Incoterms 2000

The ICC Incoterms (International Commercial Terms) make international trade easier and help traders in different countries to understand one another. The use of Incoterms such as ‘cif’, ‘fob’, ‘ex works’ etc. in international contracts is meant to simplify business. These terms describe the rights and obligations of both seller and buyer regarding the delivery of goods. The terms originate in commercial usage; i.e. that which is usual between parties in certain branches of trade. But what if the buyer and seller disagree on the meaning of a certain term?

As the exact meaning of terms can vary per region and because it is often difficult to find out which practices are usual in for example France, China, South Africa or for that matter anywhere else in the world, the International Chamber of Commerce (ICC) has developed a list of standard trade definitions, the Incoterms, in which the rights and obligations under each of the most common terms are laid down. By referring to the Incoterms – for example: CIF Rotterdam (Incoterms 2000) – parties can significantly reduce the risk of conflict regarding the terms of the agreement. The Incoterms are reviewed regularly, lastly in 2000, to keep up with developments in international trade. ICC is currently revising Incoterms 2000. The new edition, Incoterms 2011, is expected to enter into force on 1 January 2011.

The Incoterms are only applicable for purchase agreements, not for contracts of carriage. Furthermore, the Incoterms only regulate certain aspects, such as delivery, payment, transfer of risk, customs or apportionment of costs. Not covered by the Incoterms are issues regarding transfer of ownership, (non-)performance and liability.

There are thirteen Incoterms. These can be divided into four subcategories, namely one E-term, three F-terms, four C-terms and five D-terms. Each type of term lays a different level of responsibility on the seller.

When E- or F-terms are agreed upon, the contract of carriage must be concluded by the buyer. This responsibility lies with the seller if C- or D-terms are agreed upon. Clearing goods for export is the responsibility of the seller (with the exception of EXW, see below). Clearing goods for import is the buyers’ responsibility (excepting DDP). According to the Incoterms 2000, the buyer now has the responsibility for export if FAS is agreed upon. The buyer must now also arrange for import if DEQ is agreed upon. The Incoterms 2000 now follow the principle that the seller is responsible for export and the buyer for import.

A significant difference between the Incoterms 2000 and the previous version from 1990 is that the delivery obligation under the FCA term has been simplified. The 1990 version differentiated between the means of transport and the named place of delivery. Now the seller must always deliver to the carrier. If the agreed upon place of delivery is the sellers premises, the seller is obliged to load the goods, otherwise the seller only has to make the goods available.

The changes in the Incoterms are based on worldwide research and the result forms an easy set of ‘rules’ which are useful for concluding commercial contracts when seller and buyer are based in different countries.

With regards to issues such as contract of carriage, insurance, transfer of risk and apportionment of costs, the Incoterms – in short – have the following meaning:

EXW (ex works)

“Ex works” means that the seller delivers when he places the goods at the disposal of the buyer at the sellers’ premises or another named place (i.e. factory, warehouse etc.) without any obligation to load the shipment. Seller bears all risks until delivery. The buyer must clear the goods for export.

FCA (free carrier)

“Free Carrier” means that the seller delivers the goods to a carrier nominated by the buyer at the chosen place of delivery. The seller must clear the goods for export. If the chosen place of delivery is at the sellers’ premises, the seller is responsible for loading. If delivery occurs at any other place, the seller is not responsible for loading. Seller bears all risk of loss or damage until delivery.

FAS (free alongside ship)

“Free alongside ship” means that the seller delivers when the goods are placed alongside a designated vessel at the named port of shipment. From that moment buyer must arrange for carriage and bears all costs of risk of loss or damage. Since 2000 FAS requires the seller to clear the goods for export.

FOB (free on board)

“Free on board” means that the seller delivers when the goods pass the ship’s rail at the named port of shipment. The buyer has to bear all costs and risk of loss or damage to the goods from that point. The buyer must clear the goods for export.

CFR (cost and freight)

“Cost and Freight” means that the seller delivers when the goods pass the ship’s rail at the named port of shipment. The difference between FOB and CFR is that the seller must arrange for and pay for carriage necessary to bring the goods to the named port of destination. The seller must also clear the goods for export. Risk of loss or damage to the goods is transferred to the buyer once the goods have passed the ships’ rail.

CIF (cost, insurance and freight)

“Cost, insurance and freight” means that the seller as well as arranging for carriage must also arrange and pay premium for (a minimum cover) insurance of the shipment. The goods are delivered when they pass the ships’ rail in the named port of shipment. The seller must clear the goods for export.

CPT (carriage paid to)

“Carriage paid to” means that the seller delivers the goods to the carrier, which the seller has arranged. The seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. Delivery and transfer of risk to the buyer occur when the goods are delivered to the carrier. If there is more than one carrier, risk transfers when the goods are delivered to the first carrier. The seller bears the costs of freight and export. This term is similar to CFR, but CFR can only be used for transport by sea or inland waterways. CPT can be used for any mode of transport, including multimodal transport.

CIP (Carriage and insurance paid to)

“Carriage and insurance paid to” means that the seller delivers the goods to the carrier which the seller has arranged. The seller must as with CPT pay the cost of carriage necessary to bring the goods to the named destination. The seller must also arrange and pay premiums for a minimum cover insurance. Delivery and transfer of risk to the buyer occur when the goods are delivered to the first carrier. The seller bears the costs of freight, insurance and export. CIP is similar to CIF, but is used for any mode of transport other than transport by sea or inland waterways.

DAF (Delivered at frontier)

The so called D-terms are arrival terms. “Delivered at frontier” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport, not unloaded, cleared for export and placed at the frontier before customs. The buyer must arrange for import clearance. The buyer must arrange and pay for carriage to the frontier. The risk passes to the buyer at delivery on the frontier.

DES (delivered ex ship)

“Delivered ex ship” means that the seller delivers when the goods are placed at the disposal of the buyer on board the ship at the named port of destination. The seller must arrange and pay for carriage to the named port of destination. Risk of loss or damage is transferred to the buyer on board ship at the port of destination. The goods are not cleared for import; this is the buyers’ responsibility.

DEQ (delivered ex quay)

“Delivered ex quay” means that the seller delivers when the goods are placed at the disposal of the buyer on the quay (wharf) at the named port of destination. The seller must arrange and pay for carriage to the named port of destination and discharging the goods on the quay. The risk of loss or damage is transferred on the quay. The buyer must clear the goods for import. Under the Incoterms 2000, the DEQ term requires the seller to clear the goods for import and pay for all formalities, duties taxes and other charges on import.

DDU (delivered duty unpaid)

“Delivered duty unpaid” means that the seller delivers the goods to the buyer, not cleared for import and not unloaded from any arriving means of transport at the named place of destination. The seller pays all costs to the place of destination and clears the goods for export. The buyer must clear the goods for import.

DDP (delivered duty paid)

“Delivered duty paid” means that the seller delivers the goods to the buyer, cleared for import and not unloaded from any means of transport at the named place of destination. The seller bears all costs and risks involved in delivering the goods including any duty for import in the country of destination. DDP represents the maximum obligation of the seller under any agreement.

There are also many publications which give a further insight into the use of the Incoterms. It is advisable to consult these publications or seek legal advice before using the Incoterms, so that nasty surprises can be avoided at a later date.

Further information

Should you have any disagreement on the performance of an contract referring to one or more Incoterms or have other questions, please feel free to contact our Transport and International Trade contract person.

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