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What are INCOTERMS?
International commercial terms are the standard name for highly using abbreviation INCOTERMS. They are internationally identified and recognized cargo delivery terms to facilitate international trade. The International Chamber of Commerce(ICC) publishes and discusses and updates once every 10 years. The latest 2020 version has published with effect from 1st January 2020. Some traders still use the 2010 version.
So, it is important to negotiate the terms with the published years. Don’t get confuse International commercial terms with payment methods. Payment terms are only for making the payment of the invoice or value of goods to the supplier by the buyer. It recognizes the cost and risk born by both supplier and customer when transporting them from origin to destination.
There are 11 transporting methods. Out of which some are only applicable to water transportation, some are for air transportation and few are for any transportation. These types arise with the evolution of trade. These commercial terms are only applicable to tangible goods.
Don’t worry…Not much has changed from the 2010 version.
When compared to the 2010, 2020 version focus on the insurance coverage, changed DAP to DPU, and few amendments to the FCA term.
Why We Need International Commercial Terms?
The main reason for publishing them is to avoid disputes in cross-border transactions and streamline the trade. This provides a set of uniform/ standard guidelines to bring every party involves in the business into one platform. The buyer and seller decide the delivery methods as per their contract of sales. So, this helps to minimize/remove conflicts between international traders when transporting goods. Further, they draw a clear line on the duties and responsibilities and risks of the sales between seller and buyer.
It is very important to select the correct term for your sale as it will change the cost of your goods. There are cases some buyers and sellers in some countries try to make their own terms to gain more. So as a buyer or seller, you have a responsibility to know the terms well and negotiate to safeguard your interests.
Types of INCOTERMS
INCOTERMS Applicable for any Transport mode/ Multi-modal Transportation
Ex- Work| EXW
Once the goods are produced and packed for shipping consider as goods are delivered in EXW. In EXW seller doesn’t have much work. The delivery place is mostly the seller’s premises. But seller and buyer can agree on a different place like seller’s warehouse or seller’s shop. Risks of the goods pass to the buyer at the agreed place. If cargo damage while loading to the first carrier it becomes a loss to the buyer even the loading carry out by seller’s employees.
FCA| Free Carrier
Seller is responsible to hand over the goods at a named place to the agreed carrier. The seller bears the cost and risks up to the agreed place. Buyer is responsible to do the export clearance. When the term is FCA it is very critical to specify the cargo handover point clearly. From the agreed point risk and responsibility of cargo passes to the buyer. The buyer should insure the cargo from the point as damages to cargo during the voyage can happen. Having insurance cover buyer can claim for the cargo damages.
CPT| Carriage Paid To
Seller is responsible to transport goods to a named port in buyer’s country. Once cargo loaded to the 1st carrier risk passes tom the buyer. Buyer is responsible to insure cargo despite seller bearing the carriage charges.
CIP| Carriage Insurance paid to
CIP is similar to CPT. The only difference is the seller insure the cargo in CIP. Yet risk pass to the buyer once cargo loaded to the first carrier.
DAP| Delivered At Place
Seller is responsible to deliver cargo to a named destination in buyer’s country. Seller does the export clearance at seller’s country. Buyers should pay for the import clearance and duty payments at buyer’s country. Risk is with the seller until goods delivered to the agreed place. Remember, the seller is not responsible for unloading cargo from the carrier. If cargo damage while unloading it also become a loss in buyer’s account.
DPU| Delivered at Place Unloaded
Delivered At Terminal or known as DAT in 2010 version changed to DPU in 2020 version. The only difference is when say DDT its focus on a terminal as the delivery location. 2020 version identifies the delivery location as any agreed place other than a terminal. Yet the buyer is responsible for the import customs clearance of buyer’s country.
DDP| Delivered Duty Paid
DDP is the total opposite of EXW. Seller responsible to arrange transport do the import, export clearance for cargo and to arrange insurance coverage for goods. Until goods are at the buyer’s doorstep seller is responsible and risk born will be with the seller. But the seller is not responsible to unload the cargo at buyer’s place.
INCOTERMS only applicable for water Transportation
FAS| Free Alongside the Ship
Seller is responsible to deliver the cargo alongside the vessel. In reality, consider cargo alongside the ship when they are at the port for export. The seller should do the export clearance of cargo. Once the cargo placed alongside risks pass to the buyer. Cargo damages happen after cargo place alongside will be at buyers account. The buyer should bear the shipping cost and other costs incur onwards.
FOB| Free On Board
Seller is responsible until cargo load to the carrier nominated by the buyer. Charges incurs until cargo on board will be at seller’s cost. Buyer has the right to select the carrier. The seller delivers the goods to the port requested by the buyer. Buyer insures the goods up to his/her warehouse in the destination.
CFR| Cost and Freight
The seller bears the cost of shipping up to a port in the buyers country. Buyer arranges the insurance coverage for the transit and does the import clearance at buyer’s country. Seller does the export clearance. Once the cargo loaded to the carrier risk passes from seller to buyer. Thus, the seller responsible to make sure cargo reach the destination port.
CIF| Cost Insurance Freight
Seller is responsible to book a carrier and pay freight charges up to a port in buyer’s country. Once cargo on bord risk pass to the buyer. Yet seller insures the cargo during the voyage. You have to be vigilant! Seller is only responsible to get a minimum insurance cover for cargo. The cover may not sufficient to cover the cargo damage if an unforeseen misfortune happens.