Incoterms

Incoterms - International Commercial Terms

Incoterms – International Commercial Terms

 

DEFINITION
The international commercial operations have their origin in a contract of purchase and sale made between the importer and the exporter, which stipulates the clauses by which the respective commercial operation will be regulated. INCOTERMS (International Commercial Terms) can be considered as a set of optional international rules that the International Chamber of Commerce has gathered and defined based on the practices more or less standardized by traders. The INCOTERMS basically define the place where the seller is responsible for the merchandise and what the expenses are for him and which, therefore, will be included in the price.

 

FUNCTIONS
The aims of INCOTERMS are essentially as follows:

Define the transfer of expenses. The seller knows exactly when and how much to pay for his contract of sale and thus includes them in the price. This procedure allows the buyer to recognize exactly the expenses that must be added to the purchase price in order to compare with other national and international offers.

Define the transmission of risk. The buyer knows exactly the time and place from which the risks in which the goods incur during transportation are at his own expense. For this reason, the INCOTERMS define the time and place from which the responsibility of the seller ends and begins with that of the buyer. This data is extremely important to secure the merchandise.

Define the location from which the goods will exit. Indicating the exact place where the seller must deposit the merchandise and, thus, the place where the buyer will raise it.

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INCOTERMS 2010
The revision of Incoterms 2010 was published in September / 2010, becoming effective as of Jan / 01/2011. The eighth published set of pre-defined terms, Incoterms 2010 defines 11 rules, reducing from the 13 rules used in Incoterms 2000 by introducing two new rules (“Delivered at Terminal”, DAT), which will replace four rules from the previous version (Delivered at Frontier, DAF, Ship Delivered Ex, DES, Delivered Ex Quay, DEQ Delivered Duty Unpaid, DDU).

In the previous version (2000), the rules were divided into four categories, but the 11 pre-defined Incoterms 2010 terms are subdivided into two categories based solely on the delivery method. The largest group of seven rules applies regardless of the method of transport, with the smallest group of four being applicable only to sales involving only transport over water.

 

Rules for any Mode of Transport
The seven rules defined by Incoterms 2010, for any mode of transport are:

EXW Ex Works
The seller delivers when it 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 the goods for export, where such clearance is applicable.

FCA – Free Carrier
Means that 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 clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.

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 place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

CIP – Carriage and Insurance Paid to
The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place 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 CIP 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.”

DAT – Delivered at Terminal
Means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes a place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.

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.

DDP – Delivered Duty Paid
Means that 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 and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

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Rules for Sea and Inland Waterway Transport
The four rules defined by Incoterms 2010 for international trade where transport is entirely carried out by water are:

FAS – Free Alongside Ship
“Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.

FOB – Free on Board
“Free On Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.

CFR – Cost and Freight
“Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods 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.

CIF – Cost, Insurance and Freight
Exactly the same as CFR, except that the seller must also pay the insurance. Applicable only to maritime transport.

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CHART: Incoterms 2010 (click on the image to open PDF)