Incoterms

The right 'Term of Sale'

Terms of Sale serve two basic functions:

  • They determine who pays the costs involved in transportation.
  • They determine where the risk passes from seller to buyer.

If you are sending goods overseas by air or road using the Term of Sale 'FOB' (free on board) then, according to INCOTERMS 2000, you could be using the incorrect Term of Sale. INCOTERMS 2000 states that FOB should only be used when sending goods by sea.

INCOTERMS a brief explanation

INCOTERMS provide a shorthand method of addressing contractual issues such as; who will bear the costs and risks associated with the delivery of the goods; to what place they will be delivered; who, if anyone, will insure them while in transit; who will pay the charges at the destination such as customs clearance, duties and taxes.

Having been in existence since 1936 (last revised in 2000), INCOTERMS are recognised throughout the world and their use is recommended by major banks, the legal profession, forwarding agents, chambers of commerce and other advisory organisations.

All professional exporters are advised to adopt the use of INCOTERMS 2000 in all overseas contracts and include them on all documents that refer to the contract, for example, pro forma invoices, commercial invoices, documentary letters of credit and so on.

INCOTERMS 2000 currently comprises of thirteen separate Terms of Sale, each with different degrees of responsibility for the seller and buyer when transporting goods.

Common mistakes

Some commonly known and widely used INCOTERMS such as FOB or C&F are misused or not fully understood by exporters. In the case of a dispute these mistakes could prove extremely costly.

The following is an outline of the INCOTERMS definitions but should only be used as a rough guide.

For a fully comprehensive definition of all thirteen terms, we strongly recommend that you purchase a copy of INCOTERMS 2000 from your the Chamber of Commerce.

INCOTERMS 2000 your responsibility
EXW (Ex Works...Named Place) Seller makes goods available at own premises. Pays no charges.
FCA (Free Carrier..Named Place) Seller delivers & pays to carrier.
FAS (Free Alongside Ship..Named Port of Shipment) Seller delivers & pays to carrier.
FOB (Free On Board..Named Port of Shipment) Seller delivers & pays on board ship.
CFR (Cost & Freight..Named Port of Destination) Seller arranges carriage and pays to Port or named place. Arranges Insurance if appropriate.
CIF (Cost Insurance & Freight..Named Port of Destination)  
CPT (Carriage Paid to...Named Place of Destination) Arranges insurance if appropriate.

Please note

It is vital to ensure both seller and buyer is fully aware of their legal obligations under the agreed Terms of Sale. To avoid misunderstanding it is recommended that INCOTERMS 2000 are used and reference is made to such use on the contract of sale, plus all other relevant documents, i.e. pro-forma invoices, commercial invoices, documentary letters of credit etc. You should also ensure the correct INCOTERM is used so that in the event of any dispute, you have fulfilled your obligations under the chosen Term of Sale.

INCOTERMS from only part of the overseas contract of sale dealing solely with transportation. They are not a substitute for written trading conditions which should refer to other issues such as your right to retain ownership of the goods until paid for, payment terms, method of payment, the right to charge interest on overdue payments or liability for defective products etc.

INCOTERMS 2000

The purpose of Incoterms 2000 is to provide a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. Thus, the uncertainties of different interpretations of such terms in different countries can be avoided or at least reduced to a considerable degree. The scope of Incoterms 2000 is limited to matters relating to the rights and obligations of the parties to the contract of sale with respect to the delivery of goods sold. Incoterms 2000 do NOT apply to the contract of carriage.

A brief description of each Incoterm is outlined below:

EX WORKS (EXW)

The seller delivers when he places the goods at the disposal of the buyer at the seller's premises or another named place (i.e. works, factory, warehouse, etc.) not cleared for export and not loaded on any collecting vehicle.

This term represents the MINIMUM OBLIGATION for the seller, and the buyer has to bear all costs and risks involved in taking the goods from the seller's premises. However, if the parties wish the seller to be responsible for the loading of the goods on departure and to bear the risks and all costs of such loading, this should be made clear by adding explicit wording to this effect in the contract of sale. This term should not be used when the buyer cannot carry out the export formalities directly or indirectly.

In such circumstances, the FCA term should be used, provided the seller agrees that he will load at his cost and risk.

FREE CARRIER (FCA)

The seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place. It should be noted that the chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place.

If delivery occurs at the seller's premises, the seller is responsible for loading. If delivery occurs at any other place, the seller is not responsible for unloading. This term may be used for all modes of transport. "Carrier" means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea, inland waterway, or by a combination of such modes.

If the buyer nominates a person other than a carrier to receive the goods, the seller is deemed to have fulfilled his obligation to deliver the goods when they are delivered to that person.

FREE ALONGSIDE SHIP (FAS)

The seller delivers when the goods are placed alongside the vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment. The FAS term requires the seller to clear the goods for export. However, if the parties wish the buyer to clear the goods for export, this should be made clear by adding explicit wording to this effect in the contract of sale. This term can only be used for sea or inland waterway transport.

FREE ON BOARD (FOB)

The seller delivers when the goods pass the ship's rail at the at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export. This term can only be used for sea or inland waterway transport. If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used.

COST & FREIGHT (CFR)

The seller delivers when the goods pass the ship's rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any other costs due to events occurring after the time of delivery, are transferred from the seller to the buyer. The CFR term requires the seller to clear the goods for export. This term can only be used for sea or inland waterway transport. If the parties do not intend to deliver the goods across the ship's rail, the CPT term should be used.

COST, INSURANCE & FREIGHT (CIF)

The seller delivers when the goods pass the ship's rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any other costs due to events occurring after the time of delivery, are transferred from the seller to the buyer.

However, in CIF the seller also has to procure marine insurance against the buyer's risk of loss of or damage to the goods during carriage. Consequently, the seller contracts for insurance and pays the insurance premium. The buyer should note that under the CIF term the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have the protection of greater cover, he would either need to agree as much expressly with the seller or to make his own extra insurance arrangements. The CFR term requires the seller to clear the goods for export. This term can only be used for sea or inland waterway transport.

If the parties do not intend to deliver the goods across the ship's rail, the CIP term should be used.

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