InCoTerms MadeEasy

Defining international sales contracts requires you to have a bit more knowledge about specific export and import terms. Just paying for the goods is not the end of the buyer’s or the seller’s responsibility.

Luckily, as of 1936, Incoterms are widely recognized, and businesses frequently use them to determine liability and accountability. After a few revisions, the latest version of these terms appeared in 2010, and a new one should come in 2020.

However, there are certain limitations. Incoterms do not regulate anything related to the payment of the goods, and insurance is not their primary concern. Furthermore, they do not participate in the passage of ownership title.

Things to know:

Carriage:

 Pre-carriage – The initial transport of goods from the seller’s premises to the main port or place where the main carriage begins. Usually by truck, rail or inland waterway.

 Main carriage/Carriage – The primary transport of goods, generally for the longest part of the journey and generally from one country to another. Usually by sea vessel or aircraft, but also by truck, rail or inland waterway.

 Onward carriage/On-Carriage – Transport from the port, terminal or place of arrival in the country of destination to the buyer’s premises. Usually by truck, rail or inland waterway.

A simple description would be

 Pre-Carriage: The movement that happens BEFORE the container is loaded on the ship.

 Carriage: The movement that happens while the container is ON BOARD the ship.

 On-Carriage: The movement that happens AFTER the container is discharged from the ship.

To explain further

Pre-Carriage – is the term given to any inland movement that takes place prior to the container being loaded at a port of loading Such activity can take place at the same location as the port of loading, or at a location close to the port of loading. Example: Empty container is released in Johannesburg and moved to Pretoria for packing and then moved by road or rail to Durban port. This activity is known as PRE-CARRIAGE.

 If the activity is performed by the shipping line on behalf of the client, that is called Carrier Haulage. In this case, normally the bill of lading shows place of origin as Pretoria.

 If the activity is performed by the client or their transporter, that is called Merchant Haulage. This activity can be performed using rail, or road transport.

Carriage – is the term given to the actual movement of the cargo on the sea from the port of loading to the port of discharge. Example: When the container is moved from Durban to say Felixstowe by sea. This activity is known as CARRIAGE.

 This activity can be performed only by the shipping line/vessel operator who is undertaking to carry the cargo from point of origin to point destination and the bill of lading issued by the shipowner/shipping line is the evidence of the contract of such carriage.

On-Carriage – is the term given to any inland movement that takes place after the container is discharged at a port of discharge. Such activity can take place at the same location as the port of discharge, or at a location close to the port of discharge. Example: Full container is discharged at Durban and then moved by rail to Johannesburg City Deep terminal and then further moved by road to Sasolburg for unpacking. This activity is known as ON-CARRIAGE.

 If the activity is performed by the shipping line on behalf of the client, that is called Carrier Haulage. In this case, normally the bill of lading shows the final destination as Sasolburg.

 If the activity is performed by the client or their transporter, that is called Merchant Haulage. This activity can be performed using rail or road transport.

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Carrier 

 In common usage, a carrier’ is an organization that transports goods or passengers for hire, rather than simply arranging for such transport.

 In Incoterms, however, the carrier can be any person or organization who by contract ‘undertakes to perform or procure’ such services. The buyer nominates the ‘carrier’ and the seller need only accept the nomination for the term to work.

Delivery 

 In common usage, ‘delivery’ is the act of delivering something, while the ‘place of delivery’ is often the buyer’s place of business.

 In Incoterms 2010, however, ‘delivery’ is the point where ‘the risk of loss or damage passes from the seller to the buyer’. This is often the ‘named port or place’, but not necessarily the buyer’s place of business.

Multimodal

 Use of more than one mode of transport (road, rail, sea, air) to transport goods (or people) from point of origin to point of destination.

String sale

 The sale and successive resale, of a single shipment of goods while en route (during the course of Journey) from the place of shipment to the final destination.

 This is common in the commodity trade, where oil, grain, and ore (Product of mining activity is bulk ore that ships from mine site directly to the refinery to extract commodity) shipments are sold and resold before the vessel arrives in port. A number of Incoterms take this practice into account by giving the seller the option to ‘procure goods already so delivery’.

Categories to differentiate the eleven Incoterms

There are two categories which help us differentiate the eleven Incoterms. One of them splits them up on the basis of transport. The other one uses the point of the delivery as a guide.

Incoterms based on the mode of transport

Incoterms based on the mode of transport

The first group splits the incoterms even further into two categories:

 Multimodal transport: It includes seven incoterms and business can use them for any means of transportation. They are EXW, FCA, CPT, CIP, DAT, DAP and DDP.

 Sea and waterways transport: Businesses cannot use them same incoterms for ships, barges, and boats. These cover both inland waterways and seas. The main reason behind them is the fact that ports are both the place of delivery and the endpoint of the process. They are FAS, FOB, CFR, and CIF.

NoteThese terms are not recommended for maritime container traffic. Source: International Chamber of Commerce (2010), Ramberg (2011) and Roos (2011).

Incoterms based on the point of delivery

Incoterms based on the point of delivery

There are four categories:

EFCD Terms

In Bangladesh,

  • For export, DAP, DAT, DDP are not allowed.
  • For import, DDP is not allowed.
  • For CIF and CIP, permission from the Ministry of Commerce is required.
Import Policy Order 2015-2018 : Chapter Two - General Provisions for Import
Bangladesh Bank Guidelines regarding correct use of InCoTerms

eCommerce Incoterms

Most B2B eCommerce agreements will use EXW, CPT, or CIF; most business-to-consumer (B2C) transactions will use CPT or CIF (and sometimes DDP). Except for DDP, the Incoterms mentioned above require the buyer to pay all tariffs and taxes upon arrival. To make sense of all these terms, you should take the time to understand their usage.

Brief Explanation of the InCoTerms

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The E term (EXW)

EXW—(Ex Works): the seller ‘delivers’ when he or she places the goods at the disposal of the buyer at the seller’s premises or another named place. The goods will not have been cleared for export and not loaded onto any collecting vehicle. Under Ex-Works the seller has no obligation to load the goods.

The F terms (FCA, FAS, and FOB)

FCA—(Free Carrier): the seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place. It should be noted that the chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place. If delivery occurs at the seller’s premises, the seller is responsible for loading. If delivery occurs at any other place, the seller is not responsible for unloading.

FAS—(Free Alongside Ship): the seller is considered to have delivered when the goods are placed alongside the vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment. The seller should select a point other than physically ‘alongside the ship’ it is essential that under FAS the buyer indicates a loading point at the named port of shipment and give the seller sufficient notice of the vessel’s name, loading point and, where necessary, selected delivery time within the agreed period. In the event that the buyer fails to give these details, the seller may use his discretion to select a point that best suits his purposes; but, in any case, that point should be alongside the ship. In the event that the buyer has given an indication of the loading point but later wishes to change these instructions, the seller is not obliged to cover the cost of transferring the goods to a new loading point, provided that the seller has acted in line with the buyer’s first instruction.’

FOB—(Free on Board): the seller is considered to have delivered when the goods are placed on board the ship at the named port of shipment. Most will no longer use FOB/CFR/CIF for container-loaded goods. This is because, where goods in a container are sold FOB, the container is typically handed over by the seller at a container yard or warehouse, which is in practice the appropriate delivery point. Under FOB, the seller bears all the costs, risks of loss of and damage to the goods until they are delivered by being placed on board the vessel, it is recommended that for all containerized goods, buyers should opt for Incoterms such as FCA, CPT or CIP.

The C terms (CFR, CIF, CPT, and CIP)

CFR—(Cost and Freight): the seller is considered to have delivered when the goods are placed on board the ship in the port of shipment. The seller must, in addition, pay the cost of carriage necessary to bring the goods to the named destination. Although under this Incoterm the issue of insurance is silent, it is assumed that the buyer purchases his or her own insurance.

CIF—(Cost Insurance and Freight): the seller is considered to have delivered when the goods are placed on board the ship in the port of shipment and also pays the necessary freight and insurance (CIF). It is important to note that contracts placed CIF relieve the buyer of the task of making insurance arrangements. However, the disadvantages are many: under CIF the supplier is obliged only to buy the cheapest insurance coverage, with minimal coverage and conditions that may make a claim difficult.

CPT—(Carriage Paid To): the seller delivers the goods to the carrier nominated by him or her but the seller must, in addition, pay the cost of carriage necessary to deliver the goods to the named destination.

CIP—(Carriage and Insurance Paid To): the seller delivers the goods to the carrier nominated by them but the seller must in addition pay the cost of carriage necessary to deliver the goods to the named destination and also pay the necessary insurance. Here the seller is obliged to provide only minimum coverage, i.e. cover for loss or damage between the point of departure and the destination stipulated.

The D terms (DAT, DAP, and DDP)

DAT—Delivered at Terminal: the seller is considered to have delivered 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. The terminal, in this case, includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. Under this term, the seller must bear all costs and risks in bringing the goods to and unloading them at the terminal at the named port of destination. In addition to these obligations, the seller must also clear the goods for export under what is generally referred to as ‘Export Clearances’, where applicable. However, the seller has no obligation either to clear the goods for import or to pay any import duty or carry out any import customs formalities.

DAP —Delivered at Place: the seller is considered to have delivered 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 critical part of this new Incoterm is that all parties under what circumstances must clearly specify as clearly as possible the point within the agreed place of destination as the risks to that point are the account of the seller. In this regard, it is also very important to note that since the seller under DAP is responsible the procuring the contract of carriage, he or she has to make sure that he or she procures the contracts of carriage that matches and conform precisely to the buyer’s choice.

DDP—Delivered Duty Paid: the seller delivers the goods to the buyer, cleared for import and not unloaded from any arriving means of transport at the named place of destination. Under DDP there is a maximum obligation to the seller and, on the other hand, this option allows minimum obligation on the buyer. The only responsibility of the buyer under DDP is to offload at the delivery place. General guidance as a seller is to never contract under DDP. If the seller is unable to directly or indirectly obtain import clearances DAP is recommended. Any VAT or other taxes payable upon import are for the seller’s account unless expressly agreed otherwise in the sales contract.

Correct Use of InCoTerms:

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Incoterms and the transfer of risk

It is necessary for an individual to decide whether to retain risk or endeavor to transfer it to the other party. The most common form of risk transfer is by means of insurance which changes an uncertain exposure to a certain cost, the i.e. premium that can be budgeted for. In normal circumstances, insurance premiums include provision for insurers’ overheads and profit plus contributions for the catastrophe element. When dealing with Incoterms, every individual, company or government department is exposed to a wide range of risks. It is inevitable, by nature of probability that financial loss will occur sooner or later. The Incoterm you select for a particular situation should assist you in minimizing the risk exposure for your company and in the most cost-effective manner available

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Incoterms 2010 risk bands

InCoTerms 2010 risk bands

NotesFCA has two options. In FCA1 the buyer collects export cleared goods from the exporter’s premises, therefore, the seller has no transport risks. In FCA2, the seller delivers export cleared goods to an external domestic location, such as a cargo terminal (road, rail air or sea) or a freight forwarder’s premises, therefore, the seller has a transport risk. Transport risks increase if intermediate stops are part of the delivery, such as from export premises to a freight forwarder and then to the carrier. The more times the consignment is handled the greater the chances of loss or damage.

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