INCOTERM 2000

International Commercial Terms

AWP, Feb 25, 2008

Ricardo BrunnerMBA, PhD in Social and Moral International Behavior, MIT

The ICC

• ICC (International Chamber of Commerce) is the voice of world business championing the global economy as a force for economic growth, job creation and prosperity.

• ICC activities cover a broad spectrum, from arbitration and dispute resolution to making the case for open trade and the market economy system, business self-regulation, fighting corruption or combating commercial crime.

• The International Chamber of Commerce was founded in 1919 with an overriding aim that remains unchanged: to serve world business by promoting trade and investment, open markets for goods and services, and the free flow of capital.

What is Incoterm?

• It is the official ICC rule for the interpretation of trade terms.

• Incoterms are standard international trade definitions used every day in countless thousands of contracts. ICC model contracts make life easier for small companies that cannot afford big legal departments.

• It defines clearly the parties’ obligations and reduces the risk of legal complications

Purpose of Incoterms

• To provide a set of international rules for the interpretation of the most commonly used terms in foreign trade.

• Parties to a contract can avoid misunderstanding, disputes and litigations.

• ICC published first Incoterms in 1936 and updated versions in 1953, 1967, 1976, 1980, 1990 and 2000 in order to bring the rules in line with international trade practices.

Scope of Incoterms

• It 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 (tangible goods).

• There are 2 common misconceptions:1. frequently understood as applying to the contract of carriage rather

than to the contract of sale.2. wrongly assumed to provide for all the duties which parties may

wish to include in a contract of sale.

• Incoterms deal only with relation between sellers and buyers under the contract of sale, and only in some very distinct respects.

• Nevertheless, Incoterms will have implications to be considered for other contracts (carriage, insurance, finance).

Considerations to keep in mind

• Incoterms deal with:1. Obligations (Costs) imposed to the parties (clear goods, packing,

proof of delivery)2. Distribution of risk between the parties

• Incoterms are important for the implementation of the contract of sale, but does not cover all the potential problems (breaches of contract).

• Incoterms are not intended to replace other contracts (sale).

• In view of the changes made to Incoterms, if the parties intend to incorporate Incoterms into their contract of sale, an express reference should be made “Contract governed by Incoterms 2000”.

Structure of Incoterms

They are grouped in 4 categories:1. E-terms: where the seller makes goods available to

the buyer at the seller’s own premises 2. F-terms: where the seller is called upon to deliver

the goods to a carrier appointed by the buyer3. C-terms: where the seller has to contract for

carriage w/o assuming the risk of loss or damage to the goods, or cost due to events occurring after shipment and dispatch.

4. D-terms: the sellers has to bear all cost and risks needed to bring the goods to the place of destination.

The Incoterms• EXW EX WORKS (named place)*

FCA FREE CARRIER (named place)

FAS FREE ALONGSIDE SHIP (named port of shipment)*

FOB FREE ON BOARD (named port of shipment)

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 AND INSURANCE PAID TO (named place of destination)*

DAF DELIVERED AT FRONTIER (named place)*

DES DELIVERED EX SHIP (named port of destination)

DEQ DELIVERED EX QUAY (named port of destination)*

DDU DELIVERED DUTY UNPAID (named place of destination)*

DDP DELIVERED DUTY PAID (named place of destination)*

• * : DO NOT FORGET TO NAME TH PORT/PLACE of destination

Terminology: Shipper

• Two meanings, two persons:– The person handling over the goods to the

carrier– The person who makes the contract with the

carrier

• Under D-terms, the shipper is the same two persons

• Under F-terms, the shipper is two different persons

Terminology: Ports, places, point

• In some cases, the Incoterms indicate a “point” within the port , as it may be important for the seller to know not only that the goods should be delivered in a particular area (port), but also where within that area.

• Incoterms stipulate that if no specific point has been agreed, and if there are several points available, the seller may select the point which best suits his purpose.

Terminology: Delivery• Delivery: Crucial to understand fulfillment of obligations.• Use in 2 different senses in Incoterms:

– To determine when the seller has fulfilled his delivery obligation– In the context of the buyer’s obligation to take or accept delivery of the

goods.• In C terms: seller delivers upon shipment of the goods. Buyer is

obliged to received them. If he doesn’t, he may become liable to pay damages to the seller who has made the contract with the carrier, or to pay demurrages.

• “accept delivery” does not mean that the buyer as accepted the goods as conforming with the contract of sale, but only he has accepted that the seller has performed his obligation to hand the goods over for carriage in accordance with the contract of carriage.

• If upon receipt, the buyer considers goods are not according to the contract of sale, he can use any remedies (contract of sale or applicable law). These matters lie entirely outside the scope of the Incoterms.

Customs Clearance

• Whenever reference is made to an obligation of the seller or buyer to undertake obligations with passing goods through customs (country of import or export), this obligation does not only include the payment of duty and other charges, but also whatever administrative matters are connected with this.

• It is normally desirable that clearance is arranged by the party domiciled in the country where clearance takes place or by somebody acting on his behalf. Thus, exporter should clear goods for exports and importer fro import.

• In DDP the seller does it all.

Inspection of the goods

• In many cases the buyer may be advised to arrange for inspection of the goods before or at time they are handed over by the seller for carriage (PSI, pre shipment inspection).

• Unless the contract stipulates otherwise, buyer will cover all the cost.

• However, if inspection has been made in order to enable the seller to comply with any mandatory rules applicable to the export of the goods in his own country, the seller will pay (unless EXW used).

Passing of risk and cost of the goods

• The risk of loss or damage to the goods, as well as the obligation to bear the cost relating to the goods, passes from the seller to the buyer when the seller has fulfilled his obligation to deliver the goods.

• This “passing of risk and cost” may occur even before the delivery if the buyer does not take delivery as agreed or fails to give such instructions (place of delivery).

• It is a requirement for such a premature passing that goods have been identified as intended for the buyer (set aside for him). This condition is natural in F, C and D terms when measures have been taken for shipment, delivery or dispatch (e.g. hired a truck or vessel).

THE TERMS

E- terms

• Seller’s obligation is at its minimum• Seller just places the goods at the disposal of

the buyer at the agreed place (normally factory).• As of matter of practical reality, seller would

normally assist the buyer in loading the goods on the vehicle, but no obligation.

• If buyer wants the seller to do more, that has to be reflected on the sale contract.

• Cost: almost none• Risk: almost none

F - terms

• Require the seller to deliver the goods for carriage as instructed by the buyer.

• For FCA:– If deliver is in sellers’ premises, delivery is complete when goods

are loaded on the buyer’s vehicle– Other cases, deliver is complete when the goods are placed at

the disposal of the buyer not unloaded from the seller’s vehicle• For FOB:

– Delivery point is the same as CIF/CFR: “across the ship’s rail”.• In many cases, FOB is used to indicate any place of

delivery, e.g. FOB Plant, FOB factory, FOB Inland. This incoterm should only be used for Free On Board

• COST: Up to loading• Risk: up to ship’s rail

C - Terms

• Require the seller to contract for carriage on usual terms at his own expense.

• A point up to which the seller will pay transport costs must necessarily be indicated after the C.

• C are same nature as the F: seller fulfils the contract in the country of shipment or dispatch

• Cost: buyer covers up to country of destination. – This is frequently mistakenly believed to be arrival contracts, in

which seller bears all risks and costs until good have arrived at the agreed point.

• Risk: only up to deliver (same as F): across ship’s rail. The risk of loss or damage to the goods, as well as the costs from events occurring after the goods have been appropriately delivered for carriage, fall upon the buyer.

• The C Terms contains 2 critical points:– where the seller is bound to arrange and bear the costs of a contract

of carriage– where the risk is allocated

• The essence of the C is that the seller is relieved of any further risk and cost after he has duly fulfilled his contract by contracting for carriage and handling over the goods to the carrier.

• Discharge costs?. They are normally covered by the freight under “liner terms”, or adding the words “landed” after the C.

• The seller can not undertake any obligation with respect to the arrival of the goods at destination since the risk of any delay during the carriage is borne by the buyer. Expressions such as “CIF Mobile not later than…” is a misnomer. The seller has the obligation to provide a “shipment contract” and not an “arrival contract”

• Sometimes goods are sold while they are at sea. In this case the word “afloat” is added after the C.

• Since the risk of loss or damage would then have passed from the seller to the buyer, there are some options:– Maintain same C meaning: the buyer might

have to assume the consequences of events that already occurred.

– Let passing the risk coincide with the time the contract of sale is concluded.

• CFR it is not C&F: the correct Incoterm is CFR, so C&F should not be used in order to avoid misinterpretations.

• Under Incoterm 1990, the seller was obliged to provide a copy of the charter party if the BL had a reference to it. Incoterm 2000 deleted that obligation.

• Seller needs to provide proof of delivery. A clean BL or sea waybill is enough (clean means no marks declaring defective condition of the goods).

• Carrier will normally refuse to accept responsibility respect to the goods stating in the documents “said to be”, but must at least use reasonable means of checking the information he signs, or may be liable to the consignee.

Insurance under C terms

• Only under CIP and CIF, seller is obliged to procure insurance for the benefit of the buyer.

• In all other cases, it is for the parties to decide whether and to what extend they want to cover themselves by insurance.

• CIF/CIP the seller takes out the insurance for the benefit of the buyer without knowing his precise requirements.

• Insurance available: minimum cover (clause C), medium cover (B) and most extended cover (A).

• CIF/CIP limit the insurance to C

D Terms• Seller is responsible for the arrival of the goods at the

agreed place or point of destination.• Seller must bear all risk and costs in bringing the goods

thereto.• D terms means arrival contracts• C terms means departure (shipment) contract.• Except for DDP, seller does not have to deliver the

goods cleared for import in the country of destination, thus DEQ buyers carry out all custom formalities.

• COST: High• Risk: High

INCOTERMS: Some variations

• Some people add expressions after the terms (FOB stowed or EXW loaded) and they just lead to confusion regarding obligations and cost between the parties.

• Incoterms 2000 do not provide answers to those common variations.

• It is recommended to have a special contractual terms if the parties wish to go beyond the stipulations of Incoterms, e.g. DEQ the added obligation for the seller to pay for the cost after discharge

• Where such words are added it is necessary to clarify in the contract of sale whether the added obligations only relate to costs or to both costs and risks.

Remember

• Contract of Sale and Contract of carriage

• Above contracts and Incoterms

• Obligations versus Risk versus Costs

• DELIVERY: important concept to understand where one party obligation finishes and where the other party obligation starts.

GRAPHICS

EX-Works

CIF

DDP

  EXW FCA FAS FOB CFR CIF CPT CIP DAF DES DEQ DDU DDP

SERVICES

Ex Works

Free Carrier

Free Alongside Ship

Free Onboar

d Vessel

Cost & Freight

Cost Insuran

ce & Freight

Carriage Paid

To

Carriage

Insurance Paid

To

Delivered At

Frontier

Delivered Ex Ship

Delivered Ex Quay Duty

Unpaid

Delivered Duty Unpaid

Delivered Duty Paid

Warehouse Storage

Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

Warehouse Labor

Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

Export Packing

Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

Loading Charges

Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

Inland Freight

BuyerBuyer/Seller*

Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

Terminal Charges

Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

Forwarder's Fees

Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller

Loading On Vessel

Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

Ocean/Air Freight

Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller

Charges On  Arrival At Destination

Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller Buyer Buyer Seller Seller Seller

Duty, Taxes & Customs Clearance

Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller

Delivery To Destination

Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller

WEB PAGES TO STUDY

• THE ICC– http://www.iccwbo.org/incoterms

CLICK INCOTERM PREAMBLES