International backing of your business
In 1936, the International Chamber of Commerce (ICC) introduced the first rules to understand international commercial terms, which defined buyers-sellers’ costs, risks and obligations on international trade transactions. These rules have been revised over the years, mirroring international trade realities and updates among the different international trade participants: sellers, buyers, banks, transport and insurance companies.
The importance of referring to Incoterms Rules in contracts
Though using Incoterms in contracts isn’t compulsory, they’re recognised by all customs and courts worldwide. In order to make sure that your contract is backed up by Incoterms, it must explicitly mention its rule, revision and its geographical location, for instance: FCA Montevideo’s Port, Incoterms 2010.
What Incoterms Rules don’t include
- Property rights transfer
- Obligations’ cancellation in case of any incident.
- Consequences upon breaking contracts, except obligations that arise from risk transfers and goods transport’s costs.
Since 1st January 2011, a new revised version is in force, after 2 years of investigation in all of ICC local committees. This new version reflects changes between 2000 and 2010 related to:
- Container loading of goods
- New security rules
- London Institute’s insurance revised version.
- Transporters limited responsibility.
Incoterms 2010 are organized into two categories: Incoterms for any Mode or Modes of Transport and Incoterms for Sea and Inland Waterway Transport Only.
EXW – Ex Works (named place)
The buyer bears all costs and risks involved in taking the goods from the seller’s premises to the desired destination. The seller’s obligation is to make the goods available at his premises (works, factory, warehouse). This term represents minimum obligation for the seller. This term can be used across all modes of transport.
FCA – Free Carrier (named place)
The seller’s obligation is to hand over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place or point. If no precise point is indicated by the buyer, the seller may choose within the place or range stipulated where the carrier shall take the goods into his charge. When the seller’s assistance is required in making the contract with the carrier the seller may act at the buyers risk and expense. This term can be used across all modes of transport.
CPT – Carriage paid to
The seller pays the freight for the carriage of goods to the named destination. The risk of loss or damage to the goods occurring after the delivery has been made to the carrier is transferred from the seller to the buyer. This term requires the seller to clear the goods for export and can be used across all modes of transport.
CIP – Carriage anc insurrance paid to
The seller has the same obligations as under CPT but has the responsibility of obtaining insurance against the buyer’s risk of loss or damage of goods during the carriage. The seller is required to clear the goods for export however is only required to obtain insurance on minimum coverage. This term requires the seller to clear the goods for export and can be used across all modes of transport
DAT – Delivered at terminal (New term)
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.
DAP – Delivered at Place (New term)
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 etc., consideration should be given to using the DDP term.
- Seller bears the responsibility and risks to deliver the goods to the named place
- Seller is advised to obtain contracts of carriage that match the contract of sale
- Seller is required to clear the goods for export
- If the seller incurs unloading costs at place of destination, unless previously agreed they are not entitled to recover any such costs
Importer is responsible for effecting customs clearance, and paying any customs duties
DDP – Delivered duty Paid
The seller is responsible for delivering the goods to the named place in the country of importation, including all costs and risks in bringing the goods to import destination. This includes duties, taxes and customs formalities. This term may be used irrespective of the mode of transport.
Incoterms for Sea and Inland Waterway Transport Only:
FAS – Free Alongside ship
The seller has fulfilled his obligation when goods have been placed alongside the vessel at the port of shipment. The buyer is responsible for all costs and risks of loss or damage to the goods from that moment. The buyer is also required to clear the goods for export. This term should only be used for sea or inland waterway transport.
FOB – Free on board
Once the goods have passed over the ship’s rail at the port of export the buyer is responsible for all costs and risks of loss or damage to the goods from that point. The seller is required to clear the goods for export. This term should only be used for sea or inland waterway transport.
CFR – Cost and Freight
The seller must pay the costs and freight required in bringing the goods to the named port of destination. The risk of loss or damage is transferred from seller to buyer when the goods pass over the ship’s rail in the port of shipment. The seller is required to clear the goods for export. This term should only be used for sea or inland waterway transport.
CIF – Cost, insurance and freight
The seller has the same obligations as under CFR however he is also required to provide insurance against the buyer’s risk of loss or damage to the goods during transit. The seller is required to clear the goods for export. This term should only be used for sea or inland waterway transport.