Incoterms for International Shipping

UNDERSTANDING INCOTERMS©

Negotiating an international equipment transaction?  What are some of the key things you have to get correct to prevent a disaster?  Certainly the price is foremost, and of course the delivery time—how quickly can you respond to the customer.  Financing is often a key criterion, especially for large projects, and finally payment terms and securing payment is very important.

One of the most important challenges can be determining title transfer and who bears the risk of loss should cargo be lost or damaged.  How do you match delivery terms in the sales contract with other key documents such as letters of credit.  Take some examples:

  1. A supplier places a customer’s order for equipment on his loading dock. When the carrier’s tractor trailer arrives, who is responsible for loading the goods in the trailer?  The customer or the supplier?
  2. A loaded container leaves a supplier’s facility in route to the port of shipment; in transit, the truck crashes, the container is engulfed in flames and the goods are declared a total loss. Who owns the goods and is responsible for filing an insurance claim for the damage and loss?
  3. A container is being lifted by a container crane at a port. As the container passes the ships rail, a cable snaps, the container falls to the ship’s deck, and the goods are severely damaged.  Who, the supplier or the customer, bears the risk of loss and must handle the claim with the port operator?

The answer to each of these, as one might expect, depends on the terms of sale.  In the first example above, if the terms of sale are Ex Works (“EXW”), the buyer must make arrangements to load the goods on the carrier’s trailer.

In the second case, if the terms of sale are Freight Alongside Ship (“FAS”), the goods are still the property of the seller, and he must undertake filing a claim with the carrier for the loss.

In the final example, if the terms of sale are Cost and Freight (“CFR”), title to the goods would have passed once the container crossed the ships rail.  Therefore, the buyer is now responsible for undertaking the claim with the port operator.

In order to facilitate easily understood and agreed to terms of sale, The International Chamber of Commerce (“ICC”), headquartered in Paris, France develops and publishes International Commercial Terms, known as Incoterms©.  These rules are meant to standardize and define who has responsibility (seller or buyer) for cost and risk associated with the delivery of goods.  These are revised periodically, generally every ten (10) years.  The current issue is Incoterms© 2010.

Understanding Incoterms rules used in international trade can be one of the most vexing issues for a supplier and their customer, particularly if one does not deal with these on a regular basis.  Freight Forwarders have an expertise in this area of international trade, and it is always wise to consult with your Forwarder before committing your company to terms that may be unfamiliar to you.  The following basic information can help you understand certain key terms and their applicability to any contract you might enter into.

There are two common misconceptions about Incoterms©.  As noted by the ICC:

First, Incoterms© are frequently misunderstood as applying to the contract of carriage rather than to the contract of sale.  Second, they are sometimes wrongly assumed to provide for all the duties which parties may wish to include in a contract of sale.

In the current edition, there are eleven (11) specific rules that clearly define the specific costs and risks assumed by each party to a transaction.  The rules have a three letter designation, for example, EXW for Ex Works.  Each designation is followed a place specified in the contract, such as the factory or distribution warehouse.

These eleven rules are divided into two categories:

Rules for all modes of transport:

  • EXW – Ex Works
  • FCA – Free Carrier
  • CPT – Carriage Paid To
  • CIP – Carriage and Insurance Paid to
  • DAT – Delivered at Terminal
  • DAP – Delivered at Place
  • DDP – Delivered Duty Paid

Sea and inland waterways:

  • FAS – Free Alongside Ship
  • FOB – Free on Board
  • CFR – Cost and Freight
  • CIF – Cost, Insurance and Freight

Each of these rules are briefly described at the ICC website (http://www.iccwbo.org/products-and-services/trade-facilitation/incoterms-2010/the-incoterms-rules/).  In addition, detailed descriptions of each rule can be found at various websites for Logistics and Forwarding companies.  Three examples are (there are many more):

The ICC also publishes a number of books and booklets that provide a very detailed description of each rule.  A very helpful one is “Incoterms© 2010”.  This book can be purchased directly from the ICC, http://store.iccwbo.org/incoterms-2010.  If your company is engaged in international trade, it would be wise to have a copy of this in house for ready reference.

Another publication that is helpful is “Incoterms© 2010 Q&A”.  This booklet can also be purchased from the ICC (http://store.iccwbo.org/incoterms-2010-qa).  It is available either in print or in the form of an e-Book.

As mentioned above, there are eleven (11) specific rules.  Here are a few of the most common:

EXW – Ex Works (named place of delivery)

Under this rule, the seller makes the contracted products available at a named place, e.g., factory, distribution center, warehouse, etc.  The buyer is responsible for loading and all other obligations such as customs clearance.  The seller has minimum obligations under this rule and is considered to have delivered once the products are made available to the buyer at the named place.  So, for example, EXW Factory, means the seller has discharged his obligations once the goods are available at the factory loading dock.  And at this point, the buyer assumes risk of loss.  Just as the seller has minimum responsibility under this rule, the buyer has maximum responsibility.

FAS—Free Alongside Ship

Under this rule, the seller is considered to have delivered when the goods are placed alongside the vessel named by the buyer at the port of shipment.  The buyer assumes all risk of loss or damage when the goods are alongside the ship, and all other costs, such as vessel loading are the responsibility of the buyer.

CIF—Cost, Insurance and Freight

As the term implies, the seller is considered to have delivered the goods when they are placed on board the named vessel.  Title and risk of loss passes to the buyer once the goods are on the vessel.  In addition, the seller contracts for and pays the freight expense to the named destination.  Furthermore, as the rule implies, the seller is required to provide insurance to cover against the buyer’s loss or damage to the goods while they are in transit.  It should be noted that the seller is required to provide only the minimum insurance cover.  If the buyer wishes more insurance coverage, this will need to be agreed to with the seller, or the buyer will need to make its own additional insurance arrangements.

Incoterms© provide for a standardized set of rules and terminology useful for people engaged in international trade.  They can be quickly grasped through the use of the tools provided by the International Chamber of Commerce and a firm’s freight forwarder.  These tools include publications as well as online instruction.  If one is engaged in any aspect of international trade, having a firm grasp of Incoterms© is essential.  Understanding these is important to avoid costly mismatches between the contract of sale and other documents such as letters of credit.

Questions?  We can Help.  Contact gdore@meatrading.com

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