When they came into being?

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1 What are Inco terms? When they came into being? Where are they applied? Who applies them? Why are they applied? Terms covered by Incoterms INCO terms- Groups E F C D? Changes in 2010 additions Transition from 2000 to 2010 Rules for any Mode of Transport Meaning and Notes of each one of them. Rules for Sea and Inland Waterway Transport - Meaning and Notes on each one of them. Incoterms vs. Mode of Transport Summary Table

2 What are Incoterms?» In 1936 the International Chamber of Commerce (ICC) devised a set of international sales terms to remove the uncertainties of different interpretations of terms in different countries. These terms, which are used to divide transaction costs and responsibilities between buyer and seller, are known as Incoterms.» Inco terms specifies the rights and obligations of buyer & seller. The most important aspect of their role is that it clarifies as to, at what point the transfer of risk & responsibility happens between buyer & seller» It is also referred to as Terms of Sale. They are most commonly used in international contracts, thus reflected on the sales invoice.» They are reviewed every 10 years and regularly updated to keep pace with the ever-changing world of international trade. Latest edition is the Incoterms 2010.

3 When they came into being?» The International Chamber of Commerce (ICC) originally published the very first set of Incoterms in 1936.» Since that first publication, they have been updated in 1953, 1967, 1980, 1990, 2000 and most recently in 2010.

4 Where are they applied?» These terms are incorporated into exportimport sales agreements and contracts worldwide and are a necessary part of foreign trade.» Incoterms 2010 will apply when incorporated into the contract of sale by clearly specifying that the contract is governed by Incoterms 2010.

5 Who applies them?» Incoterms are international rules that are accepted by governments, legal authorities and practitioners worldwide for the interpretation of the most commonly used terms in international trade.» It ensure buyers and sellers understand each other s expectations and responsibilities.

6 Why are they applied?» Incoterms directly deal with the questions related to the delivery of the products from the seller to the buyer.» Incoterms when used in along with with a sales agreement or other types of sales transactions define the responsibilities and obligations of both: the exporter and importer, in Foreign Trade Transactions.

7 Terms covered by Incoterms Inland freight Terminal charges Freight forwarder s fees Ocean/air freight Duty, taxes, & customs clearance Delivery Packing and loading Security Clearances (new to 2010)

8 INCO terms Groups E F C D?» Incoterms 2000, like its immediate predecessor, groups the terms in four categories denoted by the first letter in the three-letter abbreviation.» Under the "E"-term (EXW), the seller only makes the goods available to the buyer at the seller's own premises. It is the only one of that category.» Under the "F"-terms (FCA, FAS and FOB), the seller is called upon to deliver the goods to a carrier appointed by the buyer.» Under the "C"-terms (CFR, CIF, CPT and CIP), the seller has the contract for carriage, but without assuming the risk of loss or damage to the goods or additional costs due to events occurring after shipment or dispatch.» Under the "D"-terms (DAF, DES, DEQ, DDU and DDP), the seller has to bear all costs and risks needed to bring the goods to the place of destination.» All terms list the Seller's and the Buyer's obligations. Examples are: Delivery, Transfer of risks, Division of costs.

9 Changes in 2012 addition» Two new rules: DAT (delivered at terminal) Delivered at a named place, at buyer s disposal, unloaded Replaces DEQ DAP (delivered at place) Delivered at a named place, at buyer s disposal, not unloaded Replaces DAF, DES, DDU» 2 Groups of Incoterms Rules» Rules for Any Mode of Transport EXW, FCA, CPT, CIP, DAT, DAP, DDP» Rules for Sea and Inland Waterway Transport/Air FAS, FOB, CFR, CIF

10 Changes in 2012 addition» Domestic-User-Friendly Now state that: Rules can be used domestically Obligation to comply with export /import formalities is where applicable Coincided with declining use of UCC terms May be used within the EU» Guidance Notes Explains fundamentals, usage, risk, costs, etc. Review and use them.» Electronic Communication Electronic means of communication now given same effect as paper as long as parties agree or where is customary

11 Changes in 2012 addition» Security-Related Clearances Rules now allocate responsibility for these also» String Sales Rules now recognize that seller may fulfill its obligations by procuring goods that have been shipped» Terminal Handling Charges Now specifically allocated so that buyer is not charged twice (seller and terminal)

12 Transition from 2000 to 2010» Existing contracts (even if performance continues into 2011) Continue to apply 2000 edition» Contracts entered into before January 2011 Should specify which version will apply» Contracts entered into beginning in January will apply

13 Rules for any Mode of Transport» Ex Works (EXW)» Free Carrier (FCA)» Carriage Paid To (CPT)» Carriage and Insurance Paid To (CIP)» Delivered at Terminal (DAT)» Delivered at Place (DAP)» Delivered Duty Paid (DDP)

14 » EXW ~ Ex Works» Notes Seller delivers when it places the goods at the disposal of buyer at the seller s premises or another named place (i.e. works, factory, warehouse, etc.). Seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable. Fewest up-front requirements for seller Seller has no obligation to load goods, even if better-suited to do so If seller does load goods, it does so at buyer s expense and risk Better-suited to domestic transport (no obligation that seller clear goods for export only provide assistance if necessary at buyer s expense and risk) Buyer bears all risk of loss from time seller places goods at buyer s disposal

15 » FCA ~ Free Carrier 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.» Notes Seller delivers the cargo to named place or party. Seller may contract for carriage at buyer s expense and risk» Seller s delivery options If the named place is seller s premises: seller must load goods onto buyer s means of transport If the named place is any other place: seller must place the goods at buyer s (or his carrier s disposal) on seller s mode of transport (ready for unloading)

16 » FCA ~ Free Carrier» Improvements over Ex Works» But Seller clears goods for export Can be used to require seller to load goods, if seller is in a better position to do so Buyer may have little idea what delivery at seller s factory means Buyer has costs in addition to sales price that must calculated Seller has no control over carrier, insurance, etc.

17 » CPT ~ Carriage Paid To The seller pays for the carriage. Risk transfers to buyer upon handing goods over to the first carrier at place of shipment in the country of export. This term is used for all kind of shipments» 2 points of importance Place of delivery of goods: to carrier Seller s delivery obligation is complete Risk of loss passes Place of destination Seller contracts for and pays for carriage to the place of destination

18 » CPT Example:» Notes Contract says seller is to deliver goods to shipping warehouse in Charleston, WV. Terms of sale are CPT buyer s facility, 24 Waffle Place, #1, Singapore (Incoterms 2010). Delivery obligation is fulfilled when seller delivers to the shipping facility in Charleston. Risk of loss passes at the moment the goods are handed over to the carrier in Charleston. But seller pays for carriage to Singapore. Seller clears goods for export and pays for transport through any country necessary to delivery Seller has no obligation to pay for insurance but must provide buyer information to buy insurance at buyer s risk and expense Buyer obtains import licenses and carries out customs formalities Seller pays for both loading and unloading if covered by contract of carriage

19 » CIP ~ Carriage and Insurance Paid To 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); seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.» Notes Like CPT, but with the additional requirement that seller pay for insurance to the named destination Insurance requirement is for minimum cover (introduce cargo clause) in the amount of contract price plus 10% from point of delivery to point of destination Buyer may pay for additional coverage (introduce cargo clauses); seller must provide the information necessary to allow buyer to do so

20 » DAT ~ Delivered at Terminal» Notes 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 port or 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. Seller s obligation is fulfilled and risk of loss passes at same time: when the goods are unloaded at the arriving terminal and placed at buyer s disposal Can specify a point within the terminal at which time the obligation is complete Seller clears goods for export but not for import No requirement of insurance If the intention is to carry seller s obligation further into buyer s country, use DAP or DDP

21 » DAP ~ Delivered at Place 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 good to the named place.» Notes Much like DAT, but with additional obligation by seller into country of delivery Goods are placed at buyer s disposal at named location ready for unloading; risk passes at that point Seller clears goods for export but not import (use DDP if intent is to require seller to clear goods for import also). No obligation on seller to purchase insurance

22 » DDP ~ Delivered Duty Paid» Notes 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 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. Like DAP, but including seller s obligation to clear goods for import pay for any necessary licenses Maximum obligation for seller If seller is not well-suited to clear goods for import, DAP should be used No obligation to pay for insurance

23 Rules for Sea and Inland Waterway Transport» Free Alongside Ship (FAS)» Free On Board (FOB)» Cost and Freight (CFR)» Cost Insurance and Freight (CIF)

24 » FAS ~ Free Alongside Ship» Notes» Notes Seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a 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, the buyer bears all costs from the moment onwards. Not appropriate when goods in container and delivered to carrier at terminal; use FCA Might want to define what it means to be alongside ship Usage: FAS Charleston, SC, USA (Incoterms 2010) Can be used in a string sale where seller procures goods already delivered for shipment Seller is obligated to clear goods for export but not import Seller has no obligation to pay for contracts of carriage or insurance but may contract for carriage and must assist buyer by providing necessary information for insurance

25 » FOB ~ Free on Board» Notes 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. Notice change in 2010: free on board no longer means across the ship s rail; now means on board the vessel Another change in 2010: if requested by buyer or if it is commercial practice and buyer does not instruct otherwise, seller may contract for carriage at buyer s risk and expense; seller may decline but must notify buyer promptly + Therefore, may want to exclude if that is the intent Like FAS but goods must be placed on board Usage: FOB Charleston, SC, USA (Incoterms 2010)

26 » CFR ~ Cost and Freight 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 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.» 2 places of importance Place of delivery of goods + Seller s delivery obligation is fulfilled when goods are on board the vessel + Risk of loss passes when the goods are on board the vessel Port of destination + Seller pays for carriage to port of destination

27 CFR ~ Cost and Freight» Examples: Contract says: Seller is to deliver goods on board vessel at Port of Charleston, SC, USA. Terms of sale are: CFR, Shanghai (Incoterms 2010). Seller s delivery obligation is fulfilled when the goods are on board the vessel in South Carolina; risk of loss passes then also Seller must pay for shipment to Shanghai Contract says terms of sale are: CFR, Shanghai (Incoterms 2010). Silent as to port of shipment Seller s delivery obligation is fulfilled when the goods are on board the vessel in the port selected by seller; risk of loss passes then also Seller must pay for shipment to Shanghai» Notes Seller pays for unloading if the contract of carriage covers unloading Seller clears goods for export but not import Seller has no obligation to obtain insurance If intent to ship in containers and delivery is to carrier other than vessel, use CPT

28 » CIF ~ Cost Insurance and Freight Seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of 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.» Notes Like CFR but with additional obligation to procure insurance to port of destination Insurance requirement is minimum cover (institute cargo clause c) in the amount of contract price plus 10% from point of delivery to point of destination Seller clears goods for export but not import

29 Incoterms vs. Mode of Transport» Any Mode:» EXW, FCA, CPT, CIP, DAF, DDU, DDP» Maritime and inland waterways only:» FAS, FOB, CFR, CIF, DES, DEQ

30 Summary: Incoterms safeguard the following issues in the Foreign Trade contract: To determine the critical point of the transfer of the risks of the seller to the buyer in the process of forwarding of the goods (risks of loss, deterioration, robbery of the goods) allow the person who supports these risks to make arrangements in particular in term of insurance. To specify who is going to subscribe the contract of carriage that is to say the seller (exporter) or the buyer (importer). To distribute between the seller and the buyer the logistic and administrative expenses at the various stages of the process. It is important to define who is responsible for packaging, marking, operations of handling, loading and unloading, inspection of the goods. Need To confirm and fix respective obligations for the achievement of the formalities of exportation and importation, the payment of the rights and taxes of importation as well as the sending of the documents.

31 Summary: Incoterms safeguard the following issues in the Foreign Trade contract: Four General Groups of Terms: E term: seller s obligation (& control of shipment) is at its minimum. A term: require the seller to deliver the goods for carriage as instructed by the buyer C term: require the seller to contract carriage on usual terms at his own expense A term: seller s obligation & control at its maximum Incoterms vs. Mode of Transport Any Mode: EXW, FCA, CPT, CIP, DAF, DDU, DDP Maritime and inland waterways only: FAS, FOB, CFR, CIF, DES, DEQ How to use Incoterms correctly: ICC recommends that "Incoterms 2010" be referred to specifically whenever the terms are used, together with a location. For example, the term "Delivered at Frontier (DAF)" should always be accompanied by a reference to an exact place and the frontier to which delivery is to be made. To prevent misunderstandings, variations of the three-letter Incoterms should be strictly avoided. Three examples of correct use of Incoterms: FCA Kuala Lumpur Incoterms 2000 FOB Liverpool Incoterms 2000 DDU Frankfurt Schmidt GmbH Warehouse 4 Incoterms 2000

32 Summary: INCOTERMS 2010 QUICK REFERENCE CHART Rules for any mode or modes of transport Rules for sea and inland waterway transport EXW FCA CPT CIP DAT DAP DDP FAS FOB CFR CIF Ex Works Free Carrier Carriage Paid To Carriage & Insurance Paid To Delivered at Terminal Delivered at Place Delivered Duty Paid Free Alongside Ship Free on Board Cost & Freight Cost, Insurance & Freight SERVICES Who Pays Who Pays Who Pays Who Pays Who Pays Who Pays Who Pays Who Pays Who Pays Who Pays Who Pays Export Packing Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Marking & Labeling Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Block and Brace Export Clearance (License, EEI/AES) Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Freight Forwarder Documentation Fees Buyer Buyer Seller Seller Seller Seller Seller Buyer Buyer Seller Seller Inland Freight to Main Carrier Buyer 2 Seller Seller Seller Seller Seller Seller Seller Seller Seller Origin Terminal Charges Buyer Buyer Seller Seller Seller Seller Seller Buyer Seller Seller Seller Vessel Loading Charges Buyer Buyer Seller Seller Seller Seller Seller Buyer Seller Seller Seller Ocean Freight / Air Freight Buyer Buyer Seller Seller Seller Seller Seller Buyer Buyer Seller Seller Nominate Export Forwarder Buyer Buyer Seller Seller Seller Seller Seller Buyer Buyer Seller Seller Marine Insurance Seller Seller Unload Main Carrier Charges Buyer Buyer 4 4 Seller Seller Seller Buyer Buyer 4 4 Destination Terminal Charges Buyer Buyer Seller Seller Buyer Buyer 4 4 Nominate On-Carrier Buyer Buyer Seller Buyer Buyer Buyer Buyer Security Information Requirements Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Customs Broker Clearance Fees Buyer Buyer Buyer Buyer Buyer Buyer Seller Buyer Buyer Buyer Buyer Duty, Customs Fees, Taxes Buyer Buyer Buyer Buyer Buyer Buyer Seller Buyer Buyer Buyer Buyer Delivery to Buyer Destination Buyer Buyer Seller Buyer Buyer Buyer Buyer Delivering Carrier Unloading Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer»Notes: 1 Incoterms 2010 do not deal with the parties obligations for stowage within a container and therefore, where relevant, the parties should deal with this in the sales contract.»2 FCA Seller s Facility Buyer pays inland freight; other FCA qualifiers. Seller arranges and loads pre-carriage carrier and pays inland freight to the F delivery place»3 Incoterms 2010 does not obligate the buyer nor must the seller to insure the goods, therefore this issue be addressed elsewhere in the sales contract.»4 Charges paid by Buyer or Seller depending on contract of carriage.»5 Charges paid by Seller if through Bill of Lading or door-to-door rate to Buyer s destination»incoterms ISA REGISTERED TRADEMARK OF THE INTERNATIONAL CHAMBER OF COMMERCE. THIS DOCUMENT IS NOT INTENDED AS LEGAL ADVICE BUT IS BEING PROVIDED FOR REFERENCE PURPOSES ONLY. USERS SHOULD SEEK SPECIFIC GUIDANCE FROM INCOTERMS 2010 AVAILABLE THROUGH THE INTERNATIONAL CHAMBER OF COMMERCE ATWWW.ICCBOOKS.COM

33 Thanks