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1 Mantissa Ltd 2017 All rights reserved. Incoterms and the Incoterms 2010 logo are trademarks of the International Chamber of Commerce (ICC). The text of the Incoterms 2010 rules is available as the ICC Publication 715E (English Edition.) This document has been supplied under your organisation s licence agreement with Mantissa Ltd, for internal use only. You are not allowed to distribute this document to other parties outside the scope of this agreement. Warning: this document contains hidden identifying information for use in tracing unauthorised copying and distribution.

2 Contents 1 History and purpose of the rules Use of the Incoterms rules The logic of the rules All transport modes or Sea & inland waterway only Who pays for main transport Where does risk transfer before or after main transport? How is an Incoterms rule chosen? The rules in detail Ex Works EXW Free Carrier FCA Carriage Paid To CPT Carriage & Insurance Paid To CIP The arrival rules DAT, DAP, DDP general considerations Delivered At Terminal DAT Delivered At Place DAP Delivered Duty Paid DDP Free Alongside Ship FAS Free On Board FOB Cost & Freight CFR Cost Insurance & Freight CIF Qualifications of an Incoterms rule The US perspective Incoterms rules vs the Uniform Commercial Code Ex Works, EAR and routed transactions Appendix A: Letters of credit and collections I. What are letters of credit and collections? II. How the Incoterms rules work with letters of credit III. Practical steps with the F rules IV. Letters of credit in practice - things to watch for V. Checklist for the transport document Appendix B: Freight insurance and the rules... 46

3 Incoterms 2010: A practical guide p. 1 1 History and purpose of the rules The global economy and modern logistical networks give both importer and exporters unprecedented opportunities for doing business with counterparties in other parts of the world. However when trading partners use different languages, legal systems and practices for the movement of goods, it is vital to avoid misunderstandings and to achieve precision as to how transactions are to be conducted. The ICC created the first edition of the Incoterms rules back in It immediately gained widespread acceptance in the international business community, and has been revised from time to time to reflect changes in trading and transport practices. The most recent revision is Incoterms 2010, which replaced the previous edition, Incoterms Incoterms 2010 consists of eleven packages of provision, designed to suit typical requirements of international business. Each of these Incoterms rules is identified by a name and by three-letter abbreviation for example: CIP Carriage and Insurance Paid to By agreeing on the use of one of the eleven Incoterms rules and incorporating it into their commercial agreement, buyer and seller can quickly and efficiently achieve precision and clarity on a wide range of issues, including: Transport who will arrange and pay for transport, and to what destination? Loading and unloading of goods Responsibility for export and import procedures and payment of applicable duty and taxes Where during the journey responsibility for the goods passes from the seller to the buyer important in the event of loss or damage The details of the rules are set out in the ICC publication no. 715 Incoterms 2010: ICC rules for the use of domestic and international trade terms. This is available from the ICC Bookstore. It is available in various languages, and in both conventional print and digital formats. This publication is essential reading for those responsible for the development of an Incoterms policy, and for negotiating agreements with trading partners and service providers such as carriers and freight forwarders.

4 Incoterms 2010: A practical guide p. 2 NOTE: The selected Incoterms rule will be part of the commercial agreement between the buyer and seller. It will not be part of the agreement between either party and service providers such as carriers and freight forwarders. The party who arranges carriage should ensure that the terms and conditions of the carriage contract align with the selected Incoterms rule.

5 Incoterms 2010: A practical guide p. 3 2 Use of the Incoterms rules The agreed Incoterms rule should be included in the commercial agreement in a form such as this: CIP Hong Kong Terminal 4 Incoterms 2010 Note these three elements: The three-letter abbreviation in this case CIP, which stands for Carriage and Insurance Paid A place, Hong Kong Terminal 4. This is the destination to which the seller has contracted to transport the goods. This should be defined as precisely as possible, as many transport hubs are very large. This place will have a defined meaning within each of the rules. For some rules but not all it will be the point where risk transfers from seller to buyer. (However as you will see later, for the CIP Incoterms rule and other the point of risk transfer is earlier in the journey, before the main transport) The rubric Incoterms 2010 indicates the revision of the rules that should apply. This will normally be the latest revision. However trading partners with complex agreements that they do not want to revise are free to specify earlier revisions such as Incoterms 2000.

6 Incoterms 2010: A practical guide p. 4 Note: There are some key aspects of the commercial agreement on which the Incoterms rules are silent. For example: The rules deal with the transfer of responsibility for the goods, but they say nothing about transfer of ownership or title. (This omission is intentional, because these concepts are subject to different treatments in various legal systems.) The rules say nothing about how and when the goods are to be paid for, e.g. whether this is to be payment in advance, open account, use of letters of credit or collections The rules say nothing about remedies for breach of contract or how disputes are to be dealt with So these matters need to be addressed in the commercial agreement

7 Incoterms 2010: A practical guide p. 5 3 The logic of the rules The eleven rules may be classified according to these three criteria. Applicable transport methods. Seven rules (EXW, FCA, CPT, CIP, DAT, DAP, DDP) can be used for any transport mode (road, sea, air, rail etc.), or where the journey involves more than one transport mode. However four rules (FAS, FOB, CFR, CIF) can only be used for transport by sea or inland waterway. Who arranges and pays for the main transport buyer or seller? Where the seller arranges the main carriage, where does risk transfer from seller to buyer before or after the main carriage? Let s look at each of these aspects in turn 3.1 All transport modes or Sea & inland waterway only What is the significance of this distinction? When the Incoterms rules were introduced in 1936, the standard mode of international transport was by sea, and goods were typically loaded as individual items (crates etc.) into the hold of the ship. To accomplish this, sellers delivered the goods directly to the quay alongside the vessel. The sea and inland waterway rules reflect this traditional mode of delivery and loading, with the transfer of responsibility from seller taking place once the goods have been loaded on board the vessel (or as expressed in the earlier Incoterms revisions, when the goods have crossed the ship s rail.) With the advent of containerisation, all this changed. At container terminals, sellers do not have direct access to the vessel. Instead, sellers deliver containers to container yards or depots operated by the terminal, for later transfer to the vessel. Once the container has been taken in charge by the terminal operator, the seller has given up effective control of the goods. Consider now the consequence of an accident at the terminal causing damage to the container before it is loaded. Under the application of a traditional Incoterms rule

8 Incoterms 2010: A practical guide p. 6 such as CIF, the seller is still responsible for the goods, even though security and effective control of the goods is now in the hands of the terminal operator. A dramatic example of why these distinctions matter was the Japanese tsunami in March 2011, which wrecked the Sendai container terminal, damaging many hundreds of consignments awaiting loading. As a consequence, exporters using the traditional Incoterms rules (FOB, CFR and CIF) found themselves facing losses that could have been avoided. The principle of risk transferring from seller to buyer at the point where the goods are taken in charge by the carrier also applies to air transport and to multi-modal operations. In today s integrated logistical systems, it is not uncommon for a consignment to go through several transport stages before getting loaded onto a container vessel. For example a less than container load consignment (LCL) may be collected by truck by a carrier who does not own any ships (NVOCC or non-vessel operating common carrier); then taken to a freight forwarder s depot where it is consolidated with other goods to create a full container load; then taken to a container freight station before being loaded onto the ship. Let us consider the implications of using an all transport modes rule such as Carriage Paid To (CPT) versus a sea and inland waterway only rule such as Cost and Freight (CFR). In this scenario, if the Incoterms rule is CPT (destination), then the seller is off risk from the moment the goods are first collected. However with the Incoterms rule CFR, the seller remains at risk until the container is loaded onto the ship. The practical implication is that the seven All transport modes rules are the rules of choice for all movements of goods except those where the seller has direct access to the ship for loading. In these cases, one of the four Sea or inland waterway only rules is appropriate. Such transactions will include: transport of bulk commodities such as oil, minerals, grain, etc., where loading takes place from specialised installations heavy machinery or plant that is too large to be containerised loose break-bulk cargo where individual items are loaded onto the vessel.

9 Incoterms 2010: A practical guide p. 7 ALL TRANSPORT MODES SEA & INLAND WATERWAY ONLY Ex Works EXW Free Carrier FCA Free On Board FOB Free Alongside Ship FAS Carriage Paid To CPT Carriage and Insurance Paid To CIP Cost and Freight CFR Cost Insurance and Freight CIF Delivered At Place DAP Delivered At Terminal DAT Delivered Duty Paid Use for: Containerised goods, multi-modal transport, air and road freight etc. Use for: Bulk commodities, large machinery, break-bulk cargo loaded directly onto vessel This recognition of the different requirements for containerised traffic is not new it is a feature of the 1990 revision of the rules, and all subsequent revisions. Unfortunately historic practices within the industry can be resistant to change. So it is still very common for importers and exporters to seek to use the traditional rules FOB, CFR and CIF inappropriately, usually on the grounds that we have always done it this way or this is how our counterparty (or the bank or the customs authorities) want it done

10 Incoterms 2010: A practical guide p Who pays for main transport As you can see from this table, for EXW and all the F rules, the buyer pays for the main transport. However for the C and D rules, the seller pays for main transport. ALL TRANSPORT MODES SEA & INLAND WATERWAY WHO PAYS? Ex Works EXW Buyer pays for main transport Free Carrier FCA Free On Board FOB Free Alongside Ship FAS Buyer pays for main transport Carriage Paid To CPT Carriage and Insurance Paid To CIP Cost and Freight CFR Cost Insurance and Freight CIF Seller pays for main transport Delivered At Place DAP Delivered At Terminal DAT Delivered Duty Paid Delivered At Place DAP Delivered At Terminal DAT Delivered Duty Paid Seller pays for main transport As you will see in the next section, the major difference between the C and the D rules is where in the journey the risk transfers from the seller to the buyer.

11 Incoterms 2010: A practical guide p Where does risk transfer before or after main transport? Where the buyer arranges the main transport Ex Works, Free Carrier, Free Alongside Ship, Free on Board then it is logical that the risk should transfer from seller to buyer before the journey. However when the seller arranges the main transport, there are two possibilities. For the C rules Carriage Paid To, Carriage and Insurance Paid To, Cost and Freight, Cost Insurance and Freight risk transfers from seller to buyer BEFORE the main transport. But for the D rules Delivered At Terminal, Delivered At Place, Delivered Duty Paid the seller retains responsibility for the goods throughout the main transport, and until they have been delivered to the specified place ALL TRANSPORT MODES SEA & INLAND WATERWAY Ex Works EXW Free Carrier FCA Free On Board FOB Free Alongside Ship FAS Buyer pays for main transport Buyer pays for main transport Carriage Paid To CPT Carriage and Insurance Paid To CIP Cost and Freight CFR Cost Insurance and Freight CIF Seller pays for main transport, but seller is off risk during transport Delivered At Place DAP Delivered At Terminal DAT Delivered Duty Paid Seller pays for main transport, remains on risk during transport This special feature of the C rules has some important implications, which will be explained in the detailed coverage later on. One of the implications is that when a C rule is cited, e.g. CIP Long Beach California Terminal 3 Incoterms 2010, it is not apparent from this where the buyer will assume risk for the cargo the destination of the goods is stated, but not the place where the goods are taken in charge before the journey.

12 Incoterms 2010: A practical guide p How is an Incoterms rule chosen? Before moving on to the detailed provisions of the eleven rules, let s look at some of the major factors that buyers and sellers may consider when deciding on a suitable Incoterms rule. Skills and resources of the parties a buyer or seller with limited experience of international trade may be happy to limit their obligations and leave as much of the work as possible to the other party. Relative volumes of international business. A large company that does a lot of importing or exporting will have existing relationships with carriers and other service providers, and will be able to obtain better rates than a smaller one freight rates are usually highly dependent on volumes that the customer can commit to. Policy and/or appetite with respect to controlling as much of the transaction as possible. An exporter may regard the timely and efficient delivery of the goods as an important aspect of overall product quality, and so will wish to have maximum control over the transport arrangements Risk issues around local transport infrastructure and/or bureaucracy. For example, an exporter sending goods to a country with unreliable transport infrastructure and inefficient customs procedures may wish to avoid responsibility for delivering the goods to the buyers premises and for clearing the goods for import.

13 Incoterms 2010: A practical guide p The rules in detail 5.1 Ex Works EXW This rule represents the minimum cost and responsibility for the seller, and the maximum cost and responsibility for the buyer. The seller is obliged to do little more than make the goods available at their premises, packed and ready for collection by the buyer or the buyer s appointed carrier. Risk transfers from seller to buyer as soon as the goods have been made available, i.e. before they have been loaded onto the vehicle even though the seller may be better placed to undertake loading. The buyer is responsible for any export clearance procedures; for loading the goods and transporting them at their own cost and risk; for import procedures and payment of any duty or local taxes. Inexperienced exporters are attracted by the apparent simplicity of this rule. However there are very significant pitfalls for both the buyer and the seller. The most important of these is that of export clearance. This is the only rule in which the buyer, and not the seller, is responsible for export clearance. This will usually be done by the buyer-appointed freight forwarder or carrier using information that the seller will need to supply. However in many countries exporters need to engage with the local authorities for many reasons for example, to demonstrate compliance with embargos or restrictions on dealing with questionable persons, business entities or countries. US exporters should take particular note of the concept of US Principal Party in Interest (USPPI), which places obligations on the seller that cannot be avoided by use of the Ex Works rule. In summary, Ex Works may be practical for domestic sales or for sales within an economic area such as the EU. However in most other cases, the exporter should consider FCA - Free Carrier (exporter s premises)

14 Incoterms 2010: A practical guide p. 12 The provisions of Free Carrier are very similar to those of Ex Works, except that the exporter is obliged to undertake export procedures. One important use of Ex Works is as a well-understood basis for quotations it represents the cost of the goods themselves - packed, but without any of the extras transport, loading and unloading, duties, insurance and so on. Buyers who are familiar with these others costs, or who have their own logistical contracts, can assess the merits of the offer and make their own decisions. Things to watch for. Packing. This rule obliges the seller to package the goods, at their own expense, in a manner appropriate for their transport. However a danger arises if an agreement is reached before the mode of transport has been decided or communicated to the seller different transport modes have their own packaging requirements. So it is important for the seller to establish the proposed transport mode, include this in the commercial agreement and then pack the goods accordingly. If the goods need to be loaded into a container for transport, then this will not be covered by the seller s obligations under the Ex Works rule responsibility for this will need to addressed in the commercial agreement Loading of the goods The Ex Works rule does not oblige the seller to load the goods onto the buyer s vehicle. The seller will often be better placed to do this, and most sellers are willing to load the goods as a matter of general convenience. However unless agreed otherwise, loading of the goods will be at the buyer s risk. Diversion of goods. An exporter may have purely commercial concerns about the actual destination of the goods. Consider a manufacturer who has a long-standing, exclusive arrangement with a distributor for all domestic sales. They receive an order for export to a distant overseas country. They proceed to deal with this buyer on Ex Works terms, only to find that the goods are never exported, but find their way onto the domestic market!

15 Incoterms 2010: A practical guide p Free Carrier FCA This very flexible rule can be used for all situations where the buyer assumes responsibility for the main carriage to the buyer s destination. The seller delivers the goods, cleared for export, to the named place, which can be a terminal, a transport hub, a freight forwarder s warehouse etc. Delivery takes place when the goods are made available to the carrier at the named place, still loaded on the arriving vehicle. There is an important usage of this rule Free Carrier (sellers premises.) In this case, the goods are collected from the seller s factory or depot. Delivery is completed when the seller has loaded the goods onto the carrier s vehicle. (NB this is an important difference from Ex Works, where the buyer is responsible for loading onto the vehicle.) Free Carrier (sellers premises) is very often a more appropriate choice of rule than Ex Works the latter can pose all sorts of problems around the outsourcing of export clearance. (See Ex Works above for more on this.) Free Carrier can be used for all transport modes and for multi-modal operations. It is also suitable for groupage and consolidation situations. This rule should not be used where the goods are transported by sea or inland waterway only and the seller has direct access to the vessel or to the quay for purposes of loading Examples where Free Carrier should not be used include transport of bulk commodities such as oil, mineral ore, grain etc. usually handled by special-purpose equipment at the terminal; large machinery that cannot be containerised; other break-bulk cargo where items require individual loading.

16 Incoterms 2010: A practical guide p. 14 In such cases, the appropriate rules are Free On Board FOB delivery is completed when goods have been loaded on board the vessel and Free Alongside Ship FAS delivery is completed when goods are place alongside the ship at the specified place. Things to watch for Where does the risk transfer? If there is more than one carrier, then risk transfers to the buyer when the goods have been delivered to the first carrier, unless otherwise specified in the commercial agreement. This may be an issue for the buyer if the first carrier is a small company with limited financial or other resources for dealing with problems. Packing This rule obliges the seller to package the goods, at their own expense, in a manner appropriate for their transport. However a danger arises if an agreement is reached before the mode of transport has been decided or communicated to the seller different transport modes have their own packaging requirements. So it is important for the seller to establish the proposed transport mode, include this in the commercial agreement and then package the goods accordingly. Containers The Incoterms 2010 rules are clear that loading goods into containers is a separate issue from packaging of the goods. So if the buyer or buyer-appointed agent is expecting to take delivery of a loaded container, this should be spelled out in the commercial agreement.

17 Incoterms 2010: A practical guide p Carriage Paid To CPT This is one of four rules where the seller is responsible for arranging and paying for transport to the named place, but where delivery and transfer of risk take place at an earlier point before the main carriage. For example, if the Incoterms rule for a consignment is CPT Pier T Long Beach, California, an exporter in the UK may deliver a container to the carrier at Felixstowe (UK), and contract with the carrier for transport to the named place (Long Beach). The key point is that delivery and transfer of risk takes place before the main carriage, when the container has been taken in charge by the carrier, and not at the destination place named in the Incoterms rule. So when this rule is used, the details of the journey, including the delivery point, must be included in the commercial agreement note that the Incoterms reference will only mention the destination point. This rule is appropriate for all modes of transport, and for multi-modal operations. It is one of the rules of choice for containerised movements, which constitute the vast majority of sea cargo operations. This rule does not oblige the seller to take out cargo insurance for the consignment see Carriage & Insurance Paid to CIP if the seller is required to provide this. So buyers may wish to take out their own cargo insurance, covering the point of delivery through to the final destination. Things to watch for Terminal Handling Charges (THC) at the destination Containerised operations typically involve a number of stages between the points where sellers deliver (and buyers collect) the containers and the container vessels. Terminal operators typically make charges for these movements, but there is no standard practice for how carriers treat these charges.

18 Incoterms 2010: A practical guide p. 16 In some instances the Terminal Handling Charges at the destination will be included in the freight rate; but in other cases these charges will be for the account of the buyer. So to avoid nasty surprises when collecting goods, buyers should raise this question with their exporters and should agree on the treatment of applicable THCs at the destination. Letters of credit This rule, along with the other C rules (CIP, CFR, CIF) work well with letters of credit and collections, because the seller controls the main transport, and so can be sure of getting a transport document that evidences delivery. NB the letter of credit may call for a transport document stating that the goods have been taken in charge by the carrier OR loaded on board a vessel the seller should ensure that the carrier can supply the document with the required wording. The other rules (EXW, FAS, FOB, FCA, DAT, DAP, DDP) all pose potential problems see the Letters of credit and collections section for more details.

19 Incoterms 2010: A practical guide p Carriage & Insurance Paid To CIP This is one of four rules where the seller is responsible for arranging and paying for transport to the named place, but where delivery and transfer of risk take place at an earlier point before the main carriage. For example, if the Incoterms rule for a consignment is CIP Pier T Long Beach, California, an exporter in the UK may deliver a container to the carrier at Felixstowe (UK), and contract with the carrier for transport to the named place (Long Beach). The key point is that delivery and transfer of risk takes place before the main carriage, when the container has been taken in charge by the carrier, and not at the destination place named in the Incoterms rule. So when this rule is used, the details of the journey, including the delivery point, must be included in the commercial agreement note that the Incoterms reference will only mention the destination point. This rule is appropriate for all modes of transport, and for multi-modal operations. It is one of the rules of choice for containerised movements, which constitute the vast majority of sea cargo operations. The other major obligation of the seller is to obtain and pay for cargo insurance for the journey to the named destination. The insurance cover required by this rule is Institute Cargo Clauses C or equivalent, which excludes various risks that the buyer may regard as necessary; so the exact cover requirements should be discussed and included in the commercial agreement. Things to watch for Terminal Handling Charges (THC) Containerised operations typically involve a number of stages between the points where sellers deliver (and buyers collect) the containers and the container vessels. Terminal operators typically make charges for these movements, but there is no standard practice for how carriers treat these charges.

20 Incoterms 2010: A practical guide p. 18 In some instances the Terminal Handling Charges at the destination will be included in the freight rate; but in other cases these charges will be for the account of the buyer. So to avoid nasty surprises when collecting goods, buyers should raise this question with their exporters and should agree on the treatment of applicable THCs Insurance As noted earlier, the minimum level of cover mandated by this rule is Institute Cargo Clauses C, which excludes war, strikes and some other risks that a buyer may regards as necessary. So the level of cover needs to be specified in the commercial agreement. As the seller will be off risk for the main transport and beyond, the insurance documents need to be made out in a form that will allow the buyer to claim under the policy if necessary. It is also good practice for the buyer to establish a channel of communication with the carrier beforehand, so that claims can be lodged promptly. Letters of credit This rule, along with the other C rules (CPT, CFR, CIF) work well with letters of credit and collections, because the seller controls the main transport, and so can be sure of getting a transport document that evidences delivery. NB the letter of credit may call for a transport document stating that the goods have been taken in charge by the carrier OR loaded on board a vessel the seller should ensure that the carrier can supply the document with the required wording. The other rules (EXW, FAS, FOB, FCA, DAT, DAP, DDP) all pose potential problems see the Letters of credit and collections section for more details.

21 Incoterms 2010: A practical guide p The arrival rules DAT, DAP, DDP general considerations For these three rules, the seller s obligations now extend to delivering the goods to the named place (usually) in the buyer s country, and risk remains with the seller until delivery has been completed. This is an important difference from the C rules (CFR, CIF, CPT, CIP), where the seller delivers the goods - and risk transfers to the buyer - before the main carriage. Delivered At Terminal. Delivery is completed when the goods have been unloaded from the arriving vehicle at the defined place. Import clearance and payment of all duties and taxes is the responsibility of the buyer Delivered At Place. Delivery is completed when the goods are available on the arriving conveyance, ready for unloading by the buyer. Import clearance payment of all duties and taxes is also the responsibility of the buyer. Delivered Duty Paid. Delivery is completed when the goods have been unloaded from the arriving vehicle at the defined place. The seller is responsible for import clearance and payment of all duty and taxes The first two of these (Delivered At Place, Delivered At Terminal) often present an issue of coordination of the actions of the seller-appointed carrier and the buyer. In many instances, import clearance (responsibility of the buyer) must take place before the seller has completed delivery of the goods to the named place. So for the goods to proceed smoothly to their delivery point, it is necessary that import clearance is done in a timely manner. The buyer or buyer s freight forwarder - is responsible for this, but they are dependent on receiving accurate information and complete documentation from the seller or the seller s freight forwarder. Delays in import clearance can arise in a number of ways. The seller (or a party acting for the seller) may provide incomplete information; information or documents may arrive late; there may be inefficiency or lack of cooperation the part of the buyer or the customs authorities. Whatever the cause, the effect will be late delivery and/or penalties by way of storage charges or demurrage and often a dispute about who should pay these! So when these rules are used, it is important that buyer and seller have a shared understanding of the liaison that will be necessary. Ideally the commercial agreement should also deal with responsibility for charges that may arise in the event of delays in import clearance.

22 Incoterms 2010: A practical guide p. 20 (Note that these problems of coordination between delivery and clearance do not arise if the goods can be delivered uncleared for example, to a depot in a Free Trade Zone.) Here are some examples of how these arrival rules may work in practice. 1. China to UK, air transport A UK manufacturer buys components from a supplier in China on a DAP basis. The Chinese supplier employs a UK-based freight forwarder to arrange delivery to the UK factory. Upon arrival of the goods, the freight forwarder sends copies of the air waybill and invoice to the buyer, who in return provides the freight forwarder with VAT numbers and other information needed for import clearance. The freight forwarder can now clear the goods for import on the buyer s behalf. There is an agreement with UK Customs that duty and handling fees for clearance are for the buyer s account. It has been agreed that in the event of delays caused by failure of the buyer to supply the required information, storage charges etc. will be the responsibility of the buyer. 2. Turkey to Azerbaijan, road transport Machine tools are transported from Turkey to Azerbaijan by road on a DAP basis. The route involves travel through Georgia, but the transport document used by the trucks allows entry to and exit from Georgia on an in transit basis. On arrival at the Azerbaijan border, the buyer must clear the goods and pay the duty without the opportunity to inspect the goods. This arrangement poses a degree of risk for the seller if the buyer fails to clear the goods at the border promptly, there will be significant costs by way of drivers wages etc. In this case the seller s solution is to require a deposit from the buyer, which can be used to defray these costs if necessary.

23 Incoterms 2010: A practical guide p. 21 Delivered Duty Paid In Delivered Duty Paid, the seller is responsible for import clearance and payment of duties and tax, so liaison around clearance is less of an issue. However there are other serious concerns for both parties these will be explained below in section 5.8 on DDP. Sellers should also be cautious in using any of the D rules for consignments to difficult destinations, where their obligations to compete delivery may be frustrated by poor transport infrastructure, bureaucratic delays and so on. Conversely, the use of DAT and DAP should be more straightforward in these situations: where delivery is to another country within a customs union such as the EU where the destination is within a Free Trade Zone - duty is not levied on arrival

24 Incoterms 2010: A practical guide p Delivered At Terminal DAT This rule can be used for any transport mode, or where there is more than one transport mode. The seller is responsible for arranging carriage and for delivering the goods, unloaded from the arriving conveyance, at the named place. Risk transfers from seller to buyer when the goods have been unloaded. Terminal can be any place a quay, container yard, warehouse or transport hub. It can also be the buyer s premises, which is useful when deliver-to-door integrated carriers are used. The buyer is responsible for import clearance and any applicable local taxes or import duties. A useful rule, well suited to container operations where the seller bears responsibility for the main carriage. Things to watch for Identification of the delivery point Modern transport hubs can be very large, so it is essential that the delivery point be specified in detail, e.g. an exact address, terminal number etc. Liaison around import clearance As noted in a previous section, there is a risk that failure of communication between the seller (or sellers representatives) and the buyer can lead to delays in import clearance, which will have consequences by way of demurrage, detention fees, storage charges etc.

25 Incoterms 2010: A practical guide p. 23 Terminal Handling Charges THC Carriers have different policies about whether freight charges include Terminal Handling Charges at the destination. So if the delivery point is a port, these costs should be identified, and agreement reached as to whether they are for the account of the buyer or the seller. Delivery to buyer s premises Where DAT (buyers premises) is used, the seller is reliant on the buyer s prompt cooperation in accepting the consignment and allowing unloading of the goods. Where there are doubts about this, then DAP is preferable delivery is complete when the goods arrive still loaded on the vehicle.

26 Incoterms 2010: A practical guide p Delivered At Place DAP This rule can be used for any transport mode, or where there is more than one transport mode. The seller is responsible for arranging carriage and for delivering the goods, ready for unloading from the arriving conveyance, at the named place. (An important difference from Delivered At Terminal DAT, where the seller is responsible for unloading.) So it is not suitable for scenarios where a rapid turn-around of a container ship or aircraft is important. Risk transfers from seller to buyer when the goods are available for unloading; so unloading is at the buyer s risk. The buyer is responsible for import clearance and any applicable local taxes or import duties. Uses for this rule include where there are no storage facilities at the destination, and/or where the buyer s vehicle is needed for unloading. The specified place can also be the buyer s premises. Things to watch for Identification of delivery point Modern transport hubs can be very large, so it is essential that the delivery point be specified in detail, e.g. an exact address, terminal number etc. Liaison around import clearance As noted in an earlier section, there is a risk that failure of communication between the seller (or sellers representatives) and the buyer can lead to delays in import clearance, which will have consequences by way of demurrage, detention fees, storage charges etc.

27 Incoterms 2010: A practical guide p. 25 Terminal Handling Charges THC As delivery takes place upon arrival with the goods ready to be unloaded, it follows that if the destination is the port of arrival, then Terminal Handling charges at the destination should be for the buyer s account. Delivery to buyer s premises This rule works well for the seller. As delivery is completed upon arrival of the vehicle, costs arising from delays in acceptance of the goods and unloading will be the buyer s responsibility

28 Incoterms 2010: A practical guide p Delivered Duty Paid DDP This rule represents the extreme of responsibility for the seller, who must deliver the goods to the specified place, having completed import clearance and paid any applicable duties and taxes. This is the only Incoterms rule that obliges the seller to undertake import clearance. The rule can be used for any transport mode, or when more than one transport mode is used Delivery is complete when the goods arrive at named place, and are available for unloading from the arriving vehicle. This rule is sometimes demanded by buyers, but it can be highly problematical for sellers. It also poses some risks for buyers see below Things to watch for Can the seller undertake import clearance? In some countries, import clearance can be complex and bureaucratic. A seller who is not familiar with the process will encounter many frustrations and delays, so it is best left to the buyer with local knowledge. In many countries, import clearance can only be undertaken by entities with a business presence in the country. By the same token, local taxes such as VAT may only be payable by businesses registered with the local authorities. (If necessary, the rule can be modified thus: Delivered Duty Paid (VAT unpaid)

29 Incoterms 2010: A practical guide p. 27 Risks for the importer Importers may seek to isolate themselves from the import process by the use of this rule. However there are now cases such as the following. A consignment of goods imported from Asia into Australia was found to have been misrepresented by the importer by use of an incorrect goods classification, with a consequent underpayment of duty. The authorities took the view that recovery of money from the supplier was unlikely to be successful, so a judgement was obtained in which the importer was held liable.

30 Incoterms 2010: A practical guide p Free Alongside Ship FAS Use of this rule is restricted to goods transported by sea or inland waterway. In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos (oil, coal, grain etc.) or non-containerised goods. For containerised goods, Free Carrier FCA should be used. Seller delivers goods, cleared for export, alongside the vessel at a named port, at which point risk transfers to the buyer. The buyer is responsible for loading the goods and all costs thereafter. The commonest uses of this rule are for ship chartering, where the buyer arranges for loading for large loads of machinery etc. which cannot be containerised at smaller ports where ships can load goods without the need for quayside facilities Things to watch for The location of the delivery point must be described in as much detail as possible. Berths and quayside storage are both scarce resources, so it is essential that the seller and the buyer/carrier work closely together to coordinate the arrival of the ship and the goods. Goods security and letters of credit One common use of this rule is for commodities transactions, which are often of high value. As the goods are being delivered before loading onto the vessel, there is no transport document that can be used by the seller to maintain control over the goods. This is turn limits the use of this rule with letters of credit and other secure-terms payment methods. See Appendix A for more on this.

31 Incoterms 2010: A practical guide p Free On Board FOB Use of this rule is restricted to goods transported by sea or inland waterway. In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos (oil, coal, grain etc.) or non-containerised goods. For containerised goods, Free Carrier FCA should be used. Seller delivers goods, cleared for export, loaded on board the vessel at the named port. Once the goods have been loaded on board, risk transfers to the buyer, who bears all costs thereafter. Things to watch for Cargo operations after loading For some types of cargo, other things will need to be done before the vessel can depart. Stowing and lashing locating the cargo appropriately within the vessel (taking into account balance of the ship, other items loaded etc.) and securing cargo to prevent its movement in rough seas. Dunnaging stabilisation & protection of cargo by using packing material, air bags etc. The Free on Board rule makes no reference to these operations the seller s responsibilities are fulfilled when the goods are loaded on board. So if these are necessary for a specific consignment and are to be performed by the seller, the rule can be qualified thus: FOB stowed and lashed. Alternatively, assignation of these costs can be included in the commercial agreement.

32 Incoterms 2010: A practical guide p. 30 Goods security and letters of credits One common use of this rule is for commodities transactions, which are often of high value. As with the other Incoterms F rules, Free on Board is not ideal for use in letters of credit transactions, because the buyer arranges the main transport and has the business relationship with the carrier. An unscrupulous buyer can frustrate the transaction by cancelling the transport arrangements. See Appendix A for a detailed discussion and possible work-arounds.

33 Incoterms 2010: A practical guide p Cost & Freight CFR Use of this rule is restricted to goods transported by sea or inland waterway. In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos (oil, coal, grain etc.) or non-containerised goods. For containerised goods, consider Carriage Paid To CPT instead. Seller arranges and pays for transport to named port. Seller delivers goods, cleared for export, loaded on board the vessel. However risk transfers from seller to buyer once the goods have been loaded on board, i.e. before the main carriage takes place. This is the point of delivery, as defined by this rule. NB seller is not responsible for insuring the goods for the main carriage. If they buyer wants the seller to arrange insurance for the journey, Cost Insurance and Freight CIF should be used. As with the other C rules, this is a good choice where letters of credit are being used. The seller contracts with the carrier for the transport, and so can be sure of obtaining the transport document that will be needed to trigger payment by the bank Things to watch for Specified destination This should be as precise as possible, and should match the transport contract. Costs arising beyond this point will be for the account of the buyer. Transport document This will usually be a bill of lading or a sea waybill, and must be provided by the seller. It must indicate that the goods have been loaded on board and that freight has been paid by the seller.

34 Incoterms 2010: A practical guide p. 32 Insurance As the seller is not providing this, the buyer will normally arrange this for the journey, as a matter of commercial prudence.

35 Incoterms 2010: A practical guide p Cost Insurance & Freight CIF Use of this rule is restricted to goods transported by sea or inland waterway. In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos (oil, coal, grain etc.) or non-containerised goods. For containerised goods, consider Carriage and Insurance Paid CIP instead. Seller arranges and pays for transport to named port. Seller delivers goods, cleared for export, loaded on board the vessel. However risk transfers from seller to buyer once the goods have been loaded on board, i.e. before the main carriage takes place. Seller also arranges and pays for insurance for the goods for carriage to the named port. However as with Carriage and Insurance Paid To, the rule only require a minimum level of cover, which may be commercially unrealistic. Therefore the level of cover will need to be addressed elsewhere in the commercial agreement. As with the other C rules, this is a good choice where letters of credit are being used. The seller contracts with the carrier for the transport, and so can be sure of obtaining the transport document that will be needed to trigger payment by the bank Things to watch for Specified destination This should be as precise as possible, and should match the transport contract. Costs arising beyond this point will be for the account of the buyer.

36 Incoterms 2010: A practical guide p. 34 Transport document This will usually be a bill of lading or a sea waybill, and must be provided by the seller. It must indicate that the goods have been loaded on board and that freight has been paid by the seller. Insurance It should be borne in mind that although the seller arranges cargo insurance, the seller is off risk once the goods have been loaded; so responsibility for making the claim rests with the buyer. The insurance document must be made out accordingly, e.g. endorsed in favour of the buyer.

37 Incoterms 2010: A practical guide p Qualifications of an Incoterms rule. It is possible to add further wording to an Incoterms rule, in order to achieve a more precise definition of obligations. For example, with some types of cargo there are cost arising from operations such as stowing the cargo on the vessel after loading. The Incoterms rule FOB stowed will make it clear that the seller is responsible for these costs as well as those for loading. Operations that may be required for the securing of cargo may include lashing and dunnage packing around the load to prevent movement in heavy seas. Other examples: DDP, VAT unpaid seller is responsible for paying import duty but not VAT (which can often only be paid by a business entity in the country of arrival.) Ex Works, loaded seller is responsible for loading onto the vehicle Note: Qualifications of the rules should be used with caution, as they may be open to different interpretations should problems arise. For example with Ex Works loaded, there have been disputes as to whether loading is at the buyer s or the seller s risk!

38 Incoterms 2010: A practical guide p The US perspective The Incoterms 2010 revision is of particular interest to companies in the United States (and their trading partners) for the following reasons. 6.1 Incoterms rules vs the Uniform Commercial Code Trade practitioners in the U.S. will be aware that the terms FOB, CIF and so on are defined within the United States federal Uniform Commercial Code (UCC). First published in 1952, UCC covers many aspects of commercial contracts. It contains shipment and delivery provisions that have similar aims to those of the Incoterms rules. Some UCC expressions have the same three-letter abbreviations as those within the Incoterms system; but their definitions are totally different. Notoriously, FOB can have several different meanings within UCC, most of which do not correspond with the ICC Incoterms FOB definition. The situation is confused further by variations between different US states. In 2004, there was a major revision of the UCC, which abolished many of these terms. However for reasons unrelated to its shipment and delivery provisions, many states have failed to adopt the 2004 revision; so in these states, the former UCC revision remains law. Companies in the US are therefore faced with the prospect of mastering two versions of the UCC for use with domestic transactions, plus ICC Incoterms rules for use with cross-border transactions. The logical solution to this confusion is to standardise on the use of ICC Incoterms rules for all transactions, whether domestic or international. The Incoterms 2010 revision has been drafted to make the interpretation of the rules very straightforward for domestic trades. For example, all obligations in respect of import or export procedures need only be considered where applicable.

39 Incoterms 2010: A practical guide p Ex Works, EAR and routed transactions The Ex Works rule places the burden of export clearance on the buyer, not the seller. However US exporters who are attracted by this opportunity to avoid work should be aware of US Export Administration Regulations. These make it clear that any infringement of regulations or defects in the information filed remain the responsibility of the exporter as US Principal Party of Interest (USPPI.) Furthermore, transactions in which transport arrangements are made by the overseas buyer and not the seller will be defined as routed transactions, and will be subject to extra scrutiny. The use of Ex Works therefore creates significant compliance risk for the exporter. Ideally the seller should control the transportation by using a rule such as CIP or CPT. But if this is not possible, then it is better to undertake export clearance oneself and use Free Carrier (seller s premises.)

40 Incoterms 2010: A practical guide p. 38 Appendix A: Letters of credit and collections I. What are letters of credit and collections? These are sometimes referred to as secure terms settlement methods. Their common feature is that buyer and seller operate in a situation of limited trust. The seller may be concerned that the buyer will be unable to pay for the goods either due to their own financial difficulties or because of country-related issues such as political instability and shortage of foreign exchange. The buyer may be concerned that the supplier may fail to deliver the goods as per the agreement. Documentary letter of credit. A payment undertaken given by a bank to a seller on behalf of a buyer, given before the goods are despatched. The bank undertakes to pay the seller upon presentation of documents representing the goods to be supplied. These documents will include a transport document as evidence of delivery of goods to the carrier (or loading of goods on board the vessel.) Documentary collection. Documents representing the goods are presented to the buyer through the banking system. If they are in order, the buyer pays the seller (or if credit terms have been extended, accepts a term draft, committing itself to pay at a future date.) Less secure that a letter of credit, because there is no prior payment undertaking from a bank. Nonetheless with some transport modes this can allow the seller to retain control of the goods until the buyer has paid or agreed to pay. Typical uses are where the seller can readily find other buyers for the goods if necessary; or where the buyer is financially secure, but where an incentive for prompt payment is needed.

41 Incoterms 2010: A practical guide p. 39 The security offered by a letter of credit The documentary letter of credit works for the seller, because a bank backs the transaction with its reputation and financial resources. Provided that the seller presents documents that comply with its terms and conditions, the bank will pay the amount due, even if: the buyer is in financial difficulties and cannot pay for a confirmed letter of credit, there are economic or political factors that interfere with payment The buyer is protected because the bank will only pay if the documents meet all the terms and conditions that the buyer has set out in the letter of credit. So the transport document will need to show despatch of the goods no later than the date that the buyer has specified in the credit, specified places of despatch and delivery and so on. Buyers who have concerns about the quality or specification of the goods can require presentation of a certificate of inspection issued by an independent company. NB letters of credit are sometimes required for purely administrative reasons, e.g. as part of a country s regime of import control or foreign exchange management. In such cases the following cautions on the choice of Incoterms rule may not apply.

42 Incoterms 2010: A practical guide p. 40 II. How the Incoterms rules work with letters of credit The C rules CPT, CIP, CFR, CIF work well with letters of credit; however all the other rules may present problems for either the buyer or the seller. For the C rules, the seller is responsible for arranging the main transport, and so has the business relationship with the carrier. Let s look at the example of a container being sent by sea using CIP. The sequence of events is as follows: 1. The seller delivers the container to the carrier at the container terminal. The seller is given a bill of lading, which is marked taken in charge by the carrier. 2. The seller presents this to the bank, along with the other documents required by the letter of credit. Provided the documents all comply with the terms of the letter of credit, the bank pays the seller. 3. All documents, including the bill of lading, are given to the buyer, so the goods can be claimed at their destination. LETTER OF CREDIT UTILISATION PROCESS Now consider the same scenario with the corresponding F rule for a container, this will be Free Carrier FCA. With this rule, it is the buyer who is responsible for the main transport, and who has the business relationship with the carrier. An unscrupulous buyer may be able to frustrate the contract by cancelling the shipping arrangements or interfering with delivery of the bill of lading to the seller. Without the bill of lading, the seller cannot make a valid presentation and so cannot get paid.

43 Incoterms 2010: A practical guide p. 41 With Ex Works EXW, the position is even more problematical. Under this rule, delivery is a matter arranged between seller and buyer. There is no carrier who can serve as neutral intermediary, and therefore no document that can serve as evidence of delivery for the purposes of the letter of credit. Now let us consider a scenario using a D rule, Delivered at Place. Suppose that the final destination is the buyer s premises, so the seller must arrange sea transport, followed by transport by truck to the specified location. Under this rule, delivery is defined as arrival at the final destination. What document can the letter of credit call for as evidence of completion of the seller s obligations? For sea transport, the usual document called for by a letter of credit is a bill of lading showing the goods taken in charge (or in some cases, loaded on board the ship) before the main transport. This will suit the seller, who can present the bill of lading and get paid before the goods arrive at their destination. But it is not ideal for the buyer, who must now trust the seller to complete their obligation to deliver to the buyer s premises, as set out in the DAP rule. (In principle the letter of credit could call for a delivery note issued by the buyer upon arrival of the goods. But there is nothing to prevent an unscrupulous buyer from refusing to take delivery and/or provide this document.) III. Practical steps with the F rules If it is necessary to use one of the F rules in conjunction with a letter of credit, and if the seller is concerned about the reliability of the buyer, then there is a potential work-around, which is based upon specifying within the letter of credit an alternative set of documents, that can be substituted by the seller in the event that a bill of lading cannot be provided. The typical set of documents specified for this contingency will be along the lines of: Forwarders certificate of receipt as evidence that the goods called for by the letter of credit have been taken in charge Copy of beneficiary s notice of cargo readiness sent to applicant Beneficiary s certificate attesting that the agreed transport arrangements are not available (e.g. non-arrival of vessel)

44 Incoterms 2010: A practical guide p. 42 IV. Letters of credit in practice - things to watch for The letter of credit process starts with the buyer and seller agreeing on the details of transaction, which will include the product and its price, the transport method and shipment date etc., the Incoterms rule that will apply. The latter will determine what documents the letter of credit will call for. For example, if this is Carriage and Insurance Paid, there will need to be a transport document and an insurance document. The details of the transaction will be incorporated into the buyer s application for the letter of credit, which will serve as the basis for the letter of credit instrument that the seller will be advised of through the banking system. The experience of banks and trading companies is that producing a set of documents that comply with all the terms and conditions of a letter of credit is not straightforward. Industry statistics show at as many of 50% of presentations by exporters to their banks are rejected in the first instance due to discrepancies, often about very trivial matters. It is therefore good practice for the seller to ask to see the buyer s application for the letter of credit at an early stage, before it is submitted to the bank. The seller will need to check that this reflects the commercial agreement, and that it will be possible to produce documents that will match all the credit s terms and conditions. Specifically, the seller will need to check the following: Do the journey stages on the letter of credit (e.g. place of receipt/taking in charge by the carrier, port of loading, port of unloading, place of final destination) match the agreed route for the consignment? Note that for multi-modal transport there can be up to four pieces of information to consider when and where goods were taken in charge; when and where goods were loaded onto a vessel; when and where good were unloaded from vessel; when and where goods finally delivered. Can the latest date of shipment be complied with? Can the carrier provide the required transport document with the required wording, e.g. a date of taking in charge or a date of loading on board, as specified? There are many other aspects of the transport document that may need to be considered in relation to the wording on the letter of credit.

45 Incoterms 2010: A practical guide p. 43 Successful letter of credit transactions require detailed knowledge of two ICC publications UCP 600: ICC Uniform Customs and Practice for Documentary Credits 2007 revision. ICC Publication No. 600 The rules for drafting of letters of credit and for examining documents for compliance ISBP International Standard Banking Practice for the Examination of Documents under Documentary Credits edition. ICC Publication No. 745 A supplementary guide for the examination process and interpretation of the rules See Appendix V for a checklist for checking the transport document against the letter of credit, to be used in conjunction with the above publications. Journey points, letter of credit for multi-modal transport