This article is written by Tanvi Trivedi, pursuing a Diploma in Contract Drafting. This article has been edited by Ojuswi (Associate, Lawsikho).
This article has been published by Sneha Mahawar.
Table of Contents
INCOTERMS (International Commercial Terms) are a collection of trade definitions issued by the International Chamber of Commerce (ICC) that are internationally recognized. The terms establish a buyer’s and seller’s trade contract obligations and liabilities. They specify who is responsible for paying freight, insuring commodities in transit, and covering any import/export charges. They are extremely useful because, once an importer and exporter have agreed on an INCOTERM, they can trade without debating obligations for the costs and risks covered by the term.
The primary goal of Incoterms is to accurately specify the duties and expenses of two parties. The seller and buyer negotiate a sales contract in which they must carefully evaluate all aspects of duty, delivery, tax, and, in some cases, insurance. Besides that, incoterms are crucial when it comes to risk transmission. If they are not used appropriately, the passage of risk may be missed. Hence, both the buyer and the seller may suffer losses.
Furthermore, Incoterms are a critical source of information for everyone participating in the delivery process. There would be a lot of uncertainty and misunderstandings between forwarders, carriers, and even banks.
The Incoterm specifies when the seller’s expenses and risks are passed to the buyer. It’s also critical to remember that not all rules apply in all situations. Some include any means or ways of conveyance. All means of transportation (road, rail, air, and sea) cover FCA, CPT, CIP, DAP, DPU (replaces DAT), and DDP. Sea/Inland waterway transport (Sea) includes FAS, FOB, CFR, and CIF.
Classification of incoterms
Two categories help us differentiate the eleven Incoterms.
Incoterms based on the Mode of Transport
The first group splits the incoterms even further into two categories:-
- Multimodal Transport: It includes seven incoterms and businesses can use them for any means of transportation. They are EXW, FCA, CPT, CIP, DAT, DAP, and DDP.
- Sea and Waterways Transport: Businesses cannot use the same incoterms for ships, barges, and boats. These cover both inland waterways and seas. The main reason behind them is the fact that ports are both the place of delivery and the endpoint of the process. They are FAS, FOB, CFR, and CIF.
Incoterms based on the Point of Delivery
Incoterms based on the Point of Delivery:-
- Group E: It solely contains the EXW Incoterm and puts the seller under the least degree of financial strain. He just has a bare minimum of responsibilities, and the point of delivery is his address – work office or warehouse. Following that, the buyer has responsibility for the remaining transportation.
- Group F: This group has three incoterms: FOB, FAS, and FCA. This time, the seller has a considerable burden of liabilities. He must pay for the products’ insurance until they are free on board or until the carrier takes over the shipment. In addition, he must provide the buyer with the bill of lading and other essential documentation.
- Group C: It comprises 4 incoterms: CFR, CIF, CPT, and CIP. Similar to the last one, the seller now needs to pay additional expenditures that occur after the buyer undertakes the risk. These include freight or transport rates, as well as Cargo Insurance premiums (CIF and CIP).
- Group D: It contains three incoterms: DAP, DPU, and DDP. The vendor is given even more obligation in this category. Furthermore, the final destination — for example, the buyer’s warehouse – is the point of delivery. If the contract specifies that the delivery shall take place somewhere else, the seller completes the delivery when he transfers the products to the buyer’s collecting vehicle.
The following are the incoterms defined:-
- EX-Works (EXW): The EXW Incoterm imposes the bare minimum of responsibilities on the seller. More specifically, the seller is merely expected to deliver the items to the buyer at a defined site of delivery, which is generally the seller’s place of business but can be any specific location such as a warehouse, factory, etc., and within the agreed period mentioned in the contract. The seller doesn’t need to load the products into a specific truck or clear the goods for export. If the site of delivery is not stated in the contract, or if many locations are possible, “the seller may choose the spot that best fits its purpose.” In general, the seller bears all risks of loss or damage to the products until the goods are not delivered as described in the sale contract. Such risk is immediately transferred to the buyer once the product is delivered. The same is true for any expenditures associated with the goods – the costs are to be borne by the seller until the goods are delivered, and thereafter by the buyer.
- Free Carrier (FCA): The following is how goods are delivered under the FCA Incoterm:-
(i) When the designated site of delivery is the seller’s premises, the products are regarded as delivered when they are put into the buyer-arranged vehicle.
(ii) When the named place of delivery is elsewhere, such as a warehouse or factory, the goods are deemed delivered when the following conditions are met: they arrive at the named place after being loaded on the seller’s vehicle, are ready for unloading from the seller’s vehicle, and are placed at the disposal of the carrier nominated by the buyer.
- Carriage Paid To (CPT): The goods are delivered under the CPT Incoterm when they are delivered by the seller to the carrier at the agreed location or are obtained by the seller to be so delivered. In this regard, the seller is required to contract for the carriage of the products from the point of delivery to the point of destination at its own expense. The presence of a carriage contract has no bearing on the transfer of risk from the seller to the buyer at the moment of delivery, i.e. when the goods are handed over to the carrier. However, if the seller incurs costs related to unloading goods at the location of destination under the carriage contract, it must cover them unless otherwise agreed.
- The CPT Incoterm also mandates that the seller clear the items for export, when appropriate, and take all risks associated with it. However, the seller is under no such responsibility to import. Neither the seller nor the buyer is obligated to enter into an insurance arrangement.
- Carriage and Insurance Paid (CIP): The seller has the same obligations under the CIP Incoterm as under the CPT Incoterm, namely, to hand over the goods to the carrier contracted by the seller and to clear the goods for export, with the addition of an obligation to contract for insurance to cover against the buyer’s risk/damage to the goods from the place of delivery to, at the very least, the place of destination. Once a contract is signed, the seller is obligated to furnish the buyer with the insurance policy or certificate.
- Delivered at Place Unloaded (DPU): The DPU Incoterm is a new element of the 2020 Incoterms, replacing the DAT Incoterm (Delivered at Terminal) introduced under the 2010 Incoterms, which had superseded the DEQ Incoterm (Delivered ex Quay) established under the Incoterms in 2000.
According to the DPU Incoterm, the seller delivers goods to the buyer when the goods are unloaded from the vehicle and placed at the buyer’s disposal at the place of destination or the agreed point within the place of destination if any. It is the only Incoterm requiring the seller to unload goods at the destination. Under the DPU Incoterm, the location of delivery and the place of destination is the same. Therefore, the seller carries the risk until the products are unloaded at the destination.
Furthermore, the seller agrees to negotiate a carriage contract or arrange transport at its own expense. It is also obligated to clear the products for export. However, no such duty exists for imports. The buyer is obligated to help the seller in getting essential documents for export clearance requirements at the seller’s expense.
Unlike the CIP Incoterm, the seller (or buyer) is not required to contract insurance under the DPU Incoterm.
- Delivered at Place (DAP): In contrast to the DPU Incoterm, this Incoterm is typically used when the parties do not want the seller to incur the risk and cost of unloading. The goods are deemed delivered by the seller to the buyer under the DAP Incoterm when they are placed at the buyer’s disposal on the vehicle, ready for unloading at the place of destination or an agreed location within such place if any. Unlike the CPT/CIP Incoterms, the DAP Incoterm specifies the same place of delivery and destination. As a result, the seller bears the risk until the goods are delivered to the buyer at the point of destination.
Although it is essential to negotiate a carriage contract or arrange for the carriage of the goods at its own expense, as well as clear the items for export (not import), the seller is not obliged to unload the goods from the vehicle at the destination. Furthermore, neither the seller nor the buyer is obligated to sign an insurance contract.
- Delivered Duty Paid (DDP): The seller is deemed to have delivered the goods to the buyer under the DDP Incoterm if they are placed at the buyer’s disposal, cleared for import, on the approaching vehicle, ready for unloading at the place of destination or an agreed location within such place, if any. The DDP Incoterm places the most obligation on the seller because it is the only Incoterm that requires the seller to clear imports.
The DDP Incoterms, like the other Incoterms, requires the seller to finalize the carriage contract or otherwise arrange the transport at its expense. However, no insurance contract is necessary from the seller/buyer.
- Free Alongside Ship (FAS): As per the FAS Incoterm, the seller delivers the products when it either deposits them alongside the ship/vessel identified by the buyer at the designated port of shipping or procures the goods so delivered. When the goods are alongside the ship, the seller transfers the risk of damage to the buyer. The seller guarantees that the goods will be cleared for export rather than an import. The seller is not required to get into a carriage contract. In turn, the buyer is responsible for all transportation costs from the designated port of shipment.
- Free On Board (FOB): The goods are regarded to be delivered by the seller to the buyer under the FOB Incoterm when they are delivered on board the ship nominated by the buyer at the stated port of shipping or when the seller procures the goods thus delivered. As a result, once the goods are loaded aboard the ship, the risk of loss or damage to the products is transferred to the customer. The seller must clear the products for export rather than import.
As with the case of FSA Incoterm, the seller is under no duty to execute a carriage contract. The buyer is responsible for all costs associated with transporting the items from the stated port of shipment.
- Cost and Freight (CFR): The seller delivers the goods to the buyer by placing them on board the ship or obtaining that they are so delivered, as per the CFR Incoterm. As a result, the risk of loss or damage to goods is transferred to the buyer when the products are loaded onto the vessel at the port of delivery, rather than the port of destination, as in the case of the above-mentioned FOB Incoterm.
Regardless of whether the risk is transferred at the port of delivery, the seller is required to negotiate a contract of transport of the goods until the port of destination. Unless otherwise agreed, the seller shall also cover all costs associated with offloading at the port of destination as a result of the transport arrangement. No insurance contract is essential from either the seller or the buyer.
- Cost Insurance and Freight (CIF): The CIF Incoterm is very similar to the CFR Incoterm :
(i) the goods are to be delivered under the CIF Incoterm when the seller places them on board the ship or procures them to be so delivered;
(ii) although the risk is transferred at the port of delivery, the seller is required to conclude a contract of carriage of the goods until the port of destination;
(iii) the seller must bear all costs related to unloading at the port of destination; and
(iv) the seller is required to clear the goods for export rather than an import.
The main distinction between CIF and CFR is that the CIF Incoterm requires the seller to complete insurance covering the buyer’s risk of loss/damage to the goods from the port of shipping to, at the very least, the port of destination.
Taking the preceding facts into account, it is evident that Incoterms can facilitate international trade; nevertheless, while selecting an Incoterm, several factors must be considered. These specific commercial words should only be used for the sale of commodities and not for the selling of services.
Before adding an Incoterm into a contract, the parties must ensure that the Incoterm fits all of their expectations and needs in the following areas:-
• Will transportation be via sea or inland waterway?
• Should the seller or the buyer bear the bulk of the risk of loss/damage to the goods? At what point in the delivery process should the risk be transferred from the seller to the buyer?
• Is it necessary to utilize the services of a carrier? If so, who should be obligated to execute a carriage contract — the seller or the buyer?
• Should the seller be responsible for the products’ unloading?
• Is it necessary to sign an insurance contract?
Therefore, Incoterms provide parties with the chance to explain their duties through the use of globally recognized contractual standards, reducing the likelihood of cross-cultural misunderstandings, contractual ambiguity, and conflicts.
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