The International Chambers of Commerce or ICC published a series of standard terms such as Incoterms or International commercial terms. . 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 to use for domestic trade. Hence, Incoterms were developed in order to streamline the process of international trade and remove the confusion. 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 objective of developing Incoterms
The government and legal authorities from across the world accept the trade rules and regulations put in the Incoterms. The intention was to remove 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 as published in 2010 is a registered trademark of the ICC. In the previous version of the rule book, there are four categories of guidelines. However, in the 2010 rendition, the 11 pre-defined Incoterms 2010 were subdivided into two categories based upon the methods of delivery.” Seven rules from the larger group is applicable to any mode of transport- be it sea, road, air, or rail. The smaller group of four rules is only applicable to transport by the sea. However, it cannot be used for consignments and freight as 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. The seller has the responsibility of loading the goods. He does it on the cost and risk of the buyer. However, the contract should explicitly mention these conditions. 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
The terms of FCA states that the seller delivers the goods cleared for export at a pre-decided destination. This is usually the seller’s own premises. The onus of obligation of loading and unloading of goods is determined by the place of delivery. This is a very important feature of the 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 has to load the goods, it becomes the buyer’s responsibility to load the goods onto their own carrier.
CPT – Carriage Paid To
“Carriage Paid To” signifies that the seller delivers and pays for the goods to a said destination (agreed between both parties). At the same time, the seller has to pay for the cost of carriage. Only when the buyer receives goods at the shipment address is when goods delivery stands confirmed.
CIP – Carriage and Insurance Paid to
CIP is very similar to CPT and the seller has to deliver the goods as well as pay for the contact as well as the cost of carriage. At the same time, the seller has to get 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
The seller has to deliver the goods at the said terminal, port or destination as per the DAT agreement. The seller takes care of the cost of transport and bears the risks until the consignment reaches the said destination or port.
DAP -Delivered at Place
The seller delivers the goods placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. Thus the risk is now upon the buyer and not the seller.
DDP – Delivered Duty Paid
The DDP agreement states that the seller is responsible for the delivery of goods to an agreed destination in the country of the buyer. The seller also bears the cost of transport, customs, import duties, and taxes. However, the seller is not responsible for unloading. The risk and responsibility of the goods are upon the buyer once he has received the consignment at the agreed destination.
4 Rules applicable only to sea and inland waterway transport
FAS – Free Alongside Ship
As the phrase suggests, the seller delivers the good alongside the buyer’s ship of the 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 delivers the goods.
FOB – Free on Board
Under such an agreement the seller bears the cost. Risks are also there only till the goods and loaded on the ship or the vessel. The seller has to take care of all the export clearances.
CFR – Cost and Freight
As per the 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 leaving for the country of export. Thereafter, the buyer has to face the risks.
CIF – Cost, Insurance & Freight
The terms of CIF are quite similar to CFR, with the exception that the seller has 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.