The Incoterms® rules

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The Incoterms 2010
Before considering shipping merchandise internationally, an important question must be answered: At which point are the risks and charges transferred to the buyer?In 1936, for the first time, the International Chamber of Commerce (ICC), located in Paris, published under the name of Incoterms 1936 (INternational COmmercial TERMS), a series of international rules that answers this question.In order to adapt these rules into the most recent international trade practices, many amendments have been added to the rules of 1936 accomplishing what today is called “Incoterms 2010” which has replaced Incoterms 2000. The last modifications to be applied on January 1st 2011 will mainly eliminate four Incoterms –  DEQ, DES, DAF and  DDU – and introduce two new Incoterms “D”, DAT (Delivered at Terminal) and DAP (Delivered at Place of Destination).12
Managing Risk Control
By making references in their contracts, using one of the Incoterms of the CCI, the buyer and the seller reduce the uncertain risks inherent in all international transactions: commercial practices and different interpretations from one country to the other. They specify their own respective responsibilities and obligations during the process of delivering the merchandise and the mandatory documentation that the vendor must supply. Also the INCOTERMS, even if they are optional, they are recognized as standardized clauses which will prevent any litigation by clearly distributing between the buyer and the vendor:

  • the charges
  • the risks

In addition, they dissociate the question of transferring risks from those of transferring ownership, this last issue remains under the control of the law that rules the contract. Concretely, Incoterms will clarify the following points:

  1. Place the critical point of transferring the risks from the vendor to the buyer during the process of shipping the goods (loss, damage or theft of the merchandise) allowing the one who is liable for these risks to make his own dispositions, notably in terms of insurance;
  2. Indicate which one, either the seller or the buyer, must underwrite the shipping contract;
  3. Distribute among the two parties the logistic and administrative charges during the different stages of the process
  4. Specify who takes care of the packaging, labeling, handling operations, loading and unloading of goods or stuffing and stripping containers as well as inspection procedures;
  5. Set up the individual obligations of each party in the process of accomplishing export and/or import formalities, legal regulations and duty taxes as well as providing all the documents required. There are 11 Incoterms being kept by the CCI, (original English acronym made up of three letters, ex: FOB) plus one specific location ex: “FOB Le Havre”.

Indicate clear specifications in the sales contract
In order to use the Incoterms 2010, it is convenient to clearly specify this issue in the sales contract indicating: “the selected Incoterm used including the designated place, followed by Incoterms 2010”.
Choose the appropriate Incoterms rule
The choice of the Incoterm is an integral part of a commercial transaction. It has to be done in function with the organizational capacities of the enterprise, the type of transportation used, the level of service that the enterprise wishes to provide to the client or the resources of its supplier, or it could be in function to the common practices of the market, or the practices used by the competitors, etc.The Incoterm selected must also be well-adapted to the type of goods that will be shipped and the type of transportation that will be used.
Specify the place and port with precision
For an optimal application of Incoterms, the contract’s parties are required to assign a place or a port with maximum exactitude: ex FCA 25 rue Saint Charles, Bordeaux, France, Incoterms 2010.It must be stressed in this part that for certain Incoterms such as CPT, CIP, CFR, CIF, the place designated is not the same as the place of delivery: it designates the place of destination paid for. In order to specify the final destination of the goods, it is advised to mention the specific address in order to avoid any ambiguity.The same applies for the “out of the factory”: Is it a factory in France or a factory established abroad by a French company?A reference to the specific place assigned in the sales contract. For example: CIF Rouen, CCI 2010; adding systematically the place of reference (port, frontier, etc.) to the acronym (set of initials) used.
Other precautions to be taken
Some precautions must be taken when using Incoterms, such as:

  • A good knowledge of the meaning of each Incoterm and its acronym
  • The usage of the variants of Incoterms with exactitude in order to prevent confusions that could result from a misinterpretation (ex: FOB USA)

The Incoterms are standards accepted worldwide. In that capacity, like all standards (industry, quality, pollution), their names do not cause any divergence. Use only the standardized abbreviations. Any other code will be prohibited! As any standard, they are an explicit reference. As the horses DIN or the ISO 9002, the three letters of the Incoterm must be followed by the specific names of the designated places and the mention “Incoterm”, see “Incoterm ICC”.

Do not hesitate to consult an international law firm;

Today’s tendency in international business is based on the fact that the buyer is released from all logistics concerns. This valorizes the position of the exporter. It is essential to negotiate the terms of the contract for the first shipment and, most of all, in the case of dealing with countries at risk, obtaining a document of credit as a form of payment will be advised.

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Sale on Departure, Sale on Arrival: a fundamental difference

Sale on Departure
A sale on departure means that the merchandise will be shipped at the risk and hazard of the buyer, which means:

  • from the moment that the goods are placed at disposal at the vendor’s premises (EXW) ;
  • from the moment that the goods are handed to the carrier in order to be shipped (FCA, FAS, FOB, CFR, CIF, CPT et CIP) ;

The Incoterms for a sale on departure assign to the buyer (in a more or less large amount) the costs and the risks linked to the shipping of the merchandise.

Sale on Arrival
A sale on arrival means that the merchandise will be shipped at the risk and hazard of the seller until it reaches the designated destination point or port. Three Incoterms are provided:

  • until the end of its maritime transportation and its disembarkation (DAP) ;
  • until its destination point (DAT, DDP).

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The term Ex Works (EXW) / Departure from warehouse

Seller
The only responsibility of the seller is to prepare the merchandise for the buyer, at his own premises, suitably packed for export shipping purposes (in general, the price includes loading the merchandise in the pallet).
Buyer
The buyer is responsible for all the charges and risks involved in the shipment of the merchandise from the moment it leaves the seller’s warehouse until it reaches its destination place.The term EXW represents a minimum obligation for the seller. However, if the parties agree that the vendor insures the loading of the merchandise at the point of departure “EXW Loaded”, and make the vendor responsible of these risks and charges, they have to precise this issue very clearly on an explicit clause included in the sales contract (ex: EXW Paris loaded, CCI 2010).The seller is expected to provide for the buyer, at his request and at his charge and risks, all the assistance required to obtain an export license, insurance and provide the buyer with all the useful information in his possession which will allow the buyer to insure the export of his merchandise in full security.
Variant
Seller
If the delivery takes place at the seller’s premises, it is the seller, who handles the loading of the suitably packaged goods into the vehicle provided by the buyer, (specify “FCA seller’s premises”). Export customs clearance is the responsibility of the seller.
Buyer
The buyer has chosen the type of transportation and the carrier with whom he has signed a transportation contract and pays for the main transportation. The transfer of charges and risks takes place at the moment when the carrier picks up the merchandise. The parties must agree upon naming a place where to hand over the merchandise (the carrier’s terminal or the vendor’s premises).The seller must, should the case arise, provide for the buyer, at the right time, all the assistance needed to obtain all the documents and information regarding the security requirements for the export and/or import of the merchandise and/or for its transportation to its final destination. The cost of the documents furnished and/or the assistance given are costs and risks paid by the buyer.
Variant
FCA seller’s premises“This Incoterm was officially added to the revised version of Incoterms 2000: it is the responsibility of the seller to load the merchandise.
Geographical precision
More than in any of the other Incoterms, in FCA, the “named place” agreed upon must be precise and indicated with care. FCA (Le Havre) is not enough if the buyer is located in Le Havre. Is it FCA (warehouse Le Havre) or FCA (in-transit bulking warehouse X Le Havre) or even FCA (dock No. X at the port of Le Havre)?If the delivery is going to be done at a place other than the vendor’s premises, for example: handing it over at a transportation terminal –truck, rail, air, maritime – the vendor will be in charge of transporting the merchandise up to this named terminal but he will not be responsible for unloading the vehicle. The unloading will be handled by the one in charge of receiving the merchandise at the transportation terminal. Prefer FCA instead of FOB if the transportation is done in containers or by roll-on roll-off ship.11
Documents fees
The seller must, should the case arise, provide for the buyer, at the right time, all the assistance needed to obtain all the documents and information regarding the security requirements for the export and/or import of the merchandise and/or for its transportation to its final destination. The cost of the documents furnished and/or the assistance given are costs and risks paid by the buyer.44

The term FOB: Free on Board / (named port of shipment)

Seller
He has to deliver the merchandise at the designated loading port, on board of the vessel chosen by the buyer and fulfill all the formalities of export customs clearance, if there are any. Under a contract type FOB, the seller fulfills his delivery obligation when the merchandise is on board of the vessel at the designated loading port, or in the case of successive sales, the vendor obtains the merchandise and delivers it, as well, in order to have it all transported up to the designated destination place indicated in the sales contract.
Buyer
He selects the vessel, pays the maritime freight, the insurance and he takes care of the formalities at the arrival. He is also responsible for all the charges and risks of loss and damage that could arise to the merchandise from the moment it was delivered.
 
Variant
For information, the “ARRANGING FOB” is the term used by the freight brokers to indicate that the operations that take place prior to placing the merchandise aboard have been done and accomplished, as well as the export customs clearance operations, if needed. All these operations represent an extra cost, to be paid by the seller, which is sometimes called “fee of placing into FOB”.
The “FOB STOWED” and/or “FOB STOWED and TRIMMED” are variations. The seller is responsible for the total charges incurred by the merchandise at the loading port. However, it has to be stipulated in the contract at which point the transfer of risks takes place.
The seller must, should the case arise, provide for the buyer, at the right time, all the assistance needed to obtain all the documents and information regarding the security requirements for the export and/or import of the merchandise and/or for its transportation to its final destination. The cost of the documents furnished and/or the assistance given are costs and risks paid by the buyer.
The American FOB
The American FOB is different. In the United States, the Incoterm FOB (Free on Board) does not refer to a shipment in a boat or to a port but to an American destination, at the border. In the United States there could be, mainly, four types of FOB:

  • FOB/Point of departure: The buyer pays for everything.
  • FOB/Border: The manufacturer pays for the charges up to the border without clearing the merchandise through customs.
  • FOB/Point of Sale: The merchandise arrives to a designated American city. It is then, the supplier, who pays for customs clearance. The chosen free port must always be marked, in general, the city.
  • FOB/Destination Customs Clearance: In this case, the manufacturer takes care of everything, without the cooperation of the buyer. It is also called DDP/Delivery duty paid. Most of the sales into the United States are done on this basis.
fob

The term CFR: Cost and Freight / Named port of destination

Seller
He chooses the transportation, contracts and pays for the freight up to the named port of destination; the unloading of the merchandise is not included. The loading of the merchandise after customs clearance into the vessel is his responsibility as well as the shipping formalities. However, the transfer of risk is the same as in FOB.
Buyer
He is responsible for the risk of transportation from the moment that the merchandise is delivered alongside the ship at the loading port; he receives the carrier and picks up the merchandise delivered at the designated destination port.
Documents fees
The seller must, at his own expense, furnish the buyer with a customary transportation document to be used until the merchandise reaches the designated port of destination, covering the contractual merchandise which serves him as a guarantee (ex: claims of merchandise to the carrier, sale of merchandise while in transit, etc.). He also has to provide all the information required in order to take proper measures in receiving the merchandise. The information and documents related to the security that the buyer needs in order to export and/or import and/or for the transportation of the merchandise until its final destination must be furnished by the seller, following the buyer’s request, and at his own expense and risks.
cfr

The term CIF: Cost Insurance Freight / Named port of destination

Seller
It is a term identical to CFR, but with the supplementary obligation for the seller to provide maritime insurance against the risk of loss or damage caused to the merchandise. The vendor pays the insurance premium. The insurance must be done according to the “minimum guarantee” clauses stipulated by the faculties of the Institute of London Underwriters or any other series with similar clauses. It has to cover the minimum anticipated price in the contract plus a surcharge of 10% and it has to be drawn up in the same currency of the contract. It is an insurance FPA (free of particular average) for 110% of its value. It is possible to add a surcharge of 20% without justification. A greater surcharge could be authorized by the insurance company if it is justified. This surcharge over the value serves to cover the expenses that can result from damage (cost of filing and following suit, correspondence, etc.) and the financial loss (interest) between the time of the loss and the indemnification by the insurance company. The seller pays the premium for this insurance.
Buyer
He is responsible for the cost and risk of transportation from the moment that the merchandise is delivered alongside the ship at the loading port. He receives and takes the merchandise from the carrier at the named destination port.

The buyers appreciate this Incoterm because they are released from logistics formalities.

Documents fees
The information and documents related to the security that the buyer needs in order to export and/or import and/or for the transportation of the merchandise up to its final destination must be furnished by the seller following the buyer’s request and at his own expense and risks.
cif

he term CPT: Carriage Paid To / Named port of destination

Seller
The seller controls the logistic chain. After having taken care of export customs clearance, he chooses the cargo carrier and pays the charges up to the designated place.
Buyer
The risk of damage or loss is borne by the buyer from the moment that the merchandise is loaded into the first carrier. After that, the buyer takes care of the import customs clearance and the unloading expenses.
Unloading fees
It is important to clarify the concept of who is responsible for the unloading charges into the frame of the transportation contract. Normally, the buyer must be responsible for these charges unless they are included in the transportation fee. In this case, they are charged to the vendor. The vendor must clarify this question with the buyer in order to prevent finding himself in a situation where the receiver refuses to pay and the cargo carrier turns back to the provider (the seller) to demand his part of the payment for the unloading charges as well as the eventual fees for the vehicle’s immobilization while waiting for the problem to be solved.
Geographical precisions
Under the rule CPT, there are transfers of risks and charges in different places. It is recommended that the parties involved specify clearly in their contract the delivery place where the risk is transferred to the buyer and the named destination up to which the seller is required to arrange a transportation contract
Documents fees
The information and documents related to security, that the buyer needs for the export/import of merchandise and/or for the transportation up to its final destination must be provided by the seller at the request of the buyer and at its own charge and risks.
crt

The term CIP: Carriage and Insurance Paid To / Named place of destination

Seller
CIP is identical to CPT, but the seller must supply, in additional, a transportation insurance. The seller settles the transportation contract, pays the freight and the insurance premium.
Buyer
The risk of damage or loss is borne by the buyer from the moment that the merchandise is loaded into the first carrier. After that, the buyer takes care of the import customs clearance and the unloading expenses.
Insurance Coverage
According to the term CIP, the seller is not obliged to apply for insurance but for a minimum coverage. If the buyer wishes to protect himself by a superior coverage, under these circumstances, he would need to obtain the agreement of the seller or apply on his own for a complementary insurance.
Documents fees
The information and documents related to security, that the buyer needs for the export/import of merchandise and/or for the transportation up to its final destination must be provided by the seller at the request of the buyer and at his own charge and risks.
cip

The term DAT (Delivered at terminal, named port terminal or named place of destination)

Seller
He must deliver the merchandise, placing it at the buyer’s disposal at a designated terminal either at the port or at the place of destination on the date or within the time-limit period established. The seller has to obtain, at his own expense, a contract for the transportation of the merchandise up to the point where it reaches this terminal and unload the merchandise from the transportation carrier at its arrival. The seller has no obligation towards the buyer of obtaining an insurance contract. Nevertheless, he must provide the buyer, at his own expense, the documents that will allow him to pick up the merchandise delivered. The Incoterm DAT obliges the seller to take care of the export customs clearance. However, he is under no obligation of performing the import customs clearance.
Buyer
He must pick up the merchandise once it is delivered and pay the price agreed on the sales contract. The buyer has to request from the seller all the information related to the security which he will need for the export, import and transportation of the merchandise until its final destination. This Incoterm rule was created specifically for the transportation of containers. It is also adapted to conventional maritime transport when the seller wants to be responsible for the risks involved during the unloading process from the vessel at the port of destination. It is convenient in this case to specify the exact place where the merchandise will be placed at disposal (quay, hoist, etc.)
dat

The term DDP: Delivered Duty Paid / Named place of destination

Seller
The seller has, in this case, the maximum obligation; he is responsible for all transfer charges and risks until the merchandise is delivered to the buyer. The import customs clearance is also under his charge.
Buyer
The buyer picks up the delivery at the designated destination place and pays the unloading fees. He must request from the seller to furnish him with all the information required in relation to the security which he will need for the export, import and transportation of the merchandise until its final destination.
DDP versus EXW
The term DDP is exactly the opposite of EXW
Charges relating to the importation of merchandise
If the parties wish to exclude from the seller’s obligations the payment of particular fees payable, by reason of imports of the merchandise, it must specify. For example: “Delivered Duty Paid, VAT unpaid (DDP, VAT unpaid)”.
ddp

The three possibilities
The two parties are placed in front of three possibilities:

  • To keep the law of the exporting country: That would be very often the wish of the seller who would prefer to apply his own law considering that it is the one that he knows well. However, it is not always the best solution. As a matter of fact, some laws, such as the French and Belgian laws, protect much more the buyer
  • To keep the law of the importing country: This law can be more interesting for the exporter since it is less constraining; however, it is important to know it and master it well because it could be very dangerous to be subject to regulations that are totally or partially unknown
  • To keep the law of a third country: This choice allows neutralizing the legal nationalism. It is often used in commercial interests for compromising or for convenient reasons (in the case where the court of competent jurisdiction belongs to this third country).
Swiss law
In this respect, the Swiss law is often recommended because it favors much more the exporter and, most of all, it has the benefit of belonging to a neutral state, which is an advantage for the parties who are conducting commercial trade.

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