what are incoterms? incoterms are a set of rules for the interpretation of the most commonly used...

What are Incoterms?

• Incoterms are a set of rules for the interpretation of the most commonly used trade terms in international trade: International Commercial Terms.

• They were first published by the International Chamber of Commerce (ICC) in 1936. The current version is Incoterms 2000.

• Parties to a contract are often unaware that there are different trading practices in their respective countries. Incoterms set out to avoid this problem by giving a set of standard rules that are recognised throughout the world.

What are Incoterms?• The basic purpose of each Incoterm is to clarify how functions, costs and risks are split between the buyer and seller in connection with the delivery of the goods as required by the sales contract.

• Delivery, risks and costs are known as the critical points. Each term clearly specifies the responsibilities of the seller and the buyer.

• The terms range from a situation in which everything is fundamentally the responsibility of the buyer to the other extreme where everything is fundamentally the responsibility of the seller.

Incoterms are split into four distinct groups:

•Group E - where the goods are made available to the buyer at the seller's premises;

•Group F - where the seller must deliver the goods to a carrier appointed by the buyer;

•Group C - where the seller must contract for the carriage of the goods without assuming risk of loss of, or damage to the goods or additional costs due to events occurring after shipment;

•Group D - where the seller has to bear all costs and risks required to bring the goods to the place of destination.

List of main Incoterm types:The following is a list of the main Incoterms, the group to which they belong and a brief outline of responsibilities under that Incoterm. Additionally it has been noted whether the term is suitable for any mode of transport or just conventional maritime and inland waterway transport.

1. Group E Departure EXW - Ex Works Named place - Any mode of transportThe seller must place the goods at the disposal of the buyer at the seller's premises not cleared for export and not loaded on any collecting vehicle.

List of main Incoterm types:2. Group F Main Carriage Unpaid

FCA - Free CarrierNamed place - Any mode of transportThe seller must deliver the goods, cleared for export, to the carrier nominated by the buyer at the named place.

FOB - Free on BoardNamed port of shipment - Maritime and inland waterway transport onlyThe seller delivers the goods, cleared for export, when they pass the ship's rail at the named port of shipment.

List of main Incoterm types:Group C Main Carriage PaidCFR - Cost and Freight Named port of destination - Maritime and inland waterway transport onlyThe seller delivers the goods when they pass the ship's rail in the port of shipment and must pay the costs and freight necessary to bring the goods to the named port of destination. The buyer bears all additional costs and risks after the goods have been delivered (over the ship's rail at the port of shipment).to the goods during carriage.

List of main Incoterm types:Group C Main Carriage PaidCIF - Cost Insurance and Freight Named port of destination - Maritime and inland waterway transport onlyThe obligations are the same as under CFR with the addition that the seller must procure insurance against the buyer's risk of loss of, or damage to the goods during carriage.CPT - Carriage Paid To Named place of destination - Any mode of transportThe seller delivers the goods to the nominated carrier and must also pay the cost of carriage necessary to bring the goods to the named destination. The buyer bears all additional costs and risks after the goods have been delivered to the nominated carrier.

List of main Incoterm types:Group C Main Carriage PaidCIP - Carriage and Insurance Paid To Named place of destination - Any mode of transportThe obligations are the same as under CPT with the addition that the seller must procure insurance against the buyer's risk of loss of, or damage to the goods during carriage.

Group D ArrivalDAF - Delivered at Frontier Named place - Any mode of transportThe seller must place the goods at the disposal of the buyer on the arriving means of transport not unloaded, cleared for export but not cleared for import, at the named point and place at the frontier.

List of main Incoterm types:Group D Main Carriage Paid

DES - Delivered Ex ShipNamed port of destination - Maritime and inland waterway transport onlyThe seller delivers when the goods are placed at the disposal of the buyer on board the ship, not cleared for import, at the named port of destination.

DEQ - Delivered Ex Quay Named port of destination - Maritime and inland waterway transport onlyThe seller delivers when the goods are placed at the disposal of the buyer, not cleared for import, on the quay at the named port of destination.

List of main Incoterm types:Group D Main Carriage Paid

DDU - Delivered Duty Unpaid Named place of destination - Any mode of transportThe seller must deliver the goods to the buyer, not cleared for import, and not unloaded at the named place of destination.

DDP - Delivered Duty Paid Named place of destination - Any mode of transportThe seller must deliver the goods to the buyer, cleared for import, and not unloaded at the named place of destination.

Incoterms - An Action Plan and ChecklistHow Do I Choose an Incoterm?There are a number of issues you should consider when choosing an Incoterm. These include:

The Method of Transport Used: There are certain Incoterms which are only suitable for traditional sea and inland waterway carriage - see Transport Issues below. Availability of Information: It is essential that you and your customer are able to meet your obligations under the chosen Incoterm. For example there may be occasions when you are unable to obtain an import license or clear the goods for import - on these occasions the term DDP cannot be used.


Availability of Information: It is important that you are able to obtain a good service and reasonable quotes for the service you will provide your customer. There may be times, for example when exporting to some of the remote regions of Russia, where it is not possible to obtain a quote to your customer's premises or even to ensure that the service provided is reliable and that the goods have arrived. In these instances a more appropriate Incoterms should be used where you take on less responsibility;


Customer Service: Although it is essential for you to meet your obligations under the chosen Incoterm, it is equally important for you to offer competitive terms. It is unwise for you to offer what may be the easiest terms for you, if these are not suitable for your customer.

Incoterms - An Action Plan and ChecklistHow Do I Choose an Incoterm?Transport Issues As mentioned earlier the choice of Incoterm is affected by the way in which the goods are sent. The table below shows which terms may be used for any mode of transport and which are intended for traditional maritime and inland waterway transport only.

Group E EXW Ex Works (named place

Group F FCA Free Carrier (named place)

Group C CPT Carriage Paid To (named place of destination)

CIP Carriage and Insurance Paid To (named place of destination)

Group D DAF Delivered at Frontier (named place)

DDU Delivered Duty Unpaid (named place of destination)

DDP Delivered Duty Paid (named place of destination)

Any Mode of Transport

Incoterms - An Action Plan and ChecklistHow Do I Choose an Incoterm?

Transport Issues As mentioned earlier the choice of Incoterm is affected by the way in which the goods are sent. The table below shows which terms may be used for any mode of transport and which are intended for traditional maritime and inland waterway transport only.

Maritime and Inland Waterway Transport Only

Group F FAS Free Alongside Ship (named port of shipment)

FOB Free on Board (named port of shipment)

Group C CFR Cost and Freight (named port of destination)

CIF Cost, Insurance and Freight (named port of destination)

Group D DES Delivered Ex Ship (named port of destination)

DEQ Delivered Ex Quay (named port of destination)


Transport Issues

You should only use the terms in the second group for maritime and inland waterway transport only. The critical point in all of these terms is the ship's rail - this obviously has no meaning when the goods are moved, for example, by air, or in a container and could lead to difficulties in allocating responsibilities between you and your customer.

In virtually all cases, for containerised cargo you should use the first group of terms (those for any mode of transport). The container is usually delivered to the carrier (or other party nominated) and, again, the ship's rail has no relevant meaning for this type of transport.


Who Chooses - the Seller or the Buyer?Often the Incoterm to be used will be stipulated by your customer. An enquiry may be made for "the best price, CIF Perth, for the following goods …". When faced with this situation you may choose just to quote as requested. At the other end of the spectrum, you may give your usual export quote such as "ExW" or "FOB", especially if you are in a niche market, and leave your customer just to accept the terms as offered.

Obviously your customer will usually have more influence but finding a term that suits both parties is often a way to ensure that you and your customer know and understand your obligations and thus avoid later problems.

Checklist The following points should be kept in mind when choosing an Incoterm:•What method of transport is to be used? •What are the terms currently used? Who chose these? •Are there any company policies on which terms should be used and how much responsibility should be taken? •Are there any restrictions on the term to be used imposed by the country of importation? •Are there any commercial norms in the country with which you are dealing? •Discuss the terms to be used with your trading partner - it is important to take their point of view into account.

Checklist The following points should be kept in mind when choosing an Incoterm:•Ensure that both parties understand and can carry out their obligations. •Ensure that you are able to obtain enough information to give a quote for a certain Incoterm. •Incorporate the terms decided into all relevant commercial paperwork such as invoices, quotations, terms and conditions of sale. •Review the terms periodically and change them if necessary.

what are incoterms? incoterms are a set of rules for the interpretation of the most commonly used...

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