Overview Of The Incoterms
Incoterms rules are terms used by governments, legal authorities and practitioners worldwide. It is aimed to reduce or eliminate the proportion of uncertainties that occur during the interpretation of the rules in different countries. For this reason, it is possible to see it in worldwide sale contracts.[1] In the Incoterm 2010 published by the ICC, Incoterms are divided into all forms of transport and rules only those suitable for marine and inland water transport. Thus, the ICC wants multimodal terms to be used rather than maintaining the habit of using maritime terms.[2] Such practices are not restricted only to maritime trade because it tries to create the scope more extended. The Incoterms 2010 rules in the first chapter can be applied to any type of transportation and can be in any mode. EXW, FCA, CPT, CIP, DAT, DAP and DDP belong to this class. It can be used even if there is no sea transport. It should be remembered that these rules can also be used when a ship is used for transport. According to the rules of the second class of Incoterms 2010, it refers to sea and inland waterway because it refers to the delivery point and the ports where goods are transported to the buyer. FAS, FOB, CFR and CIF belong to this class. According to the latest rules, the ship’s rail is referred to as the delivery point when the ship is on board. This modern trade rule reflected a reality and avoided the confusion of an outdated concept in an uncertain oscillation.[3]
Incoterms, as mentioned before, should be divided into two main groups. Categories are grouped according to the delivery type: rules for any mode or modes of transport and rules for sea and inland waterway transport.
i) Any Mode or Modes of Transport
- EXW (Ex Works)
In accordance with the EXW requirement, the seller leaves the goods at the buyer’s disposal without the goods being loaded to the cargo and without clearing the goods (this may be the seller’s property or elsewhere).[4] In such a specification, carriage of the goods can be difficult if buyer’s vehicle is expected to be delivered and the country that this transport process is happening is a member party to Convention on the Contract for the International Carriage of Goods by Road (CMR)[5] The carrier will not be held liable for damaging the goods which made by the shipper or an agent who acts behalf of the shipper during the transportation process However, the buyer may experience a lack of insurance coverage within the time taken by the carrier.[6] Despite this deficiency, this term usually gives minimum responsibility to seller. EXW is therefore usually a term proposed by sellers.[7]
- FCA (Free Carrier)
In international trade, it means the delivery to the carrier by specifying the place of delivery in the seller’s country. In this type of trade, export formalities and domestic transportation to the designated location expenses belong to the seller. The buyer is responsible for the import formalities in the buyer country and also transports formalities after the designated location. This term is generally common in practice because sellers often apply the loading procedure.[8]
- CPT (Carriage Paid To)
CPT means that the seller will deliver the goods to the specified location by paying the freight. After the seller has delivered the goods to his shipper in good condition, he / she has to carry out the customs clearance and is obliged to forward the loading information and documents to the buyer. The buyer must insure the goods against damage after receiving this information. That is because after the delivering of the goods to the carrier; all damages and additional costs belong to the buyer.
- CIP (Carriage And Insurance Paid To)
In this form of delivery, the seller pays for the transportation of the goods; in addition, the insurance costs of the goods belong to the seller. The seller is obliged to deliver the goods to the customs, pay the freight cost and deliver it in the place indicated in the form of delivery. Also, the seller is not obliged to pay for the insurance, but if it does not insured seller is responsible for all future damages and losses. At the same time, after arrival all the expenses from the goods (customs commission, successor, etc.) belong to the buyer. Buyers or sellers may be forced to insure their goods in their own country to reduce their spending in foreign currencies or to support the domestic insurance industries. In such cases the buyer may be obliged to import through the CPT or FOB terms. Whereas the seller is legally able to make sales according to the CIP requirement.[9]
- DAT (Delivered At Terminal)
It means that the seller brings the goods and then unloads them and places the goods at the designated port, terminal or named destination at the buyer’s disposal. The terminal also includes closed or non-closed areas such as quay, warehouse, container area or road, rail or air cargo terminal. Seller is responsible for the risks that may arise in bringing and unloading goods to the specified port or destination.[10]
- DAP (Delivered At Place)
According to the DAP term; seller’s responsibility ends when goods are delivered and unloaded. Seller is also responsible for export clearances.
- DDP (Delivered Duty Paid)
DDP exerts the maximum responsibility to the seller as opposed to EXW. It means that the seller has delivered the goods to the buyer without clearing it from the transport vehicle that arrives at the specified destination. In addition to the responsibilities in the DAP, it is also responsible for the fees (customs, clearances, authorization etc.) that are generated when the seller is importing.[11] Implementation of DDP has many benefits in practice. One of them is the sale fee includes transport cost and custom clearance. Buyer is involved the process in the unloading of the goods to the designated place. This makes things easier for the buyer
ii) Rules for Sea and Inland Waterway Transport
- FAS (Free Alongside Ship)
In this term, the seller shall deliver the goods together with the ship and arrange export clearances. After this point, the risk is transferred to the buyer along with the transportation and insurance costs. In this type of trade, the export formalities and the shipping costs for the ship at the determined port by the buyer; belong to the seller.[12]
- FOB (Free On Board)
It includes the responsibility of the supplier in the process of transporting the goods to the ship. The transportation costs from the factory, port customs and port fees belong to the supplier. After the good is moved to the ship’s deck, the responsibility belongs to the customer. It is a term used in maritime transport and it is the most commonly used term in conjunction with CIF. The use of FOB can have some difficulties in practice.[13] Risk transfer is carried out at the loading point in the ship, but the seller actually loses control after unloading the goods. In addition, some authors and practitioners[14] suggest the use of certain terms such as FAS, FOB, CFR, and CIF, since they do not comply with customs regulations and delivery options, especially when transporting maritime containers. Similarly, in another aspect, the confusion about the use of containers by FOB demonstrates that confusion over the use of containers can be avoided using terms such as FCA, CPT and CIP.
- CFR (Cost and Freight)
It is an international trade term which means cost and freight. All transportation costs up to the pre-determined port shall be fully covered by the exporter company. However, the increase in costs or damage during transportation is the responsibility of the other party (the buyer).
- CIF (Cost, Insurance and Freight)
The word equivalents are the cost of goods, insurance and freight. In this type of trade, the seller undertakes the same obligations as in CFR, but in addition he is obliged to provide marine insurance against the risk of loss and damage of goods during transportation. It is here that the insurance contract is concluded and the insurance premium is paid to the seller.[15] The buyer has to take into account that the CIF term requires only a minimum level of insurance coverage from the seller. The term CIF also requires that the goods are exported by the seller. This term may only be used in sea or river transport.
[1]Incoterms 2010 by ICC p.2 <https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-2010/> accessed at 04.05.2019
[2]Ibid p.2
[3]Ibid p.3
[4]J. Malfliet, Incoterms 2010 and the mode of transport: how to choose the right term, Management Challenges in the 21st Century: Transport and Logistics – Opportunity for Slovakia in the Era of Knowledge Economy (Bratislava, 2011), p.165.
[5]Done at Geneva, 19 May 1956.
[6]J. Malfliet, Incoterms 2010 and the mode of transport: how to choose the right term, Management Challenges in the 21st Century: Transport and Logistics – Opportunity for Slovakia in the Era of Knowledge Economy (Bratislava, 2011), p.175.
[7]ICC INCOTERMS 2010– Domestic and International Trade Terms, (English Version,Zurich,2011) p.4
[8]J. Wayne, J and K.C. Shippey, “A Short Course in International Contracts”, (2nd Ed, World Trade Press, 2013) p.47
[9]J. Ramberg, ICC Guide to Incoterms 2000, (Paris, ICC Publication no 588, 1999) p.62
[10]Incoterms 2010 by ICC p.2 <https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-2010/> accessed at 04.05.2019
[11]Franco Ferrari “What Sources of Laws for Contracts for the International Sale of Goods? Why One has to Look Beyond the CISG”, International Review of Law and Economic, 25, p.6
[12]Incoterms 2010 by ICC p.2 <https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-2010/> accessed at 04.05.2019
[13]Docherty, An Overview of Incoterms 2010, (Special Report, IIFA, 2010)
[14] Bergami, Incoterms 2010: What You Need to Know for Smooth Trading, (MHD Supply Chain Sollutions, 2011) p. 39
[15]J. Wayne, J and K.C. Shippey, “A Short Course in International Contracts”, (2nd Ed, World Trade Press, 2013) p. 46
