2010 INCOTERMS® GENERAL OVERVIEW

What are Incoterms? A brief overview:

The Incoterms® rules explain a set of three-letter trade terms reflecting business-to-business practice in contracts for the sale of goods. The Incoterms rules describe mainly the tasks, costs and risks involved in the delivery of goods from sellers to buyers.
Updated once every 10 years.

What has changed?

Incoterms® 2010 has seen the elimination of 4 Incoterms rules (DAF, DES, DEQ and DDU) and has seen the creation of 2 new rules – DAP (Delivered at Place) & DAT (Delivered at Terminal), which replace DDU (Delivered Duty Unpaid).
New rules make the DAF, DES, DEQ and DDU Incoterms superfluous because the place or terminal specified will serve to encompass these options.
Under both new rules, delivery occurs at a named destination: in DAT, at the buyer’s disposal unloaded from the arriving vehicle (as under the former DEQ rule); in DAP, likewise at the buyer’s disposal, but ready for unloading (as under the former DAF, DES and DDU rules).

Incorporating Incoterms into a Sales Contract

If you want the Incoterms® 2010 rules to apply to your contract, you should make this clear in the contract, through such words as, “[the chosen Incoterms rule including the named place, followed by] Incoterms®2010”.
The interpretation of the contract may well be influenced by customs particular to the port or place being used. (Does anybody have experience with this?)
Specify the place or port as precisely as possible – A good example: “FCA 7130 Miramar Road, Suite 100A, San Diego, CA, USA Incoterms®2010”
Incoterms are not a contract for sale. Incoterms do say which party to the sale contract has the obligation to make carriage or insurance arrangements, when the seller delivers the goods to the buyer, and which costs each party is responsible for. However, Incoterms say nothing about the price to be paid or the method of payment. Neither do they deal with the transfer of ownership of the goods, or the consequences of a breach of contract. These matters are normally dealt with through express terms in the contract of sale or in the law governing that contract.

How to choose the proper Incoterm

The Incoterm chosen needs to be appropriate to the goods, to the means of transport, and above all, to whether the parties intend to put additional obligations, for example such as the obligation to organize carriage or insurance, on the seller or on the buyer.

Place of Delivery vs. Place of Destination

Under the ‘C’ Incoterms (CPT, CIP, CFR, CIF), the named place differs from the place of delivery. Under these 4 Incoterms rules, the named place is the place of destination to which carriage is paid. Delivery actually takes place when the goods are handed over to the carrier.
Under the remaining Incoterms (EXW, FCA, DAT, DAP, DDP, FAS, FOB), the named place is the place where delivery takes place and where risk passes from the seller to the buyer.

Who pays for Insurance?

Only the CIP and CIF Incoterms require the seller to purchase insurance against the buyer’s risk of loss of or damage to the goods during the carriage.
The seller is only required to obtain minimum cover.
Minimum Cover: 110% of the price provided in the contract and must be in the currency of the contract. Insurance is required to cover Clauses ( C ) of the Institute Cargo Clauses (LMA/IUA) or any similar clauses.
The insurance must be contracted with underwriters or an insurance company of good repute and entitle the buyer, or any other person having an insurable interest in the goods, to claim directly from the insurer.

2010 INCOTERMS®- KEY POINTS

*For the most accurate & thorough procedures, please reference Incoterms ® 2010, published by the International Chamber of Commerce (ICC). The below key points are excerpts from this publication.

Rules which may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed:

EXW: Ex-Works

Seller delivers when goods are placed at the disposal of the buyer at the seller’s premises or at another named place (i.e., works, factory, warehouse, etc.). The seller doesn’t need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable.
Specify the point within the named place of delivery, as the costs and risks to that point within are for the account of the seller. The buyer bears all costs and risks involved in taking the goods from the agreed point, if any, at the named place of delivery.
If seller loads the goods, it does so at the buyer’s risk and expense.
Don’t use this term if you are a buyer who is unable to obtain export clearance
Buyer must provide appropriate evidence to seller of having taken delivery.

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 clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.
*Requires the seller to clear the goods for export, where applicable.
Delivery takes place at the seller’s premises, when the goods have been loaded on the means of transport provided by the buyer. Or, in any other case, when the goods are placed at the disposal of the carrier (or another person nominated by the buyer) on the seller’s means of transport ready for unloading.

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 place is agreed between the parties).
The seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
*This rule has 2 critical points because risk passes and costs are transferred at different places. The parties are well advised to identify as precisely as possible in the contract both the place of delivery (transfer of possession/risk), where the risk passes to the buyer, and the named place of destination (transfer of cost) to which the seller must contract for the carriage.
If the seller incurs costs under its contract of carriage related to unloading at the named place of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed between the parties.
Seller is required to clear the goods for export
Delivery – The seller must deliver the goods by handing them over to the carrier they’ve contracted from the agreed point of delivery, if any, at the place of delivery to the named place of destination or, if agreed, any point at that place.

CIP: Carriage and Insurance Paid To

Same as CPT, only the seller also contracts for insurance cover against the buyer’s risk of loss or damage to the goods during carriage.
The seller is required only to obtain insurance on minimum cover. 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.
*When CPT, CIP, CFR or CIF are used, the seller fulfills its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination.
If a specific point is not agreed or is not determined by practice, the seller may select the point of delivery and the point at the named place of destination that best suits its purpose.
Insurance shall cover, at a minimum, the price provided in the contract plue 10% (i.e. 110%) and shall be in the currency of the contract
Insurance shall cover the goods from the point of delivery to at least the named place of destination.

DAT: Delivered at Terminal

The seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named place of destination.
“Terminal” includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal.
The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.
The parties are well advised to specify as clearly as possible the terminal and, if possible, a specific point within the terminal at the agreed port or place of destination, as the risks to that point are for the account of the seller. The seller is advised to procure a contract of carriage that matches this choice precisely.
*If the parties intend the seller to bear the risks and costs involved in transporting and handling the goods from the terminal to another place, then the DAP or DDP rules should be used.
Delivery: The seller must unload the goods from the arriving means of transport and must then deliver them by placing them at the disposal of the buyer at the named terminal at the port or place of destination on the agreed date or within the agreed period.
Where applicable, the buyer must obtain, at its own risk and expense, any import license or other official authorization and carry out all customs formalities for the import of the goods.
If the parties wish the seller to clear the goods for import, pay any import duty, and carry out any import customs formalities, the DDP term should be used.
Seller must pay all costs relating to the goods until they have been delivered to the named place of destination; any charges for unloading at the place of destination that were for the seller’s account under the contract of carriage; and where applicable, the costs of customs formalities necessary for export as well as all duties, taxes and other charges payable upon export, and the costs for their transport through any country, prior to delivery to the named place of destination.

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.
If the seller incurs costs under its contract of carriage related to unloading at the place of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed between the parties.
If the parties wish the seller to clear the goods for import, pay any import duty, and carry out any import customs formalities, the DDP term should be used.
For DAP/DAT the seller’s risk transfers to the buyer at the place of destination vs. CIP/CIP/CIF/CFR where the risk transfers from seller to buyer once the goods are handed over to the carrier.
Seller must pay all costs relating to the goods until they have been delivered to the named place of destination, any charges for unloading at the place of destination that were for the seller’s account under the contract of carriage, and where applicable, the costs of customs formalities necessary for export as well as all duties, taxes and other charges payable upon export and the costs for their transport through any country, prior to delivery to the named place of destination.

DDP: Delivered Duty Paid

The seller delivers 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 and has an obligation to clear the goods not only for export, but also for import, to pay any duty* for both export and import and to carry out all customs formalities.
DDP represents the maximum obligation to the seller.
The parties are well advised not to use DDP if the seller is unable directly or indirectly to obtain import clearance
If the parties wish the buyer to bear all risks and costs of import clearance, the DAP rule should be used.
*Any VAT or other taxes payable upon import are for the seller’s account unless expressly agreed otherwise in the sales contract.
Where applicable, the seller must obtain, at its own risk and expense, any export and import license and other official authorization and carry out all customs formalities necessary for the export of the goods, for their transport through any country and for their import.
Delivery: The seller must deliver the goods by placing them at the disposal of the buyer on the arriving means of transport ready for unloading at the agreed point, if any, at the named place of destination, on the agreed date ,or within the agreed period.
Where applicable, the buyer must provide assistance to the seller, at the seller’s request, risk and expense, in obtaining any import license or other official authorization for the import of the goods.

Rules to be used only for sea or inland waterway transport:

FAS: Free Alongside Ship

Generally used for break bulk shipments
The seller delivers when the goods are placed alongside the vessel (e.g., on a quay or barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.
The parties are well advised to specify as clearly as possible the loading point at the named port of shipment, as the costs and risks to that point are for the account of the seller, and these costs and associated handling charges may vary according to the practice of the port.
The seller is required either to deliver the goods alongside the ship or to procure goods already so delivered for shipment. The reference to “procure” here caters for multiple sales down a chain (‘string sales’), particularly common in the commodity trades.
Where the goods are in containers, it is typical for the seller to hand the goods over to the carrier at a terminal and not alongside the vessel. In such situations, the FAS rule would be inappropriate, and the FCA rule should be used.
FAS requires the seller to clear the goods for export, where applicable.
The seller has no obligation to the buyer to make a contract of carriage. However, if requested by the buyer or if it is commercial practice and the buyer does not give an instruction to the contrary in due time, the seller may contract for carriage on usual terms at the buyer’s risk and expense. In either case, the seller may decline to make the contract of carriage and, if it does, shall promptly notify the buyer.
If the vessel nominated by the buyer fails to arrive on time, or fails to take the goods or closes for cargo earlier than the time notified then the buyer bears all risks of loss of or damage to the goods from the agreed date or the expiry date of the agreed period for delivery, provided that the goods have been clearly identified as the contract goods.
The buyer must give the seller sufficient notice of the vessel name, loading point and, where necessary, the selected delivery time within the agreed period.

FOB: Free On Board

“Free on board” means that 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 goods are on board the vessel, and the buyer bears all costs from that moment onwards.
The seller is required either to deliver goods on board the vessel or to procure goods already so delivered for shipment (string sales).
FOB may not be appropriate where goods are handed over to the carrier before they are on board the vessel; for example, goods in containers, which are typically delivered at a terminal. In such situations, the FCA rule should be used.
FOB requires the seller to clear the goods for export, where applicable.
The seller has no obligation to the buyer to make a contract of carriage.
Delivery: The seller must deliver the goods either by placing them on board the vessel nominated by the buyer at the loading point, if any, indicated by the buyer at the named port of shipment or by procuring the goods so delivered.

CFR: Cost and Freight

The seller delivers the goods on board the vessel or procures the goods already so delivered.
Risk of loss of or damage to the goods passes when the goods 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.
When CPT, CIP, CFR or CIF are used, the seller fulfills its obligation to deliver when it hands the goods over to the carrier in the manner specified in the chosen rule, and not when the goods reach the place of destination.
This rule has two critical points, because risk passes and costs are transferred at different places. While the contract will always specify a destination port, it might not specify the port of shipment, which is where risk passes to the buyer. If the shipment port is of particular interest to the buyer, the parties are well advised to identify it as precisely as possible in the contract.
The parties are well advised to identify as precisely as possible the point at the agreed port of destination, as the costs to that point are for the account of the seller.
If the seller incurs costs under its contract of carriage related to unloading at the specified point at the port of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed between the parties.
*CFR may not be appropriate where goods are handed over to the carrier before they are on board the vessel; for example, goods in containers, which are typically delivered at a terminal. In such circumstances, the CPT rule should be used.
CFR requires the seller to clear the goods for export.
Seller must contract or procure a contract for the carriage of the goods from the agreed point of delivery, if any, at the place of delivery to the named port of destination, or if agreed, any point at that port.
Delivery: Either by placing goods on board the vessel or by procuring the goods so delivered.

CIF: Cost Insurance and Freight

Same as CFR, only the seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
Seller is required to obtain insurance only on minimum cover. 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.
When CPT, CIP, CFR or CIF are used, the seller fulfills its obligation to deliver when it hands the goods over to the carrier in the manner specified in the chosen rul, and not when the goods reach the place of destination.