INCOTERMS

INCOTERMS
1
Patrick Donner

International sales of goods can be quite risky. The parties to the transaction - the
sellers and buyers - are in different countries and used to different trade practices.
They are often unaware of the trading practices and customs in the other country,
which may lead to disputes and litigation. This is expensive and the outcome may
be uncertain - a waste of time and money, which should be spent on business
activities.
If the goods are lost or damaged or are not properly delivered for some other reason,
it is extremely important that the parties have a clear agreement, which spells out
their respective rights and obligations. The best method of settling disputes is by
agreement but when problems already have occurred, the climate of trust between
the parties may already have been ruined or is, in the best of cases, at least strained.
The purpose of INCOTERMS is to provide a set of international rules for
interpretation of the most commonly used trade terms in international trade in order
to avoid or reduce misunderstandings and differences in interpretations in different
countries. As such, Incoterms facilitate the conduct of international trade.
 OBJECTIVES
X To understand INCOTERMS
– terminology and definitions
– functions
– what they are and what they are not
– how to use them

INCOTERMS
2
Patrick Donner

The Incoterms are an effective tool in international trade transactions, but only if
they are used correctly.
Correct use of the Incoterms is not possible unless they are properly understood,
which includes a proper understanding of the terminology, the functions of the
Incoterms and a clear understanding of what Incoterms are and, maybe even more
importantly, what they are NOT.
 The Risk Ladder

Exporter
Exporter Payment mechanism Importer
Importer

High Open account More

Collection
RISKS ADVANTAGES
Documentary credit

Low Cash in advance Less

INCOTERMS
3
Patrick Donner

When goods are sold “over the counter” the buyer sees and receives the goods when
he hands over the payment and the seller sees and receives the money when he
hands over the goods. In any international sale of goods the seller and buyer
encounter risks in connection with the geographical fact that they are located in
different countries. An important part of this risk is that either the seller has to
deliver the goods to the buyer and get paid afterwards (or hope that he will be paid).
Alternatively, the buyer can pay in advance and trust the seller to deliver the goods
afterwards, at the same time hoping that the goods are, in fact, the goods that he
thought he was buying.
Therefore, since goods and payment do not exchange hands at the same moment the
parties need to assess the risks and reach an agreement on how the risks are shared.
INCOTERMS deal with this distribution of risks and need to be linked with the
parties agreement on how payment is going to be made.
 Documentary Credit
1

Seller Buyer
5 11

4 7 6 10 10 2

3
Bank Bank

Advising/Confirming 9 Issuing
INCOTERMS
4
Patrick Donner

In international sales of goods an often used method of payment is a documentary

credit.
The picture illustrates the process as a flow chart, starting with the sales agreement
between the buyer and seller (no.1). It is in this agreement that the parties agree
which INCOTERM is used. The INCOTERM define some of the rights and
obligations of the seller and the buyer and, therefore, needs to be suitable and fit the
other arrangements that the parties have agreed, such as method of payment,
division of risk and costs and which one of the parties is responsible for arranging
the transport.
Another method of payment would be documentary collection, which could be
described by a quite similar picture, but essentially reversing the sequence of events.
 What are INCOTERMS ?
X International rules for interpretation of
commonly used trade terms in foreign trade
– First published in 1936
– Present version “Incoterms 2000”
X Incoterms are only concerned with the
contract of sale of goods
– although they may have implications on the
contract of carriage
INCOTERMS
5
Patrick Donner

Incoterms were created by the International Chamber of Commerce (ICC).

INCOTERMS = the official ICC rules for the interpretation of trade terms.
The first Incoterms were published in 1936 (“Incoterms 1936”) and they have been
revised regularly (in 1953, 1967, 1976, 1980 and 1990) to take into account
developments in international trade. The Free Carrier (now FCA) term was
introduced in 1980 due to increased use of containers and the 1990 revision
permitted the use of EDI-messages instead of paper documentation, if the parties
had agreed to communicate electronically.
Incoterms have been revised again. The new rules are called “Incoterms 2000” and
took effect on 1st January 2000. The changes from Incoterms 1990 are relatively
small but there has been more emphasis on consistency in the wording and
terminology.
The Incoterms are only concerned with the relationship between the buyer and seller
of goods, i.e. the parties to the contract of sale, with respect to the delivery of the
goods (tangibles). Therefore, the Incoterms do not apply to the contract of carriage.
However, the choice of a particular Incoterm has implications for the contract of
carriage as well; a seller who has agreed to use the CIF term cannot perform his
contractual obligations to deliver the goods by any other mode of transport than by
sea, since the term specifically requires him to contract for the carriage of the goods
by a seagoing vessel (or inland waterway vessel as the case may be).
 Limitations to Incoterms
INCOTERMS
X are CONTRACT not LAW
X do not make up for an inadequate contract
X do not define property rights
X do not determine whether there is a breach
of contract
X are a CONTRACTUAL SHORTCUT

INCOTERMS
6
Patrick Donner

Incoterms are NOT LAW, they do not need ratification or enactment - they apply by
agreement. Therefore, Incoterms are applicable in any country in the world, where
the principle of freedom of contract is observed.
Incoterms do not cover ALL the contractual obligations of the parties. They only
address a number of specific obligations, such as the seller’s obligation to place the
goods at the disposal of the buyer and the buyer’s obligation to take delivery, the
distribution of risk between the parties and the obligation to clear the goods for
export and import. But there are other important issues, which are NOT covered,
such as the transfer of ownership to the goods (only delivery of the goods - but the
delivery may determine the passing of property rights). Likewise, Incoterms do not
determine whether there is a breach of contract or the consequences of a breach of
contract.
Such important issues (and others) need to be agreed specifically by the parties,
either by individually negotiated terms or by incorporation of standard terms. If the
contract terms are incomplete or inadequate, Incoterms do not help. But they are a
convenient contractual shortcut but clearly defining the obligations of the sellers and
the buyers, respectively, in several important areas.
Note that FOB (for example) does not always mean the same thing.
When parties use a trade term (such as CIF or CIP) and wish to use the
Incoterm meaning of the term, there should be a specific reference: “CIF
Rotterdam Incoterms 2000” or “CIP Frankfurt Schmidt GmbH Warehouse 4
Incoterms 2000”.
 Ten headings - Four groups
X Incoterms are organised in four groups
– group E (departure)
– group F (main carriage unpaid)
– group C (main carriage paid)
– group D (arrival)
X Incoterms cover ten areas of obligations of
the Seller and the Buyer
– e.g.: delivery - taking delivery
INCOTERMS
7
Patrick Donner

The four groups mean successively more obligations for the Seller.
The E-group: EXW Ex works (…named place)
The F-group: FCA Free Carrier (…named place)
FAS Free Alongside Ship (…named port of shipment)
FOB Free On Board (…named port of shipment)
The C-group: CFR Cost and Freight (…named port of destination)
CIF Cost, Insurance and Freight (…named port port of dest.)
CPT Carriage Paid To (…named place of destination)
CIP Carriage and Insurance Paid To (…named place of dest.)
The D-group: DAF Delivered At Frontier (…named place)
DES Delivered Ex Ship (…named port of destination)
DEQ Delivered Ex Quay (…named port of destination
DDU Delivered Duty Unpaid (…named place of destination)
DDP Delivered Duty Paid (…named place of destination)
Incoterms define ten types of obligations of the seller and buyer:
1. Provision of the goods - Payment of the price
2. Licenses, authorisations and formalities
3. Contracts of carriage and insurance
4. Delivery - taking delivery
5. Transfer of risks
6. Division of costs
7. Notice to the buyer - Notice to the seller
8. Proof of delivery, transport document or equivalent electronic message
9. Checking, packaging, marking - Inspection of goods
10.Other obligations
 The E-group
X Only one term - EXW
X Minimum obligations for the Seller
X Seller delivers at his own premises
X Buyer is responsible for
– arranging transportation
– all costs
– all risks

INCOTERMS
8
Patrick Donner

“Ex works” means that the seller delivers the goods by placing them at the buyer’s
disposal at the seller’s premises (factory, warehouse, etc.).
This Incoterm represents the minimum obligation for the seller. The seller does not
need to clear the goods for export or load them on a vehicle. The buyer is
responsible for all costs and risks in taking the goods from the seller’s premises - in
fact, theoretically the buyer has to fetch the goods from inside the warehouse. EXW
can be used for all modes of transport.
However, quite often the parties (wish to) agree that the seller loads the goods on to
the vehicle (truck, railway wagon, etc.). This should be made clear by adding
appropriate words to the contract of sale. But be careful - the words “EXW loaded”
do not make it clear what the seller is responsible for; simply the function or also the
cost of the loading operations or whether he also bears the risk of loss of or damage
to the goods until the loading operation is completed. This should be specifically
agreed in the contract of sale.
Another function, which the seller is often asked to perform for the buyer is customs
clearance. In principle the parties can agree (using specific wording in the contract
of sale) that the seller performs the export clearance, either at his own expense or to
be invoiced to the buyer. But, if the buyer cannot carry out export clearance and the
seller agrees that he can (load the goods at his cost and risk and) take care of the
export formalities, they should not use the EXW term but use FCA instead.
The ICC website shows the preamble to each INCOTERM in order to help traders
understand the function of each term (www.iccwbo.org/incoterms/preambles.asp).
 EXW : Ex Work
(…named place)

SELLER CARRIER BUYER

Export clearance Import clearance

Carriage of goods

Risks

Costs

INCOTERMS
9
Patrick Donner

The illustration shows graphically the point at which the responsibility for arranging
the transportation of goods shifts from seller to buyer as well as the point of transfer
of cost responsibility and risk.
The symbols on the left illustrate which modes of transport the particular
INCOTERM is suitable suitable.
 The F-group
X FCA, FAS and FOB
X Seller delivers goods for carriage as
instructed by Buyer
– Responsibility for pre-carriage depends on the
delivery place named in the contract
X Buyer arranges and pays for transportation

INCOTERMS
10
Patrick Donner

The F-group of terms are the traditional shipment terms under which the buyer has
to contract for the main carriage at his own expense and the seller delivers the goods
for carriage as instructed (notified) by the buyer. In all F-terms the seller has to clear
the goods for export.
In “Free Carrier” the seller delivers the goods to the nominated carrier at a named
place. The place of delivery impacts on the loading and unloading obligations. If the
place is at the seller’s premises, delivery has taken place when the seller has loaded
the goods on the buyer’s collecting vehicle. If any other place is agreed, the seller’s
delivery obligation is complete when the goods have been placed at the buyer’s
disposal at that place but not unloaded from the seller’s vehicle. FCA can be used
for all modes of transport.
“Free Alongside Ship” means the seller has to place the goods alongside the
nominated vessel at the named port within the agreed time and in the customary
manner at that port. The goods have to be cleared for export by the seller, which is a
change from previous Incoterms!
“Free On Board” is the most traditional term. Note that FOB can mean different
things in different circumstances – be careful! The INCOTERM FOB is similar to
FAS but the seller has to place the goods on board the nominated ship and the risk is
transferred to the buyer when the goods pass the ship’s rail. If the parties intend the
seller to have further responsibilities (cost, risk?) this needs to be agreed
specifically: “FOB stowed” or “FOB stowed and trimmed” may not be specific
enough.
FAS and FOB should only be used for sea or inland waterway transport. If the
goods are not to be delivered across the ship’s rail, FCA should be used instead of
FOB.
 FCA : Free Carrier
(…named place)

SELLER CARRIER BUYER

Export clearance Import clearance

Carriage of goods

Risks

Costs

INCOTERMS
11
Patrick Donner

FOB : Free On Board

(…named port of shipment)
SELLER CARRIER BUYER

Export clearance Import clearance

Carriage of goods

Risks

Costs

INCOTERMS
12
Patrick Donner
 The C-group
X CFR, CIF, CPT and CIP
X Seller fulfils his delivery obligation upon
shipment, but
X Seller has to contract for carriage
– on usual terms
– at his own expense
– with or without insurance for Buyer’s benefit
X TWO critical points
INCOTERMS
12
Patrick Donner

C-terms are NOT delivery terms - they are shipment terms just like F-terms.
In both “Cost and Freight” and “Cost, Insurance and Freight” the seller has to
deliver the goods on board and the risk for the goods is transferred to the buyer
when they pass the ship’s rail, just like in FOB. The difference lies in the fact that
the seller also has to contract, on usual terms, and pay the freight for the carriage to
the port of destination but the buyer has to bear the risk of loss of or damage to the
goods or any additional cost due to events occurring after the time of delivery.
Therefore, the transfer of risk and cost responsibility are takes place at different
points.
CFR and CIF should only be used for sea and inland waterway transport. If the
parties do not intend to deliver the goods over the ship’s rail the CPT and CIP terms
should be used. CPT and CIP can be used for all modes of transport including
multimodal transport.
The “Carriage Paid To” and “Carriage and Insurance Paid To” differ from CFR and
CIF, respectively, in that the delivery obligation is fulfilled when the goods have
been delivered to the carrier contracted by him (or the first carrier).
In CIF and CIP the seller also has to procure insurance on behalf of the buyers
against the risk of loss of or damage to the goods giving the buyer the right to claim
directly from the insurer. However, the buyer needs to be aware of the fact that the
sellers obligation is only to obtain minimum insurance cover (=Clause C of the
Institute Cargo Clauses) for the price of the goods + 10%. This may be insufficient
to cover the risk of theft, pilferage or improper handling (particularly for CIP buyers
of manufactured goods). The buyer can demand the sellers to arrange better cover
(at the buyer’s expense) or obtain additional insurance himself.
 CIP:Carriage&Insurance Paid to
(…named place of destination)
SELLER CARRIER BUYER

Export clearance Import clearance

Carriage of goods

Risks

Costs

INCOTERMS
13
Patrick Donner

CIF : Cost, Insurance & Freight

(…named port of destination)
SELLER CARRIER BUYER

Export clearance Import clearance

Carriage of goods

Risks

Costs

INCOTERMS
15
Patrick Donner
 The D-group
X DAF, DES, DEQ, DDU and DDP
X Seller is responsible for the arrival of the
goods at the agreed place or point
X Delivery in the country of import
X Important considerations for choice of term
– import clearance
– unloading
– mode of transport
INCOTERMS
14
Patrick Donner

The D-terms are arrival terms, i.e. the seller has to deliver the goods at his expense
and risk to a named place or point in the country of import.
“Delivered at Frontier” means placing the goods at the buyer’s disposal on the
arriving means of transport, not unloaded and not cleared for import.
DAF can be used for any mode of transport provided that the place or point is
at a land frontier. If delivery is to take place at a port (on board a ship or on the
quay) DES or DEQ should be used.
As the names “Delivered Ex Ship” and “Delivered Ex Quay” imply, DES and DEQ
can only be used when the goods are to be delivered by sea or inland waterway
or multimodal transportation, when the final leg of the transportation chain is
by sea. When DES is agreed, the goods are placed at the buyer’s disposal on board
the arriving ship, not cleared for import. If the parties wish the seller to bear the cost
and risk of discharging, they should use the DEQ term. (Note, that in Incoterms
1990, import clearance under DEQ was for the seller’s account).
If the parties wish the seller to bear the risk and cost of taking the goods from the
quay to another place such as a warehouse or terminal, they should use the DDU or
DDP terms. DDU and DDP can be used for all modes of transport but, when
delivery is to take place on board a vessel or on the quay, DES or DEQ should be
used.
“Delivered Duty Unpaid” means the goods are not cleared for import while
“Delivered Duty Paid” means the seller has to arrange and pay for the import
clearance. In both cases the goods are not unloaded from the arriving vehicle. If the
named place of delivery is an inland location, DDP may be the appropriate term.
DDP represents the maximum obligation for the seller and should be avoided if the
seller is unable to obtain the import licence.
 DAF : Delivered At Frontier
(… named place)
SELLER CARRIER BUYER

Export clearance Import clearance

Carriage of goods

Risks

Costs

INCOTERMS
15
Patrick Donner

DDP : Delivered Duty Paid

(… named place of destination)

SELLER CARRIER BUYER

Export clearance Import clearance

Carriage of goods

Risks

Costs
 INCOTERMS
X Understand WHAT
they are
X Use the
APPROPRIATE
term
X Use them
PROPERLY

INCOTERMS
16
Patrick Donner

BIBLIOGRAPHY
International Chamber of Commerce (1999). Incoterms 2000. ICC publication No
560. Paris, France: ICC Publishing SA.
International Chamber of Commerce (1989). Incoterms 1990. ICC publication No
400. Paris, France: ICC Publishing SA.
International Chamber of Commerce (1995). ICC Uniform Rules for Collections.
ICC publication No 522. Paris, France: ICC Publishing SA.
International Chamber of Commerce(1993). Uniform Customs and Practice for
Documentary Credits. ICC publication No 500. Paris, France: ICC Publishing.
del Busto, C. (1994). ICC Guide to Documentary Credit Operations for the UCP
500. ICC publication No 515. Paris, France: ICC Publishing SA.
Ramberg, J. (1999). ICC Guide to Incoterms 2000. ICC publication No 620. Paris,
France: ICC Publishing SA.
http://www.iccwbo.org/incoterms/preambles.asp