13 Key International Trade Delivery Terms of Incoterms. Seller’s and Buyer’s obligation in International Trade Contract.
Saturday, October 8th, 2011International delivery terms
Table 1 – The categories of Incoterms
Group E
EXW Ex Works ( …named place )
Group F
FCA Free Carrier ( …named place )
FAS Free Alongside Ship ( …named port of shipment )
FOB Free on Board ( …named port of shipment )
Group C
CFR ( C&F) 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 ( ….named place of destination
Group D
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 )
It is obvious that the price(s) quoted are central elements of the export quotation.
It can also be seen that for an exporter to simply say to an overseas
customer that a particular product is, for example, $25.00 per unit does not really say much, in that the goods could cost them $25.00 each in a warehouse in Manchester or $25.00 each in their warehouse in Tokyo, and there is clearly a big difference between the two.
For the export price to make any sense then there must be some expression as to what is included, and not included, in that price, as in $25.00 per unit FOB. It is here where the use of what are referred to as delivery terms or trade terms is necessary and this has been the case for centuries.
It is natural that international traders have established, over long periods of time, a range of standard expressions to cover most types of contract, but the most important development was in 1936 when the International Chamber of Commerce (ICC) produced the first version of Incoterms. This publication has been amended and updated on six separate occasions since then and the current version is Incoterms 2000 (ICC Publication No 560), available from your local Chamber of Commerce or direct from the ICC on www.iccbooks.com.
As the trade term specified on the quotation is such a vital factor in the conditions of the contract of sale between seller and buyer, and as it has such a direct relevance to the price calculation, it is extremely important that all exporters have a firm grasp of the meaning of the various Incoterms.
The 13 terms can be grouped into four categories and are listed in Table 1.
The listed terms all identify a very specific point, on the journey from the seller to the buyer, for the passing of costs, delivery and risk.
Costs
As we have already seen, the export price quoted makes very little sense without some reference to what is included in the price and what is excluded.
Each trade term acts as a statement as to what costs will be met by the seller, and are therefore already included in the quoted price, and what costs will have to be paid by the buyer, in addition to the purchase price.
Thus an EXW price means that the buyer will have to pay all the costs of the physical distribution of the goods from the place of collection at the seller’s premises, but a DDP price means that the seller has included all those costs in the quoted price.
Delivery
This defines the seller’s and buyer’s responsibilities for the transport and documentary arrangements for delivery of the goods. In this context it is not enough for an exporter to quote, as in the previous example, $25.00 each, it is also necessary to define a particular geographic location.
Thus the seller needs to be specific, as in $25.00 per unit FOB UK Port, in which case the buyer can request shipment out of any UK port, or even more specific, as in $25.00 per Kilo FOB Liverpool. The point of delivery, once identified, confers obligations on both parties for the transport arrangements and production of the relevant documentation.
In relation to other topics covered in the Handbook it is interesting to ask, ‘How would a seller actually prove that they had delivered goods FOB Liverpool’? The answer, of course, is not a photograph of the smiling driver watching his load being lifted onto the vessel with the Liver Buildings in the background. It is documents which will prove performance and, in this case, the relevant document would be the receipt from the shipping line ie a Bill of Lading.
Risk
One of the most contentious issues in international trade is the relative responsibilities of the parties involved when the goods are damaged or lost during transit. It is important to establish first of all where the risk of loss or damage to the goods passes from the seller to the buyer, which is in fact defined by the trade term, and secondly to attempt to establish exactly where the loss or damage occurred during the transit.
In simple terms, if loss or damage occurs before the point specified by the trade term then it is the seller’s problem (they have not in fact delivered in accordance with the contract) but if loss or damage occurs after that point then the seller has fulfilled a contractual obligation and it is the buyer’s problem.
Table 2 shows the points in the journey where risk passes from the
seller to the buyer as identified in the Incoterms.
Each of the Incoterms defines the seller’s and buyer’s duties within a
formalised structure.
The definitive version of the seller’s and buyer’s duties under these terms is, of course, Incoterms 2000 itself. However the following is an overview of the main points of each term.
Table 2 – Definiton of seller’s and buyer’s obligation within Incoterms
THE SELLER’S OBLIGATIONS
A1 Provision of goods in conformity with the contract B1 payment of the price
A2 Licences, authorisations and formalities B2 Licences, authorisations and formalities
A3 Contracts of carriage and insurance B3 Contracts of carriage and insurance
A4 Delivery B4 Taking delivery
A5 Transfer of risks B5 Transfer of risks
A6 Division of costs B6 Division of costs
A7 Notice to the buyer B7 Notice to the seller
A8 Proof of delivery, transport document or equivalent electronic
message
B8 Proof of delivery, transport document or equivalent electronic
message
A9 Checking-packaging-marking B9 Inspection of goods
A10 Other obligations B10 Other obligations
Ex Works (EXW)
The lazy exporter’s term ! This is the easiest term for the seller and it may be that it is perfectly acceptable to the buyer, particularly for EU trade.
However to use EXW as a matter of policy is unacceptable when we are
dealing with buyers who would have significant problems in arranging
collection and shipment from a place in the UK. We often have to do more for the buyer.
The ‘named place of delivery’ is invariably the seller’s loading bay, before the loading of the vehicle. The buyer is responsible for arranging the collection, transport, export clearance and paying all costs from this point.
The risk of loss or damage passes when the goods are ‘placed at the
disposal of the buyer at the named place’. The seller has no responsibility for loading the goods, but in practice often does, and does not have to get the goods off their premises or past any ‘factory gates’.
An issue which can cause difficulty is export packing. The seller has a duty to pack the goods for the journey only ‘to the extent that the
circumstances related to the transport ( eg modalities, destination ) are made known to them’. In order to avoid any problems the seller should be aware of where the goods are going and how they are being transported so that they can pack them suitably for the journey.
Free On Board (FOB)
FOB is a very popular term and has been used by traders for centuries. The seller is responsible for the goods until they ‘ have passed the ship’s rail at the named port of shipment’. It is at this point that the costs, risk and responsibility end for the seller and begin for the buyer.
The major issue here is that traders today do not now exclusively use sea freight for their exports but a whole range of air, road, rail, express and courier services. Indeed, even when moving goods by sea the goods are invariably containerised and delivered to a groupage depot for Less than Container Load ( LCL ) shipments or the shipping line will collect the goods at the seller’s premises for a Full Container Load ( FCL ) movement.
In addition, container ship does not have a ‘ ship’s rail’. This means that FOB, no matter how standard is its use, is inappropriate for most modern, multimodal, forms of transport where, not only does the ship’s rail not exist it is also irrelevant to the place at which the seller hands goods over to the carrier.
In fact, the termFOBis really only accurate for traditional but increasingly rare conventional sea freight movements ( ie non-containerised ). The 2000 revision of Incoterms contains more appropriate terms for container sea freight, air, road, rail, express and courier services.
Free Carrier (FCA)
FCA is one of the new terms incorporated originally in the 1990 revision of Incoterms. Instead of specifying the ship’s rail, the FCA term gives the seller the duty to deliver the goods to the ‘carrier… nominated by the buyer at the named place’. This place will invariably be the inland depot ( container base,
road depot, rail terminal or airport) not unloaded for LCL shipments or the seller’s premises when the goods are loaded on the buyer’s collecting vehicle for FCL shipments.
This is particularly suited for the multi-modal movements of goods form depot to depot, or door to door, which characterises modern international transport.
Free Alongside Ship (FAS)
The seller must deliver the goods alongside the vessel nominated by the buyer at the named port of shipment. Its main relevance is where vessels may be berthed in deep water and lighters are needed to move the goods alongside, it is therefore very unusual out of the UK.
Cost Insurance & Freight (CIF)
Cost & Freight (CFR – often stated as C and F or C&F)
CFR and CIF are like FOB in terms of longevity but, as is the case with FOB, they are appropriate only to conventional sea freight, where a ship’s rail actually exists, and inappropriate for multimodal movements. For CFR the contract for the international carriage will be arranged and paid for by the seller and, for CIF, the seller will additionally arrange and pay for cargo insurance on behalf of the buyer.
Therefore, the costs and arrangements for the seller end when the goods effectively arrive at the port of destination. However it is very important to note that the risk ends for the seller when the goods ‘ have passed the ship’s rail at the port of shipment’.
It is at this point in the performance of the contract that the seller can produce a set of documents proving full performance of a CIF contract eg Bill of Lading or Waybill, invoice, certificate of origin, insurance certificate etc. Therefore, if the goods are subsequently damaged in transit before they arrive at the destination port this is contractually the responsibility of the buyer. It is perfectly feasible for the overseas buyer to make a claim on insurance arranged by the seller.
These are therefore ‘shipment contracts’ not ‘arrival contracts’.
Carriage & Insurance Paid to (CIP) and Carriage Paid to (CPT)
CIP and CPT can be viewed as the multimodal versions of CIF and CFR
respectively. As with FCA they have been introduced to address the
difference between CIP and CPT is again the cost of the insurance for the goods in transit.
The critical point where the risk ends for the seller is when the goods have been delivered to ‘ the first carrier at the named place’. The expression ‘first’ carrier is used because it may be the case, particularly in road freight, that there is a ‘subsequent’ carrier who completes the delivery.
This means that, in a similar way to FCA, the risk passes to the buyer
when the seller has delivered the goods to the carrier at the named place.
Damage in transit following this point is again the buyer’s responsibility. These are again ‘ shipment contracts’ not ‘ arrival contracts’.
Delivered Ex Ship (DES)
The seller arranges, and pays for, the carriage to the named port of
destination and must ‘place the goods at the disposal of the buyer on board the vessel at the unloading point’. This term tend to be used for bulk goods only.
Delivered Ex Quay (DEQ)
The seller arranges, and pays for, carriage to the port of destination and must ‘place the goods at the disposal of the buyer on the quay (wharf)’ at that point. This term also tends to be used for bulk goods only.
Delivered At Frontier (DAF)
The seller arranges, and pays for, the carriage to the named point of delivery at the frontier and must ‘place the goods at the disposal of the buyer …. not unloaded’ at that point. There is no obligation to arrange cargo insurance and risk passes at the frontier.
Delivered Duty Unpaid/Paid (DDU/DDP )
The opposite of EXW is DDP. The most onerous term for the seller in terms of costs, risks, and responsibilities. The seller must ‘place the goods at the disposal of the buyer… not unloaded at the named place of destination’, which is usually the buyers’ premises in the country of import.
Under a DDP the seller would have to arrange and pay the costs of
Customs formalities at import, ie import declarations, duty, tax, excise etc.
whilst under a DDU these would be the responsibility of the buyer. In either case there is no obligation for the seller to insure the goods as they are responsible for loss or damage until goods are delivered to the named place but do not have to insure that liability – however most would. These are therefore ‘ arrival contracts’.
