What are Incoterms?
According to Emmanuel Jolivet, General Counsel of the International Court of Arbitration:
“Incoterms® are a perfect example of effective standardization of an international business instrument. Their everyday use in international sales contracts brings legal certainty to business transactions while at the same time simplifying the drafting of international contracts.”
In addition, the rules specify the insurance, export and import clearance, and distribution of other costs related to the delivery of goods between the buyer and the seller.
Incoterms® were created under a registered trademark by the International Chamber of Commerce (ICC) and developed to facilitate global trade by providing explicit definitions of each party’s obligations to reduce the potential for legal complications. Incoterms® terms are updated regularly to keep pace with the ever-changing world of international trade.
Incoterms® covers the who, what, and when issues in the international sale of goods and delivery, including:
– Who does what;
– Who pays what;
– When the risk passes from the seller to the buyer;
– When the delivery takes place;
The terms consist of 4 main groups:
"E" - conditions where the seller's obligation and control over delivery is minimal
"F" - conditions where the main burden on the buyer is to arrange the main transports
"C" - conditions where the main burden on the seller is to arrange the main transports
"D" - conditions where the seller's obligations and control over the delivery are maximum.
Incoterms® do not cover ownership or title to goods, details of payment obligations, vessel requirements, termination, bankruptcy, etc. They do not constitute a complete contract of sale. Yet they are incorporated by express reference, or referred to, in both most international and many domestic sales contracts. Yet they are incorporated by express reference, or referred to, in both most international and many domestic sales contracts. Yet they are incorporated by express reference, or referred to, in both most international and many domestic sales contracts. Yet they are incorporated by express reference, or referred to, in both most international and many domestic sales contracts.
Incoterms® terms are not designed to be applied automatically – they are subject to agreement and negotiation, and in most cases, a successful buyer or seller is often the one who is best at negotiating the terms of sale.
Incoterms® are used as Terms of Sale, also fulfilling the role of International Trade Terms. Incoterms® defines the terms of shipment and delivery, as well as the transfer of risk between the buyer and the seller.
The latest revised edition of Incoterms® is Incoterms®2020, effective since1 January 2020 and replaces Incoterms®2010.
In EX WORKS, the seller delivers the goods to the buyer by placing them in favor of the buyer at a specified location, leaving the buyer to pick them up from that location. The specified location, factory, or warehouse does NOT have to be the seller's property: this location can be a forwarding warehouse or another site agreed between the seller and the buyer. Moreover, from the point of view of the transfer of risk, it occurs not when the buyer takes the goods but when the seller makes them ready for the buyer to receive. At this stage, when the goods are made available for collection by the buyer, the seller is not bound to load the goods on the buyer's vehicle. The seller is NOT obliged to organize the export customs clearance of the goods.
Under FCA, the seller delivers/provides goods for the benefit of the buyer: or in his warehouse, loaded on a vehicle of; or at another specified place loaded on the seller's vehicle and ready for unloading/reloading at the buyer's carrier or another person nominated by the buyer. The seller's warehouse or specified place where the goods are delivered is where delivery takes place, and the risk and costs pass to the buyer. A significant difference between EXW and FCA is that, unlike EXW, FCA provides for the delivery of loaded goods.
As with FCA, the seller delivers the goods (and transfers the risk and costs) when he delivers the goods onto the carrier's vehicle (or the carrier's warehouse) with one exception. Unlike FCA, in CPT the carrier is nominated by the seller, not the buyer. Once the goods are delivered to the carrier, the seller's obligation to deliver the goods is fulfilled. The seller has fulfilled his obligation even if the goods do not reach the final destination in perfect condition or do not arrive at all. This is because the risk is transferred to the buyer when the goods are delivered for transport to the carrier. It is the seller's duty to conclude a contract of carriage to the agreed destination.
CIP largely overlaps with CPT. Here too, goods delivered to the carrier are the point at which delivery occurs and risk passes. Also, the seller must transport the goods to an agreed destination and conclude a contract for transport to this specified destination. It is essential, as with CPT, to indicate an accurate and, if possible, detailed description of the point of delivery. CPT is valid for different modes of transport. One significant difference between CPT and CIP is the insurance that the seller must take out for the buyer's benefit.
With DPU, delivery takes place after the goods have been unloaded from the vehicle at the agreed destination and made available to the buyer. This means that the risk of damage and/or loss of the goods during unloading is at the seller's expense and the costs of unloading itself. Only with DPU is the seller obliged to unload the goods at the destination. Therefore, the seller must ensure that he is able to physically arrange for unloading at the final destination, which is usually in the buyer's country. If he has difficulty with this, he better considers DAP terms.
The first two D terms of delivery are very similar; the main difference is that in DAP, the delivery and transfer of risk occur before unloading at an agreed point or destination and in the second (DPU) after unloading. With DAP, delivery happens when the goods are provided to the buyer at an agreed destination (or a specified point at a destination) and ready for unloading.
In the two conditions mentioned above, the seller was obliged to organize the customs representation on export but not on the import of the goods. In DDP, the seller delivers the goods unloaded from the vehicle, as in DAP, but is obliged to arrange customs clearance of the goods upon importation. This makes the DDP terms carry the most significant obligations on the seller. The risk and costs of unloading the goods at the destination are the buyer's responsibility, but if the seller does not wash the goods, the delivery is not considered to have been made. If something happens to the goods while they await import clearance, the seller bears the risk. If the seller is not sure he can handle the import duty, it is better to consider DAP or DPU terms.
The two marine F conditions are very similar, with one significant difference – the delivery timing. In FAS, the seller delivers the goods by making them available for the buyer's benefit to a ship (for example, on a quay or a barge) at a pre-specified port. The risk of damage and/or loss of the goods shall pass to the buyer when the goods are delivered/delivered for the buyer's benefit to the vessel. The buyer also pays the costs from that point on.
Under FAS, the seller delivers the goods to a vessel, while under FOB, the seller delivers the goods by placing them in favor of the buyer on board a ship nominated by the buyer at an agreed port. The risk of damage and/or loss of the goods passes to the buyer when the goods are on board a vessel, and the buyer bears all costs from that point onwards.
As with F terms, delivery under C terms is by sea and takes place when the seller places the goods on board a ship. In contrast to the F terms, here, the commitment to organize sea transport is the seller's obligation. The two sea C terms are very similar, the main difference being that in CFR, the seller has no obligation to insure the goods, and in CIF, apart from arranging the sea transport of the goods, the seller is obliged to insure the goods. In CFR, the seller delivers the goods to the buyer on board a ship. The risk of damage and/or loss of the goods is transferred to the buyer, even though the ship/sea transport is arranged by the seller and regardless of whether the goods will arrive at the final destination in good condition or in general because under CFR the seller is not obliged to insure the goods. The buyer may insure the goods at his discretion from the time of delivery/acceptance of delivery.
As with CFR, under CIF terms, the seller delivers the goods by loading them onboard a vessel. The risk of damage and/or loss of the goods passes to the buyer when the goods are placed on board a vessel. The seller must organize the sea transport to the agreed destination and ensure the goods. With CIF, the requirement is that the insurance has minimum coverage.