Incoterms

OCEAN UNIVERSITY OF SRI LANKA

International Trade and Finance

MTL 2013
Learning Objectives
• Identify the different documents involved in Domestic and
international trade
• Understand the importance of the sales contact and parties
associated
• Explain the use of Incoterms 2020 in domestic and International
trade
• Understand the how the buyer’s and sellers responsibilities change
with each Incoterm
• Identify the difference between Incoterm 2010 and Incoterm 2020
Commercial Documents involved in International trade

Quotation – An offer to sell goods, Should state clearly the price,

details of quality, quantity, trade terms, delivery terms and payment
terms.
Prepared by Exporter
Sales Contract - An agreement between buyer and the seller
stipulation every detail of the transaction. Since this is a legally binding
document, it is advisable to seek legal advise before signing the
contract
Prepared by Exporter and importer
Check List For an Effective Sales
Agreement
In Addition to Quantity of goods and unit price buyer and seller should
agree on following to minimize risk of dispute.
• Point of risk transfer from seller to buyer
• Who will take care of custom formalities
• Who will arrange insurance and up to which point
• What precise risks need to be covered
• What commercial documents needed and what should be covered
• What other documents are needed (inspection, quality)
Commercial Documents involved in International trade

• Pro forma Invoice

• An invoice provided by the supplier prior to the shipment of merchandise,
informing the buyer of the kind of quantities of the goods to be sent, their value
and importation specifications ( weight, size and similar characteristics). This is
not a Legally Binding document
Prepared by - Exporter
• Commercial Invoice
• A formal demand note for payment issued by the exporter to the importer for
goods sold under Sales Contract.
• It should give details of the goods sold, payment terms and the trade terms
• This is a Legally Binding document
Prepared by - Exporter
Commercial Documents involved in
International trade
• Packing List
• A list with detailed packing information of the goods shipped
Prepared by Exporter
• Inspection certificate
• Report issued by an independent surveyor ( inspection company) or the exporter on
the specification of the shipment required by certain buyers and countries
Prepared by inspection company or the exporter
• Product testing certificate
• This certifies the products are conformed to certain international /national technical
standards such as product quality, safety and specifications
• Eg : Electrical testing, Food Testing, material testing, textile testing
Prepared by - Sri Lanka Standards Institution (SLSI)
Commercial Documents involved in
International trade
• Health Certificate
• Is a document used in export import transactions, issued by the governmental
organizations at the countries of origin, to certify that a food shipment is fit for
human consumption, and meets safety standards or other required legislation for
exporting
• Phytosanitary Certificate
• Frequently an international requirement that any consignment of plants or planting
materials importing in to a country shall be accompanied by this certificate
• Certificate issued by the exporting country stating that the consignment is found
free from diseases and pests and conforms with the current phytosanitary
regulations of the importing country
Prepared by exporter
Commercial Documents involved in
International trade
• Fumigation certificate
• A pest control certificate issued to certify that the concerned products have been
undergone the quarantine and pre-shipment fumigation by the approved fumigation
service providers
• It is mainly required by the US, Canada, Australia, New Zealand, and UK customs and solid
wood packing materials
Issued by Exporter or inspection company (Ceylon Pest Control )
• Consular Invoice
• A document required by some foreign countries showing shipment information such as
consignor, consignee and value description ect
• Certified by the consular official of the importing country stationed in the foreign country.
Used by country’s custom officials to verify value , quantity and nature of the shipment
Prepared by Exporter
Commercial Documents involved in
International trade
Certificate of Origin - Serves as proof that goods are originating from a particular
country.
• COO useful in accommodating trade agreements , tax exemptions, sanctions ect
• To prepare a CoO, you will need information about the shipping products and
their place of manufacture. At a minimum, the certificate of origin should
include:
• The shipping company or carrier that issued it
• The shipping date and location of origin
• The signature of the issuing authority
Depending on the shipping destination and the requirements of the sales contract
there may be additional requirements for the certificate of origin.
Commercial Documents involved in
International trade
Customs Declaration Form - Used to declare any import restrictions,
requirements, and declarations for shipping goods.
This document will typically include information about
• Shipment's value
• commodity type and classification (HS Code )
• Country of origin or manufacture
• Shipping details such as packing lists and weight information.
• Type of packaging used
• Special shipping restrictions
Filling this document with accurate details is crucial as it could create unnecessary
delays
This document is valid only at the customs of the country where it is prepared
HS Code (Harmonized System Code)
System Consists of more than 5,000 commodity groups; each identified
by a six digit code,
Over 98 % of the merchandise in international trade is classified in
terms of the HS.
HS code is used for Customs tariffs , quota control and for the collection
of international trade statistics
What are Incoterms
• International Commercial Terms
• 1st created by the International Chamber Of Commerce (ICC) in 1936
and they have been maintaining and developing them ever since.
• INCOTERMS and uniform, internationally recognized foreign trade terms that
refer to the type of agreement for the purchase and shipping of goods
internationally
• There are 11 (Incoterm 2020) different incoterms each of which helps users
deals with different situations involving the moving of goods
• Incoterms significantly reduce misunderstandings among traders and thereby
minimize trade disputes and litigation.
• Explain the division of costs, control and liability between the parties.
Major Areas in Incoterms
1. Costs – Who is responsible for the expenses involved in a shipment
at a given point in a shipment’s journey
2. Control – Who owns the goods at a given point in journey
3. Liability – Who is responsible for paying damages to goods at a
given point in shipment transit
 Incoterms
• Incoterms® 2020. is the newest edition of the Incoterms 9th set of pre-
defined international contract terms published by the International
Chamber of Commerce
• These rules are accepted by governments and legal authorities around
the world.
• Incoterms® 2020 are subdivided into two categories based only on
method of delivery (Mode of Transport
• Incoterms® 2020 has 11 Terms
• 7 for Any mode of transport Road, Rail, Air and Sea (and intermodal) EXW, FCA,
CPT, CIP, DAP, DPU and DDP.
• 4 only for sea/Inland water ways transport only FAS, FOB, CFR and CIF
Incoterms
• Any Obligation that does not appear in a incoterms is the
responsibility of the buyer.
• Incoterms deal solely with the rights and responsibilities of parties
involved in the delivery of goods sold under a contract of sales.
• They do not extend to other contracts such as insurance, carriage and
payment.
• But incoterms used may have implications for such contracts
Incoterm 2010 and Incoterm 2020
Any Mode of transport Transportation by water only

2010 2020
• EXW • EXW • FAS
• FCA • FCA • FOB
• CPT • CPT • CFR
• CIP • CIP • CIF
• DAT • DPU
• DAP • DAP
• DDP • DDP
EXW – Ex-Works or Ex-Warehouse
• Ex works is when the seller places the goods at the disposal of the
buyer at the seller’s premises or at another named place (i.e., works,
factory, warehouse, etc.).
• The seller does not need to load the goods on any collecting vehicle.
Nor does it need to clear them for export, where such clearance is
applicable.
EXW (Ex-Work)(Place)
Exw
Seller’s Obligations
• Goods, commercial invoice and
documentation
• Export packaging and marking
Buyer’s Obligations
• Loading at seller’s location
• Export licenses and customs
formalities
• Pre-carriage to terminal
• Loading charges to main carriage
• Main carriage
• Discharge and onward carriage
• Import formalities and duties
• Cost of pre-shipment inspection
FCA – Free Carrier

• The 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 explicitly as possible the
point within the named place of delivery, as the risk passes to the
buyer at that point.
FCA -Free Carrier (named place of delivery)
FCA Shipping Obligations
Seller’s Obligations
• Goods, commercial invoice and
documentation
• Export packaging and marking
• Export licenses and customs
formalities
• Loading to pre-carriage
• Pre-carriage to terminal or
named place of delivery
Buyer’s Obligations
• Unloading from arriving means
of transportation ( if buyers
premises)
• Loading charges to main carriage
• Main carriage
• Import formalities and duties
• Discharge and onward carriage
• Cost of pre-shipment inspection
FAS – Free Alongside Ship
• The seller delivers when the goods are placed alongside the vessel
nominated by the buyer at the named port of shipment.
• The risk of loss of or damage to the goods passes when the products are
alongside the ship. The buyer bears all costs from that moment
onwards.
FAS -Free Alongside Ship (named port of
shipment)
FAS Incoterm Obligations

Seller’s Obligations Buyer’s Obligations

• Goods, commercial invoice and • Loading charges to main carriage
documentation
• Main carriage
• Export packaging and marking
• Export licenses and customs formalities • Discharge and onward carriage
• Loading charges to Pre-Carriage • Import formalities and duties
• Pre-carriage to terminal • Cost of pre-shipment inspection
• Origin terminal charges
• Unload and Delivery alongside vessel at
port of shipment
FOB – Free On Board
• The seller delivers the goods on board the vessel nominated by the
buyer at the named port of shipment
• The risk of loss of or damage to the goods passes when the products
are on board the vessel. The buyer bears all costs from that moment
onwards.
FOB-Free On Board (named port of
shipment)
Free on Board Incoterm Obligations

Seller’s Obligations Buyer’s Obligations

• Goods, commercial invoice and • Main carriage
documentation
• Export packaging and marking • Discharge and onward carriage
• Export licenses and customs formalities • Import formalities and duties
• Pre-carriage and delivery
• Origin terminal Charges • Cost of pre-shipment inspection
• Loading charges to main carriage
• Delivery onboard vessel at named port of
shipment
• Proof of delivery
commonly used for bulk cargo (such as oil or grain) or freight coming out of Asia.
CFR – Cost and Freight
• The seller delivers the goods on board the vessel
• The risk of loss of or damage to the goods passes when the
products 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.
CFR -Cost and Freight (named port of
destination)
CFR Shipping Obligations

Seller’s Obligations Buyer’s Obligations

• Goods, commercial invoice and • Risk starting onboard ship
documentation
• Discharge and onward carriage
• Export packaging and marking
• Import formalities and duties
• Export licenses and customs
formalities • Cost of pre-shipment inspection
• Pre-carriage and delivery
• Loading charges to main carriage
• Delivery at named port of
destination ( Main Carriage)
CIF – Cost, Insurance and Freight
• The seller delivers the goods on board the vessel . The risk of loss of
or damage to the goods passes when the products are on the ship.
• The seller must contract for and pay the costs and freight necessary
to bring the goods to the named port of destination.
• The seller also contracts for insurance cover against the buyer’s risk
of loss of or damage to the goods during the carriage.
• The buyer should note that under CIF the seller is required to obtain
insurance only on minimum cover. Should the buyer wish to have
more insurance protection, it will need either to agree as much
expressly with the seller or to make its own extra insurance
arrangements.
CIF - Cost, Insurance and Freight (named
port of destination)
CIF Incoterm Obligations

Seller’s Obligations Buyer’s Obligations

• Goods, commercial invoice and • Risk starting onboard ship
documentation
• Export packaging and marking • Discharge and onward carriage
• Export licenses and customs formalities • Import formalities and duties
• Pre-carriage and delivery • Cost of pre-shipment inspection
• Loading charges
• Delivery at named port of destination
(Cost of Main Carriage)
• Insurance (Minimum coverage Insurance
110% Institute Cargo Clauses (C)
CPT – Carriage Paid To
• The seller delivers the goods to the carrier or another person
nominated by the seller at an agreed place (if any such site is agreed
between parties).
• The seller must contract for and pay the costs of carriage necessary
to bring the goods to the named place of destination.
CPT - Carriage Paid To (named place of
destination)
CPT Incoterm Obligations

Seller’s Obligations Buyer’s Obligations

• Goods, commercial invoice and • Risk starting at port of shipment
documentation
• Export packaging and marking
• Import formalities and duties
• Export licenses and customs formalities • Cost of pre-shipment inspection
• Pre-carriage and delivery
• Loading charges
• Delivery at named place of destination
• Responsible for freight costs for carriage
to the named place of destination
CIP – Carriage And Insurance Paid To
• The seller has the same responsibilities as CPT, but they also contract
for insurance cover against the buyer’s risk of loss of or damage to
the goods during the carriage.
• The buyer should note that under CIP the seller is required to obtain
insurance only on maximum cover.
CIP - Carriage and Insurance Paid To (named
place of destination)
CIP Incoterm Obligations

Seller’s Obligations Buyer’s Obligations

• Goods, commercial invoice and • Risk starting at port of shipment
documentation
• Export packaging and marking • Import formalities and duties
• Export licenses and customs formalities • Cost of pre-shipment inspection
• Pre-carriage and delivery
• Loading charges
• Delivery at named place of destination
• Responsible for freight costs for carriage to
the named place of destination
• Insurance 110% Institute Cargo Clauses (A)
DAP – Delivered At Place
• The 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 goods to the named
place.
DAP -Delivered At Place (named place of
destination)
DAP Shipping Obligations

Seller’s Obligations Buyer’s Obligations

• Goods, commercial invoice and • Unloading from arriving means
documentation of transportation
• Export packaging and marking • Import formalities and duties
• Export licenses and customs
formalities
• Cost of pre-shipment inspection
• Pre-carriage and delivery
• Loading charges
• Main carriage
• Delivery to place of destination
DPU – Delivered At Place Unloaded
(replaces Incoterm® 2010 DAT)
• DPU replaces the former Incoterm® DAT (Delivered At Terminal). The
seller delivers when the goods, once unloaded are placed at the
disposal of the buyer at a named place of destination.
• The seller bears all risks involved in bringing the goods to, and
unloading them at the named place of destination.
DPU – Delivered At Place Unloaded(named
terminal at port or place of destination)
DPU Incoterm Obligations

Seller’s Obligations Buyer’s Obligations

• Goods, commercial invoice and • Import formalities and duties
documentation
• Export packaging and marking • All charges after unloading (for
• Export licenses and customs formalities example, Import duty, taxes,
• Pre-carriage and delivery customs and on-carriage) are to
• Loading charges be borne by buyer
• Main carriage
• Unloading charges from main carrier at
• Cost of pre-shipment inspection
destination port and destination port charges
• Delivery at named terminal at port or place of
destination and unloading
DDP – Delivered Duty Paid
• The 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. They must clear the products not only for
export but also for import, to pay any duty for both export and import
and to carry out all customs formalities.
DDP - Delivered Duty Paid (named place of
destination)
DDP Incoterm Obligations
Seller’s Obligations
• Goods, commercial invoice and documentation
• Export packaging and marking
• Export licenses and customs formalities
• Pre-carriage and delivery
• Loading charges
• Main carriage
• Proof of delivery
• Import formalities and duties
• Cost of all inspections
• Delivery to named place of destination/buyer
Buyer’s Obligations
• Unloading at destination
• The buyer is free of any risk or
cost until the goods are
unloaded from the vehicle at the
named place of destination
which is usually the buyer’s
place of business.
What are the differences between Incoterms® 2010 and
Incoterms® 2020?
• New Incoterm® DPU Replaces DAT
• In the past, DAT required ‘Delivery at Terminal (unloaded)’, however the word
“terminal” caused confusion. The new term DPU covers delivery to any agreed
place including, but not limited to, delivery at terminal.
• Different level of insurance cover between CIF and CIP
• CIF remains the same, it requires ‘Institute Cargo Clause C’ insurance cover –
Number of listed risks, subject to itemized exclusions.
• CIP now requires an upgraded ‘Institute Cargo Clause A’ insurance cover – All
risk, subject to itemized exclusions.
What are the differences between
Incoterms® 2010 and Incoterms® 2020?

• Buyer’s and Seller’s Own Transport

• Under Incoterms® 2010 it was assumed that all transport would be
undertaken by a third party transport provider. Updates to Incoterms®
2020 allows for the provision for the buyer or seller’s own means of
transport. This recognizes that some buyers and sellers are using their own
methods of transport, including trucks or planes to get goods delivered.
More
• Is FOB (San Francisco) Same as FOB (Newark) ?
• Is FOB (San Francisco) Same as FOB ( Los Angeles) ?
Case Study 1
Mica Textile is a newly established garment factory in Sri Lanka and they are
trying to negotiate a sales contract with Old Navy. Old Navy is a well-known
American brand with over 1000 stores and many suppliers. Old navy is trying
to get a clothing manufacturer who can meet their standards with a lowest
possible unit price and Mica Textile is trying to establish a long-lasting
business relationship with the textile giant. Old Navy is willing to pay for the
main carriage from Sri Lanka to USA via sea. Buyer old navy will also take care
of port charges, custom, transportation and any other charges once the
shipment reach USA. Old Navy has also offered to arrange insurance for the
total shipment.
1. What is the most suitable incoterm to be used for the above transaction?
2. Clearly list out the responsibilities of the buyer and the seller for the
chosen Incoterm?
Case Study 2
Bolwaththa Plantation in Pussalawa, Sri Lanka is a small scale organic tea
manufacturer who is specialized in organic flavored tea. Recently they found
a new buyer from London,UK (ABC Company )and they are in the process of
finalizing the Inco-terms in the sales contract. XYZ Company is an agent of
ABC Company located in Colombo, Sri Lanka. ABC Company wants XYZ
Company to inspect and accept cargo from Bolwaththa Plantation and
arrange transportation to London (Sea Shipment) on behalf of ABC Company.
XYZ will also take care of export formalities.
1. What is the most suitable Inco-term for the above transaction?
2. List out the responsibilities of importer and exporter separately