Development of trade history is like the history of any other area that has witnessed peace and conflict, failure and success.
For centuries, people in commercial trade have learned the business from practice and began to form the base of international sales contracts. The forms of contracts have been developed to the standards and always contain a code of certain conditions of what is known today as trade terms. These trade terms have been adopted and defined by trade organizations such as the International Chamber of Commerce in Paris and later used by the countries throughout the world. Such experiences were derived from wide range of practices through having dealt with real big mistake and conflict in trade, from which, people seek solutions and preventions, and set up terms and rules to outline the responsibility of each party involving in a trade. These terms and rules are now called the incoterms in trade.
The functions of the incoterms are mainly and summarized for the following major principles:
1. When and where must the seller make the goods available?
2. Who has to provide which documents or equivalent EDI (Electronic Data Interchange) messages?
3. Who bears the risk of loss or damage of the goods and to which point of transfer in title?
4. Who pays for what?
There are mainly 13 incoterms that can be divided into 4 groups. Here are the terms:
1. EXW, Ex Works (name a place, usually the seller’s factory or warehouse); Whereby the seller only makes the goods available to the buyer at the seller’s premises. The buyer is responsible to pick up the goods at the seller’s premises and to move it to his home country at his cost and risk.
2. FCA, Free Carrier (name a place);
3. FAS, Free Alongside Ship (name the port of shipment departure);
4. FOB, Free On Board (name the port of shipment departure);
Whereby the seller is called upon to deliver the goods to a carrier appointed by the buyer.
5. CFR, Cost and Freight (name the port of destination);
6. CIF, Cost, Insurance and Freight (name the port of destination);
7. CPT, Carriage Paid to…(name place of destination)
8. CIP, Carriage and Insurance Paid to (name the port of destination);
Whereby the seller has to contract at his cost for carriage and/or insurance.
9. DAF, Delivered at Frontier (name a place)
10. DES, Delivered Ex Ship (name the port of destination)
11. DEQ, Delivered Ex Quay (name the port of destination)
12. DDU, Delivered Duty Unpaid (name the place of destination)
13. DDP, Delivered Duty Paid (name the place of destination)
Whereby the seller has to bear all costs and risks to the place of destination named.
Details of explanation of each incoterm will follow right below. Incoterms have to be understood as part of the sales contract. The scope of incoterms is limited to matters relating to the rights and obligations of the parties to the contract of sale (seller and buyer with respect to the delivery of goods sold, in particular questions of delivery, documents, transfer of risks from seller to buyer and division of costs between seller and buyer. The incoterm rules out the responsibilities of the seller and the buyer.
All questions relating to the transfer of ownership, property rights of the goods, breaches of contract and its consequences, exclusions of liabilities in certain circumstances, limitation period and conditions of payment are not subject to the incoterms. These issues should be clarified in the sales contract that is to be discussed in later chapters.
In real trading operations, the most commonly used incoterms that we often see are: EXW, FOB, CFR & CIF, DDU & DDP.
When your sales contract name the price of the goods followed by an incoterm code and a name of the place, the line of liability becomes very clear. For example, you have ordered 1000 bicycles from a manufactory in China for US$20,000 FOB Port of Shanghai, this price and incoterm plus the name of the place have outlined the liability of the seller and the buyer. Detail interpretation of each incoterm is discussed in the following paragraphs right here. The actual interpretation in international trade may change by ruling of official ICC (International Chamber of Commerce):
EXW – Ex Works (name a place):
Ex Works means that the seller’s only responsibility is to make the goods available at this premises (i.e. works, factory or warehouse). In particular, he is not responsible for loading the goods on the vehicle provided by the buyer, unless otherwise agreed. The buyer bears the full cost and risk involved in bringing the goods from there to the desired destination of the buyer. This term thus represents the minimum obligation for the seller.
FCA – Free Carrier (name a place):
FCA means Free Carrier. Under this term, the seller’s obligations are fulfilled when the goods have been placed to the carrier’s terminal for transportation. That means that the buyer has to bear all cost and risks of loss of or damage to the goods from that point, including the responsibility to clear the goods for export.
FAS – Free Alongside Ship (name the port of shipment)
Under this term, the seller’s obligations are fulfilled when the goods have been placed alongside the ship on the quay. This means that the buyer has to bear costs and risks of loss of or damage to the goods from that point. It should be noted that unlike FOB, FAS term requires the BUYER to clear the goods for export.
FOB – Free On Board (name the port of shipment for departure)
The goods are placed on board a ship by the seller at a port of origin of the shipment named in the sales contract. The risk of loss of or damage to the goods is transferred from the seller to the buyer when the goods pass the ship’s rail. The seller is responsible to clear goods for export.
FOB Airport (plus the name of the airport) has become a realistic term in sales contract when transportation of goods by air has become very popular, although FOB - properly meaning free on board – is not in relation to air transportation, to be taken literally but rather as announcing that the next word constitutes the point where the seller’s responsibility is to terminate, for instance, FOB Los Angeles Airport.
Sometimes when the sales contract indicates that the transportation mode is “by air” and “FOB Los Angeles”, it is accepted as FOB Los Angeles Airport.
CFR – Cost and Freight (name the destination port)
This term, used as known to be C&F, defines that the seller must pay the costs and freight necessary to bring the goods to the named destination but the risk of loss of or damage to the goods is transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment.
CIF – Cost, Insurance and Freight
This term is the same as CFR but with the addition that the seller has to procure marine insurance against the risk of loss of or damage to the goods during the carriage. The seller contracts with the insurer and pays the insurance premium. The buyer should note that under the CIF term, unlike the term “Freight, Carriage and Insurance Paid to”, the seller is only required to cover insurance on minimum conditions.
CPT – Carriage Paid to (name a place of destination)
Like C&F, CPT means that the seller pays the freight for the carriage of the goods to the named destination. However, the risk of loss or damage to the goods, as well as if any cost increases, is transferred from the seller to the buyer when the goods have been delivered into the custody of the first carrier and not at the ship’s rail. It can be used for all modes of transport including multi-modal operations. When the seller has to furnish a bill of lading, waybill or carrier’s receipt, he duly fulfills his obligation by presenting such a document issued by the person with whom he has contracted for carriage to the named destination.
CIP – Carriage & Insurance Paid to (name a place of destination)
CIP is the same as CPT, but with the addition that the seller has to procure transport insurance against the risk of loss or of damage to the goods during the carriage. The seller contract with the insurer and pays the insurance premium.
DAF – Delivered at Frontier (name a place)
DAF means that the seller’s obligations are fulfilled when the goods have arrived at the frontier – but before “the customs border” of the country named in the sales contract.
DES – Delivered Ex Ship (name the port of destination)
Delivered Ex Ship means that the seller shall make the goods available to the buyer on board the ship at the destination that is named in the sales contract. The seller has to bear the full cost and risk involved in bringing the goods there. It is all up to the buyer for the rest of the trip whether insurance is to be procured.
DEQ – Delivered Ex Quay (name the port of destination)
DEQ means that the seller makes the goods available to the buyer on the quay (wharf) at the destination that is named in the sales contract. The seller has to bear the full cost and risk involved in bringing the goods there. The sales contract must clearly indicate which one of the two DEQ terms is to be used, DEQ Duty Paid” or DEQ Duty on Buyer’s Account”.
DDU – Delivered Duty Unpaid (name the place of destination)
DDU defines that the seller must bear the full cost and risk involved in bringing the goods to the entry port of the country and delivering the goods to the door of the named destination address after the buyer has filed the customs entry that enables the full release of the goods by governmental agencies. The buyer has to take the responsibility to file the customs entry and pays duty, tax and any governmental charges for import permission, license and inspection related cost.
DDP – Delivered Duty Paid (name the place of destination)
While the term EXW signifies the seller’s minimum obligation, DDP, when followed by words naming the buyer’s premises, denote the other extreme – the seller’s maximum obligation. DDP may be used irrespective of the mode of transport.