You will need to know who is responsible for all the costs and risks associated with a sales contract between you and your new export market. Knowing the delivery terms incorporated into your worldwide sales contracts will reduce any uncertainties and misunderstandings for both you and the buyers of your products.
To understand the mutual obligations between you and your buyers.
International Commercial Terms: keeping both parties happy
International Commercial Terms (Incoterms) rules were created to prevent any misunderstandings in international sale contracts where goods pass across national borders.
The rules were created and adapted by the International Chamber of Commerce. These define, clearly, the obligations of both sellers and buyers to make global trade easier and reduce the risk of legal complications. They are designed to help trade, not to hinder it.
Incoterms are regularly updated to keep up with developments in international trade. Incoterms 2010 is the latest version of the rules and has been adapted to take into account the:
- Increase in customs free zones
- Increased use of electronic communication in business transactions
- Effort to increase security in the movement of goods
- Changes in transport practices
Delivery terms are put into sales contracts worldwide to make sure both supplier and buyer don’t fall into a costly misunderstanding over who is responsible for the costs and risks in a sales contract.
These costs and risks could apply to:
- Transport freights
- Customs clearance
- Duties payable
Incoterms are three letter trade terms relating to the business terms which are in contracts relating to the sale of goods to export markets.
Clarifying terms for exporters
When you export to a new country or even region, there is a risk of misunderstandings due to countries potentially having different interpretations of the business practices relating to a sale of your goods.
The rules clearly explain a set of three letter trade terms reflecting business practices in contracts of the sale of goods.
The terms describe mainly the tasks, costs, and risks involved for exporters delivering goods to their buyers.
The Incoterms rule is suited to the type of goods sold, the means of transport used, and other obligations of the seller and the buyer which could include insurance or customs clearance.
What Incoterms do (and don’t do)
Firstly, Incoterms do not replace the contract of sale. They only clarify:
- Which party to the sale contract is obliged to arrange for shipment
- When the seller delivers the goods to the buyer
- Which costs each party is responsible for
Incoterms do not deal with the transfer of ownership of goods, or any issues arising from a breach of contract. These are usually dealt with in the contract of sale or in the law governing the contract.
The Incoterms 2010 rules and you
Your obligations and your buyer’s obligations mirror each other. These can be carried out personally or through other parties such as carriers or freight forwarders. The individual obligations of the contractual parties (you and your buyer) are below.
|A||Seller’s Obligations||B||Buyer’s Obligations|
|A1||General obligations||B1||General obligations|
|A2||Licenses, authorisations, security clearances||B2||Licenses, authorisations, security clearances|
|A3||Contracts of carriage and insurance||B3||Contracts of carriage and insurance|
|A5||Transfer of risks||B5||Transfer of risks|
|A6||Allocation of costs||B6||Allocation of costs|
|A7||Notices to the buyer||B7||Notices to the seller|
|A8||Delivery document||B8||Proof of delivery|
|A9||Checking, packaging, marking||B9||Inspection of goods|
|A10||Help with information and related costs||B10||Help with information and related costs|
2 The ABCs of the 2010 Incoterms Rules
The 2010 Incoterms Rules are divided into two distinct classes.
The first class of rules includes seven rules that can be used no matter what the type and number of selected modes of transport. You can apply these rules where a ship is used as part of the carriage of your exported goods.
In the second class of rules the point of delivery and the place to which the goods are carried to the buyer of your goods are both maritime or inland waterway ports. For example exporting from Liverpool to Marseilles.
Here is your list of the three letter trade terms relating to the business terms you will find in the contracts which relate to the sale of your goods to your export markets.
Underneath each three letter rule you will find an explanation about what each rule means for you the seller, and your buyer.
Terms for the first class of Incoterms rules
Ex Works (named place of delivery)
The seller delivers when goods are placed at the disposal of the buyer at the seller’s premises, or at a mutually agreed place such as a warehouse or factory.
The buyer is responsible for:
- All transportation costs
- Bringing the goods to their final destination
If the seller loads the goods, he does so at the buyer’s risk and cost.
Free Carrier (named place of delivery)
- Delivers the goods, cleared for export, to the buyer-designated carrier at a named location. The risk passes to the buyer at this point
- Has no obligation to clear the goods for import, pay any import duty or carry out any import custom formalities
- Is obliged to load goods onto the buyer’s carrier
Carriage Paid To (named place of destination)
This rule is critical because risk passes and costs are transferred at different places. The risk passes when the goods have been delivered to the first carrier.
The seller must:
- Deliver the goods to the carrier or another person nominated by the seller at an agreed place
- Contract and pay for the costs of carriage necessary to bring the goods to the named place of destination
When CPT rules are used, the seller fulfils their obligation delivering the goods to the carrier, not when the goods reach the place of destination.
Carriage and Insurance Paid to (named place of destination)
Like the CPT rule, the rule is critical because the risk passes and costs are transferred at different places.
- Delivers the goods to the carrier or another person nominated by the seller at an agreed place
- Is obliged to pay the costs of carriage necessary to bring the goods to the named place of destination
- Contracts for insurance covering risk of loss of, or damage to, the goods during their carriage
- Is obliged to obtain at its own expense cargo insurance complying at least with the minimum cover as provided by Clauses ( C ) of the Institute Cargo Clauses
This insurance shall be:
- Contracted with an insurance company of good repute
- Entitle the buyer to claim directly from the insurer
- Able to cover, at a minimum, the price provided in the contract plus 10%
- Shall be in the currency of the contract
When CIP rules are used, the seller fulfils their obligation delivering the goods to the carrier, not when the goods reach the place of destination.
Delivered at Terminal (named terminal at port or place of destination)
The seller delivers when the goods are placed at the disposal of the buyer at the named terminal at the named port, or place of destination
Here “terminal” means any place, covered or uncovered, such as a warehouse, container yard or road, rail or air cargo terminal.
The seller bears all freights and risks connected with bringing the goods to and unloading them at the terminal.
Delivered at Place (named place of destination)
The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination
The seller bears all the risks connected with bringing the goods to the named place.
The seller isn’t obliged to arrange for the unloading of goods at the place of destination.
Delivered Duty Paid (named place of destination)
This rule has the most obligation for the seller, who must bear all the costs and risks connected with the transport of the goods at the place of destination. The seller must carry out both export and import customs formalities, and pay all the related duties and taxes.
The seller delivers when all three objectives below are achieved, namely when the goods are:
Placed at the disposal of the buyer Cleared for import on the arriving mode of transport *Ready for unloading at the named place of destination
Terms for the second class of Incoterms rules:
You need adhere to only the following rules if you are exporting goods and the place of departure and the place of destination are both ports on the sea or both an inland waterway.
Free Alongside Ship (named port of shipment)
This rule is widely used in maritime and inland waterway transport, although it may not be appropriate where goods are handed over to the carrier before they are on board the vessel.
The seller delivers when the goods are placed alongside the vessel, on a quay for example, at the named port of shipment
The risk to the seller of the loss of or damage to the goods also passes from the moment of placing goods alongside a vessel at a named port of shipment.
Cost and Freight (named port of destination)
This rule has a critical point because the risk passes and the costs are transferred at different places. While the rule will always specify a destination port, it may not specify the port of shipment where the risk passes to the buyer.
The seller is obliged to:
Deliver the goods on board the vessel Contract for and 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 from the supplier when the goods are on board the vessel.
When the CFR rule is used, the seller fulfils their obligation delivering delivering the goods to the carrier, not when the goods reach the place of destination.
Cost, Insurance, and Freight (named port of destination)
The seller is obliged to:
Deliver the goods on board the vessel Contract for and pay the costs and freight necessary to bring the goods to the named port of destination Contract for insurance covering buyer’s risk of loss of or damage to the goods during the carriage. Obtain insurance only on minimum cover
The risk of loss of, or damage to, the goods passes from the supplier when the goods are on board the vessel
When the CIF rule is used, the seller fulfils their obligation delivering delivering the goods to the carrier, not when the goods reach the place of destination.
Tip: Extra insurance arrangements at the buyer’s account are needed for getting more insurance protection.
3 American Foreign Trade Definitions, a quick reference
The Revised American Foreign Trade Definitions (RAFTD) was first adapted by the U.S. Chamber of Commerce in 1941.
Despite their longevity you won’t come across these terms in the more widely-used ICC Incoterms in international business transactions. You may, however, find them in requests for quotes in the United States. We have listed the rules below so you can compare them with the Incoterms 2010.
Your handy guide to the Revised American Foreign Trade Definitions
Ex Point of Origin (named point of origin)
- Delivers the goods available to the buyer at a named place, mostly at his factory, plant, or warehouse
- Bears all costs and responsibilities from loading the goods to the carrier of the goods to the place of destination
Free on Board (named inland carrier at point of departure or port of shipment)
This rule has several uses. Its content can even be identical with the EXW rule.
The seller is:
- Obliged to place the goods or deliver to an inland carrier for loading at the named point of departure, exportation, or port of shipment
Note: the named point can even be in the country of the buyer.
Free Alongside Ship (named port of destination)
The seller delivers when:
- The goods are placed alongside the sea carrier for loading at named port of exportation
Cost and Freight (named port of destination)
- Bears the costs of domestic inland transport, and loading cargo onto a vessel
- Bears the costs of the ocean freights from the port of shipment to the port of destination
Cost, Insurance, and Freight (named port of destination)
This rule is identical to the C&F rule. In addition to the obligations of the C&F rule, the seller contracts for insurance covering the buyer’s risk of loss of, or damage to, the goods during the carriage.
Ex Dock (named port of importation)
The seller bears:
- Responsibility for taking the goods off the ship in a named port and making them available there
- All costs until the unloading of the goods on the dock in the port of destination, including the cost of unloading from the vessel.
Thanks to the Incoterms, when you next review a sales contract, it should be that bit easier for you to see exactly who is responsible for the costs and risks associated with your export market. That way, there will be no unnecessary misunderstanding when dealing with your new customers.
Before signing a sales contract it’s important to check:
- The Incoterms 2010 to clarify your obligations
- Which class of Incoterms rule applies to you
- The contract for three letter Incoterms