INCOTERMS

• In their sales contract buyer and seller agree on the conditions of sale : payment on the one hand and delivery on the other.

• These terms determine at what precise location the ownership of the goods is transferred from seller to buyer and when/how payment will be done.

• In international trade a universal set of rules on delivery has been developed over the years. It is called INCOTEMRS.

• Initially created in 1936 by the International Chamber of Commerce (ICC) and have been periodically revised (Incoterms 2010 is the 8th revision)

• Incoterms reflect world-wide trade practices, as practices change, Incoterms are revised

• “The Incoterms rules are a perfect example of an efficient standardization of an international business tool. Their day-to-day use in international sales contracts brings legal certainty to business transaction while simplifying the drafting of international contracts.”

Purpose

• Clarity in interpretation of terms and rules• Minimization of losses• Base of contract of sale• Documentary evidence• Solid base to the contract

Definitions

Key Definitions

• What is Delivery?

• It is not always:– When the goods arrive in your customer’s hands or– When the goods leave your dock– Defined the same in all countries

• You must know your contract and your Incoterm– Note: A Purchase Order and a matching Acknowledgement will constitute a

“contract” if there isn’t a separate stand-alone contract related to the transaction.

As defined in Incoterms 2010, “it is used to indicate where the risk of loss of or damage to the goods passes from the seller to the buyer.”

Transportation Definitions

• Pre-carriage: inland transportation on the seller’s side– Domestic: from the place where the shipment starts to any subsequent

transportation carriage– International: from the place where the shipment starts to the departure

point on the seller’s side

• Main Carriage: – Domestic: subsequent transportation beyond pre-carriage– International: transportation from the point of departure on the

seller’s side to the arrival pint on the buyer’s side

• On-carriage:– Domestic: subsequent transportation beyond main carriage– International: transportation from the arrival pint on the buyer’s side

Transportation Definitions• Door – to – Door

– Contract of carriage that includes pre-carriage, main-carriage and on-carriage by the same carrier

• Door – to – (Air) Port:– Contract of carriage including pre-carriage and main-carriage to airport or

ocean port or truck terminal port or rail port

• (Air) Port – to – (Air) Port:– Contract of carriage for main carriage only

• (Air) Port – to – Door:– Contract of carriage including main carriage and on-carriage

Type of Transportation?

• Company A

• Company B

Door to Door – one contract for all carriage (pre-, main, and on-carriage)

Type of Transportation?

• Company A

Door to Port – contract for pre-carriage and main-carriage

Company B responsible for arranging pick up at Arrival Airport

A Few More Definitions…..• Omni-modal: Used with terms that use all modes of

transportation (truck, airplane, vessel, train…)

• Marine-restricted: Terms that only apply to carriage by vessel

• Shipment Contract: sales/purchase contract where the seller’s responsibility ends when goods are handed over to the first carrier

• Arrival Contract: sales/purchase contract where seller’s responsibility ends when goods have arrived at agreed place

Packaging Definitions

1. The packaging of the goods to comply with any requirements under the contract of sale.

2. The packaging of goods so that they are fit for transportation.

3. The contents of the packaged goods within a container or other means of transport.Only Definition 1 & 2 are addressed in Incoterms® 2010.

Definition 3 must be addressed within the contract between the parties.

What Questions to Ask?• Who furnishes the goods?• Who packages the goods in a manner suitable for shipment (export)?• Who moves the goods from the seller’s factory to a port, airport, or

border crossing in the seller’s country?• Who arranges for export clearance in the seller’s country (if applicable)?• Who arranges for main carriage (international transportation) from the

departure port to the arrival port?• Who pays for main carriage?• Who insures the shipment?• Who arranges for import clearance?• Who pays import duties?• Who pays for on-carriage from the arrival port to the delivery destination?• Who arranges and pays for country-specific documentation (e.g., consular

invoices, inspection reports, licenses)?

Incoterms 2000

Group E Departure

EXW

Ex Works

Group F Main carriage unpaid

FCAFASFOB

Free Carrier Free alongside shipFree on board

Group C Main carriage paid

CFRCIFCPTCIP

Cost and FreightCost, Insurance, FreightCarriage Paid toCarriage and Insurance Paid to

Group DArrival

DAFDESDEQDDUDDP

Delivered at FrontierDelivered Ex ShipDelivered Ex QuayDelivered Duty UnpaidDelivered Duty Paid

• The Incoterms divide costs and risksThe Incoterms of trade have been designed to clarify obligations of both parties, the buyer and the seller. Principally, these are:

The seller must: Provide the goods according to the contract

The buyer must: Pay the price as agreed upon

In order to finalise the transaction, both parties will have to perform certain tasks, like:

Arrange for licences, Arrange for licences,

Authorisation and formalities

Authorisation and formalities

Arrange for shipment Arrange for shipment

Arrange for delivery Accept delivery

Bear the risks for his activities

Bear the risks involved in his contractual activities.

• EXW = EX WORKS (… named place) Cost of Goods plus cost of Export packing and markingIn this term the seller delivers the goods by keeping it ready in deliverable state at the seller's place or another named place. This named place can be factory/godown or manufacturing unit. In this term seller does not clear the goods for exports nor goods are loaded on vehicle.

• FCA = FREE CARRIER (… named place) Cost of Goods plus cost of Getting goods to railway station or truck for transportation to portThis term refers to seller's responsibility to deliver the goods, cleared for export, to the carrier appointed by the buyer at the named place. In this term the place of delivery is very important. If the delivery is at sellers place's then he is responsible for loading. If the delivery occurred at any other place, the seller is not responsible for unloading. This term can be used for all modes of transport as well as multimodal.

• FAS = FREE ALONGSIDE SHIP (…named port of shipment)Cost of Goods plus cost of Transport to port and getting goods alongside ship

• In this term when the goods are placed alongside the vessel at the named port of shipment it will be considered that the seller has completed the delivery. The buyer has to bear all risks of loss or damage to the goods and all costs from this point of time. However the seller must clear the goods for the purpose of export.

• This term can be used only for inland waterway transport or shipment by sea. It is not used when it is air shipment.

• FOB = FREE ON BOARD (… named port of shipment)Cost of Goods plus cost of Getting goods on board and preparing shipping documents

• This is the most popular term and is widely in use. FOB means that the seller delivers when the goods pass the ship's rail at the named port of shipment. Under this term the buyer has to bear all costs and risk of loss of damage to the goods from that point.

• This term requires the seller to clear the goods for exports. This term is used only for sea or inland waterway transport. It is not suitable for shipment by air.

• CFR = COST AND FREIGHT (… named port of destination)Cost of Goods plus cost of Freight cost (port to port) Earlier this term was popularly known as C&F or CNF. CFR means the seller must pay the cost and the freight necessary for the goods to reach at the named destination. However, the risks of loss or damage to the goods after the time of the delivery is on buyers account. The seller is required to clear the goods for exports. This term can be used only for sea and inland waterway transport.

• CIF = COST INSURANCE AND FREIGHT (… named port of destination)Cost of Goods plus cost of Marine Insurance

• “Cost, Insurance and Freight” means that the seller, delivers when the goods pass the ship’s rail in the port of shipment.

• The CIF price refers that it covers the cost of the goods, freight necessary to bring the goods to the named port of destination and also marine insurance. Compared to the previous term, CFR the seller contracts for the insurance and pay the insurance premium.

• It will be essential for the buyer to know that under the CIF term the seller is required to obtain the insurance only on minimum cover. If the buyer wishes to have more protection then he should make his own insurance arrangement extra or should specify to the seller at the time of contract.

• In this term the seller must clear the goods for exports and the buyer must arrange necessary clearance for import. This term can be used only for sea and inland water transport.

• CPT = CARRIAGE PAID TO (… named place destination)“Carriage Paid To” means the seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This refers to the fact that all the risks and any other cost occurring after the goods have been delivered will be on buyer’s account. This term is used for all modes of transport including multimodal transport.

• CIP = CARRIAGE AND INSURANCE PAID TO (…named place of destination)“Carriage and Insurance Paid To” means that the seller delivers the goods to the carrier nominated by him, but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This means that the buyer bears all risks and any additional costs occurring after the goods have been so delivered. However, in CIP the seller also has to procure insurance against the buyer's risk of loss of or damage to the goods during the carriage.

• DAF = DELIVERD AT FRONTIER (… named place)This term is used when goods are to be delivered at land frontier, irrespective of the mode of transport. "Delivered At Frontier" means the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport not unloaded, cleared for exports but not cleared for import at the named point and place at the frontier, but before the customs border of the adjoining country.

• DES = DELIVERD EX SHIPCost of Goods plus cost of Putting goods at disposal of customer on board vessel at port of destination “Delivered Ex Ship” means that the seller delivers when goods are place at the disposal of the buyer on board ship not cleared for import at the named port of destination. In this term all the cost and risk in bringing the goods to the named port of destination before discharge is on seller. This term can be used only when the shipment is by sea or inland waterway or multimodal transport in the vessel at the port of destination.

• DEQ = DELIVERED EX QUAY (… named port of destination)Cost of Goods plus cost of Unloading charges at port of destination

• “Delivered Ex Quay” means that the seller delivers when the goods are placed at the disposal of the buyer not cleared for, import on the quay (wharf) at the named port of destination.

• The seller has to bear costs and risks involved in bringing the goods to the named port of destination and discharging the goods on the quay (wharf). The DEQ term requires the buyer to clear the goods for import and to pay for all formalities, duties, taxes and other charges upon import.

• DDU = DELIVERED DUTY UNPAID• “Delivered Duty Unpaid” means that the seller delivers the

goods to the buyer, not cleared for import, and not unloaded from any arriving means of transport at the named place of destination.

• The seller has to bear the costs and risks involved in bringing the goods thereto other than where applicable any duty for import in the country of destination. Such duty has to be borne by the buyer as well as any costs and risks caused by his failure to clear the goods for import in time.

• DDP = DELIVERED DUTY PAID (…named place of destination)Cost of Goods plus cost of Payment of duties and transport to customer

• “Delivered Duty Paid" means that the seller delivers the goods to the buyer, cleared for import, and not unloaded from any arriving means of transport at the named place of destination.

• The seller has to bear all the costs and risks involved in bringing the goods thereto including, where applicable, any duty for import in the country of destination.

• Incoterms 2000 – an exampleA customer in Hanover, Germany, asks for a quotation for 3000 pairs of shoes, to be delivered DDP at his warehouse. You have decided on a unit selling price of $2, giving a total nominal price of $ 6000 for the goods when sold domestically. For export you will have to calculate with an additional set of costs which are involved in making them physically available to your customer.

What are the additional costs of getting the goods from your factory in (e.g.) Agra, India, to the customer? How (*) is your quotation affected by the terms of delivery?

(*) In this calculation example, all costs are hypothetical

Incoterms 2000 – an example

If you quote:

Your price should include:

Additional costs:

Your total price is:

EXW Ex-works AgraExport packing, marking crates with shipping marks

300 6300

FCA Free on Carrier at Agra station. Carriage and insurance for delivery to railway station by road transport including insurance

100 6400

FAS Free alongside ship at JNPT port. Rail transport to port (including insurance) and getting goods on the quay alongside ship.

310 6710

FOB Free on board JNPT Port. Dock dues, loading goods on board ship. Preparing shipping documents

100 6810

CFR Cost and Freight.Sea Freight to Hamburg (nearest port to Hanover)

875 7685

CIF Cost, insurance, freight. Sea freight + marine insurance (port to port)

100 7785

DES Delivered ex ship at Hamburg. Landing charges at Hamburg port.

90 7875

DDP Delivery duty Paid at customer’s warehouse in Hanover. Import duties for 3000 pairs of shoes

1200 9075

Transport by rail Hamburg to Hanover

150 9225

The buyer actually pays **

1350 9225

Choosing

• Name/place handover along with shipping term• Clear mention of incoterm edition• Clarity in soul and spirit of incoterm used• Understanding cost, responsibility and obligation

aspect• Avoid risky incoterms• Same incoterm not suitable for each importer• Understand rules and regulations for importers

country

• Standard practices of country or region• Mode of Transport• Avail all information in execution of your

obligations and responsibilities• Offering competitive incoterms for retaining

satisfied importers

INCOTERMS 2010: Applicable in all Modes(Sea,Air,Road Water ways)

• EXW(Ex work)• FCA(Free Carrier)• CPT(Carriage Paid to)• CIP(Carriage and Insurance Paid)• DAT(Delivered at terminal)• DAP( delieverd at Place)• DDP(Delivered duty paid)

Applicable in Sea and Inland waterways

• FAS(free alongside Ship)• FOB (Free On Board)• CFR( Cost and Freight)• CIF (Cost Insurance & freight)

Changes in INCOTERMS 2010

Removal of four terms (DAF, DES, DEQ and DDU) Introduction of 2 new terms (DAP - Delivered at Place and DAT -

Delivered at Terminal).Creation of two classes of INCOTERMS –

o (1) rules for any mode or modes of transport ando (2) rules for sea and inland waterway (INCOTERMS 2000 had four

categories).Rules which are able to serve both domestic and international trade.Express reference to the use of "equivalent electronic records", if the

parties agree or it is customary.

Amended insurance cover to reflect the alterations made to the Institute Cargo Clauses.

Allocation of parties' respective obligations to obtain or to provide information in order to obtain security-related clearances.

Responsibility for Terminal handling charges expressly allocated.

Including an obligation to "procure" goods to reflect current practices in string sales.

WHY REMOVAL?

• Delivered At Place (DAP) which should be used in place of DAF, DES and DDU; and

• Delivered At Terminal (DAT) which replaces DEQ.• These terms may be used irrespective of the

agreed mode of transport.• Part of the reasoning for fewer

terms/simplification was that traders often chose the "wrong" term or muddled terms, leading to contradictory or unclear contracts.

Creation of two, rather than four categories of

terms• The 11 terms have been categorized under two

categories:• Deliveries by any mode of transport (sea, road,

air, rail) - EXW, FCA, CPT, CIP, DAP, DAT and DDP. These may all be used where there is no maritime transport at all; and

• Deliveries by sea/inland waterway - FAS, FOB, CFR and CIF.

• This, again, is to make the new INCOTERMS easier to use.

Incoterms 2000 vs. 2010• EXW – Ex Works

• FCA – Free Carrier• FAS – Free Alongside Ship• FOB – Free On Board

• CFR – Cost and Freight• CIF – Cost, Insurance & Freight• CPT – Carriage Paid To• CIP – Carriage & Insurance Paid To

• DEQ – Delivered Ex Quay • DES – Delivered Ex Ship• DAF – Delivered at Frontier• DDU – Delivered Duty Unpaid• DDP – Delivered Duty Paid

• EXW – Ex Works

• FCA – Free Carrier• FAS – Free Alongside Ship• FOB – Free On Board

• CFR – Cost and Freight• CIF – Cost, Insurance & Freight• CPT – Carriage Paid To• CIP – Carriage & Insurance Paid To

• DAT – Delivered At Terminal• DAP – Delivered At Place• DDP – Delivered Duty Paid

Marine Restricted Omni-Modal

F-Group TermsAre considered to be “Shipment Contracts”Are considered Buyer Friendly

• Seller Handles Export Clearance Handles Pre-carriage Named Place on Seller’s

Side

• Buyer• Contracts for Main

Carriage• In charge of Carrier (and

usually forwarder) selection

• Control over Freight Costs• Control of

Documentation

C-Group TermsAre considered to be “Shipment Contracts”Are considered Seller Friendly

Seller• Contracts for Main Carriage• In charge of carrier (and

usually forwarder) selection• Handles pre-carriage• Has control over freight costs• In control of documentation• Passes risk of loss (delivers) to

Buyer prior main carriage• Handles export clearance

Buyer• Named Place is on Buyer’s side• Has risk of loss while goods

are in transit with carrier selected and paid for by seller

• Must rely heavily on Seller for data elements required for ocean shipments such as Importer Security Filing (known as ISF or 10+2)

• If informed, should not consider “C” terms due to downside described

D-Group TermsAre considered to be “Arrival Contracts”

Seller• Contracts for Main Carriage• In charge of carrier (and usually

forwarder) selection• Handles pre-carriage• Has control over freight costs• In control of documentation• Passes risk of loss (delivers) to

Buyer at freight arrival point• Handles export clearance

• Seller may have revenue recognition issues since “delivery” occurs on arrival side, meaning revenue is recognized only upon arrival

Buyer• Named Place on Buyer’s side• Must rely heavily on Seller for

data elements required for ocean shipments such as Importer Security Filing (known as ISF or 10+2)

• Undertakes less risk than in “C” terms

• If inexperienced, or does not have good relationship with carriers, is served will by “D” terms

Omni-Modal Incoterms 2010

Ex Works (EXW) + (Named Place)Named Place is generally Seller’s Location (or where product initially

ships from)• Delivery – Seller delivers goods when placed at buyer’s disposal at

the name place of delivery– Goods are packaged– Goods are NOT LOADED on the collecting vehicle

• Seller Risks – Minimum obligation for seller; once packaged there is a loss of control over transportation movement, where package is finally received, how export or import documentation is presented to relevant governments

• Buyer Risks – Buyer bears all costs and risks involved in taking the goods from the named place

• Carriage: Buyer responsibility to arrange for pre-carriage, main carriage, on-carriage

• Insurance: Neither party required to insure goods• Export/Import Clearance: Buyer must handle all requirements, pay

all associated duties and fees

Free Carrier (FCA) + (Named Place)

• Named Place is generally:– Seller’s Place of Business

• Seller responsible for having goods available when promised, packaged to the extent known or agree, loaded onto collecting vehicle

• Buyer responsible for pre-carriage, main carriage, on-carriage– Another Location on Seller’s side (i.e., International Airport, Freight

Forwarder Warehouse for consolidation, another location agreed by Seller and Buyer)

• Seller responsible for having goods available when promised, packaged to the extent known or agree, loaded onto collecting vehicle, pre-carriage

• Buyer responsible for unloading pre-carriage delivering vehicle, main carriage, on-carriage

• Contract of Carriage: Buyer is responsible to make a contract of Carriage, however if requested or the buyer does not give instruction in due time, the seller may contract for carriage on usual terms at the buyer’s risk and expense.

• Risks: passes to buyer at point of delivery

• Insurance: Neither party required to insure goods

• Export Clearance: Handled by Seller– Associated Licenses can be obtained and maintained under US Law– Automated Export System filings can be completed by Seller

• Import Clearance: Handled by Buyer – responsible for the customs formalities and any duties, fees, other charges due upon importation.

This is the most versatile of the “F” terms.

Carriage Paid To (CPT) + Named Place (on Buyer’s Side)

• Delivery: Seller delivers goods to a carrier or another person nominated by the seller, at an agreed place, for transportation to the named destination on the Buyer's side, appropriately packaged

• Carriage: Seller chooses and pays cost of carriage to bring the goods to the named destination (the final location, not the destination port)

• Risks: Seller bears all risks and costs incurred until the goods are delivered to the first carrier on the Seller’s side

• Export Clearance: handled by Seller• Import clearance: Buyer responsibility for paperwork and

all costs• Insurance: Neither party required

Carriage and Insurance Paid To (CIP) + Named Place (on Buyer’s Side)

• Delivery: Seller delivers goods to a carrier or another person nominated by the seller, at an agreed place, for transportation to the named destination on the Buyer's side, appropriately packaged

• Carriage: Seller pays cost of carriage to bring the goods to the named destination (the final location, not the destination port)

• Risks: Seller bears all risks and costs incurred until the goods are delivered to the first carrier on the Seller’s side

• Export Clearance: handled by Seller• Import clearance: Buyer responsibility for paperwork and

all costs• Insurance: Seller required to obtain minimum coverage

Delivered at Terminal – DAT + Named Place (Buyer’s side)

• Replaces DEQ Term• Delivery: Seller delivers goods to named destination terminal on

Buyer’s side, packaged appropriately and unloaded• Carriage:

– Seller responsible for pre-carriage and main carriage– Buyer responsible for on-carriage

• Risks: Transfer from Seller to Buyer once goods are unloaded on buyer’s side at terminal

• Export Clearance: Seller Responsibility• Import Clearance: Buyer Responsibility – documentation and fees

associated• Insurance: Neither party required to insure

Delivered at Place (DAP) + Named Place (Buyer’s Side)

• Previously contained elements of DDU, DAF, DES terms• Delivery: Seller delivers the goods to the buyer at the

named place on the Buyer’s side, appropriately packaged, but not unloaded

• Carriage: Seller handles all carriage to named place on buyer’s side

• Risks: Transfer from Seller to Buyer once goods are delivered to the named place on buyer’s side

• Export Clearance: Seller handles• Import Clearance: Buyer handles and pays associated costs• Insurance: neither party required to insure

Delivered Duty Paid (DDP) +Named Place (Buyer’s Side)

• Delivery: Seller delivers goods to the Buyer, cleared for import on the arrival transportation, but not unloaded at the final destination

• Carriage: Seller handles all carriage to named place on Buyer’s side

• Risks: Transfer from Seller to Buyer once goods are delivered to the named place on the Buyer’s side

• Export Clearance: Seller Handles• Import Clearance: Seller Handles & pays for any

charges associated• Insurance: Neither party required to provide

Water Transport Only Incoterms

Free On Board (FOB) + Named Place (loaded on vessel at a port on the Seller’s side)

• Delivery: Seller delivers goods to Buyer on board the vessel chosen by the Buyer at the named port of shipment, packaged for shipment

• Carriage: – Seller handles pre-carriage– Buyer handles main carriage and on-carriage

• Risks: Pass from Seller to Buyer once goods are placed on board the vessel on the Seller’s side

• Insurance: Neither party is required to insure goods• Export Clearance: Handled by Seller• Import Clearance: Handled by Buyer

Cost and Freight (CRF) +Named Place (port on Buyer’s side)

• Delivery: Seller delivers goods packaged for shipment on board the Seller-designated vessel at the port on Seller’s side

• Carriage: – Seller handles pre-carriage and main carriage– Buyer handles on-carriage following delivery to port on Buyer’s

side• Risks: Passes from Seller to Buyer once goods are on board the

vessel• Insurance: Neither party required to insure goods• Export Clearance: Handled by Seller• Import clearance: Buyer is responsible for the customs

requirements and associated costs (fees, duties, etc.)

Cost Insurance Freight (CIF) +Named Place (port on Buyer’s side)

• Delivery: Seller delivers goods packaged for shipment on board the Seller-designated vessel at the port on Seller’s side

• Carriage: – Seller handles pre-carriage and main carriage– Buyer handles on-carriage following delivery to port on Buyer’s side

• Risks: Passes from Seller to Buyer once goods are on board the vessel

• Insurance: Seller required to procure minimum coverage against Buyer’s risk of loss or damage to the goods during carriage

• Export Clearance: Handled by Seller• Import clearance: Buyer is responsible for the customs

requirements and associated costs (fees, duties, etc.)

When negotiating a contract, keep in mind the following:

• The more responsibility the Seller takes on, the more they must charge the Buyer.

Structure of Price QuotationsChargeable Item Unit cost Rs Total Cost Rs

1 EXW CostAdd Selling and Distribution Head

XXX

2 Cost of Sale or FOB CostAdd Exporters Margin

XXX `

A FOB PRICE XXX XXX

3 Freight Charges from port of loading to port of discharge

XXX

B CFR XXX XXX

4 Insurance Premium on Cargo Insurance Policy

XXX

C CIF PRICE XXX XXX

Chargeable Item Unit cost Rs Total Cost Rs

5 Unloading Charges at Destination XXX

D DELIVERED AT TERMINAL(DAT) XXX XXX

6 Transport Charges from terminal to named Place

XXX

E DELIVERED AT PLACE(DAP) XXX XXX

7. Import Duty and Taxes XXX

8 Clearing Agent’s fee in importers country XXX

9 Port/airport handling charges and fees at destination

XXX

10 Transport to importers Warehouse XXX

F DELIVERED DUTY PAID(DDP) XXX XXX

11 Importers Margin /Markup (Margin of different links in the chain of distribution)

XXX

G Price to Customer /Retail Price XXX XXX

• Calculate FOB(In Rs):– No of Units:100– When selling and distribution cost is 5000– Cost of manufacturing :7000– Exporters margin: 20%– Insurance cost to exporter :10% of total contract

cost

Per unit cost

• If CIF : US $ 5000• Insurance :US $ 20• Freight: US $ 10• What will be FOB and CFR?