Incoterms Explained

Incoterms or International commercial terms are series of standard terms published by the International Chambers of Commerce or ICC.  They are an essential component of everyday communication of trade and are an integral part of sale contracts. Every country has its own trade agreement, rules as well as terminologies that are used for domestic trade. This can cause a lot of confusion and for streamlining the process of international trade Incoterms were developed.  Incoterms are used by both buyers and sellers and serves as a rule book of international trade to importers, exporters, legal experts and insurance & transport agencies.

The trade rules and regulations put in the Incoterms are accepted by Government and legal authorities from across the world. They were developed with the intension of removing all ambiguities associated with international trade and attain standardization of regulations.  Incoterms also throw light on the varied features of marine insurance policy.

Published for the first time in 1936, the Incoterms guidelines are updated from time to time. The eighth rendition Incoterm, which is a registered trademark of the ICC was published in 2010. In the previous version of the rule book, the guidelines were divided into four categories, however in the 2010 rendition; “the 11 pre-defined terms of Incoterms 2010 are subdivided into two categories based upon the methods of delivery.” Out of these, seven rules from the larger group is applicable to any mode of transport- be it sea, road, air or rail. Whereas, the smaller group of four rules is only applicable to transport by the sea and cannot be used for consignments and freight that are being sent by road, air or rail.

7 Rules applicable to any mode of transport.  

EXW – Ex Works

If the sale contract states, EXW this means that the seller will make the goods available at a set location. The location can be the factory or industrial unit of the seller or another decided place.  Under such a term, the maximum onus of responsibility or obligation lays on the buyer and not so much on the seller. Even if the seller is given the responsibility of loading the goods, he does it on the cost and risk of the buyer. However, these conditions must be explicitly stated in the contract. Under the terms of EXW, it is also the buyer’s responsibility to get the clearance from the customs and complete the export documentation.

FAC- Free Carrier

As per the terms of FCA, the seller delivers the goods that are cleared for export at a pre-decided destination, which is usually the sellers own premises.  The onus of obligation with respect loading and unloading of goods is determined by the place of deliver. This is a very important feature of marine insurance policy.

For instance, if the place of delivery takes place at the seller’s premises or any other place that is under the control of the seller, it becomes the seller’s responsibility to load the goods on the buyer’s carrier. Conversely, if the delivery takes place at any other place and the seller is expected to load the goods once the buyer’s transport has arrived at the said place, it becomes the responsibility of the buyer to load the goods on to their own carrier.

CPT – Carriage Paid To

“Carriage Paid To” signifies that seller delivers and pays for the goods to a said destination (agreed between both parties). At the same time the seller must also pay for the cost of carriage and the goods are only considered to be delivered, once the buyer receives it at the shipment address.

CIP – Carriage and Insurance Paid to 

CIP is very similar to CPT and the seller has to deliver the good as well as pay for the contact as well as the cost of carriage.  At the same time, the seller has to get the insurance for the goods while the shipment is in transit. CIP requires the seller to insure the goods for 110% of the contract value under at least the minimum cover.

DAT – Delivered at Terminal

Under the agreement of DAT, the seller is expected to deliver the goods, once it is unloaded at the said terminal, port or destination. The seller takes care of cost of transport and bears the risks, until the consignment reaches the said destination or port.

DAP -Delivered at Place

This means that the “the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination.”  It is here where (the designation agreed upon in the contract) the risk is transferred from the seller to the buyer.

DDP – Delivered Duty Paid

As per DDP agreement, the seller is responsible for the delivery of goods to an agreed destination in the country of the buyer. The seller also bears cost of transport, customs, import duties and taxes. However, the seller cannot be held responsible for unloading.  The risk and responsibility of the goods is only transferred to the buyer once he has received the consignment at the agreed destination.

4 Rules applicable only sea and inland waterway transport

FAS – Free Alongside Ship

As the phrase suggests, the seller delivers the good alongside the buyer’s ship of vessel as a said port mentioned in the contract. As per the agreement of this contract, the buyer must also bear the cost and risks for any loss or damage of goods from the very moment the seller deliver the goods.

FOB – Free on Board

Under such an agreement the seller bears the cost and risk only till the goods and loaded on the ship of vessel.  It is also expected out of the seller to take care of all the export clearances.

CFR – Cost and Freight

As per Cost and Freight rule, the seller has to pay for the carriage of the goods, up to the named port of destination. Post that, the seller has to load the goods on the ship that is leave for the country of export, only then that the risk is transferred to the buyer.

CIF – Cost, Insurance & Freight 

The terms of CIF are quite similar to CFR, with an exception that the seller is required to get the insurance for the goods while still in transit to the designated port. CIF requires the seller to insure the goods for 110% of their value under at least the minimum cover of the Institute Cargo Clauses of the Institute of London Underwriters (which would be Institute Cargo Clauses (C)), or any similar set of clauses.

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