Understanding International Trade Terms (INCOTERMS

INCOTERMS
• ICC introduced the first version of INCO
terms short for "International Commercial
Terms" - in 1936.
• INCO terms are standard trade definitions
most commonly used in international sales
contracts. Devised and published by the
International Chamber of Commerce, they are
at the heart of world trade

•Inco terms 2000
• Inco terms are 13
• There are7 Multimodal & 6Water Transport Inco
terms.
• Not valid for Domestic Sales
• Does not recognize electronic Communication
• Confusion during String salese specially on HighSea.
• Silent on Information Duties for Insurance cover
• Security related clearances; Incoterm sare silent

Incoterms 2010
• Incotermsare11
• There are 7 Multimodal & 4Water Transport Inco
terms.
• Has equal force of law if incorporated in domestic
sales contract. This clause is Not relevant to India
• Guidance Notes incorporated like on Terminal
Charges
• Recognizes Electronic Communication
• String Sales Allowed /Procure
• Insurance Cover/ Information Duties
• Security Related Clearances

Incoterms are divided in to four(4)categories:
• E”term–Seller makes the goods available to the buyer at the
seller’s premises or other place named by the seller.
• F”terms–Seller is responsible to deliver the goods to the
export shipment point and carrier designated by the buyer
• “C”terms–Seller is responsible for contracting carriage of
goods to the place of destination, but does not assume risk
of loss or damage to goods, or additional costs due to events
occurring afte rshipment
• “D”terms–Seller is responsible for all costs and risks
associated with delivering goods to the named place in the
country of destination

4 groups of terms
• Group E Departure EXW Ex Works (… named place)
• Group F Main carriage unpaid FCA Free Carrier (…named place)
FAS Free alongside Ship (…named port of shipment) FOB Free On
Board (…named port of shipment)
• Group C Main Carriage Paid CFR Cost and Freight (…named port
of destination) CIF Cost Insurance and Freight (…named port of
destination) CPT Carriage Paid To (…named place of destination)
CIP Carriage Insurance Paid To (…named place of destination)
• Group D Delivered DAT Delivered at Terminal (….named port or
place of destination) DAP Delivered at Place (…..named place of
destination) DDP Delivered Duty Paid (…named place of
destination)

INCOTERMS
• INCOTERMS
• International Chamber of Commerce first
published INCOTERMS in 1936 and
subsequently amended in
1953,1967,1976,1980,1990 ,2000 and 2010

INCOTERMS
• INCOTERMS ( The International rules of the
Interpretation of Trade Terms)
These interpretation terms were introduced by the
International Chamber of Commerce (ICC) to
simplify and clarify the international trade terms.
INCOTERMS may infact have customary or even
statutory force in some jurisdictions.
 Important-applicable in English law only if chosen
by the parties.

INCOTERMS
• An international set of trade terms
(INCOTERMS) which has been adopted by
most countries that defines exactly the
responsibilities and risks of both the buyer and
seller including while the merchandise is in
transit.

INCOTERMS
• INCOTERMS ( The International rules of
the Interpretation of Trade Terms)
• A failure to refer to the current version may
result in disputes as to whether the parties
intended to incorporate that version or an
earlier version into their contract.
• Merchants wishing to use Incoterms 2010
should therefore specify clearly that their
contract is governed by Incoterms 2010.

INCOTERMS
• Where the cargo being transported consists of
commodities rather than manufactured goods,
it is common for the cargo to change hands by
being bought and sold more than once during
the transit, a practice known as string sales. In
this situation, the sellers who are in the middle
of a string of sales and are selling the goods
during transit are not the same sellers who
were responsible for shipping the goods.

INCOTERMS
• The wording of the Incoterms 2010 has
therefore been amended to reflect this by
containing an obligation to procure goods
shipped, rather than to ship the goods, in the
case of a seller in the middle of a string sale.

INCOTERMS
• The Incoterms 2010 have been updated so as
to remain as useful as possible to parties
drawing up contracts in relation to
international trade.
• All those engaged in international transactions
should now examine their standard contracts
and update them where necessary to
incorporate the changes introduced by
Incoterms 2010.

INCO Terms
• Example;
• When quoting INCOTERMS correctly - for
example "FCA INCOTERMS 2000" - traders
throughout the world are referring to the same
set of rules.

INCOTERMS
• Frequently parties to a contract are unaware of
the different trading practices in their
respective countries.
• This can give rise to misunderstandings
disputes and litigation ,with all the waste of
time and money.

INCOTERMS
• INCOTERMS –Advantages
• Make a valuable contribution to international
uniformity in the interpretation of contractual
terms.
• The purpose of INCOTERMS is to provide a
set of International rules for the interpretation
of the most commonly used trade terms in
foreign trade.

INCOTERMS
• INCOTERMS –Advantages
• Thus the uncertainties of different interpretations of
such terms in different countries can be avoided or at
least reduced to a considerable degree.

INCOTERMS
• What do they cover?
The scope of INCOTerms 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, but excluding
"intangibles" like computer software.

INCO Terms
• WHAT INCOTERMS DO NOT DO -
INCOTERMS by themselves DO NOT:
• Constitute a contract;
• Supersede the law governing the contract;
• Define where title transfers; nor,address the price
payable, currency or credit terms.
• These items are defined by the express terms in the
sales contract and by the governing law.

INCOTERMS
• Scope of INCOTERMS
• It’s a common misconception that
INCOTERMS apply to contract of carriage
.However the parties agreement to use
particular will necessarily have implications
for the other contracts which are part of the
matrix.

INCOTERMS
• What does it take to use INCOTERMS correctly?
The revised rules, designated "INCOTERMS 2010",
contain a series of changes, such as a reduction in the
number of terms to 11 from 13. The DAF, DES,
DEQ, and DDU designations have been eliminated,
while two new terms, Delivered at Terminal (DAT)
and Delivered at Place (DAP), have been added.
INCOTERMS 2010 also attempt to better take into
account the roles cargo security and electronic data
interchange now play in international trade.

INCOTERMS
• 2010 INCOTERMS are reduced to 11 from 13.
• INCOTERMS 2010 are grouped into two
classes;
• 1.Terms for any Transport Mode
• 2. Maritime-only Terms

INCOTERMS
• Example;
• 1. TERMS FOR ANY TRANSPORT
MODE
• • EXW - EX WORKS (... named place of
delivery) the Seller's only responsibility is to
make the goods available at the Seller's
premises. The Buyer bears full costs and risks
of moving the goods from there to destination.

INCOTERMS
• Example;
• FCA - FREE CARRIER (... named place of
delivery) The Seller delivers the goods,
cleared for export, to the carrier selected by
the Buyer. The Seller loads the goods if the
carrier pickup is at the Seller's premises.
• From that point, the Buyer bears the costs and
risks of moving the goods to destination.

INCOTERMS
• UNDERSTAND WHO HAS RESPONSIBILITY
FOR LOADING AND UNLOADING CHARGES.
FOR
• EXAMPLE:
• DAT obliges the Seller to place the goods at the
Buyer's disposal after unloading at the named
terminal at port or place of destination.
• DAP obliges the Seller to place the goods at the
Buyer's disposal on the delivering carrier ready for
unloading at the named place of destination.

INCOTERMS
• Example;
• DAT - DELIVERED AT TERMINAL (... named terminal
at port or place of destination) The Seller delivers when the
goods, once unloaded from the arriving means of transport, are
placed at the Buyer's disposal at a named terminal at the
named port or place of destination. "Terminal" includes any
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

INCOTERMS
• UNDERSTAND WHO HAS RESPONSIBILITY
FOR LOADING AND UNLOADING CHARGES.
FOR
• EXAMPLE:
• CPT, CIP, CFR or CIF on the other hand, require the
parties to identify as precisely as possible the point at
the agreed port of destination because the costs up to
that point are for the account of the Seller.

INCOTERMS
• BE SPECIFIC:
• If you use INCOTERMS in the Sales Contract
or Purchase Order, you should identify the
appropriate INCOTERM Rule [e.g. FCA,
CPT, etc.], state "INCOTERMS 2010" and
specify the place or port as precisely as
possible.

INCOTERMS
• RECOGNIZE WHERE THE RISK OF LOSS
TRANSFERS:
• A common misconception when the Seller pays the freight is
that the Seller has the risk of loss until the goods are delivered
to the place or port specified on the bill of lading or airway
bill. Actually, when using INCOTERMS CPT, CIP, CFR or
CIF, risk transfers to the Buyer when the Seller hands the
goods over to the carrier at origin, not when the goods reach
the place or port of destination.
• Understand that under CIP and CIF, the Seller is only obliged
to obtain

INCOTERMS
• UNDERSTAND WHO HAS RESPONSIBILITY FOR U.S.
CUSTOMS ENTRY DECLARATIONS:
• DDP is the only INCOTERM where the Seller has
responsibility for U.S. Customs entry declarations.
• IMPORTANT NOTE: An important factor to be
considered when asking the Seller to be responsible
for international carriage, is if the goods ship by
Ocean Freight, an Importer Security Filing (ISF) must
be electronically submitted to Customs 24 hours
before the cargo is laden on the vessel bringing the
cargo to the U.S.

INCOTERMS
• UNDERSTAND WHO HAS RESPONSIBILITY FOR U.S.
CUSTOMS ENTRY DECLARATIONS:
• The Buyer should specify in the contract either (a) the shipper
is responsible for the ISF or (b) the Seller is responsible for
providing the required data in a timely manner (i.e. 72 hrs
before lading) to the Buyer’s appointed agent (e.g. Customs
Broker). In our experience, when the broker and the
international forwarder are unrelated parties, this requirement
is honored more in the breach than in the observance. The
Buyer should indemnify against the penalties (US$5,000) for
filing a late, inaccurate or incomplete ISF. The ISF does not
apply at this time to airfreight shipments.

INCO Terms
• INCOTERMS which are suitable for water
transport, FOB and CIF are the most
commonly used terms.
• An outline meaning of each INCOTERM is
shown in next slide.

INCOTERMS
• Examples ;
• EXW-Ex Works ( named place)
• FCA- Free Carrier ( ..named place)
• FAS-Free Alongside (..named port of
shipment)
• FOB-Free on Board(..port of shipment)
• CFR-Cost and freight (..port of discharge)

INCOTERMS
• Examples
• CIF –Cost Insurance and freight(…port of
discharge)
• CPT-Carriage paid to (…named place of
destination)

INCOTERMS
• Free On Board (named port of shipment),
e.g.
• The seller duties:
• Supply Goods & documents as per the sale of
contract
• Load the goods on board the vessel named by the
buyer at the named port of shipment on the date or
within the period stipulated.

INCOTERMS
e.g.
• Bear all costs and risks of the goods until they
have passed the ship’s rail at the named port of
shipment, including export charges and taxes.
• Pay for packing where necessary. Risk passes
when the goods pass the ship’s rail.

INCOTERMS
e.g.
• The seller must notify the buyer when the
goods have been loaded with sufficient
information to buyer.

INCO Terms
• FOB Contracts
• Buyers Duties:
• To arrange insurance; if the seller fails to give
enough information, the risk stays with him.
• Charter a ship or reserve the necessary space on a
Ship and notify the seller of the ship’s name ,loading
berth and loading dates.

INCO Terms
• FOB Contracts:
• The buyer must bear all costs, including insurance
(which he must arrange) and freight, from the time
the goods cross the ship’s rail at the loading port,
from when he is liable to pay the contract price.
(Freight is normally collectable by the carrier from
the buyer at the discharge port.)
• The buyer must also pay the seller for providing the
required documents, e.g. bills of lading and certificate
of origin

INCO Terms
• FOB is advantageous when the cargo is of a
type (e.g. oil) and size that the buyer wishes to
charter a particular vessel, or where foreign
currency restrictions compel an importer to use
FOB (e.g. where governments want importers
to use national flag vessels). It is mainly used
for bulk sales contracts.

INCO Terms
• FOB advantageous :With respect to the bill of
lading ,title in the goods does not pass to the
buyer until shipment.
• The FOB contract is based on the loading port,
so the buyer is free after loading to re-sell the
goods, even while they are on the vessel.
• The FOB invoice price is lower than the CIF
price.

INCO Terms
• Example of passing property in FOB
Contracts:
• In such contract the risk of goods and its
condition is passed over to the buyer
movement the cargo passes the ‘’ship’s rails’’.
• This means the seller to have deemed to have
delivered the goods to the buyer.

INCO Terms
• Example of passing property in FOB Contracts:
• Sales of Goods act section 18 states that where the
seller delivers the goods to the buyer or a carrier or
other bailee for the purpose of transmission to the
buyer ,he has appropriated the goods to the contract.
• Upon passing the goods to the ship the seller obtains
the document such as the Bill of Lading.

INCO Terms
• Example of passing property in FOB
Contracts:
• The payment of goods is made to the seller
against conforming documents ,the contract
would usually have stipulated that the bill of
lading is made deliverable to the seller or to
his security for payment.

INCO Terms
• Example: FOB Documentation required.
Certificate of Insurance
Bills of Lading would normally be marked as Freight
collect or Freight payable at destination
Certificate of origin
Movement certificates
Invoices of value
Pre-shipment Inspection certification

INCO Terms
• Cost, Insurance and Freight (paid to a named
place), e.g. CIF London.
• Is a contract based on the discharge port.
• The seller must pay all costs including marine
insurance and freight to carry the goods to the
named destination, but risk passes from the
seller to the buyer when the goods cross the
ship’s rail at the loading port.

INCO Terms
• Cost, Insurance and Freight (paid to a
named place), e.g. CIF London.
• The seller must supply the goods and make a
contract (at his own expense) for carriage of
the goods to the agreed port of destination,
paying freight and charges for
loading/unloading.

INCO Terms
• Cost, Insurance and Freight (paid to a named
place), e.g. CIF London
• He must arrange (at his own expense) a marine
insurance policy covering the goods against the risks
of carriage for the CIF price plus 10%.
• Any war risks insurance required by the buyer must
be arranged by the seller but charged to the buyer.
(The cost of providing these services are included in
the invoice price for the goods.)

INCO Terms
• CIF Contract:
• The seller must provide the buyer with clean,
negotiable bills of lading (dated for the agreed
period of loading), an invoice and an insurance
policy or certificate of insurance. The bills of
lading must be a full set of negotiable “order”
marine bills so that delivery can be made to
the order of the buyer or his agreed
representative.

INCO Terms
• CIF Terms:
• Clean bills of lading to be passed to a bank in
the documentary credit system, enabling the
seller to obtain early payment.
• If the bill of lading contains a reference to a
charter party, the seller must also provide a
copy of the charter party.

INCO Terms
• CIF Contract:
• The seller must tender all the documents to the
buyer, his agent or his bank.
• The buyer must accept the documents when
tendered by the seller, and must pay the agreed
contract price.
• Property passes on transfer to the buyer of the
documents.

INCO Terms
• CIF Contract:
• The buyer bears all costs and charges excluding
freight, marine insurance and unloading costs unless
included in the freight when collected by the carrier.
• The buyer must also pay for war risks insurance if
he requires it. He must effectively bear all risks of the
goods from passing the ship’s rail at the port of
shipment. He is protected by the insurance arranged
by the seller.)

INCO Terms
• CIF Contract:
• As freight is paid by the seller, the bill of
lading is normally marked “FREIGHT PRE-
PAID”, but the master should ensure that
freight has been paid before signing the bills of
lading.
• The buyer bears the risks during the
voyage, but title in the goods only passes
when the documents are taken up by the
buyer.

INCO Terms
• CIF Contract:
• When the buyer has received the documents
he must pay for the goods; he cannot
demand receipt of the goods first.
• The purpose of a CIF contract is not so
much the sale of goods as the sale of
documents relating to the goods, so as to
enable the negotiability of the bill of lading.

INCO Terms
• CIF Contract:
• CIF is therefore widely used where the
documentary credit system is used.
• The advantage of CIF to the buyer is in
making the seller wholly responsible for
arranging the shipment.
• The seller is protected against loss or
damage before payment by the insurance
policy.

INCO Terms
• CIF Contract:
• The seller can also retain title in the goods
beyond the time of shipment and as security
against payment by the buyer, so it is easier for
the seller to obtain credit at his bank. Once the
buyer receives the documents and pays, he can
secure credit or resell the goods.

INCO Terms
• CIF Contracts
• The goods will cost more on CIF terms than
on FOB terms.
• In view of the advantages in CIF for normal
international sales, in which the banks’ documentary
credit system requires the transfer of title through the
passing of documents (including the set of bills of
lading and a certificate of insurance).the vast majority
of international seaborne cargo shipments are CIF.

INCO Terms-Legal aspect
• Legal relationship between the buyer and seller
and other parties
• Those who provide insurance for the goods against
the loss or damage.
• The term of the contract of sale e.g the date of
delivery will be necessarily be of importance to these
parties.
• Thus we can say that an International Sale contract is
at the heart of the matrix in international trade.
• This contractual matrix provides for a number of
interlinked and inter dependant legal relationships.

• Legal Relationship between the buyer and
the seller and the other parties
• The commercial success or failure of an
international sale contract will be affected not
only by the state of the market for the goods in
question but also by the state of the market for
the services provided by other parties whom
the contract will involve

• Legal relationship between the buyer and seller
and other parties.
• Similarly a breach of the contract of sale will produce
a ‘’domino effect’’
• It will affect the ability of those who have made
related contracts to perform their obligations.
• The composite nature of International sale
arrangements means that a party who breaches an
international sale arrangement means may face not
only contractual liability to other party but also
liability to others in tort.

• Legal relationship between the buyer
and seller and other parties
• Therefore we must keep in mind that this
contract does not exist in a vacuum.

• The Preliminary question;
• Sellers or Carriers liability
• Two fundamental questions always if the goods
arrive in damaged condition
• (a) Under the contract of sale had the risk in the
goods to the buyer by the time the goods were
damaged ?
• (b) If so can the buyer (in the context of carriage of
relationships as the consignee or endorse) sue the
carrier on the contract of carriage.

• Shifting liability for damage to the goods from the
seller to the carrier is the moment at which the risk in
the goods under the contract of sale passes from the
seller to the buyer.
• This point at which the risk passes is determined by
the contract of sale itself.
• Thus we can say that the buyer has accepted the risk
in the goods under the contract of sale and he/she
must sue the carrier in respect of their damage.
• This then explains the importance of the buyer
receiving clean bill of lading.

• Once the risk in the goods has passed to the buyer
under the contract of sale ,then any claim by the
buyer in respect of loss or damage to the goods
must be brought against the carrier rather than
the seller.
• In other words if the seller has complied with its
obligations under the contract of sale ,then he/she so
to speak have fallen out of the picture.

• Shifting of liability for damage to the goods from the
seller to the carrier is the moment at which the risk in
the goods under the contract of sale passes from the
seller to the buyer.
• Thus where the buyer has accepted the risks in the
goods under the contract of sale ,he must as
consignee/endorsee sue the carrier in the respect of
their damage.

IncoTerms
• Security concerns have increased in the last
ten years, and a more thorough examination of
goods may be expected by customs, the parties
to a contract are now required by the
Incoterms 2010 to provide all information
necessary for export and import clearance.

Understanding International Trade Terms (INCOTERMS

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