the conflicts arising out

of international trade will be reduced.

b) Scope

The scope of the Incoterms is limited to the rights and obligations of the parties’ arising from

the delivery of the sale of goods. Incoterms do not define the goods, but the goods should be

understood as commodities.

Incoterms do not regulate any contract other than sale contract. However, even in a sale

contract, Incoterms do not cover all the contractual aspects. The topics that Incoterms govern

can be gathered under four groups: (i) the delivery of goods, (ii) transfer of risks, (iii) division

of costs, and (iv) obligations concerning the documents. Incoterms do not provide rules for

the (i) payment and payment methods, (ii) transfer of ownership, (iii) variants, (iv) dispute

resolution and (v) other issues relating to fulfilment of the contract.



Here is the shortlist of the Incoterm definitions from the International Chamber of Commerce

that you should be familiar with:

EXW “Ex Works”

The seller delivers when he places the goods at the disposal of the buyer at the seller's

premises or another named place (i.e. works, factory, warehouse, etc.) not cleared for export

and not loaded on any collecting vehicle. This term thus represents the minimum obligation

for the seller, and the buyer has to bear all costs and risks involved in taking the goods fromthe seller's premises.

Here is the legend that should be used

inconjunction with the diagrams displayed

with each Incoterm. This legend indicatesthe balance of risks and costs for both the

buyer and seller when entering into

international trade business during 2008

and 2009.



FCA "Free Carrier"

The seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the

named place. It should be noted that the chosen place of delivery has an impact on the

obligations of loading and unloading the goods at that place. If delivery occurs at the seller's

premises, the seller is responsible for loading. If delivery occurs at any other place, the seller

is not responsible for unloading. This term may be used irrespective of the mode of transport,

including multimodal transport.

"Carrier" means any person who, in a contract of carriage, undertakes to perform or to

procure the performance of transport by rail, road, air, sea, inland waterway or by a

combination of such modes.

If the buyer nominates a person other than a carrier to receive the goods, the seller is deemed

to have fulfilled his obligation to deliver the goods when they are delivered to that person



FAS “Free Alongside Ship”

The seller delivers when the goods are placed alongside the vessel at the named port of

shipment. This means that the buyer has to bear all costs and risks of loss or damage of the

goods from that moment. The FAS term requires the seller to clear the goods for export.

FOB "Free on Board”



The seller delivers when the goods pass the ship's rail in the port of shipment. 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 of delivery, are transferred from the seller to the buyer.

However, with CIF the seller also has to procure marine insurance against the buyer’s risk of

loss of or damage to the goods during the carriage. Consequently, the seller contracts for

insurance and pays the insurance premium. The buyer should note that under the CIF term the

seller is required to obtain insurance only on minimum coverage. Should the buyer wish to

have protection of greater coverage, he would either need to agree as much expressly with the

seller or to make his own extra insurance arrangements.

The CIF term requires the seller to clear the goods for export. This term can be used only for

sea and inland waterway transport. If the parties do not intend to deliver the goods across the

ship's rail, the CIP term should be used.



CIP "Carriage and Insurance paid to..."

The seller delivers the goods to the carrier nominated by him but the seller must in addition

pay the cost of carriage necessary to bring the goods to the named destination. This means

that the buyer bears all risks and any additional costs occurring after the goods have been

delivered. However, in CIP the seller also has to procure insurance against the buyer's risk of

loss of or damage to the goods during the carriage.

Consequently, the seller contracts for insurance and pays the insurance premium. The buyer

should note that under the CIP term the seller is required to obtain insurance only on

minimum coverage. Should the buyer wish to have the protection of greater cover, he would

either need to agree as much expressly with the seller or to make his own extra insurance

arrangements.

"Carrier" means any person who, in a contract of carriage, undertakes to perform or to

procure the performance of transportation by rail, road, air, sea, inland waterway or by a

combination of such modes.



If subsequent carriers are used for the carriage to the agreed destination, the risk passes when

the goods have been delivered to the first carrier. The CIP term requires the seller to clear the

goods for export

CPT “Carriage paid to..."

The seller delivers the goods to the carrier nominated by him but the seller must in addition

pay the cost of carriage necessary to bring the goods to the named destination. This means

that the buyer bears all risks and any other costs occurring after the goods have been so

delivered.

'Carrier" means any person who, in a contract of carriage, undertakes to perform or to procure

the performance of transport, by rail, road, air, sea, inland waterway or by a combination of

such modes.

If subsequent carriers are used for the carriage to the agreed destination, the risk passes when



the goods have been delivered to the first carrier, The CPT term requires the seller to clear the

goods for export.

DAF "Delivered at Frontier"

The seller delivers when the goods are placed at the disposal of the buyer on the arriving

means of transport not unloaded, cleared for export, but not cleared for import at the named

point and place at the frontier, but before the customs border of the adjoining country. The

term "frontier" may be used for any frontier including that of the country of export.

Therefore, it is of vital importance that the frontier in question be defined precisely by always

naming the point and place in the term.



However, if the parties wish the seller to be responsible for the unloading of the goods from

the arriving means of transport and to bear the risks and costs of unloading, this should be

made clear by adding explicit wording to this effect in the contract of sale.

DES “Delivered Ex Ship”



Means that the seller delivers when the goods are placed at the disposal of the buyer on board

the ship not cleared for import at the named port of destination. The seller has to bear all the

costs and risks involved in bringing the goods to the named port of destination before

discharging. If the parties wish the seller to bear the costs and risks of discharging the goods,

then the DEQ term should be used.

This term can be used only when the goods are to be delivered by see or Inland waterway or

multimodal transport on a vessel in the port of destination.

DEQ “Delivered Ex Quay”



DDU “Delivered Duty Unpaid”

The seller delivers the goods to the buyer, not cleared for import, and not unloaded from any

arriving means of transport at the named place of destination. The seller has to bear the costs

and risks involved in bringing the goods thereto, other than, where applicable, any "duty"

(which term includes the responsibility for and the risks of the carrying out of customs

formalities, and the payment of formalities, customs dudes, taxes and other charges) for

import in the country of destination. Such "duty" has to be borne by the buyer as well as any

costs and risks caused by his failure to clear the goods for import in time. However, if the

parties wish the seller to carry out customs formalities and bear the costs and risks resulting

there from as well as some of the costs payable upon import of the goods should be made

clear by adding explicit wording to this effect in the contract of sale



DDP "Delivered Duty Paid”

The seller delivers the goods to the buyer, cleared for import, and not unloaded from any

arriving means of transport at the named place of destination. The seller has to bear all the

costs and risks involved in bringing the goods thereto including, where applicable, any "duty”

(which term includes the responsibility for and the risks of the carrying out of customs

formalities and the payment of formalities, customs duties, taxes and other charges) for

import in the country of destination.

Whilst the EXW term represents the minimum obligation for the seller, DDP represents the

maximum obligation. This term should not be used if the seller is unable directly or indirectly

to obtain the import licence. However, if the parties wish to exclude from the seller's

obligations some of the costs payable upon import of the goods (such as value-added tax :

VAT), this should be made cear by adding explicit wording to this effect in the contract of

sale. If the parties wish the buyer to bear all risks and costs of the import, the DDU term



First of all, the number of Incoterm rules has been reduced to 11 from 13.

Two new rules that may be used irrespective of the agreed mode of transport being namely

(1) DAT (Delivered at Terminal) and (2) DAP (Delivered at Place) replace the Incoterms

2000 rules DAF, DES, DEQ and DDU. Both of the new rules provide for delivery to occur at

a named destination. In DAT, the delivery occurs at the buyer’s disposal unloaded from the

arriving vehicle. In DAP, it occurs at the buyer’s disposal, ready for unloading. These new

rules, like their predecessors, are “delivered”, with the seller bearing all the costs, other than

those related to import clearance, where applicable, and risks involved in bringing the goods

to the named place of destination.

ii) Classification of Incoterms

Under the previous version of 1990 and 2000 of Incoterms, the rules were classified under

four groups as;

• “E” Group consisting of “Ex Works: EXW”,

• “F” Group consisting of “FCA, FAS and FOB”,

• “C” Group consisting of “CFR, CIF, CPT and CIP”, and

• “D” Group consisting of “DAF, DES, DEQ, DDU and DDP”.

Incoterms® 2010 prefers a completely different distinction and a classification system based

on modes of transport each Incoterms could be used for. Under the new classification, there

are two groups as;

• Group 1: Rules for any mode or modes of transport consisting of EXW, FCA,

CPT, CIP, DAT, DAP and DDP; and

• Group 2: Rules for sea and inland waterway transport consisting of FAS, FOB,

CFR and CIF.

The first group includes the seven Incoterms® 2010 rules that can be used irrespective of the

mode of transport selected and irrespective of whether one or more than one mode of

transport is employed.

In the second group, the point of delivery and the place to which the goods are carried to the

buyer are both ports. Under FOB, CFR and CIF all mention of the ship’s rail as the point of

delivery in the previous versions of Incoterms has been omitted in preference for the goods

being delivered when they are “on board” of the vessel. ICC states that this approach more



closely reflects modern commercial reality and avoids the rather outdated image of the risk

swinging to and across an imaginary perpendicular line.

iii) Electronic Communication

Incoterms 2010 grant electronic means of communication the same effect as paper

communication, as long as the parties so agree or where customary under Articles A1/B1 of

each Incoterm. It is emphasized by ICC that this formulation facilitates the evolution of new

electronic procedures throughout the lifetime of the Incoterms 2010 rules.

iv) Insurance Cover

There are only two terms which provide an insurance obligation for the parties. CIP and CIF

refer to Institute Cargo Clauses as to the coverage of the insurance. Institute Cargo Clauses

were subject to a revision which started on 2006 and finalized on 2009. The Incoterms 2010

rules take account of the Institute Cargo Clauses 2009.

The Incoterms 2010 rules provide for information duties relating to insurance in articles

A3/B3, which deal with contracts of carriage and insurance.

v) Security related clearances

ICC paid attention to the heightened concern about security in the movement of goods,

requiring verification that the goods do not pose a threat to life or property for reasons other

than their inherent nature in the new version of Incoterms 2010. Therefore, ICC have

allocated obligations between the buyer and seller to obtain or to render assistance in

obtaining security-related clearances, such as chain-of-custody information, in articles A2/B2

and A10/B10 of various Incoterms rules.

vi) Terminal Handling Charges

The Incoterms 2010 rules seek to avoid multiple payments of terminal handling charges by

the buyer. Under Incoterms 2000 CPT, CIP, CFR, CIF, DAT, DAP, and DDP, the seller must

make arrangements for the carriage of the goods to the agreed destination. While the freight

is paid by the seller, it is actually paid for by the buyer as freight costs are normally included

by the seller in the total selling price.



The carriage costs will sometimes include the costs of handling and moving the goods within

port or container terminal facilities and the carrier or terminal operator may well charge these

costs to the buyer who receives the goods.

In these circumstances, the buyer would want to avoid paying for the same service twice:

once to the seller as part of the total selling price and once independently to the carrier or the

terminal operator. The Incoterms 2010 clearly allocate terminal handling costs in articles

A6/B6 of the relevant Incoterms rules.

vii) String Sales

During the sale of commodities, goods in subject are frequently sold several times during

transit “down a string”. ICC notes that a seller in the middle of the string does not “ship” the

goods because these have already been shipped by the first seller in the string. The seller in

the middle of the string therefore performs its obligations towards its buyer not by shipping

the goods, but by “procuring” goods that have been shipped.

Incoterms 2010 rules includes the obligation to “procure goods shipped” as an alternative to

the obligation to ship goods in the relevant Incoterms rules.

c. Significant issues that must be taken into consideration when using Incoterms 2010

Not only uniform interpretation of Incoterms is significant but also being well informed about

Incoterms in order to be able to choose the appropriate Incoterm rules convenient for the

particular transaction between them is rather important for the parties. Therefore, while

incorporating the Incoterms 2010 rules into their contract, parties must carefully read the

rules and the guidelines that are placed before each Incoterm. The mentioned guidelines

explain the fundamentals of each Incoterm rule and try to assist the users to accurately and

efficiently choose the appropriate Incoterm rule for that particular transaction.

It is also very important to specify the place or port as precisely as possible in order for

chosen Incoterm rule to be able to work and to avoid the parties to face unexpected duties to

be borne on them.

As a last remark, as stated under Section II (B) (1) (b) above, Incoterm rules do not regulate

every aspect of a commercial relationship and do not give the parties a complete contract of



sale. Therefore, parties should deal with through express terms in the contract of sale or in the

law governing that contract as to issues not covered by Incoterms.

The parties should also be aware that mandatory local law may override any aspect of the sale

contract, including the chosen Incoterms rule.

Incoterms 2010 Rules have been launched on September 2010 and will enter into force

officially on 1st January 2011. Until the entry in force of Incoterms 2010, the parties are free

to use either Incoterms 2000 or Incoterms 2010. After 1st January 2011, unless otherwise

stated by the parties, all references to Incoterms rules will be deemed to be made to Incoterms

2010. As any new version of Incoterms does not cancel the old versions, it is recommended

to the parties to clearly set forth in their contract to which version of the Incoterms rules they

refer to.An international committee of eight legal and international business

experts appointed by the ICC, drafted the revisions to the current rules

represented in INCOTERMS 2010. During the 2.5 year revision process, the

committee considered more than two thousand recommendations from 130+ ICC

member countries.

As a result, INCOTERMS 2010 was published on September 27, 2010 and will

take effect on January 1, 2011.

The goal of the new INCOTERMS is to simplify the drafting of sales contracts

by clearly defining some of the obligations of both buyers and sellers, thus

avoiding misunderstandings, which might otherwise occur.

The 2010 revision recognizes the significant changes that have occurred in

global trade since 2000, including:

•

Post 9/11 cargo security regulations

• 2004 revision of the U.S. Uniform Commercial Code

• New Institute Cargo Clauses

• Increase in electronic communications

• Delivery, with respect to revenue recognition compliance

• Spread of customs free zones

•

Increasing development of trade blocs (e.g. the European Union) where border formalities have largely disappeared

http://www.businessdictionary.com/definition/institute-cargo-clauses.html

http://www.businessdictionary.com/definition/institute-cargo-clauses.html



When INCOTERMS 2010 Applies

•

Existing sales contracts: INCOTERMS 2000 will continue to apply, evenif performance of the contract will be made in 2011.

• Sales contracts entered into between September and December 2010:

Either the 2000 or 2010 versions can be used. The version the parties

agree to utilize, however, should be expressly stated in the sales contract.

• Sales contracts drafted after January 1, 2011: Any reference to

“INCOTERMS” will be assumed to mean INCOTERMS 2010.

Key Changes Addressed in INCOTERMS 2010

The new INCOTERMS expressly state (on the front page) that they can be used

for “both domestic and international trade.” The previous version did not refer

directly to domestic sales.

The 2000 version of INCOTERMS had four classes: E, F, C, and D.

INCOTERMS 2010 separates the terms into t wo groups: those that apply to all

modes of transportation and those applying only to sea and inland waterway

transport.

The 2010 version adds two new INCOTERMS – DAP (delivered at place) and

DAT (delivered at terminal) to replace DEQ (delivered ex quay - duty paid).

These were introduced to take into account new practices in containerization and

point-to-point deliveries. The two new terms can be used for any agreed mode of

transportation including sea, a ir, road, and rail.

Four INCOTERMS were deleted: DAF (delivered at frontier), DES (delivered ex

ship), DEQ (delivered ex quay) and DDU (delivery duty unpaid).

Some other key changes:

• Express reference made to the use of “equivalent electronic records”,

instead of assuming only hard copies would be utilized.



DAT

(Delivered

At Terminal)

New Term - May be used for all transport modes

Seller delivers when the goods, once unloaded from the arriving means of

transport, are placed at the disposal of the buyer at a named terminal at the

named port or place of destination. "Terminal" includes quay, warehouse,

container yard or road, rail or air terminal. Both parties should agree the

terminal and if possible a point within the terminal at which point the risks

will transfer from the seller to the buyer of the goods. If it is intended that the

seller is to bear all the costs and responsibilities from the terminal to another

point, DAP or DDP may apply.

Responsibilities

• Seller is responsible for the costs and risks to bring the goods to the

point specified in the contract• Seller should ensure that their forwarding contract mirrors the contract

of sale

• Seller is responsible for the export clearance procedures

• Importer is responsible to clear the goods for import, arrange import

customs formalities, and pay import duty

• If the parties intend the seller to bear the risks and costs of taking the

goods from the terminal to another place then the DAP term may

apply

DAP

(Delivered

At Place)

New Term - May be used for all transport modes

Seller delivers the goods when they are placed at the disposal of the buyer on

the arriving means of transport ready for unloading at the named place of

destination. Parties are advised to specify as clearly as possible the point

within the agreed place of destination, because risks transfer at this point from

seller to buyer. If the seller is responsible for clearing the goods, paying duties

explicate the cost and risks to buyer and seller involved under various delivery terms incoterms in...

Documents