Incoterms

Incoterms 2010- premium guide- 11 terms description

Incoterms – Importing from China

 

Incoterms are rules that allows buyers and sellers to identify the responsibility of each one. It allows the parties to identify a point where the costs and risks of transportation are precisely divided between both of them.

Incoterms e.g (International commercial terms) Has a set of 11 international standard trade terms which last version is Incoterms 2010.

Incoterms also coordinate responsibilities for Customs clearance/ duties between the parties.

In other words, incoterms Are essential in every import/ export process, it’s a tool used by freight forwarders to facilitate the shipping process.  It defines who will arrange for carriage, who will pay for the carriage, who will break risk of loss or damage to goods.

 

Incoterms rules, are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade.

 

Incoterms are associated with freight charges, they are used as a convenient way of confirming the role of each party ( who will pay the various charges during international transport). They are frequently used by freight forwarders and carrier when issuing freight quotations or clarifying who should pay the fees. However, incoterms cover a much wider range of responsibilities and obligations for sellers and buyers. Each incoterm has its proper rules and responsibilities that defines the role of each party.

 

Using Incoterms properly as part of a sales contract provides clarity for both parties, gives certainty over costs, and reduces the risk of disputes and disagreements with clients or suppliers.

 

Using unsuitable Incoterms, or using the terms without understanding the implications of your choice can lead to unexpected costs, delays or unhappy clients.

 

The chart below demonstrates the exact responsibilities and charges of the buyer and seller according to incoterm 2010. The chart defines the following information:

  • Obligations of the buyer and the seller
  • Which party handles insurance, permits, and permissions
  • At which point costs and risks are transferred from the seller to the buyer

 

 

Incoterms 2010 by the international chamber of commerce

 

 These rules Are identified by the ICC ( international chamber of commerce, which is the source for any freight forwarder and in case of any issue the ICC should be your first resource for information

 

The eleven terms – Premium Guide

 

Everyone who works in import/export should know all the incoterms; (International commercial terms). It’s subject that helps not only traders but more importantly lawyers, Transporters, and insurers.

 

Some incoterms are used for any mode of transportation like:  EXS, FCA, CPT, CIP, DAT, DAP and DDP.

Other Incoterms for sea and inland waterway transport like: FAS, FOB, CFR and CIF

 

Before going into details, you have to know that the eleven terms can be divided into 4 parts:

 

  1. Departure
  2. Main carriage not paid by seller
  3. Main carriage paid by seller
  4. Arrival

 

Now let’s categories the 11 terms into these four groups:

 

  1. Departure:

 

EXW – EX works

Means that the seller fulfills his obligation to deliver when he has made the goods available at his premises to the buyer. In particular, he is not responsible for loading the goods on the vehicle provided by the buyer or for clearing the goods for export, unless otherwise agreed. The buyer must carry out all tasks of export & import clearance. Carriage & insurance is to be arranged by the buyer. This term thus represents the minimum obligation for the seller.

 

  1. Main carriage not paid by seller:

 

FCA – Free Carrier

Means that the seller fulfills his obligation to deliver when he has handed over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place or point.

If no precise point is indicated by the buyer, the seller may choose within the place or range stipulated the parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.

 

FAS- (Free Alongside ship)

Means that the seller fulfill his obligation to deliver when the goods have been placed alongside the vessel, the quay, or in the lighters at the named port of shipment.

The seller is required to clear the goods for export.

The buyer has to bear all costs and risks of loss or damage to the goods from that moment.  This term is only used for ocean transport only. FAS is applied for bulk cargo.

 

FOB – Free on board

Means that the seller fulfills his obligation when the goods pass the ship’s rail at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point.

The seller must clear the goods for export. This term can only be used for ocean transport. If the parties do not intend to deliver the goods across the ship’s rail, the FCA term should be used.

 

FCA is the preferred term over Free on Board (FOB), which has been used for years. This is due to the fact that FOB is only applicable to ocean freight and intended for charter type cargo.

 

However FCA is more flexible because it allows the delivery  of the goods, both on the premises of the seller and at various points such as ports, airports, etc.

 

Incoterms 2010 rules advised to use FCA instead of FOB, because the containers are delivered regularly in the port’s container terminal and not loaded onto the ship. But in practical work, almost all the Chinese supplier will use FOB instead of FCA.

 

  1. Main carriage paid by seller:

 

CFR- cost and freight

Means that the seller must pay the costs and freight necessary to bring the goods to the named port of destination. 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. The CFR term requires the seller to clear the goods for export.

This term can only be used for sea and inland waterway transport.

 

CIF_ cost, insurance and freight

Means that 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.

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.

However, if the buyer wishes to have more insurance protection, he will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

 

CPT- carried payed to

Means that the seller pays the freight for the carriage of the goods to the named destination. The risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier is transferred from the seller to the buyer when the goods have been delivered into the custody of the carrier.

“Carrier” means any person who, in a contract of carriage, undertakes to perform or to procure the performance of carriage, by rail, road, sea, air, inland waterway or by a combination of such modes.

If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier.

The CPT term requires the seller to clear the goods for export.

This term may be used for any mode of transport including multimodal transport.

 

CIP- carriage and insurance paid to

This term is the same as CPT with the exception that the seller also has to procure insurance against the buyer’s risk of loss or damage to the goods during the carriage.

However, if the buyer wishes to have more insurance protection, he will need either to agree as much expressly with the seller or to make its own extra insurance arrangement This term may be used for any mode of transportation.

 

  1. Arrival:

 

DAT- Delivered at terminal

Seller pays for carriage to the terminal, except for costs related to import clearance, and assumes all risks up to the point that the goods are unloaded at the terminal.

 

DAP- Delivered at place

Seller pays for carriage to the named place, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer.

 

DDP – Delivered duty paid

Means that the seller fulfils his obligation to deliver when the goods have been made available at the named place in the country of importation.

The seller has to bear the risks and costs, including duties, taxes and other charges of delivering the goods thereto, cleared for importation.

Whilst the EXW term represents the minimum obligation for the seller, DDP represents the maximum obligation.

This term should not be used if the seller is unable directly or indirectly to obtain the import licence.

 

If the parties wish the buyer to clear the goods for importation and to pay the duty, the term DDU should be used.

 

If the parties wish to exclude from the seller’s obligations some of the costs payable upon importation of the goods (such as value added tax(VAT)), this should be made clear by adding words to this effect: “Delivered duty paid, VAT unpaid … (named place of destination)”.

 

The 11 terms can be also divided into 2 groups:

  • Waterway transport: FAS, FOB, CFR, CIF
  • Any mode of transport: EXW, FCA, CPT, CIP, DAT, DAP, DDP

 

The five Most commonly used incoterms

 

FOB – Free On Board (named port of shipment)

  • Loading at the sellers’ facility whether onto truck, train or barge = Sellers’ responsibility
  • Pre-carriage – those freight charges that arise from moving goods from the sellers’ origin to the port or airport = Sellers’ cost and responsibility
  • Loading to vessel = Sellers’ responsibility
  • Principle carriage (ocean carrier) = Buyer is responsible for cost and any loss or damage while in transit on the ocean carrier.

 

 EXW – Ex Works(named place)

the key thing to know about EXW? All charges incurred for transportation of the goods are the responsibility of the buyer and transfer of ownership happens as soon as the goods leave the floor of the seller’s facility.

Incidentally, this is the most common term encountered when importing goods from the EU and applies exclusively to containerized or multimodal transport as well as air, rail or road.

 

CFR – Cost and Freight (named port of destination)- ocean shipment

 

  • Loading at the sellers’ facility whether onto truck, train or barge = Sellers’ responsibility
  • Pre-carriage – those freight charges that arise from moving goods from the sellers’ origin to the port or airport = Sellers’ cost and responsibility
  • Loading to vessel = Sellers’ responsibility
  • Principle carriage (ocean carrier) = Seller is responsible for cost but the Buyer is responsible for any loss or damage while in transit on the ocean carrier.

 

CIF – Cost, Insurance and Freight (named port of destination)- maritime or ocean shipments

 

  • Loading at the sellers’ facility whether onto truck, train or barge = Sellers’ responsibility
  • Pre-carriage – those freight charges that arise from moving goods from the sellers’ origin to the port or airport = Sellers’ cost and responsibility
  • Loading to vessel = Sellers’ responsibility
  • Principle carriage (ocean carrier) = Seller is responsible for cost but the Buyer is responsible for any loss or damage while in transit on the ocean carrier.
  • Ideal for containerized shipments

 

DDP – Delivered Duty Paid (named place)

 

This term means the seller is responsible for all charges involved in bringing the goods from the sellers’ facility or point of loading to the final place of destination. This includes all charges associated with freight, customs clearance, duties and taxes.

 

Understanding and using Incoterms effectively is important, and every importer has unique requirements. Before concluding a sales contract, we recommend that you consult our complete list of incoterms and consult your lawyer. Remember that your freight forwarder must do more than just offer a good price.

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