INCOTERMS On 27 August 2012

INCOTERMS

• ICC introduced the first version of INCO terms short for "International Commercial Terms" - in 1936.

• INCO terms are standard trade definitions most commonly used in international sales contracts. Devised and published by the International Chamber of Commerce, they are at the heart of world trade

•Inco terms 2000• Inco terms are 13• There are7 Multimodal & 6Water Transport Inco

terms.• Not valid for Domestic Sales• Does not recognize electronic Communication• Confusion during String salese specially on HighSea.• Silent on Information Duties for Insurance cover• Security related clearances; Incoterm sare silent

Incoterms 2010• Incotermsare11• There are 7 Multimodal & 4Water Transport Inco

terms.• Has equal force of law if incorporated in domestic

sales contract. This clause is Not relevant to India• Guidance Notes incorporated like on Terminal

Charges• Recognizes Electronic Communication• String Sales Allowed /Procure• Insurance Cover/ Information Duties• Security Related Clearances

Incoterms are divided in to four(4)categories:

• E”term–Seller makes the goods available to the buyer at the seller’s premises or other place named by the seller.

• F”terms–Seller is responsible to deliver the goods to the export shipment point and carrier designated by the buyer

• “C”terms–Seller is responsible for contracting carriage of goods to the place of destination, but does not assume risk of loss or damage to goods, or additional costs due to events occurring afte rshipment

• “D”terms–Seller is responsible for all costs and risks associated with delivering goods to the named place in the country of destination

4 groups of terms• Group E Departure EXW Ex Works (… named place) • Group F Main carriage unpaid FCA Free Carrier (…named place)

FAS Free alongside Ship (…named port of shipment) FOB Free On Board (…named port of shipment)

• Group C Main Carriage Paid CFR Cost and Freight (…named port of destination) CIF Cost Insurance and Freight (…named port of destination) CPT Carriage Paid To (…named place of destination) CIP Carriage Insurance Paid To (…named place of destination)

• Group D Delivered DAT Delivered at Terminal (….named port or place of destination) DAP Delivered at Place (…..named place of destination) DDP Delivered Duty Paid (…named place of destination)

INCOTERMS

• INCOTERMS

• International Chamber of Commerce first published INCOTERMS in 1936 and subsequently amended in 1953,1967,1976,1980,1990 ,2000 and 2010

INCOTERMS

• INCOTERMS ( The International rules of the Interpretation of Trade Terms)

These interpretation terms were introduced by the International Chamber of Commerce (ICC) to simplify and clarify the international trade terms.

INCOTERMS may infact have customary or even statutory force in some jurisdictions.

Important-applicable in English law only if chosen by the parties.

INCOTERMS

• An international set of trade terms (INCOTERMS) which has been adopted by most countries that defines exactly the responsibilities and risks of both the buyer and seller including while the merchandise is in transit.

INCOTERMS

• INCOTERMS ( The International rules of the Interpretation of Trade Terms)

• A failure to refer to the current version may result in disputes as to whether the parties intended to incorporate that version or an earlier version into their contract.

• Merchants wishing to use Incoterms 2010 should therefore specify clearly that their contract is governed by Incoterms 2010.

INCOTERMS

• Where the cargo being transported consists of commodities rather than manufactured goods, it is common for the cargo to change hands by being bought and sold more than once during the transit, a practice known as string sales. In this situation, the sellers who are in the middle of a string of sales and are selling the goods during transit are not the same sellers who were responsible for shipping the goods.

INCOTERMS

• The wording of the Incoterms 2010 has therefore been amended to reflect this by containing an obligation to procure goods shipped, rather than to ship the goods, in the case of a seller in the middle of a string sale.

INCOTERMS

• The Incoterms 2010 have been updated so as to remain as useful as possible to parties drawing up contracts in relation to international trade.

• All those engaged in international transactions should now examine their standard contracts and update them where necessary to incorporate the changes introduced by Incoterms 2010.

INCO Terms

• Example;

• When quoting INCOTERMS correctly - for example "FCA INCOTERMS 2000" - traders throughout the world are referring to the same set of rules.

INCOTERMS

• 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.

INCOTERMS

• INCOTERMS –Advantages

• Make a valuable contribution to international uniformity in the interpretation of contractual terms.

• The purpose of INCOTERMS is to provide a set of International rules for the interpretation of the most commonly used trade terms in foreign trade.

INCOTERMS

• INCOTERMS –Advantages

• Thus the uncertainties of different interpretations of such terms in different countries can be avoided or at least reduced to a considerable degree.

INCOTERMS

• What do they cover?The scope of INCOTerms is limited to matters relating to the rights and obligations of the parties to the contract of sale with respect to the delivery of goods sold, but excluding "intangibles" like computer software.

INCO Terms

• WHAT INCOTERMS DO NOT DO - INCOTERMS by themselves DO NOT:

• Constitute a contract;

• Supersede the law governing the contract;

• Define where title transfers; nor,address the price payable, currency or credit terms.

• These items are defined by the express terms in the sales contract and by the governing law.

INCOTERMS

• Scope of INCOTERMS

• It’s a common misconception that INCOTERMS apply to contract of carriage .However the parties agreement to use particular will necessarily have implications for the other contracts which are part of the matrix.

INCOTERMS

• What does it take to use INCOTERMS correctly?The revised rules, designated "INCOTERMS 2010", contain a series of changes, such as a reduction in the number of terms to 11 from 13. The DAF, DES, DEQ, and DDU designations have been eliminated, while two new terms, Delivered at Terminal (DAT) and Delivered at Place (DAP), have been added. INCOTERMS 2010 also attempt to better take into account the roles cargo security and electronic data interchange now play in international trade.

INCOTERMS

• 2010 INCOTERMS are reduced to 11 from 13.• INCOTERMS 2010 are grouped into two

classes;• 1.Terms for any Transport Mode• 2. Maritime-only Terms

INCOTERMS

• Example;

• 1. TERMS FOR ANY TRANSPORT MODE

• • EXW - EX WORKS (... named place of delivery) the Seller's only responsibility is to make the goods available at the Seller's premises. The Buyer bears full costs and risks of moving the goods from there to destination.

INCOTERMS

• Example;

• FCA - FREE CARRIER (... named place of delivery) The Seller delivers the goods, cleared for export, to the carrier selected by the Buyer. The Seller loads the goods if the carrier pickup is at the Seller's premises.

• From that point, the Buyer bears the costs and risks of moving the goods to destination.

INCOTERMS

• UNDERSTAND WHO HAS RESPONSIBILITY FOR LOADING AND UNLOADING CHARGES. FOR

• EXAMPLE:

• DAT obliges the Seller to place the goods at the Buyer's disposal after unloading at the named terminal at port or place of destination.

• DAP obliges the Seller to place the goods at the Buyer's disposal on the delivering carrier ready for unloading at the named place of destination.

INCOTERMS

• Example;

• DAT - DELIVERED AT TERMINAL (... named terminal at port or place of destination) The Seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the Buyer's disposal at a named terminal at the named port or place of destination. "Terminal" includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal.

• The Seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination

INCOTERMS

• UNDERSTAND WHO HAS RESPONSIBILITY FOR LOADING AND UNLOADING CHARGES. FOR

• EXAMPLE:

• CPT, CIP, CFR or CIF on the other hand, require the parties to identify as precisely as possible the point at the agreed port of destination because the costs up to that point are for the account of the Seller.

INCOTERMS

• BE SPECIFIC:

• If you use INCOTERMS in the Sales Contract or Purchase Order, you should identify the appropriate INCOTERM Rule [e.g. FCA, CPT, etc.], state "INCOTERMS 2010" and specify the place or port as precisely as possible.

INCOTERMS

• RECOGNIZE WHERE THE RISK OF LOSS TRANSFERS:

• A common misconception when the Seller pays the freight is that the Seller has the risk of loss until the goods are delivered to the place or port specified on the bill of lading or airway bill. Actually, when using INCOTERMS CPT, CIP, CFR or CIF, risk transfers to the Buyer when the Seller hands the goods over to the carrier at origin, not when the goods reach the place or port of destination.

• Understand that under CIP and CIF, the Seller is only obliged to obtain

INCOTERMS

• UNDERSTAND WHO HAS RESPONSIBILITY FOR U.S. CUSTOMS ENTRY DECLARATIONS:

• DDP is the only INCOTERM where the Seller has responsibility for U.S. Customs entry declarations.

• IMPORTANT NOTE: An important factor to be considered when asking the Seller to be responsible for international carriage, is if the goods ship by Ocean Freight, an Importer Security Filing (ISF) must be electronically submitted to Customs 24 hours before the cargo is laden on the vessel bringing the cargo to the U.S.

INCOTERMS

• UNDERSTAND WHO HAS RESPONSIBILITY FOR U.S. CUSTOMS ENTRY DECLARATIONS:

• The Buyer should specify in the contract either (a) the shipper is responsible for the ISF or (b) the Seller is responsible for providing the required data in a timely manner (i.e. 72 hrs before lading) to the Buyer’s appointed agent (e.g. Customs Broker). In our experience, when the broker and the international forwarder are unrelated parties, this requirement is honored more in the breach than in the observance. The Buyer should indemnify against the penalties (US$5,000) for filing a late, inaccurate or incomplete ISF. The ISF does not apply at this time to airfreight shipments.

INCO Terms

• INCOTERMS which are suitable for water transport, FOB and CIF are the most commonly used terms.

• An outline meaning of each INCOTERM is shown in next slide.

FOB Terms-Risk Transfer

Cost Insurance and Freight

INCOTERMS

• Examples ;

• EXW-Ex Works ( named place)

• FCA- Free Carrier ( ..named place)

• FAS-Free Alongside (..named port of shipment)

• FOB-Free on Board(..port of shipment)

• CFR-Cost and freight (..port of discharge)

INCOTERMS

• Examples• CIF –Cost Insurance and freight(…port of

discharge)• CPT-Carriage paid to (…named place of

destination)

INCOTERMS

• Free On Board (named port of shipment), e.g.

• The seller duties:

• Supply Goods & documents as per the sale of contract

• Load the goods on board the vessel named by the buyer at the named port of shipment on the date or within the period stipulated.

INCOTERMS

• Free On Board (named port of shipment), e.g.

• The seller duties:

• Bear all costs and risks of the goods until they have passed the ship’s rail at the named port of shipment, including export charges and taxes.

• Pay for packing where necessary. Risk passes when the goods pass the ship’s rail.

INCOTERMS

• Free On Board (named port of shipment), e.g.

• The seller duties:

• The seller must notify the buyer when the goods have been loaded with sufficient information to buyer.

INCO Terms

• FOB Contracts

• Buyers Duties:• To arrange insurance; if the seller fails to give

enough information, the risk stays with him.

• Charter a ship or reserve the necessary space on a Ship and notify the seller of the ship’s name ,loading berth and loading dates.

INCO Terms

• FOB Contracts:

• The buyer must bear all costs, including insurance (which he must arrange) and freight, from the time the goods cross the ship’s rail at the loading port, from when he is liable to pay the contract price. (Freight is normally collectable by the carrier from the buyer at the discharge port.)

• The buyer must also pay the seller for providing the required documents, e.g. bills of lading and certificate of origin

INCO Terms

• FOB is advantageous when the cargo is of a type (e.g. oil) and size that the buyer wishes to charter a particular vessel, or where foreign currency restrictions compel an importer to use FOB (e.g. where governments want importers to use national flag vessels). It is mainly used for bulk sales contracts.

INCO Terms

• FOB advantageous :With respect to the bill of lading ,title in the goods does not pass to the buyer until shipment.

• The FOB contract is based on the loading port, so the buyer is free after loading to re-sell the goods, even while they are on the vessel.

• The FOB invoice price is lower than the CIF price.

INCO Terms

• Example of passing property in FOB Contracts:

• In such contract the risk of goods and its condition is passed over to the buyer movement the cargo passes the ‘’ship’s rails’’.

• This means the seller to have deemed to have delivered the goods to the buyer.

INCO Terms

• Example of passing property in FOB Contracts:

• Sales of Goods act section 18 states that where the seller delivers the goods to the buyer or a carrier or other bailee for the purpose of transmission to the buyer ,he has appropriated the goods to the contract.

• Upon passing the goods to the ship the seller obtains the document such as the Bill of Lading.

INCO Terms

• Example of passing property in FOB Contracts:

• The payment of goods is made to the seller against conforming documents ,the contract would usually have stipulated that the bill of lading is made deliverable to the seller or to his security for payment.

INCO Terms

• Example: FOB Documentation required.Certificate of InsuranceBills of Lading would normally be marked as Freight

collect or Freight payable at destinationCertificate of originMovement certificates Invoices of value Pre-shipment Inspection certification

INCO Terms

• Cost, Insurance and Freight (paid to a named place), e.g. CIF London.

• Is a contract based on the discharge port.

• The seller must pay all costs including marine insurance and freight to carry the goods to the named destination, but risk passes from the seller to the buyer when the goods cross the ship’s rail at the loading port.

INCO Terms

• Cost, Insurance and Freight (paid to a named place), e.g. CIF London.

• The seller must supply the goods and make a contract (at his own expense) for carriage of the goods to the agreed port of destination, paying freight and charges for loading/unloading.

INCO Terms

• Cost, Insurance and Freight (paid to a named place), e.g. CIF London

• He must arrange (at his own expense) a marine insurance policy covering the goods against the risks of carriage for the CIF price plus 10%.

• Any war risks insurance required by the buyer must be arranged by the seller but charged to the buyer. (The cost of providing these services are included in the invoice price for the goods.)

INCO Terms

• CIF Contract:

• The seller must provide the buyer with clean, negotiable bills of lading (dated for the agreed period of loading), an invoice and an insurance policy or certificate of insurance. The bills of lading must be a full set of negotiable “order” marine bills so that delivery can be made to the order of the buyer or his agreed representative.

INCO Terms

• CIF Terms:

• Clean bills of lading to be passed to a bank in the documentary credit system, enabling the seller to obtain early payment.

• If the bill of lading contains a reference to a charter party, the seller must also provide a copy of the charter party.

INCO Terms

• CIF Contract:

• The seller must tender all the documents to the buyer, his agent or his bank.

• The buyer must accept the documents when tendered by the seller, and must pay the agreed contract price.

• Property passes on transfer to the buyer of the documents.

INCO Terms

• CIF Contract:• The buyer bears all costs and charges excluding

freight, marine insurance and unloading costs unless included in the freight when collected by the carrier.

• The buyer must also pay for war risks insurance if he requires it. He must effectively bear all risks of the goods from passing the ship’s rail at the port of shipment. He is protected by the insurance arranged by the seller.)

INCO Terms

• CIF Contract:

• As freight is paid by the seller, the bill of lading is normally marked “FREIGHT PRE-PAID”, but the master should ensure that freight has been paid before signing the bills of lading.

• The buyer bears the risks during the voyage, but title in the goods only passes when the documents are taken up by the buyer.

INCO Terms

• CIF Contract:

• When the buyer has received the documents he must pay for the goods; he cannot demand receipt of the goods first.

• The purpose of a CIF contract is not so much the sale of goods as the sale of documents relating to the goods, so as to enable the negotiability of the bill of lading.

INCO Terms

• CIF Contract:

• CIF is therefore widely used where the documentary credit system is used.

• The advantage of CIF to the buyer is in making the seller wholly responsible for arranging the shipment.

• The seller is protected against loss or damage before payment by the insurance policy.

INCO Terms

• CIF Contract:

• The seller can also retain title in the goods beyond the time of shipment and as security against payment by the buyer, so it is easier for the seller to obtain credit at his bank. Once the buyer receives the documents and pays, he can secure credit or resell the goods.

INCO Terms

• CIF Contracts

• The goods will cost more on CIF terms than on FOB terms.

• In view of the advantages in CIF for normal international sales, in which the banks’ documentary credit system requires the transfer of title through the passing of documents (including the set of bills of lading and a certificate of insurance).the vast majority of international seaborne cargo shipments are CIF.

INCO Terms-Legal aspect

• Legal relationship between the buyer and seller and other parties

• Those who provide insurance for the goods against the loss or damage.

• The term of the contract of sale e.g the date of delivery will be necessarily be of importance to these parties.

• Thus we can say that an International Sale contract is at the heart of the matrix in international trade.

• This contractual matrix provides for a number of interlinked and inter dependant legal relationships.

INCO Terms-Legal aspect

• Legal Relationship between the buyer and the seller and the other parties

• The commercial success or failure of an international sale contract will be affected not only by the state of the market for the goods in question but also by the state of the market for the services provided by other parties whom the contract will involve

INCO Terms-Legal aspect

• Legal relationship between the buyer and seller and other parties.

• Similarly a breach of the contract of sale will produce a ‘’domino effect’’

• It will affect the ability of those who have made related contracts to perform their obligations.

• The composite nature of International sale arrangements means that a party who breaches an international sale arrangement means may face not only contractual liability to other party but also liability to others in tort.

INCO Terms-Legal aspect

• Legal relationship between the buyer and seller and other parties

• Therefore we must keep in mind that this contract does not exist in a vacuum.

INCO Terms-Legal aspect

• The Preliminary question;

• Sellers or Carriers liability

• Two fundamental questions always if the goods arrive in damaged condition

• (a) Under the contract of sale had the risk in the goods to the buyer by the time the goods were damaged ?

• (b) If so can the buyer (in the context of carriage of relationships as the consignee or endorse) sue the carrier on the contract of carriage.

INCO Terms-Legal aspect

• Shifting liability for damage to the goods from the seller to the carrier is the moment at which the risk in the goods under the contract of sale passes from the seller to the buyer.

• This point at which the risk passes is determined by the contract of sale itself.

• Thus we can say that the buyer has accepted the risk in the goods under the contract of sale and he/she must sue the carrier in respect of their damage.

• This then explains the importance of the buyer receiving clean bill of lading.

INCO Terms-Legal aspect

• Sellers or Carriers liability

• Once the risk in the goods has passed to the buyer under the contract of sale ,then any claim by the buyer in respect of loss or damage to the goods must be brought against the carrier rather than the seller.

• In other words if the seller has complied with its obligations under the contract of sale ,then he/she so to speak have fallen out of the picture.

INCO Terms-Legal aspect

• Sellers or Carriers liability

• Shifting of liability for damage to the goods from the seller to the carrier is the moment at which the risk in the goods under the contract of sale passes from the seller to the buyer.

• Thus where the buyer has accepted the risks in the goods under the contract of sale ,he must as consignee/endorsee sue the carrier in the respect of their damage.

IncoTerms

• Security concerns have increased in the last ten years, and a more thorough examination of goods may be expected by customs, the parties to a contract are now required by the Incoterms 2010 to provide all information necessary for export and import clearance.