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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
a. What are Incoterms®?
Incoterms® are standard international trade terms developed by ICC, widely recognized by common abbreviations such as “FOB” and “CIF”. Trade terms are essential elements of a properly drafted international contract of sale, because they notify the buyer what is “included” in the sales price. In essence, Incoterms® allocate the following key contract elements between seller and buyer:
When used properly in combination with a named place, Incoterms® also notify the buyer exactly where the seller will deliver the goods (or hand them over to the carrier). As a result, Incoterms® are sometimes loosely referred to by traders as “shipping” or “delivery” terms, but ICC suggests that “trade terms” is a more accurate designation. Incoterms® deal with more than just transport responsibilities, so a reference to “shipping” or “delivery” does not fully describe them. Moreover, Incoterms® are used in contracts of sale to allocate responsibilities between a seller and a buyer; it is important not to confuse them with terms used in contracts of carriage (such as so-called “liner terms”) which allocate duties between a carrier and shipper.
If a seller in Berlin informs a buyer in Beijing that a certain product costs “1000 euros per unit”, we still do not know (until we add an Incoterm and a named place) where the goods will be delivered, who will pay for the shipment from Berlin to Beijing, who will clear the goods through customs and pay any necessary insurance or import duties. By adding an Incoterm and a named place, such as “1000 euro per unit DDP Beijing Incoterms® 2010”, all of these issues are clarified.
There are currently 11 Incoterms® (in the most recent 2010 revision of Incoterms®). The different Incoterms® represent steps of increasing responsibility from the seller’s premises to buyer’s premises. Thus, the minimum responsibility for the seller is found in EXW (Ex Works), commonly used when delivery is at the seller’s factory or warehouse. A buyer on EXW terms knows that nothing “extra” (in terms of transport, customs clearance or insurance) is included in the sales price. The EXW buyer must handle the entire transport operation itself.
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Conversely, DDP (Delivered Duty Paid) represents maximum responsibility on the part of the seller, with delivery generally at the buyer’s premises. A buyer on DDP terms (“Delivered Duty Paid”) knows that the quoted price includes all transport costs, risks, duties and formalities up to the final destination. In between these two extremes there are nine other Incoterms®, representing a range of options for the division of costs/risks between the parties.
b. Are certain Incoterms® appropriate only for maritime transport?
Four of the Incoterms® should be used only for maritime or inland waterway transport (involving port–to–port shipment): FAS, FOB, CFR, and CIF. The remaining seven Incoterms® are appropriate for use with any mode of transport or with multiple means of transport: EXW, FCA, CPT, CIP, DAT, DAP, DDP.
Some traders mistakenly use maritime terms such as FOB and CIF for non–maritime shipments such as those involving containerized road or air shipments. This practice is to be avoided, because the Incoterms® rules for FAS, FOB, CFR and CIF are specifically adapted to the maritime context (which often involves bulk commodities sales and so-called “string” sales with several intermediaries between seller and buyer). Thus, a CFR or CIF seller is required (unless otherwise agreed) to furnish a transport document which will “enable the buyer to sell the goods in transit by the transfer of the document to a subsequent buyer or by notification to the carrier”. As a result, a seller who uses a maritime term but then ships by air, for example, is in breach of contract. Buyers may not always object to this kind of documentary breach, but it is a dangerous form of legal exposure for the seller. The most prudent practice is to strictly follow ICC’s distinction between the general rules, which are appropriate for any mode of transport, and the rules that are appropriate only for maritime transport.
c. Rules for any mode of transport
The following rules can be used irrespective of the mode of transport selected. Note that they can also be used in cases where a ship is used for part of the carriage.
d. Rules appropriate when the point of delivery and the place to which the goods are carried are both ports
The following rules fall into this category:
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e. How are Incoterms® used in contracts?
Incoterms® should be explicitly incorporated into sale contracts by reference, e.g., “1000 euro per unit FOB Rotterdam Incoterms® 2010”. One way to do this is by appending the Incoterm to the statement of the price and/or delivery place (as in the preceding example). Another way is by including in all form documents a pre-printed statement to the effect: “All transactions covered by this document are subject to Incoterms® 2010”.
f. Are Incoterms® required by law?
Incoterms® are creatures of contract and trade custom, not legislation. They were developed by ICC, a private non-governmental organization that promotes and facilitates international trade. Therefore, Incoterms® are not, strictly speaking, required by law and are not mandatory. If two parties wish to exclude Incoterms®, or wish to draft their own highly precise delivery and risk terms, they may do so.
If the parties use a trade term such as FCA or FOB but fail to make a specific reference to Incoterms®, the situation becomes ambiguous (which is why ICC strongly recommends an explicit reference to Incoterms®). Increasingly, courts are referring to Incoterms® as an authoritative statement of trade customs in international transactions, even in the absence of an explicit reference. Thus, the courts in the U.S. and Germany, for example, have ruled that Incoterms® are incorporated into transactions governed by the Vienna Convention on Contracts for the International Sale of Goods (CISG).
Moreover, if trade or industry customs or previous contractual dealings indicate an acceptance of Incoterms®, then Incoterms® may apply even in the absence of a specific reference in the sale contract. Under many legal systems, great weight is given to customs of trade, and there may be a presumption that Incoterms® constitute an international custom of trade. Judges and arbitrators may take judicial notice of an Incoterms® rule to resolve cases even when there is no explicit reference to Incoterms®.
However, it is always more prudent to be explicit. If the parties fail to incorporate Incoterms® into the sales contract, they may find that surprising national legal interpretations apply.
g. How and why were Incoterms® developed?
By the early part of the 20th century it had become a vexing problem in international trade that major trading countries had different legal definitions of such common trade terms as FOB and CIF. ICC responded with a working group that derived Incoterms® (International Commercial Terms) from studies of prevailing international trade practices, publishing the first version of Incoterms® in 1936. There had been several previous attempts to harmonize the definition of trade terms, but the ICC’s 1936 publication was the first that met with broad commercial acceptance. Subsequent revisions were published in 1953, 1967, 1976, 1980, 1990, 2000 and 2010.
h. What happens if one does not refer to the current edition of Incoterms®?
Traders sometimes wonder whether contracts referring to previous versions of Incoterms® are valid. The answer is that each contract is governed by the version of Incoterms® that was referred to in that contract. If the contract referred only to Incoterms® but not to a particular year, then the Incoterms® version in force at that time of contracting would most[Page47:]likely be applied in the event of a dispute. Of course, the best practice is to refer to the most recent revision, currently Incoterms® 2010.
In practice, ICC has revised Incoterms® roughly once per decade, so traders do not have to check for a new version every year (though it is wise to monitor ICC for the notifications and statements that sometimes issue between Incoterms® revisions).
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i. Do Incoterms® determine the transfer of property or title?
Incoterms® do not govern the transfer of property or title to goods, though many traders are under that impression. This misunderstanding arises from the fact that Incoterms® determine the place of delivery.
However, delivery under Incoterms® does not necessarily equate with transfer of ownership. In fact, there is no standard international legal practice as regards the transfer or title or property in international transactions, nor is the matter addressed by the CISG. Since the law on transfer of property rights differs from country to country, the parties to a contract of sale may wish to specifically provide for this matter in the contract.
For example, the seller may wish to retain title and ownership of the property until the purchase price is paid in full. A “retention of title” clause in the contract of sale can be an extremely important form of risk management for exporters. Retention of title is not available in all jurisdictions, so traders should check with local counsel to see what is permissible.
j. Do Incoterms® require the parties to obtain insurance? How much insurance is required?
The CIF and CIP Incoterms® require the seller to obtain insurance coverage for the buyer’s account. The other Incoterms® do not require either side to procure insurance as part of their contractual obligations to their counterparty, but that does not mean they should not insure themselves. Incoterms® only address one party’s legal obligations to the other party. Therefore, parties should always seek to have the goods appropriately insured as a matter of commercial prudence, but it is only with CIF and CIF that insurance becomes a contractual duty.
The CIF and CIP Incoterms® require that the seller obtain cargo insurance complying with at least the minimum cover provided by Clause (C) of the Institute Cargo Clauses or any similar clauses. The insurance coverage must be for the contract price plus 10% and must be in the currency of the contract.
The Incoterms® acceptance of minimum coverage may be risky for the inexperienced trader. Minimum coverage does not include damages resulting from theft, pilferage or improper handling of the goods. Consequently, minimum cover may not be suitable for manufactured goods, especially if they are of high value. The buyer may wish to require insurance coverage against war, riots and strikes (as in so-called “SRCC” clauses - coverage for “strikes, riots and civil commotions”), but these and similar items must be included specifically, and cannot be added simply by using a formula such as “maximum insurance”. If the buyer agrees to a CIF or CIP term with “maximum insurance”, he will, in effect, be leaving it to the seller to determine which of the possible and available covers this could be, with a resultant level of uncertainty.
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k. What important matters are not covered by Incoterms®?
Although often used in documents which quote prices, Incoterms® say nothing about the price to be paid or the method of its payment, nor do they determine transfer of ownership or the consequences of a breach. Such matters are best dealt with specifically in the contract of sale or in the governing law. It is always the case that mandatory local law may override any aspect of the sale contract, including the choice of Incoterm.
Incoterms® should be accompanied by a number of specific provisions in order to make a contract that is sufficiently precise. Thus, it is generally advisable to include details on the exact place and method of delivery, loading and unloading charges, extent of insurance and mode of transport.
Consequently, there is nothing in the Incoterms® on how the seller should transport the goods to the agreed delivery point. If the sale is “FOB Buenos Aires Incoterms® 2000”, the buyer has no control - under Incoterms® - over how the seller transports the goods to Buenos Aires. But it might be very important to the buyer that the goods be transported, for example, in refrigerated containers. If this is the case, the buyer should specify in the contract how the goods must be transported to the delivery point.
a. New Incoterms®: Addition of Delivered at Terminal (DAT) and Delivered at Place (DAP)
Incoterms® 2010 has introduced two new rules and eliminated four old ones, reducing the total number of Incoterm from 13 to 11. This has been achieved by substituting two new rules that may be used irrespective of the agreed mode of transport - DAT, Delivered at Terminal and DAP, Delivered at Place - for the Incoterms® 2000 rules DAF, DES, DEQ and DDU.
Under both new rules, delivery occurs at a named destination:
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b. Incoterms® are presented in two classes: All Modes and Sea/Inland Waterway
All ModesThe first class includes the seven Incoterms® 2010 rules that can be used irrespective of the mode of transport selected and irrespective of whether one or more than one mode of transport is employed. EXW, FCA, CPT, CIP, DAT, DAP and DDP belong to this class. It is important to remember, however, that these rules can also be used in cases where a ship is used for part of the carriage.
Sea and Inland WaterwayIn the second class of Incoterms® 2010 rules, the point of delivery and the place to which the goods are carried to the buyer are both ports; hence, the label “sea and inland waterway” rules. FAS, FOB, CFR and CIF belong to this class. Under the last three Incoterms® rules, all mention of the ship’s rail as the point of delivery has been omitted in preference for the goods being delivered when they are “on board” the vessel. This reflects modern commercial reality and avoids problems related to the imaginary perpendicular line that had been related to the concept of the ship’s rail.
c. Adaptation for domestic transport
Incoterms® rules have traditionally been used in international sale contracts where goods pass across national borders. In various areas of the world, free trade areas have reduced or eliminated border formalities between countries. Consequently, Incoterms® 2010 rules have been formally and explicitly designed to function in both international and domestic sale contracts. Thus, the rules clearly state in a number of places that the obligation to comply with export/import formalities exists only where applicable.
d. Use of Guidance Notes
Each Incoterms® 2010 rule is prefaced by a Guidance Note. These Notes explain the fundamentals of each Incoterms® rule. The Notes are not part of the actual Incoterms® 2010 rules, but are intended to help guide and inform users.
e. Suitability for digital communications
Previous versions of Incoterms® rules have specified those documents that could be replaced by EDI messages. Articles A1/B1 of the Incoterms® 2010 rules, however, now give electronic means of communication the same effect as paper communication, as long as the parties so agree or where customary.
f. Security issues
Heightened security concerns have led to the introduction of additional customs clearance verifications. Therefore, the Incoterms® 2010 rules have allocated obligations between the buyer and seller to obtain or to render assistance in obtaining security-related clearances, such as chain-of-custody information, in articles A2/B2 and A10/B10 of various Incoterms® rules.
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g. Treatment of terminal handling charges
Under Incoterms® rules CPT, CIP, CFR, CIF, DAT, DAP, and DDP, the seller must make arrangements for the carriage of the goods to the agreed destination. While the freight is paid by the seller, it is actually paid for by the buyer, as freight costs are normally included by the seller in the total selling price. The carriage costs will sometimes include the costs of handling and moving the goods within port or container terminal facilities, and the carrier or terminal operator may well charge these costs to the buyer that receives the goods. In these circumstances, the buyer will want to avoid paying for the same service twice: once to the seller as part of the total selling price and once independently to the carrier or the terminal operator. The Incoterms® 2010 rules seek to avoid this by clearly allocating such costs between seller and buyer.
h. Adaptation for string sales
In the commodities trade, cargo is frequently sold several times during transit “down a string”. When this happens, an intermediary seller does not “ship” the goods, because these have already been shipped by a previous seller. The middle or intermediary seller therefore performs its obligations towards its buyer not by “shipping” the goods, but by “procuring” goods that have been shipped. For clarification purposes, Incoterms® 2010 rules include the obligation to “procure goods shipped” as an alternative to the obligation to ship goods.
INCOTERMS® RULES SUMMARIES – THE 11 CURRENT INCOTERMS®
Please note: These summaries are intended ONLY for pedagogical purposes. Traders negotiating actual contracts must acquire and refer to the full, definitive text of Incoterms® 2010, which contains substantially more detailed provisions (available from www.iccbooks. com or from your local ICC national committee or chamber of commerce).
RULES FOR ANY MODE OF TRANSPORT
EXW – “EX WORKS (named place)”
The seller delivers when it places the goods at the disposal of the buyer at the seller’s premises (or at another named place, i.e., works, factory, warehouse, etc.). The seller is not required to load the goods or clear them for export. The parties should precisely specify the point within the named place of delivery, as all costs and risks up to that point are for the seller’s account. The buyer thereafter bears all costs and risks of transport.
EXW represents the seller’s minimum obligation. The seller has no obligation to load the goods, even though it may be in a better position to do so. If the seller does load the goods, it does so at the buyer’s risk and expense. In cases where the seller is in a better position to load the goods, FCA, which obliges the seller to do so at its own risk and expense, is usually more appropriate.
The seller is only required to assist the buyer with export clearance and is not responsible for organizing or obtaining export clearance. Buyers should not use EXW if they cannot easily obtain export clearance. The buyer has limited obligations to provide the seller with any information regarding the export of the goods, though in some situations a seller may need this information for, e.g., taxation or reporting purposes.
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FCA – “FREE CARRIER (named place)”
The seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties should clearly specify the point within the named place of delivery, as the risk passes to the buyer there.
If the parties intend to deliver the goods at the seller’s premises, they should identify the address of those premises. If the parties intend the goods to be delivered at another place, they should identify it specifically. FCA requires the seller to clear the goods for export, where applicable.
CPT – “CARRIAGE PAID TO (named place of destination)”
The seller delivers the goods to the carrier and contracts for and pays the costs of carriage to the named place of destination.
When CPT, CIP, CFR or CIF are used, the seller fulfils its delivery obligation to deliver when the goods are handed over to the carrier and not when the goods reach the place of destination. Risk and costs are transferred at different places. The parties should precisely identify the place of delivery (where the risk passes to the buyer) and the place of destination to which the seller must contract for carriage. If several carriers are used for the carriage to the agreed destination and the parties do not agree on a specific point of delivery, risk passes when the goods have been delivered to the first carrier at a point of the seller’s choosing and over which the buyer has no control. Should the parties wish the risk to pass at a later stage (e.g., at an ocean port or airport), they should specify this in their contract of sale.
The parties should precisely specify the point within the agreed place of destination, as the costs to that point are for the account of the seller. The seller should procure contracts of carriage that match this choice. If the seller incurs costs under its contract of carriage related to unloading at the named place of destination, it is not entitled to recover such costs from the buyer unless otherwise agreed between the parties.
CPT requires the seller to clear the goods for export if necessary. However, the seller has no import clearance or duty obligations.
CIP - “CARRIAGE AND INSURANCE PAID TO (named place of destination)”
The seller delivers the goods to the carrier and contracts for and pays the costs of carriage necessary to bring the goods to the named place of destination.
The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
When CPT, CIP, CFR or CIF are used, the seller fulfils its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination.
This rule has two critical points, because risk passes and costs are transferred at different places. In the contract, the parties are well advised to identify as precisely as possible both the place of delivery, where the risk passes to the buyer, and the named place of destination to which the seller must contract for carriage. If several carriers are used for the carriage to the agreed destination and the parties do not agree on a specific point of delivery, the default position is that risk passes when the goods have been delivered to the first carrier at[Page54:]a point entirely of the seller’s choosing and over which the buyer has no control. Should the parties wish the risk to pass at a later stage (e.g., at an ocean port or an airport), they need to specify this in their contract of sale. The parties are also well advised to identify as precisely as possible the point within the agreed place of destination, as the costs to that point are for the account of the seller. The seller should procure contracts of carriage that precisely match this choice. If the seller incurs costs under its contract of carriage related to unloading at the named place of destination, itis not entitled to recover such costs from the buyer unless otherwise agreed between the parties.
CIP requires the seller to clear the goods for export, where applicable. However, the seller has no obligations as regards import clearance or duties.
DAT – “DELIVERED AT TERMINAL”
The 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 any place, whether covered or not, such as a quay, warehouse, container yard or cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal. The parties should specify precisely which terminal and, if possible, a specific point within the terminal, as the risks up to that point are for the seller’s account. The seller should procure a contract of carriage that matches this choice precisely. If the parties intend the seller to bear the risks and costs involved in transporting the goods from the terminal to another place, then DAP or DDP should be used.
DAT requires the seller to clear the goods for export, where applicable. However, the seller has no obligation as regards import clearance or duties.
DAP - “DELIVERED AT PLACE”
The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at destination. The seller bears all risks involved in bringing the goods to the named place.
The parties should precisely specify the point within the agreed place of destination, as all risks to that point are for the seller’s account. The seller should procure contracts of carriage that match this choice. If the seller incurs unloading costs under its contract of carriage, it is not entitled to recover such costs from the buyer unless otherwise agreed.
DAP requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. If the parties wish the seller to clear the goods for import, pay any import duty and carry out any import customs formalities, the DDP term should be used.
DDP - “DELIVERED DUTY PAID”
The seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport and ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods, not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.
DDP represents the maximum obligation for the seller. The parties are well advised to specify as clearly as possible the point within the agreed place of destination, as the costs and risks to that point are for the account of the seller. The seller is advised to procure contracts of carriage that precisely match this choice. If the seller incurs costs under its contract of[Page55:]carriage related to unloading at the place of destination, it is not entitled to recover such costs from the buyer unless otherwise agreed between the parties.
The parties are well advised not to use DDP if the seller is unable directly or indirectly to obtain import clearance. If the parties wish the buyer to bear all risks and costs of import clearance, the DAP rule should be used. Any VAT or other taxes payable upon import are for the seller’s account unless expressly agreed otherwise in the sale contract.
RULES FOR SEA AND INLAND WATERWAY TRANSPORT
FAS - “FREE ALONGSIDE SHIP”
The seller delivers when the goods are placed alongside the vessel (e.g. on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all subsequent costs. The parties should clearly specify the loading point at the named port of shipment, as the costs and risks to that point are for the account of the seller, and these costs and associated handling charges may vary according to the practice of the port.
The seller must deliver the goods alongside the ship or procure goods already so delivered for shipment. Where the goods are in containers, it is typical for the seller to hand the goods over to the carrier at a terminal and not alongside the vessel. In such situations, the FAS rule would be inappropriate, and the FCA rule should be used. FAS requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities.
FOB - “FREE ON BOARD”
The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.
The seller is required either to deliver the goods on board the vessel or to procure goods already so delivered for shipment. The reference to “procure” here caters for multiple sales down a chain (“string sales”), particularly common in commodity trades. FOB may not be appropriate where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such situations, the FCA rule should be used. FOB requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities.
CFR - “COST AND FREIGHT”
The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
When CPT, CIP, CFR or CIF are used, the seller fulfils its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination. Thus, risk and costs are transferred at different places. While the contract will always specify a destination port, it might not specify the port of shipment, which is where risk passes to the buyer. If the shipment port is of particular interest to the buyer, the parties are well advised to identify it as precisely as possible in the contract.
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It is recommended that the parties identify as precisely as possible the point at the agreed port of destination, as the costs to that point are for the account of the seller. The seller is advised to procure contracts of carriage that match this choice precisely. If the seller incurs costs under its contract of carriage related to unloading at the specified point at the port of destination, it is not entitled to recover such costs from the buyer unless otherwise agreed between the parties.
The seller is required either to deliver the goods on board the vessel or to procure goods already so delivered for shipment to the destination. In addition, the seller is required either to make a contract of carriage or to procure such a contract. The reference to “procure” here caters for multiple sales down a chain (“string sales”), particularly common in commodity trades.
CFR may not be appropriate where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such circumstances, the CPT rule should be used.
CFR requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities.
CIF - “COST, INSURANCE AND FREIGHT”
The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
When CPT, CIP, CFR, or CIF are used, the seller fulfils its obligation to deliver when it hands the goods over to the carrier in the manner specified in the chosen rule, and not when the goods reach the place of destination.
This rule has two critical points, because risk passes and costs are transferred at different places. While the contract will always specify a destination port, it might not specify the port of shipment, which is where risk passes to the buyer. If the shipment port is of particular interest to the buyer, the parties are well advised to identify it as precisely as possible in the contract. The parties are also well advised to identify as precisely as possible the point at the agreed port of destination, as the costs to that point are for the account of the seller. The seller is advised to procure contracts of carriage that match this choice precisely. If the seller incurs costs under its contract of carriage related to unloading at the specified point at the port of destination, it is not entitled to recover such costs from the buyer unless otherwise agreed between the parties.
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CIF may not be appropriate where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such circumstances, the CIP rule should be used.
CIF requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities.
Incoterms® allocate costs, risks and responsibilities between seller and buyer according to the provisions of 10 numbered articles, divided into two parallel series - “A” for seller’s responsibilities and “B” for buyer’s responsibilities:
a. Shipment vs. arrival contracts
Incoterms® can be divided into those that correspond with “shipment” or “arrival” contracts:
1) Shipment Contracts - EXW, FAS, FOB, FCA, CFR, CIF, CPT, CIP. The seller fulfils its delivery obligation at the point of shipment; hence, “shipment contracts”. Shipment contracts were the norm when the risks of ocean travel were much higher. Sellers did not wish to gamble that the goods would reach the overseas destination or that foreign buyers would pay after receipt. Instead, sellers preferred to be paid (and to transfer all risks) once they had delivered the goods on board a ship at the port of loading. The letter of[Page58:]credit system developed in tandem with the practice of shipment contracts, allowing the seller to receive prompt payment against documents proving that the goods had indeed been shipped. However, it is a very common misconception amongst traders that there is a difference between “F”-terms and “C”-terms contracts with respect to transfer of risk. Both FOB and CIF terms dictate shipment contracts.
2) Arrival contracts - DAT, DAP, DDP. Under “D”-terms, the seller is responsible for the goods until they arrive in the country of destination (hence “arrival contracts”). The seller not only pays the cost of transport to the ultimate destination, it is also at risk for any damage that may occur to the goods up to that point.
Compare CIF (a shipment contract) and DDP (an arrival contract) in the case of a maritime shipment to a foreign port. Under CIF, there are two critical points: i) the point of division of risks (on board the vessel in the port of loading) and ii) the point to which freight is paid, the destination port. With DDP, on the other hand, the seller bears all risk until the goods arrive at destination, and he also pays for the carriage all the way to the destination. This distinction becomes crucial if the goods are lost or damaged in transit. Under CIF, the seller is safe, because it fulfilled its delivery obligation when the goods were loaded on board the ship. The buyer must pay the contract price even if the goods arrive damaged or are lost. The buyer can rely only on the insurance to recompense itself (and bear any losses not covered by insurance should the insurance prove insufficient).
Under DDP, on the other hand, if the goods are damaged in transit, the seller has not fulfilled its delivery obligation under the contract. It may, therefore, be liable for breach of contract, meaning it would be required to pay damages, provide substitute goods or make some other kind of restitution. Since “D- terms thus involve greater risk for the seller than “C- terms, this will generally be reflected in higher prices.
b. Optimal transport economy and the trend toward D–terms
Carriers charge lower freight rates for shippers that ship large quantities. Thus, the total cost of transport between seller and buyer will in general be cheaper if it is arranged entirely either by the seller or buyer. This would seem to militate in favour of either EXW or the “D- terms.
In fact, delivered terms have become more popular in international trade over the past decades. In addition to the advantage of optimizing transport economy, “D”-terms allow for greater control by the seller of the quality of transport. In the case of high-value manufactured goods, it may be very important for the seller to be in a position to assure that the goods arrive in time and in good condition. Control of the entire transport chain is facilitated for seller under “D- terms. Moreover, in highly competitive markets, buyers may insist on being quoted “D”- terms, which facilitates the comparison of offers from different countries.
c. Ship arrives before bill of lading
In cases involving documentary credit payments, the ship often arrives in the port of discharge before the buyer has received the bill of lading entitling it to take possession of the goods. Frequently, the ship’s master accepts to hand over the goods to the buyer (despite the absence of a bill of lading) against the security provided by a bank guarantee, standby credit (sometimes called a “steamer” guarantee) or letter of indemnity (“LOI”). ICC recommends avoiding this practice, as it reduces the security of the documentary credit transaction, which is based on the firm principle that under no circumstances should the goods be delivered except in return for an original bill of lading.
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d. Incoterms® variants and additions: “loaded”, “landed” etc.
Traders should note that Incoterms® 2010 do not contain standard definitions of the additional terms that are sometimes appended to trade terms, as for example in the expression, “CIF landed”. Incoterms® variants can be dangerous and can result in an ambiguous or even self-contradictory term. In particular, traders should be aware that by altering the cost element of a particular Incoterm, they may also be altering the transfer of risk. It is strongly recommended, therefore, that they clarify the meaning of the variations.
The only solution for the trader wishing to modify or vary the basic distribution of responsibilities or risks under Incoterms® is to think carefully through the potential consequences, and, in particular, to question: are both costs and risks intended to be shifted? If the variant affects customs clearance or duties, is it intended to shift responsibility for a) customs duties, b) administrative clearance, c) risk of non-clearance or d) all of the preceding?
CHECKLIST
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