CHAPTER 6 - INTERNATONAL COMMERCIAL TERMS
In any business transaction commercial terms are very important
because these clarify the extent of rights and responsibilities which
should be assigned to every party in the agreement. Thus each of the
party involve becomes aware of their rights and duties which they can
exercise and enjoy as stipulated in the contract; enabling to generate an
orderly and smooth implementation of the business agreement. The
introduction of internationally accepted commercial terms would make
business agreements much easier to conclude because the parties
involved in such agreement would have common understanding of the
commercial terms used. Any disputes to arise in the business agreement
may be easier to solve because technical and legal terms are well
understood by all parties.
The approval of the internationally accepted commercial terms
(INCOTERMS) came during the International Chamber of Commerce
meeting in Paris in 1936. This later became the used terms in foreign
trade. The Paris meeting had defined INCOTERMS with respect to the
roles and obligations of the buyer and seller in the agreement of
transportation and other responsibilities and clarify when the ownership
of the merchandise takes place, who incurs the costs and risk, and who
files the documents necessary to make the transaction. These terms are
incorporated into export-import sales agreements and contracts
worldwide and are a necessary part in foreign trade.
THE INCOTERM (International Commercial Terms)
The application of the INCOTERM (International Commercial Terms) may
be seen in the following conditions which primarily comprise of business
transactions with the outside world. It is used primarily in;
 The distribution of goods
 Issues involving regulation of transport charges
 Identifying and defining the place where transfer of
merchandise will take place and the transport risks involved
in order to justify to owners for support and the chance for
damage to goods when shipped to its destination.
 Determining the obligations of both seller and the buyer.
 Identifying the cost relative to the transaction and the one
who will shoulder it.
 Identifying the risk involved in the delivery of goods.
 Making international commercial transactions more to adapt
to the most contemporary commercial practices.
In international trade, people involved are far apart so that if there‘s any
problem to resolve pertaining to the transactions, this would be very
difficult to initiate hence people involved are basically far from each other ;
thus the chance for misunderstanding would be greater. Moreover,
because of the high value of the transaction involved and the far distance
of the source to the products‘ destination, notwithstanding the absence of
personal contact between the exporter and the importer; with these
conditions, the chances for a problematic outcome in the transaction
would be greater. All of these shortcomings may be properly addressed
with the introduction of the INCOTERMS in international transactions.
The coverage of the INCOTERMS includes the following areas:
Group E or E Terms – Departure
Ex Works (EXW) – this term is used for goods which are departing from
the premises of the exporter. The title and risk are passed to the buyer
which includes transportation and insurance costs from the time the
goods depart from seller's premises. This is applicable to all kinds of
transportation. The seller (Exporter) in EXW shipment terms prepares the
goods which the buyer( Importer) collects from the former‘s premises.
The responsibility of the seller is to properly pack the goods with a
package which is compliant and can be easily disposed of. The buyer
arranges the insurance for the goods while on transit however the cost
and risks which entails the transporting of the merchandise maybe
shouldered either by the buyer or the seller. Whoever bear these two
basically are indicated in the contract of sell.
Buyer: Under normal condition, the buyer or the importer is responsible
for the insurance of the imported goods while in transit and has to bear all
costs and risks involved in the shipment of the product however if the
contract of sell says otherwise then the seller or the exporter must
arrange and pay for the products‘ insurance cost and bear all risks which
entails it. In order to explain this arrangement fully, we can take the
following example wherein the merchandise is to be bought from
Australia and sold elsewhere in the world. This example determines
which, who is responsible for the charges in relation to the product being
sought from Australia.
Obligations under the E Group or E term (B – Buyer/Importer, S –
Seller/Exporter)
Inland freight in Australia; delivery to the carrier or frontier B
Export customs clearance B
Payment of customs charges and taxes in Australia B
Loading to the main carrier and port charges B
Main carriage/freight B
Cargo (marine) insurance B
Unloading from the main carrier and port charges B
Customs clearance in Buyer's country B
Payment of customs duties and taxes in Buyer's country B
Inland freight in Buyer's country B
Other costs and risks in Buyer's country B
Group F or F Terms
Under this term the Free Carrier (FCA) clause states that the title and risk
is passed to the buyer including expenses for transportation and
insurance at a time the seller delivers the goods cleared for export to the
carrier. The seller‘s obligation extends up to the point where the product
has already been loaded in the collecting vehicle of the buyer. In specific
terms, seller‘s main obligation is to bring the goods into the custody of
the carrier primarily at its terminal. Moreover, under this term, the buyer
can suggest the mode of transport to be used and pays shipping charges.
Other than the carrier, the buyer can also appoint an individual to receive
the merchandise in his behalf and the seller‘s responsibility deemed
fulfilled once the product concern has been delivered to that person.
The Free Alongside Ship (FAS) clause requires that the title and risk
should be passed only to the buyer including payment of all
transportation and insurance cost once the merchandise been delivered
alongside ship by the seller. This mode is basically applied to sea or
inland waterway transportation. The seller is obliged to secure export
clearance. In FAS the determination of price for the merchandise
includes all the costs incurred including delivery of the goods alongside
the vessel at the port or the indicated place of the buyer, however no
applicable charges are to be borne by the seller for loading the goods on
board a vessel including ocean freight charges and marine insurance.
The seller is cleared of all of responsibility in relation to the shipment
once the goods are place cleared alongside ship. while the buyer or the
importer shall bear all risks of loss or damage while the goods are in
transit alongside ship.
The Free on Board (FOB) arrangement is price inclusive of Ex-Works,
packaging charges, transportation cost up to the place of shipment. The
seller is responsible for securing customs clearance, pay customs dues,
quality inspection charges, weight measurement charges and other
export related dues. It is important that the Bill of Lading indicates the
shipment term and portray the wording "Shipped on Board‖ and bear the
signature of the shipper or his authorized representative with the date on
which the goods were boarded. The buyer‘s responsibility on one hand is
to indicate the name of the ship, pays freight, and transfer expenses. The
following is an illustration on who and what in terms of obligations to be
fulfilled by either the seller or the buyer. Obligations under the under the
F Group or F Terms(B – Buyer/Importer, S – Seller/Exporter)
 FCA FAS FOB Obligations under the Group C or C Terms (B – Buyer/Importer, S –
Seller/Exporter)
Inland freight in Australia; delivery to the S S S CFR CIF CPT CIP
carrier or frontier
Inland freight in Australia; delivery to the S S S S
Export customs clearance S S S
carrier or frontier

Payment of customs charges and taxes in S S S

Australia Export customs clearance S S S S
Loading to the main carrier and port charges S B S
Payment of customs charges and taxes in S S S S
Australia
Main carriage/freight B B B
Loading to the main carrier and port S S S S
charges
Cargo (marine) insurance B B B
Main carriage/freight S S S S

Unloading from the main carrier and port B B B Cargo (marine) insurance B S B S
charges
Customs clearance in Buyer's country B B B Unloading from the main carrier and port S S S S
charges
Payment of customs duties and taxes in B B B Customs clearance in Buyer's country B B B B
Buyer's country
Inland freight in Buyer's country B B B Payment of customs duties and taxes in B B B B
Buyer's country

Other costs and risks in Buyer's country B B B

Inland freight in Buyer's country B B S S

Under Group C or C Terms the main carriage shall be borne by the Seller Other costs and risks in Buyer's country B B B B
or Exporter. There are various types under this arrangement, namely:

1. Cost and Freight (CFR) – the term under this condition oblige the
exporter to bear the cost of carriage for the transport of the product to
selected destination port however this term makes the risk transferable
only to buyers at the port of shipment. Moreover the seller has the option
to choose the carrier, pay the expenses for the freight to the agreed port
of destination but unloading is excluded. It is also his responsibility to
load the merchandise unto the ship and the required processing of
documents for forwarding purposes. The agreement on transfer of risks is
similar to FOB.
2. Cost, Insurance and Freight (CIF) – this arrangement requires that the
title and risk should be transferred only to the buyer once the shipment
reaches destination port from the seller who pays transportation and
insurance cost against loss or damage. This is mostly applied for sea or
inland waterway transportation.
3. Carriage Paid to (CPT) – this term requires that the title, risk and
insurance cost should be in the name of the buyer when the merchandise
is brought to the carrier by the seller who pays transportation cost to
destination. It is basically suited to all forms of transportation like: land
transport by rail, road and inland waterways. The obligation of the seller
in as far as transportation cost is concern is limited only to the first carrier
however it is also his obligation to pay customs clearance for export and
the selection of carrier. Once the goods arrive at the destination port, the
risks from damages or loss is transferred to the buyer along with costs for
customs importation clearance and unloading.
4. Carriage and Insurance Paid To (CIP) – this term requires that the title
and risk are transferred to the buyer during the time the goods are
delivered to the carrier by the seller who in turn pays transportation and
insurance cost to destination. This is basically applied to all forms of
transportation. This term is basically similar to Carriage Paid To except
that under this condition the seller is obliged to pay for insurance
premium against risk or loss or damage while the goods are in transit.
The buyer‘s obligation under this term is similar to Carriage Paid To. To
provide a clearer understanding of whose and what obligations under
this term, the following example provides illustration. If products are
sourced in Australia and exported elsewhere outside the country , the
following obligations are to be paid by the party indicated therein such as
when such products are transported to a destination port inside Australia
and later loaded to a container ship for distribution to other countries, the
expenses to be borne by each of the parties involved are indicated below
subject to the term used .
Group D or D Terms – Arrival
When goods arrive in the premises of the importer, various questions on
who‘s is to shoulder transportation costs , insurance, processing fees
paid in the Bureau of Customs and may be for some other fees that need
to be paid in relation to the importation, and lastly the burden on who‘s
going to bear the risks? In order to fully answer these questions, we need
to look at various commercial terms which may be applied:
1. (Delivered at Frontier DAF) – under this term , the merchandise being
shipped has to be titled under buyer’s name including the risk and the
responsibility for securing import clearance when such merchandise is
delivered to agreed place by the seller. This term can be used for any
mode of transport primarily by rail or by any form of land transport.
2. Delivered Ex-Ship (DES) – this term makes the transfer of title over the
goods, the risk and responsibility over vessel discharge, secure of import
clearance, and cost for unloading , cargo insurance, unloading from the
main carrier and port charges, customs clearance, including duties and
taxes, inland freight,; to the buyer at times when the goods reach the
destination port. This term is basically used for sea or inland waterway
transportation.
3. Delivered Ex-Quay (DEQ) – this term makes the transfer of title and
risk pass to buyer at the destination point by the seller who delivers the
goods on dock at destination point and is cleared for import. This is
basically used for sea or inland waterway transportation. The seller has
to pay for all costs except cargo insurance, inland freight in buyer‘s
country and other costs and he/she also assume the risks.
4. Delivered Duty Unpaid (DDU) – this term requires the seller to deliver
the goods at the agreed place in the country of importation and pays all
the transportation costs excluding customs duty and taxes as specified in
the customs procedures. On the part of the buyer, he/she has to process
customs clearance for importation.
5. Delivered Duty Paid (DDP) – the title and risk are passed to the buyer
only when the goods reached its agreed destination point and already
cleared for import. All taxes in both source and destinations have to
borne by the seller including all other costs.

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When it comes to the kind of transportation used, the INCOTERMS are II. Transfer of Risks
also applicable and each mode of transportation has its corresponding Another item in the incoterms of great importance to all parties concern,
terms. The table below provides the buyer a guide on the suitability of is the issue on the transfer of risks. Incoterms does not only provide
INCOTERMS to use in relation to probable transport mode information on who among the parties should pay for transportation costs
but identifies as well the party which must assumes risks at a time the
Air Freight Road Freight Rail Freight Sea Freight goods are in transit. This is one of the most important issues that need to
be considered when negotiating Incoterms. The following conditions are
EXW used to determine the responsibility over risks pertaining to the goods
being transported.
FCA EXW When the goods are at the disposal of the buyer.
FAS
FCA When the goods have been delivered to the carrier at the
FOB named place
CFR FAS When the goods have been placed alongside the ship

CIF
FOB When the goods pass the ship‘s rail
CPT

CIP CFR When the goods pass the ship‘s rail

DAF CIF When the goods pass the ship‘s rail

DES
CPT When the goods have been delivered to the carrier
DEQ

DDU CIP When the goods have been delivered to the carrier

DDP
DAF When the goods have been delivered to the carrier

To summarize this term based on who among the exporter and the DES When the goods are placed at the disposal of the buyer on
importer has to bear the costs, the table below provides clearer board the ship
information.
DEQ When the goods are placed at the disposal of the buyer on
the quay
Obligations under the D Group or D Terms (B – Buyer/Importer, S –
Seller/Exporter) DDU When the goods are placed at the disposal of the buyer

DES DEQ DDU DDP DDP When the goods are placed at the disposal of the buyer
Inland freight in Australia; delivery to S S S S
the carrier or frontier

Export customs clearance S S S S III. INTERCOMS 2020: MAIN CHANGES

The new Incoterms 2020 are being drafted in the International Chamber
Payment of customs charges and S S S S of Commerce (ICC) as the body that publishes them since 1930. In the
taxes in Australia last decades, there has always been a revision of Incoterms Rules
coinciding with the first year of each decade 1990, 2000, 2010, which is
Loading to the main carrier and port S S S S the latest version and currently in force.
charges
Main carriage/freight S S S S Incoterms 2020 are being drafted by a Committee of Experts (Drafting
Group) that for the first time include representatives from China and
Cargo (marine) insurance B B S S Australia, although most of the members are European. This Committee
Unloading from the main carrier and B S S S meets periodically to discuss the different issues that come from the 150
port charges members (mainly Chambers of Commerce) of the International Chamber
of Commerce. The new Incoterms are expected to appear in the last
Customs clearance in Buyer's country B S B S
quarter of 2019, simultaneously with the centenary of the International
Payment of customs duties and taxes B S B S Chamber of Commerce, and will enter into force on January 1, 2020.
in Buyer's country Some of the new issues and changes that are being evaluated to be
included in the new edition of the Incoterms 2020 are:
Inland freight in Buyer's country B B S S
a. Removal of EXW and DDP Incoterms. It would be a very important
Other costs and risks in Buyer's B B S S change since EXW is an Incoterm used in many companies with little
country export experience, and DDP is also commonly used especially for goods
(e.g., samples or spare parts) that are sent by couriers and via express
Applicable Incoterms in Different Modes of Transportation shipping companies that deal with all the logistics and customs
The choice of the appropriate incoterms must be done in consideration to procedures until delivery at the buyer‘s address. The justification to
the mode of transport which the parties see beneficial effects on their eliminate these two terms is that they are really domestic operations: in
interest. Thus when we decide for our incoterms, we should at the same the case of EXW by the seller-exporter and in DDP by the buyer-importer.
time look at the suited mode of transport because there are terms which In addition, these two Incoterms contradict, in some way, the new
are restricted only to sea or land carriage. The table below provides the Customs Code of the European Union since the responsibility of the
buyer a guide on the suitability of incoterms to use in relation to probable exporters and importers takes place once the clearance of export and
transport mode. import have been carried out.

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b. Removal of Incoterm FAS. FAS (Free Alongside Ship) is an
Incoterm very little used and, in fact, does not contribute almost anything
to FCA (Free Carrier Alongside) that is used when the merchandise is
delivered at the port of departure in the exporter‘s country. With FCA, the
exporter can also deliver the goods at the dock, as in FAS, since the dock
is part of the maritime terminal. On the other hand, if FAS is used and
there is a delay in the arrival of the ship, the merchandise will be
available to the buyer at the dock for several days and, on the contrary, if
the ship arrives in advance, the merchandise will not be available for
shipment. Actually, FAS is only used for the exportation of some
commodities (minerals and cereals) and, in this sense, the Drafting
Committee is evaluating the convenience of creating a specific Incoterm
for this type of products.
c. Unfold FCA in two Incoterms. FCA is the most used Incoterm
(about 40% of the international trade operations are carried out with this
Incoterm) since it is very versatile and allows the delivery of goods in
different places (seller‘s address, land transport terminal, port, airport,
etc.) that, most of the times, are in the seller‘s country. The Committee is
thinking about the possibility of creating two Incoterms FCA; one for
terrestrial delivery and another for maritime delivery.
d. FOB and CIF for container shipping. The modification made in the
edition of Incoterms 2010 that when the merchandise does not travel in a
container, Incoterms FOB and CIF should not be used, but their
counterparts FCA and CIP are not being applied by the vast majority of
exporting and importing companies, nor by agents involved in
international trade (freight forwarders, logistics operators, banks, etc.).
This is due to the fact that FOB and CIF are two very old Incoterms (FOB
was already used in England at the end of the XVIII century), and the
International Chamber of Commerce has not made an effort to transmit
this change adequately, which is very important, since approximately
80% of the world trade is made in a container. In the Incoterms 2020
version, it is possible that FOB and CIF can be used again for container
shipping, as was the case with Incoterms 2000 and earlier versions.
e. Creation of a new Incoterm: CNI. The new Incoterm would be
denominated as CNI (Cost and Insurance) and would cover a gap
between FCA and CFR/CIF. Unlike FCA, which would include the cost of
international insurance on account of the seller-exporter, and as opposed
to CFR/CIF that would not include freight. As in the other Incoterms
in ―C,‖ this new Incoterm would be an arrival Incoterm,‖ i.e., the risk of
transport would be transmitted from the seller to the buyer at the port of
departure.
TWO INCOTERMS BASED IN DDP
As with FCA, DDP (Delivered Duty Paid) also generates some problems
due to the fact that the customs duties in the importing country are paid
by the exporter-seller, regardless of the place of delivery of the goods.
For this reason, the Drafting Committee is considering creating two
Incoterms based on DDP:
1) DTP (Delivered at Terminal Paid): when the goods are
delivered to a terminal (port, airport, transport center, etc.) in the
country of the buyer, and the seller assumes the payment of
customs duties.
2) DPP (Delivered at Place Paid): when the goods are delivered
at any place other than a transport terminal (for example, at the
buyer‘s address), and the seller assumes the payment of the
customs duties.
In addition to the elimination and creation of some Incoterms, the Drafting
Committee is analyzing other issues to include in the new version of the
Incoterms 2020. Among them are:
 Transportation security.
 Regulations on transportation insurance.
 The relationship between the Incoterms and the International
Sale Contract.
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Over the next few months, the Committee will meet periodically to
address these and other issues that will eventually be incorporated into
Incoterms 2020. Hopefully, the version of Incoterms 2020 that comes into
force on January 1, 2020, will serve to facilitate international trade
between exporters and importers, adapting to the changes that have
occurred in the last decade.
The new Incoterms 2020 would take effect on January 1, 2020, and this
version drafted by the International Chamber of Commerce includes
some changes in relation to previous versions of Incoterms Rules.
How to use the Incoterms 2020?
In order to use Incoterms®, this must be clearly stated in the contract of
sale by indicating: the Incoterms® rule chosen, the port, designated
place or location, followed by "Incoterms® 2020". Example: CIF Hong
Kong Incoterms® 2020
1. Choose the appropriate Incoterms® rule. The choice of the Incoterm®
is an integral part of a commercial transaction. It has to be done in
function with the organizational capacities of the enterprise, the type of
transportation used, the level of service that the enterprise wishes to
provide to the client or the resources of its supplier, or it could be in
function to the common practices of the market, or the practices used by
the competitors, etc. The Incoterm® selected must also be well-adapted
to the type of goods that will be shipped and the type of transportation
that will be used.
2. Specify the place and port with precision. For an optimal application of
Incoterms®, the contract's parties are required to assign a place or a port
with maximum exactitude: ex FCA 25 rue Saint Charles, Bordeaux,
France, Incoterms® 2020. It must be stressed in this part that for certain
Incoterms® such as CPT, CIP, CFR, CIF, the place designated is not the
same as the place of delivery: it designates the place of destination paid
for. In order to specify the final destination of the goods, it is advised to
mention the specific address in order to avoid any ambiguity. The same
applies for the "out of the factory": Is it a factory in France or a factory
established abroad by a French company?
Other precautions to be taken
Some precautions must be taken when using Incoterms®, such as:
 A good knowledge of the meaning of each Incoterm® and its
acronym;
 The usage of the variants of Incoterms® with exactitude in
order to prevent confusions that could result from a
misinterpretation (ex: FOB USA).The Incoterms® are
standards accepted worldwide. In that capacity, like all
standards (industry, quality, pollution), their names do not
cause any divergence. Use only the standardized
abbreviations. Any other code will be prohibited! As any
standard, they are an explicit reference. As the horses DIN or
the ISO 9002, the three letters of the Incoterm must be
followed by the specific names of the designated places and
the mention "Incoterm", see "Incoterm ICC". Do not hesitate
to consult an international law firm.
Today's tendency in international business is based on the fact that the
buyer is released from all logistics concerns. This valorizes the position
of the exporter. It is essential to negotiate the terms of the contract for the
first shipment and, most of all, in the case of dealing with countries at risk,
obtaining a document of credit as a form of payment will be advised.
 Code Name in
English
EXW EX Works
FCA Free CArrier
*Possibility to add the on-board notation.
CPT Carriage Paid
To
CIP Carriage and
*Integration of Institute Cargo Clause A of the Insurance Paid
Institute Cargo Clauses, including "All Risks" to
insurance coverage.
DAP Delivered at
Place

Code Name in
English

DPU* Delivered at
Place Unloaded

DDP Delivered Duty

Paid

Incoterms® 2020 applicable to maritime and inland waterway transport

Code Name in
English
FAS Free AlongSide
ship

FOB Free On Board

CFR Cost and

Freight
CIF Cost,
*Incorporation of Institute Cargo Clause C, including Insurance,
"Minimum" insurance coverage. Freight
* New for Incoterms® 2020

Sale on Departure, Sale on Arrival: a fundamental difference

Sale on Departure
A sale on departure means that the merchandise will be shipped at the
risk and hazard of the buyer, which means:

 from the moment that the goods are placed at disposal at the
vendor's premises (EXW) ;
 from the moment that the goods are handed to the carrier in
order to be shipped (FCA, FAS, FOB, CFR, CIF, CPT et CIP) ;

The Incoterms® for a sale on departure assign to the buyer (in a more or
less large amount) the costs and the risks linked to the shipping of the
merchandise.

Sale on Arrival
A sale on arrival means that the merchandise will be shipped at the risk
and hazard of the seller until it reaches the designated destination point
or port. Three Incoterms® are provided:

 until the end of its maritime transportation and its

disembarkation (DAP);
 until its destination point (DPU, DDP).

International Business and Trade

International Business and Trade