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The Incoterms ® are a set of trade/trade rules used by the International Chamber of Commerce (ICC) in international sales contracts. The Incoterms are not binding rules – to obtain legal effect for them, they must be explicitly included by the parties in their contract. In the following paragraphs, according to the classification of the Incoterms, we will describe the basic functions of Incoterms, which are used for all modes of transport, as well as those used only for maritime and inland waterway transport.
Classification of Incoterms
The Incoterms are divided into four main categories: E., F., C and D.
Category E. (Departure), which contains only one trade term: EXW (Ex works).
Category F. (Main carriage unpaid), which contains three commercial terms:
- FCA (Free Carrier)
- FAS (Free Alongside Ship)
- FOB (Free On board)
Category C. (Main carriage paid), which contains four commercial terms:
- CPT (Carriage Paid To)
- CIP (Carriage and Insurance Paid To)
- CFR (Cost and Freight)
- CIF (Costs, Insurance and Freight)
Category D. (Arrival), which contains three trade terms:
- DAP (Delivered at Place)
- DPU (Delivered at Place Unloaded)
- DDP (Delivered Duty Paid)
The four categories mentioned above can also be classified by means of transport:
- Incoterms for each mode of transport: EXW, FCA, CPT, KVP, DPU, DAP and DDP;
- Incoterms for sea and inland navigation only: FAS, FOB, CFR and CIF.
Each Incoterm contains a set of rules of interpretation for the obligations of both sellers (A1-A10) and the buyer (B1-B10) covering the following topics:
- A1 / B1 – General Obligations,
- A2 / B2 – Delivery,
- A3 / B3 – Transfer of risks,
- A5 / B5 – Insurance,
- A6 / B6 – Delivery / transport document,
- A7 / B7 – Export / Import Release,
- A8 / B8 – Inspection / Packaging / Labelling,
- A9 / B9 – Sharing of costs, and
- A10 / B10 – Notes.
Basic functions of Incoterms for all modes of transport
EXW Incoterm (Ex Works)
The EXW Incoterm imposes only minimum obligations on the seller. More precisely, the seller is only obliged to deliver the goods at a designated place of delivery to the buyer, which is normally the seller’s place of business, but this may be a specific place, e.g. a warehouse, factory, etc., and within the agreed time specified in the contract. It is not necessary for the seller to load the goods into a particular vehicle or release the goods for export. If the place of delivery is not specified in the contract, or if multiple delivery locations can be provided, “The seller can select the point that best suits its purpose.” Generally speaking, until the goods have been delivered as indicated in the sales contract, the seller bears all risks of loss or damage to the goods. Once delivered, this risk is automatically transferred to the buyer. The same applies to all costs associated with the goods – up to the delivery of the goods, the costs borne by the seller; after their delivery, by the buyer.
Several experts suggest that the EXW Incoterm is better suited for domestic use (and not international) trade and point out that “it is often used in courier shipments when the courier picks up the shipment from the customer and loads the courier’s own truck. The payment terms for EXW transactions are usually prepayment and account opening.”
As mentioned in the ICC Guide for Incoterms 2010, parties sometimes add a term a “loaded”. After referring to EXW Incoterm, i.e., EXW loaded, into their purchase agreement. Such an addition is normally intended to extend responsibility to loading operations. however, without further clarification, it is quite difficult to say whether such a term is “loaded at the risk of the seller” or “loaded at the risk of the buyer” and can be interpreted in the event of a dispute. In this respect, if “loaded” should extend liability to the seller, the parties may consider inserting the FCA Incoterm, and not EXW, into their contract. However, you should take into account that the FCA Incoterm requires that the obligation to release the goods for export is also borne by the seller.
FCA Incoterm (Free Carrier)
Under the FCA Incoterm, the delivery of the goods is as follows:
- If the said place of delivery is the seller’s location, the goods shall be deemed to have been delivered when they are loaded onto the transport vehicle arranged by the buyer;
- If the said place of delivery is located in a different location, e.g., a warehouse or a factory, etc., the goods shall be deemed to have been delivered if the following requirements are met: after they have been loaded into the seller’s transport vehicle, you will reach the named location, are ready to unload from the Seller’s transport vehicle and will be made available to the Carrier designated by the Buyer.
With regard to the carrier, this is normal ‘a company that transports goods or passengers for rent, rather than simply arranging such a transport. Examples are a shipping company, airline forwarding company, or railway. In the FCA term of office, however, the carrier may be provided by any person who is contractually obliged to provide or procure such services”.
In 2020, several new commitments have been added to the FCA Incoterm. For example, the parties may agree that the buyer instructs the carrier to issue the transport document (invoice of the landing) with the on-board notation to the seller. In return, the seller undertakes to send this document to the buyer, “Who needs the landing certificate to obtain the unloading of the goods from the carrier.”
The FCA Incoterm also obliges the Seller to release the goods for export where applicable. However, the seller is not obliged to release the goods for import. Neither the seller nor the buyer is insured.
CPT Incoterm (Carriage Paid To)
Under the CPT Incoterm, the delivery of the goods takes place when it is delivered by the seller to the agreed place to the forwarding agent or procured by the thus delivered seller. In this respect, the Seller is contractually obligated, at his own expense, for the transport of the goods from the place of delivery to the destination of the goods. The existence of the contract of carriage has no influence on the transfer of risk from the seller to the buyer, i.e. by handing over the goods to the freight forwarder, which occurs at the time of delivery. However, if the seller incurs costs for unloading goods at the place of destination under the contract of carriage, it must bear them, unless otherwise agreed.
The CPT Incoterm also requires the seller to release the goods for export where applicable and assume all associated risks. However, the seller has no such obligation to import. Neither the seller nor the buyer is required to enter into an insurance contract.
CIP Incoterm (Carriage and Insurance Paid to)
Under the CIP Incoterm, the Seller has the same obligations as under the CPT Incoterm, i.e. to hand over the goods to the carrier commissioned by the Seller and to release the goods for export, with the addition of an insurance obligation to cover the risk/damage of the buyer to the goods from the place of delivery, at least, the destination.
With regard to insurance, it is to be made in accordance with clauses (ON) of the institution’s freight clauses, or similar clauses, and should cover, at least, the contractual price plus 10%. Before the 2020 revision of the Incoterms, only a minimum insurance cover according to clauses (C.) of the institution’s freight clauses was needed. However, even today, the parties can agree on a smaller coverage. Once contractually agreed, the seller is obliged to provide the buyer with the insurance policy or the certificate.
DAP Incoterm (Delivered at Place)
This Incoterm is normally used in cases where the parties do not wish the Seller to bear the risk and costs of unloading, as opposed to the DPU Incoterm. Under the DAP Incoterm, the goods are deemed to have been delivered by the seller to the buyer if they are made available to the buyer on the transport vehicle that can be unloaded at the destination or at an agreed location within that place, if at all. In contrast to the CPT / CIP incoterms, the place of delivery and the destination are identical according to the DAP incoterm. Therefore, the seller bears the risk until he has made the goods available to the buyer at the destination as described above.
Although it is obliged to conclude a contract of carriage or to arrange for the goods to be transported at its expense and to release the goods for export (not import), the seller is not obliged to unload the goods from the transport vehicle at the destination. In addition, neither the seller nor the buyer, is required to conclude an insurance contract.
DPU Incoterm (Delivery at Place Unloaded)
The DPU Incoterm is a new feature of the 2020 Incoterm, which replaced the DAT Incoterm (delivered at the terminal) founded under the 2010 Incoterms which, in turn, had replaced DEQ Incoterm (delivery from quay) founded under the 2000 Incoterms.
According to DPU Incoterm, the delivery of the goods by the seller to the buyer takes place when the goods are unloaded from the transport vehicle and made available to the buyer at the destination or at the agreed destination, if at all. It is the only Incoterm “To do this, the seller must unload the goods at the destination.” Again, the place of delivery and the destination are identical according to DPU Incoterm. Therefore, the seller bears the risk until he has unloaded the goods at the destination.
In addition, the Seller undertakes to conclude a contract of carriage or to arrange the carriage at its own expense. It is also obliged to release the goods for export. However, there is no such obligation for imports. The buyer is obliged to assist the seller in obtaining relevant documents for the export clearance formalities, at the expense of the seller.
Unlike the CIP Incoterm, the seller (or buyer) has no obligation to take out insurance under the DPU Incoterm.
DDP (Delivered Duty Paid)
Under the DDP Incoterm, the goods are to be delivered by the seller to the buyer when it is made available to the buyer, released for import, on the arriving transport vehicle, ready for unloading at destination or at an agreed point within that place, if at all. The DDP-Incoterm imposes maximum responsibility on the seller as it is the only Incoterm that requires an import permit from the seller.
As with the other Incoterms, the DDP Incoterm requires the Seller to conclude the contract of carriage or arrange the carriage at his own expense in any other way. There is no insurance contract, however, required by the seller/buyer.
Incoterms for maritime and inland waterway transport.
FAS Incoterm (Free Alongside Ship)
According to the FAS Incoterm, the seller delivers the goods when he places them either next to the ship/ship designated by the buyer in the said port of dispatch or procures the goods delivered in this way. The risk /damage of the goods passes from the seller to the buyer if the goods are next to the ship. The seller undertakes to release the goods for export, not to import them.
The Seller is not obligated to conclude a contract of carriage. In return, it is the buyer who bears all the costs for the carriage of the goods from the said shipping port. Consequently, the FAS Incoterm is not suitable for cases where the goods are to be handed over only to the carrier, e.B., at a container terminal before they are placed next to the ship. For this scenario, the FAS Incoterm mentioned above is more suitable.
In addition, the seller is obliged to release the goods for export (do not import). There is no need to take out insurance.
FOB Incoterm (Free On board)
Under the FOB Incoterm, the goods shall be deemed to have been delivered by the Seller to the Buyer if they are delivered on board the ship designated by the Buyer in the said port of dispatch or if the Seller procures the goods delivered in this way. Therefore, the risk of loss/damage of the goods passes to the buyer as soon as the goods are brought on board the ship. The seller must release the goods for export, not import them.
As with the FSA Incoterm, the Seller is not obligated to conclude a contract of carriage. All costs for the transport of the goods from the said port of shipment shall be borne by the buyer.
The FOB Incoterm does not require insurance to be taken out by the seller or buyer.
CFR Incoterm (Cost and Freight)
According to CFR Incoterm, the seller delivers the goods to the buyer by bringing them aboard the ship or thus procuring them. Therefore, the risk of loss/damage of goods passes to the buyer when the goods are brought on board the ship at the port of delivery, and not the port of destination as in the case of the above-mentioned FOB Incoterm.
Irrespective of the transfer of risk in the port of delivery, the seller is obliged to conclude a contract of carriage to the port of destination. The seller shall also bear all costs for unloading in the port of destination arising from the contract of carriage, unless otherwise agreed. It is also obliged to release the goods for export, not import them. No insurance contract is required from the seller or buyer.
CIF Incoterm (Cost, Insurance and Freight)
The regime of the CIF Incoterm is very similar to that of the CFR Incoterm:
- The goods must be delivered within the framework of the CIF-Incoterm if the seller brings them on board the vessel or delivers it in this way;
- However, the transfer of risk takes place in the port of delivery, the seller is obliged to conclude a contract of carriage to the port of destination;
- The seller shall bear all costs arising from unloading in the port of destination resulting from the contract of carriage, unless otherwise agreed;
- The seller is obliged to release the goods for export, not import them.
The main difference between CIF and CFR is the obligation under CIF-Incoterm that the seller concludes insurance cover against the risk of the buyer of loss/damage from the port of dispatch, at least, the port of destination. however, unlike the CIP Incoterm (see above), the Seller is obliged to take out a minimum insurance according to clauses (C.) of the Institution’s freight clauses, or any other clause (not clauses (EIN) of the Institution’s freight clauses as required for the CIP Incoterm).
The use of incoterms in international trade is a widespread phenomenon, and disputes often arise due to confusion over them. Before inserting an Incoterm into a contract, it is imperative that the parties ensure that the Incoterm meets all their expectations and needs with respect to the following points:
- Should transport take place at sea / inland water or not?
- Who should bear most of the risk of loss/damage to the goods – the seller or the buyer? At what time should there be a risk of moving from the seller to the buyer when delivery to the destination?
- Is there a need to use the services of a carrier? If so, who should be obliged to conclude a contract of carriage – the seller or the buyer?
- Should the seller be responsible for unloading the goods?
- Does an insurance contract have to be concluded?
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