Business Law

Course Code: L101

Submitted to

Dr. Md. Rahmat Ullah

Professor and Dean

Faculty of Law

University of Dhaka

Submitted by

Tanzima Mahbub (RH-20)

Institute of Business Administration,

University of Dhaka

Submitted on

April 10, 2021

1. Briefly state the meaning and importance of incoterms in trade transactions.
Answer:
Incoterms or international commercial terms are a series of three different commercial terms
published by the International Chamber of Commerce (ICC). These are related to international
commercial laws. Incoterms is basically a series of 3-letter trade terms related to common
contractual sales practices.
The incoterms describe three things. These are:
a. Obligations relating to Buyer and Seller.
Some of the Incoterms describe who does what between the buyer and the seller. For
example, who organizes carriage or insurance of goods, or who obtains shipping
documents or who handles the customs.

b. Risk.
The risk is present in things such as when and where the seller delivers the goods. The
Incoterms describe where the risk transfers from seller to buyer.

c. Cost.
The Incoterms describe which party is responsible for which cost. For example, the cost
involved in transport, packaging, loading, or unloading costs or security related costs.

Importance of Incoterms in Trade Transactions

The main significance of Incoterms lies in the fact that they are taken as the standardized
terminology by all the companies engaging in international business. The Incoterms serve as
clear rules for both the buyers and the sellers. This helps to avoid confusion about each party’s
responsibilities, obligations, and cost management.
The primary ways that Incoterms are so crucial for international shipping and trade are as
follows:
a. Incoterms Reduce Risks.
Many people will hold the misconception that the defined language in a contract is
enough to make sure that all the parties maintain their obligations. What they forget is
that oftentimes, language barriers and connotations of terms vary from location to
location.
As for an example, Country A may define tariffs as fees imposed by the local
government. On the other hand, country B may describe tariff as the taxes, fees and
surcharges imposed by many forms of governments like the federal, state, and local
governments.
The use of Incoterms eliminates these language barriers and inconsistencies to a great
extent. Incoterms give all the parties the same definition of various terms within the trade
agreement. So the risk during shipment is considerably reduced as all the parties clearly
understand their responsibilities in conducting trade under the given contract.

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 b. Failure to Use Incoterms Leads to Problems.
Failure to understand what each Incoterm means on part of the parties will lead to great
problems in the supply chain. The problems can vary from payment of goods, delivery
schedules, increased costs and poor inventory control to negative customer reviews.
Improper or missing Incoterms have the likelihood of greatly disrupting the flow of
goods and damaging a company’s reputation.

c. Incoterms Affect Monetary Gain and Competitive Advantage.

Incoterms are essential for ensuring proper and timely payment of goods and services.
These terms ensure that all the parties are able to maintain a competitive advantage in the
international supply chain. If the governing authority of a given shipper makes
modifications to local terminology, this terminology could directly affect the competitive
advantage of companies. One company may benefit from the local terminology while the
other company would suffer limitations on the capacity and shipping regulations. This
would give rise to incidents of bribery and unfair business practices. So Incoterms are
important for avoiding potential penalties and fines in international trade.

d. Incoterms Change and Vary in Responsibility.

Incoterms are updated every ten years to accommodate the changes in the global supply
chain. Usually, the responsibility of defining Incoterms for a specific contract applies to
the buyer. On the contrary, the responsibility of using Incoterms correctly transfers from
buyer to seller and depends on the nature and the type of transport involved. So the
sellers and shippers can maintain compliance with the changing laws in international
trade.

From the discussion it is evident that there is no denying of the fact that Incoterms help ensure all
international trade is conducted in a standardized, thorough manner. In absence of Incoterms, the
buyers and sellers would suffer from language barriers and hazards arising from inconsistencies
in shipping practices. Incoterms clarify the obligations and help the shippers maintain a standard
practice throughout the process. So many people compare Incoterms to the fuel in a shipping
vessel; the products simply cannot move easily without them.

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2. Describe the rights and duties of the seller and buyer under each category of Incoterms.
Answer:
In each of the eleven Incoterms, the rights and duties of the sellers and buyers differ in terms of
carriage, risk transfer, and insurance. These rights and duties of both parties are discussed below.

a. EXW (Ex-Works):
This term means Ex-works. When the contract between buyers and sellers mentions this term, it
means the seller is only responsible for having the goods packed and made available at the
seller’s premises only. The buyer bears the full cost, risk, and insurance from there to the
destination. The cost undertaken by the buyer includes the loading of cargo at the premises. The
seller does not need to load the items onto a truck or a ship. The remainder of the shipment is the
responsibility of the buyer, including freight and customs duty. EXW is therefore more favorable
to the sellers as they do not have to worry about the freight and other obligations once the
consignment has left their premises.
Rights and Duties of the Buyer and the Seller under EXW:

Carriage
The seller has no obligation to make a contract of carriage not even to load the goods. The
buyer is responsible for carriage from loading the goods onto a vehicle(even though the
seller may be better able to do this and does often load the vehicle this would still be considered
as the buyers risk); for all export procedures; for onward transport and for all costs arising after
collection of the goods.
Risk Transfer
The seller delivers, and risk transfers, when the goods are placed at the disposal of the buyer,
suitably packaged, at the seller’s premises or other named place.
Insurance
The seller has no obligation to insure.
The goods are at the buyers risk from the point they are placed at their disposal at sellers
premises and they should consider purchasing insurance to include risks of loading to the
vehicle at the collection point until received at final destination.

b. FCA (Free Carrier Act):

In this case, the seller is responsible for delivery to a named place. So the seller is only
responsible for loading the consignment onto the transport vehicle. The risk and the cost are
transferred to the buyer as soon as the consignment is delivered at the named place. At that place
unloading is the buyer’s responsibility. This rule works well for the land transport within the
Europe or Central Asian land mass. Like the transfer of goods between India and Pakistan or
Thailand and Malaysia which have land borders. This is because the truck collecting the goods
will be the one transporting the goods to the destination country.
The 2020 version of incoterms introduced a new obligation on the buyer, i.e. to instruct its
carrier to issue an on-board bill of lading.
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As for an example, FCA Shanghai Incoterms 2020 means the seller is responsible to deliver the
goods from his premises in Beijing to Shanghai port.
Rights and Duties of the Buyer and the Seller under FCA:

Carriage

The seller has no obligation to make a contract of carriage but is responsible for loading of the
goods to the collection vehicle or they may be required to arrange for transport to a nominated
place such as the terminal or a forwarders warehouse. The buyer is responsible for arranging
carriage.
Risk Transfer

Delivery of the goods takes place, and risk transfers from seller to buyer, at the point the goods
are delivered to the carrier or another person nominated by the buyer at the sellers
premises or another named location (e.g. a terminal or transport hub, forwarder’s warehouse,
etc.). If the named place is the seller’s premises –risk transfers when the goods are loaded on to
the buyers arranged transport. In any other case risk transfers when goods are placed at the
disposal of the buyers carrier or named place whilst on the sellers means of transport ready
for unloading(the buyers carrier is responsible for unloading and if there is more than one
carrier, then risk transfers on delivery to the first carrier).
Insurance

The seller has no obligation to insure but can if they wish arrange insurance up to the point of
delivery to the carrier. The goods are at the buyer’s risk thereafter and they should consider
purchasing insurance from point of delivery to the carrier until received at final destination.

c. FAS (Free Alongside Ship (Port)):

In this case, the seller is responsible for the delivery of goods at the port alongside the ship. This
means, the seller will transfer the goods till the port, complete the customs, and then place the
goods alongside the vessel; but not load them on the ship. From this point onwards, the risk and
cost transfers to the buyer. Here the buyer is responsible for loading the goods into the vessel,
pay for freight and then finally unload the goods at the destination country’s port, clear the
customs, and then transport to his destination. All these will be borne by the buyer.
Rights and Duties of the Buyer and the Seller under FAS:

Carriage
The seller is responsible only for arranging delivery of the goods alongside the vessel. The
buyer is responsible for arranging and paying cost of carriage from port to place of
destination.
Risk Transfer

Delivery of the goods takes place, and risk transfers from seller to buyer, at the point when the
goods are placed alongside the vessel nominated by the buyer at the named port of shipment.
The buyer is responsible for loading the goods and all costs thereafter.

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Insurance
The seller has no obligation to insure, but can if they wish arrange insurance up to the point of
goods being delivered alongside the vessel. The goods are at the buyers risk thereafter and
therefore they should consider purchasing insurance from goods being delivered alongside the
vessel, including loading risk, transport until received at final destination.

d. FOB (Free on Board (Port)):

Here, the seller is responsible for getting the goods to the port of export and then loading on the
vessel. The cost and risk are transferred to the buyer as soon as the goods have been loaded onto
the vessel. Under the 2020 Incoterm rules, FOB is inappropriate for container shipments. This is
because the cargo is given to the carrier at a place some distance from the port such as a
container yard or even the seller’s premises.
Rights and Duties of the Buyer and the Seller under FOB:

Carriage
The seller is responsible only for arranging delivery of the goods until they are placed on
board the vessel. The buyer is responsible for arranging and paying cost of carriage from port
to place of destination.
Risk Transfer
Delivery of the goods takes place, and risk transfers from seller to buyer, at the point the seller
delivers the goods on board the vessel nominated by the buyer at the named port of
shipment and bears risk until goods are on board the vessel. Once the goods have been loaded
on board, risk transfers to the buyer.
Insurance
The seller has no obligation to insure, but can if they wish arrange insurance up to the point of
goods being loaded to the vessel. The goods are at the buyers risk thereafter and therefore they
should consider purchasing insurance from the time the goods have been loaded to the vessel,
including loading risk, transport until received at final destination.

e. CFR (Cost and Freight (Port)):

The seller covers the cost of the freight to the named port of destination or place. The risk is
transferred to the buyer as soon as the goods have been loaded onboard the vessel. The seller
delivers at the port of loading but pays freight till the port of destination, where the buyer is
obligated to receive the goods from the carrier.
Rights and Duties of the Buyer and the Seller under CFR:

Carriage
The seller is responsible for arranging and paying for costs of carriage, import clearance and
delivering the goods to the named place of destination.
Risk Transfer
Delivery of the goods takes place, and risk transfers from seller to buyer, at the point the goods
are placed on board the vessel, i.e. before the main carriage takes place.

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Insurance
The seller has no obligation to insure, but can if they wish arrange insurance up to the point of
goods being loaded to the vessel. The goods are at the buyers risk thereafter and therefore they
should consider purchasing insurance from the time the goods have been loaded to the vessel,
including loading risk, transport until received at final destination.

f. CIF (Cost Insurance and Freight) (Port)):

This rule is identical to CFR except in one aspect. That is, here seller covers the cost of insurance
and freight to the named port of destination or place. But the risk is transferred from the seller to
the buyer as soon as the goods have been loaded onboard the vessel. In case of CIF, the seller is
required to obtain minimum insurance cover complying with Institute Cargo Clauses (C) in the
buyer’s name.
Rights and Duties of the Buyer and the Seller under CIF:

Carriage
The seller is responsible for arranging and paying cost of carriage to the named port of
destination.
Risk Transfer
Delivery of the goods takes place, and risk transfers from seller to buyer, at the point the goods
have been loaded on board, i.e. before the main carriage takes place.
Insurance
The seller arranges and pays for insurance for the goods for carriage to, at least, the named
port of destination. The rule only requires a minimum level of cover under Institute Cargo
Clause (C), which may be commercially unrealistic. Therefore the level of cover may need to be
addressed elsewhere in the commercial agreement. The goods are at the buyers risk thereafter
and therefore they should consider purchasing insurance from the time the goods are delivered
at the named port of destination until received at final destination. The buyer can ask the
seller to arrange insurance to the final delivery point at destination.

g. CPT (Carriage Paid To (Place)):

Here the seller arranges the transportation and costs to the named place at destination. But the
risk and insurance is transferred to the buyer once delivered at first carrier.
Rights and Duties of the Buyer and the Seller under CPT:

Carriage
The seller is responsible for arranging and paying cost of carriage to a nominated person at an
agreed destination.

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Risk Transfer
Delivery of the goods takes place, and risk transfers from seller to buyer, at the point where the
goods are taken in charge by a carrier.

Insurance
The seller has no obligation to insure the goods but can if they wish arrange insurance up to the
point of delivery to the carrier. The goods are at the buyers risk thereafter and therefore they
should consider purchasing insurance from point of delivery to the carrier until received at
final destination.

h. CIP (Carriage and Insurance Paid To (Place)):

In case of CIP, the seller arranges the transportation, costs, and insurance on behalf of the buyer
to the named place at destination. The risk is transferred to the buyer once delivered at the first
carrier. Also it is required to note that the seller is required to obtain extensive insurance cover
complying with the Institute Cargo Clauses (A) or similar clause in the buyer’s name.
Rights and Duties of the Buyer and the Seller under CIP:

Carriage
The seller is responsible for arranging and paying cost of carriage to a nominated person at an
agreed destination.

Risk Transfer
Delivery of the goods takes place, and risk transfers from seller to buyer, at the point where the
goods are taken in charge by a carrier.

Insurance
The seller contracts and pays for insurance cover whilst goods are at the buyers risk during
carriage to the named place. The goods are at the buyers risk thereafter and therefore they
should consider purchasing insurance from point of delivery to the named place until received
at final destination.

i. DAP (Delivered at Place (Place)):

In this case, the seller delivers the goods to the agreed place at destination typically the buyer’s
premises. But the buyer is responsible for unloading the means of transport. The seller has to
carry out the export formalities and the buyer has to carry out the import formalities. Like in case
of CPT and CIP, the seller contracts for carriage and the risk transfers only upon delivery which
now is at the buyer’s premises. The seller here has no obligation to the buyer to insure for excess.
Rights and Duties of the Buyer and the Seller under DAP:

Carriage
The seller is responsible for arranging and paying cost of carriage and for delivering the goods
ready for unloading at the named place of destination (normally the terminal).

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Risk Transfer
Delivery of the goods takes place, and risk transfers from seller to buyer, at the point when the
goods are available for unloading at the place of destination. Unloading carried out at the
buyer’s risk.

Insurance
The seller has no obligation to insure, but can if they wish arrange insurance until discharged
at the named place (normally the terminal).The goods are at the buyers risk thereafter and
therefore they should consider purchasing insurance following unloading at the named place
until received at final destination.

j. DPU (Delivered at Place Unloaded (Place)):

This is a new rule for Incoterms 2020. It replaced the previous DAT (Delivered AT Terminal
incoterm), which meant seller delivered the goods, unloaded into a terminal whether that can be
an open area of land such as a container jar or a covered warehouse such as an airport. DPU now
means any place including buyer’s premises. Therefore, in the list of incoterms, it is shown after
DAP. In DPU, seller is responsible for unloading.
Rights and Duties of the Buyer and the Seller under DPU:

Carriage
The seller is responsible for arranging and paying cost of carriage to a named terminal(the
Terminal’ can be any place –a quay, container yard, warehouse or transport hub, yard, port or
place of destination and should be specified as precisely as possible).
Risk Transfer
Delivery of the goods takes place, and risk transfers from seller to buyer, at the point when the
goods have been unloaded from the arriving transport and placed at the disposal of the
buyer at the named terminal at place of destination. The seller bears the risks involved in
transport and unloading.
Insurance
The seller has no obligation to insure, but can if they wish arrange insurance up to the point of
unloading at the terminal. The goods are at the buyers risk thereafter and therefore they
should consider purchasing insurance from point goods unloaded at the terminal until
received at final destination.

k. DDP (Delivered Duty Paid (Place)):

In DDP, seller delivers the goods to the agreed place at destination. The seller also assumes all
cost, including import formalities and risks until the goods are ready for unloading at the agreed
place at destination. DDP functions a lot like DAP, but with one important exception. That is, in
DDP, it is the seller’s obligation to import, clear the goods in the buyer’s country and pay any
duties and also VAT/GST.

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This is a very rare scenario that a seller can be found like this. So if the seller finds itself unable
to be the importer or to be able to recover any VAT/GST, then the parties should contract on
DAP terms instead of DDP.
Rights and Duties of the Buyer and the Seller under DPU:

Carriage
The seller is responsible for arranging and paying for costs of carriage, import clearance and
delivering the goods to the named place of destination, this can be the buyer’s own premises
or may be a terminal or other named delivery point.
Risk Transfer
Delivery of the goods takes place, and risk transfers from seller to buyer, at the point when the
goods are made available to the buyer, cleared and ready for unloading from the arriving
conveyance at the place of destination.
Insurance
The seller has no obligation to insure, but can if they wish arrange insurance up to the point of
arrival at the named place (normally the terminal). The goods are at the buyers risk thereafter
and therefore they should consider purchasing insurance if the named place is not their own
premises from arrival at the named place, including unloading risk, until received at final
destination.

So it is necessary for both parties, that is, the buyers and sellers to be aware of these incoterms to
avoid confusion and hazards in their trade transactions.

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3. What are the mostly useful incoterms for Bangladesh in internal and international
business transactions?
Answer:
Incoterms are divided into two classes based on the mode of transportation. Some incoterms can
be used for all forms of transportation like land, water, or air while others can be used in sea
transport only. The classification is shown below:
Incoterms for all types of transportation (including maritime):

 EXW (Ex Works)

 FCA (Free Carrier)
 CPT (Carrier Paid To)
 CIP (Carrier and Insurance Paid To)
 DPU (Delivered at Place Unloaded)
 DAP (Delivery at Place)
 DDP (Delivered Duty Paid)

Incoterms for fluvial and maritime transportation:

 FAS (Free Alongside Ship)

 FOB (Free on Board)
 CFR (Cost and Freight)
 CIF (Cost Insurance and Freight)

Since Bangladesh uses multi-modal transportation for export and import, all these eleven
incoterms are more or less used in Bangladesh. However, the following 5 incoterms are most
commonly used for internal and international trade for many reasons ranging from the
convenience of the buyers and the sellers to the shipment of expensive and heavy commodities.

The 5 Most Commonly Used Incoterms in Bangladesh

a. FAS Free Alongside Ship (named port of shipment)

Bangladesh often imports heavy machinery and electronic items from abroad. Such items often
do not fit into a container. In global shipping, these items are called out of gauge (OOG) cargo.

For these types of goods, Bangladesh uses the Incoterm FAS. OOG cargos certainly do not
account for the majority of shipments from and to Bangladesh and so FAS has a monopoly over
such heavy goods.

Under FAS, it is the responsibility of the seller to place the goods alongside the ship sent by the
buyer to collect them. The delivery of the goods occurs just at that point. All the transport costs
after that point up to the destination fall on the buyer.

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 b. FCA Free Carrier (named place of delivery)

FCA is very similar to EXW Ex Works. However, there are two inconveniences in EXW. These
are:

 EXW is not suitable for international deliveries.

 It is very inconvenient for the buyer and so it might serve as an obstacle to reach an
agreement.

A much better Incoterm with the same features for Bangladesh is FCA.

Most of the Bangladeshi population is risk-averse. So in case of exports, it is the best incoterm
for a Bangladeshi seller who:

 Does not get involved in transport costs.

 Does not want to take additional risks

Under the FCA, the seller can be certain that both his transport obligations and risk will end
at origin. FAS and FOB provide the same result; the only difference is that FCA is meant for
containerized cargos.

The place of delivery in FCA can be a sea port, an airport, a train station, a warehouse close
to the seller’s headquarters, or even the seller’s premises. The multi-modality of export-
import makes this Incoterm more favorable to use.

c. FOB Free on Board (named port of shipment)

Just as FAS has monopoly over OOG cargos, FOB has monopoly on commodities. FOB is
meant for use only in waterway transport. So this makes it more convenient to be used in the
inland water transport in Bangladesh and shipping to and fro neighboring countries like
India, Myanmar, and Sri Lanka.

FOB is similar to FAS. The key difference is that the seller is responsible to load the goods
on the ship sent by the buyer.

For goods like grains, iron ore, etc. this Incoterm is widely used in Bangladesh.

d. DDP Delivered Duty Paid (named place of destination):

DDP is on the rise as the sector of e-commerce is gradually expanding in Bangladesh. This
has become the standard for Bangladeshi online retailers because they want to provide
maximum comfort to their clients and avoid bad occurrence like a bill for import taxes upon
delivery.

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Usually, the price of the goods we buy online includes everything from transport, import
clearance to taxes, etc. We receive the goods at our door at only that moment they are
delivered to us. If in case the truck carrying the goods suffers from an accident and all the
goods are damaged, we, as buyers are entitled to new ones. The risk is on the seller. This is
what happens in DDP.

e. CIF Cost, Insurance and Freight (named port of shipment)

The balancing out of risk between the buyer and the seller makes CIF one of the most
commonly used Incoterms in Bangladesh. This is a maritime Incoterm that is beneficial to
both the seller and the buyer. The seller can provide the transportation up to the destination
and include the additional service in the pricing of goods. However, the seller is relieved of
the risk that the goods are lost or damaged along the way. This is because the risks shift to
the buyer at the origin.

The buyer enjoys the benefit of having the goods delivered at his own port. Though the buyer
carries the risk during the transportation, CIF requires that the seller provides for a minimum
level of insurance. In this way, the risk is balanced out.

CIF is widely used in Bangladesh for the transportation of automotive vehicles, commodities,
and machinery. It is not used for containers. For containers, CIP Carriage and Insurance Paid
is used as an alternative in Bangladesh. Since it needs a higher level of minimum insurance
coverage and is not limited to waterway transportation or to the port of destination CIP is
sometimes preferred over CIF in Bangladesh.

References:

1. Globartis Blog. 2021. Here Are The 5 Most Commonly Used Incoterms - Globartis Blog.
[online] Available at: <https://blog.globartis.com/here-are-the-5-most-commonly-used-
incoterms/> [Accessed 7 April 2021].

2. Peterlole.co.uk. 2021. [online] Available at:

<https://www.peterlole.co.uk/uploads/files/downloads/Incoterms%20-%20pdf.pdf>
[Accessed 9 April 2021].

3. Flash Global. 2021. Why are Incoterms So Important?. [online] Available at:
<https://flashglobal.com/blog/4-reasons-why-incoterms-understanding-is-vital-for-a-
undisrupted-global-supply-chain/> [Accessed 10 April 2021].

4. Meadowswye.com. 2021. Resources: INCOTERMS > TERMS, Responsibilites of

Seller/Buyer Explained | Meadows Wye & Co., Inc.. [online] Available at:
<https://www.meadowswye.com/resources/incoterms.htm> [Accessed 10 April 2021].

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