International Commerce Terminology or INCOTERMS
International Commerce Terminology or INCOTERMS as they are popularly known as, are classified as per categories. International Chambers of Commerce has incorporated and classified 13 terms that are widely used in international business.
- EXW – Ex Works (…agreed delivery point): Ex can be defined as abbreviation used for exporting principal or consignor delivering i.e. making the commodities available to the buyer at the premises of exporters. Execution of this nomenclature in agreements places minimum responsibility and risk on exporting party and maximum onus and risk of collection and all other related tasks is transferred to buyer.
The consignor in this case will not be liable for any resulting cost of insuring and transporting the commodities to the importer’s or consignee’s delivery address i.e. there will be no participation on part of exporter in loading, transport and completing formalities for export clearance of commodities in question and all financial and aspects whatsoever will be borne by importer.
However if the parties agree to terms that institute placing of responsibility and onus of consignor to participate in transportation and clearing export formalities then it should be clearly indicated in the trade agreement.
- FCA – Free Carrier(… agreed delivery point): Under this clause the exporting party hands over the merchandise to the first carrier indicated by buyer or importer at an indicated point. In this case the all export formalities concerned with exports are handled by consignor. In this case there are specifications concerned with the costs bearing loading and unloading of merchandise i.e. if the point of delivery is decided as the consignor’s establishment loading cost (loading on to logistics medium) will be borne by the consignor but if the merchandise are transferred at any other predestined other than consignor’s facility unloading is not borne by exporter.
At the agreed point of delivery onus and exporter’s responsibility to financial risks and other implications ceases and is transferred to buyer or consignee.
Carrier refers to an organization or individual performing or taking responsibility of transporting by any means of transportation by train, air, shipping vessel or an array of all components involved in ensuring delivery at buyer’s desired address.In case, the consignee appoints an individual or an organization other than logistic concern (carrier) to collect merchandise from exporter the responsibility of consignor is considered fulfilled after the transfer of possession of merchandise is affected.
- FAS – Free Alongside Ship (agreed port of shipping):Free Alongside Ship refers to duty of consignor to clear all formalities concerned with export clearance and place the merchandise along side the sea cargo liner.Post placement of merchandise the risks involved are automatically transferred to consignor and responsibility of consignor ceases beyond this point.Here the onus of negotiating all formalities concerned with export clearance must be duly handled by exporter. If in case it has been agreed that consignee will take care of all export clearances then it must be clearly indicated in agreement.This clause is clearly indicated for marine transportation.
- FOB – Free On Board (agreed Shipping port): This clause refers to consignor ensuring loading of merchandise on cargo ship as indicated by buyer. All formalities concerned with export clearance must be duly completed by consignor. After loading of merchandise onto cargo ship responsibility and risk concerned with the merchandise are duly transferred to importing party.
If both parties have decided against delivery of merchandise on cargo ship then FCA should be indicated on agreement.The clause is clearly indicated for marine transportation.
- CFR – Cost & Freight(agreed port of destination): Cost and freight refers to exporter ensuring delivery of merchandise on cargo ship at the port of origin of shipping.
Consignor must complete all formalities related to export clearances and pay for costs involving transportation (excluding marine insurance) till the port of delivery.
All risks and responsibilities occurring in incidents of loss or damage to merchandise are transferred to buyer beyond loading at port of origin.If parties agree against delivering merchandise on cargo ship then CFR should be implemented. This terms was formerly called CNF (C&F).
- CIF – Cost, Insurance & Freight (agreed port of Delivery): Cost, Insurance and Freight is similar to CFR but the exporter must also procure a marine insurance i.e. in addition to completing all formalities concerned with securing clearance for export of merchandise and loading on cargo ship exporter also pays for insurance cover of merchandise in question.However all risk implications, expenditure and responsibilities are transferred to buyer beyond loading at the port of origin of shipping.Seller is required to bear cost of insurance cover and pay connected premium only to extent of minimum essential premium amount required for appropriate minimum insurance cover.
If the buyer intends to procure insurance cover of higher value then the additional costs accruing in paying premium beyond the minimum premium amount must be borne by the importer.If the parties agree against loading of merchandise onto cargo ship then CIP is implemented.CIF is used purely for marine transportation.
- CPT – Carriage Paid To (agreed port of destination) : Carriage paid to indicates that consignor or exporter ensures handing over of merchandise to first carrier as indicated by buyer. The costs involved with transporting of merchandise to port of destination must be borne by exporter.
The risks and responsibility concerned with merchandise are transferred to buyer beyond the handing over of merchandise to first carrier.
Carrier refers to an organization or individual performing or taking responsibility of transporting by any means of transportation by train, air, shipping vessel or an array of all components involved in ensuring delivery at buyer’s desired address.
CPT is used for all transportation mediums involved in transfer of merchandise to buyer.
- CIP – Carriage and Insurance Paid To (agreed point of destination): this clause refers exporter ensuring handing over of merchandise to the first carrier indicated by the importer. The expenditure involved with delivery at an agreed point of destination is borne by consignor. Here all formalities concerned with clearance of export of merchandise must be negotiated by exporter.
Exporter also must pay for premium of insurance of merchandise which is at risk of buyer against loss and damages during shipping.Seller is however required to bear cost of insurance cover and pay connected premium only to extent of minimum essential premium amount required for appropriate minimum insurance cover.
If the buyer intends to procure insurance cover of higher value then either it should be duly agreed by both the parties or the additional costs accruing in paying premium beyond the minimum premium amount must be borne by the importer.The risk and responsibility of merchandise are passed over to buyer beyond point of delivery to first carrier.
Carrier refers to an organization or individual performing or taking responsibility of transporting by any means of transportation by train, air, shipping vessel or an array of all components involved in ensuring delivery at buyer’s desired address.CIP is used for all connected logistics medium used to ensure delivery to port of delivery.
- DAF – Delivered At Frontier (agreed destination): This clause means exporter making merchandise available to buyer at the border point as agreed (outside the border point of country of import) but not yet unloaded and not yet given clearance for importing at the agreed destination and point on border or frontier.
The point may well be on border of exporting country. It is henceforth essential that point or border must be clearly indicated in agreement and clause.The exporter usually bears the expenditure for delivering the merchandise at the preset point on border (frontier).
From there the risk and the responsibility of merchandise is transferred to importer and all costs of transferring merchandise from border to importer’s desired address are borne by buyer.Incase, it is desired of exporter to arrange and pay for unloading then it must be clearly indicated in terms and conditions in agreement.DAF is associated primarily with transportation of merchandise to an agreed point of delivery using inland logistics means i.e. rail and road.Incase intended delivery is at port of destination, on board cargo ship or ocean liner or on a dock DES or DEQ must be implemented.
- DES – Delivered EX-Ship (agreed port of destination): This clause means exporter making merchandise available to buyer for delivery at agreed port of destination on board cargo ship (carrying merchandise).
Exporter must bear all expenditure incurred on transportation, insurance and other sundry expenses connected with shipping merchandise to intended port of delivery before being released to buyer.In this case the title and risk involved with damages and loss rests with the exporter till the point of destination port.
The costs involve with unloading and accruing taxes are borne by importer.In case it is agreed that exporter must pay for releasing of merchandise then DEQ should be mentioned in terms.DES is applicable only incases of final phase delivery of merchandise being done using cargo ship.
- DEQ – Delivered Ex-Quay (agreed post of destination) This clause is applicable in cases where consignor must pay for all expenditure incurred for making merchandise (Merchandise not yet cleared for imports) available to buyer at destination port, dock or quay intended (agreed). In this case title of merchandise and risk involved rests with the exporter till the merchandise is physically released to buyer.Importer bears all expenses associated with formalities concerned with unloading and custom duties, taxes and miscellaneous levies connected with import.In case parties to agreement wish that exporter must pay total or part of expenses associated with imports, it must be clearly indicated in terms and conditions of agreement.
DEQ is exclusively applicable in instances where delivery of merchandise is using marine transportation includes multimode logistics used to deliver merchandise on dock or quay.In case it is intended by both parties that exporter must bear expenses incurred on handling and delivery of merchandise from Quay to other facility inside or outside port then DDU or DDP should be implemented.
- DDU – Delivery Duty Unpaid(agreed port of destination): delivery duty unpaid is applicable where consignor delivers the merchandise to buyer, which is not yet been cleared for imports and have also not been unloaded from means of logistics used at the agreed port of destination. Here, exporter pays for all expenditure incurred on making merchandise available at agreed destination.
All expenses beyond this point are borne by importer, which include expenses incurred on getting import clearances, customs, duties, taxes, and miscellaneous levies.
Consignee also bears the risks and accruals resulting from importer’s failure to get clearance for merchandise within schedule.In case if both parties agree that expenses associated with customs, import clearances and risks connected with it must be borne by exporter then it must be clearly indicated in terms and conditions of agreement.DDU is applicable when the merchandise has been shipped by any medium of transportation. If the intended delivery is scheduled to be on cargo ship or on Quay then DES or DEQ is applied.
- DDP – Delivery Duty Paid (agreed port of destination): Delivery duty paid in cases where exporter pay for all expenses incurred on making merchandise available to importer including clearance for import and associated duties and levies (i.e. customs, taxes, duties and miscellaneous levies).
The merchandise which has not yet been unloaded from transportation medium used to ship merchandise at the intended port of destination.DDP places maximum risks and liabilities on exporters and least on importers.
This clause is completely opposite to EXW (which place maximum liability on importer and least on exporters).
This clause must not be applied in cases where exporter is not able to obtain import permit in destination country.In cases where both parties to contract intend to exclude or offload some liabilities off exporter i.e. some part of expenses incurred on import then its should be clearly indicated in agreement.In case it is intended and agreed that buyer must bear all expenses and risks associated with exports then DDU must be indicated.
DDP is used for all mediums of transportation but incases where intended delivery is on cargo ship or on quay then DES or DEQ must be indicated.