International Commercial Terms (INCOTERMS)
- Incoterms are referred to as International Commercial Terms.
- They are a set of rules published by the International Chamber of Commerce (ICC), which relate to International Commercial Law.
- According to the ICC, Incoterms rules provide internationally accepted definitions and rules of interpretation for most common commercial terms used in contracts for the sale of goods’.
- All International purchases will be processed on an agreed Incoterm to define which party legally incurs costs and risks.
- Incoterms will be clearly stated on relevant shipping documents.
- They are the selling terms that the buyer and seller of goods both agree to during international transactions.
An Overview of INCOTERMS 2020
- EXW – Ex-Works
- Ex-works is when the seller places the goods at the disposal of the buyer at the seller’s premises or at another named place. The seller does not need to load the goods on any collecting vehicle. Nor does it need to clear them for export, where such clearance is applicable.
- FCA – Free Carrier
- The seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as explicitly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.
- FAS – Free Alongside Ship
- The seller delivers when the goods are placed alongside the vessel nominated by the buyer at the named port of shipment.
- The risk of loss of or damage to the goods passes when the products are alongside the ship. The buyer bears all costs from that moment onwards.
- FOB – Free On Board
- The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered.
- The risk of loss of or damage to the goods passes when the products are on board the vessel. The buyer bears all costs from that moment onwards.
- CFR – Cost and Freight
- 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 products 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.
- CIF – Cost, Insurance and Freight
- 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 products are on the ship.
- 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.
- CPT – Carriage Paid To
- The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such site is agreed between parties).
- The seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
- CIP – Carriage and Insurance Paid To
- The seller has the same responsibilities as CPT, but they also contract for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
- Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
- DAP – Delivered At Place
- 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 risks involved in bringing the goods to the named place.
- DPU – Delivered at Place Unloaded (replaces Incoterm® 2010 DAT)
- DPU replaces the former Incoterm® DAT (Delivered at Terminal).
- The seller delivers when the goods, once unloaded are placed at the disposal of the buyer at a named place of destination.
- The seller bears all risks involved in bringing the goods to, and unloading them at the named place of destination.
- DDP – Delivered Duty Paid
- The seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination.
- The seller bears all the costs and risks involved in bringing the goods to the place of destination.
- They must clear the products not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.
Learning Activities
Sesco Uganda Ltd, is a new importer based in Masaka, Uganda. He intends to import his first container from China, and the supplier told him the can sell on three international commercial terms and the supplier is asking him to choose one, the options available for the importer are EXW, FOB and CIF.
Required
- Explain to the importer his obligations in each of the 3 incoterms to enable him make an informed decision.
- Explain to the customer the obligations of the seller in each of the 3 incoterms.
- Explain your obligations as a forwarder in each of the 3 incoterms.
Assignments
- Discuss the importance of carriage of good in international trade.
- What is a contract of carriage and why is it important?
- Discuss at least five (5) key parties and their roles in international carriage of goods.
- What are INCOTERMS? Why are they important in international carriage of goods?