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INCO TERMS – A Brief Guide
Introduction
Central to the concept of the Incoterm definitions
of terms of purchase is the understanding that at any given point where
either risk, responsibility, liability or costs terminate from the seller's
perspective, so they must instantly initiate from the buyer's perspective.
In this way continuity is maintained throughout the entire journey. It
is an aspect of the Incoterms that they leave no room for uncertainty or
doubt, which might otherwise give rise to dispute.
While the terms are thumb-sketched in the next few paragraphs, the greater details of the terms are not touched upon. Your attention is drawn to the availability of the ICC publication INCO 1990 and it must be accepted that the following brief outlines are no substitute for the document in question. Should you wish to order a copy of this publication, please contact us.
It is strongly recommended that all personnel involved as either a seller or a buyer or as a service provider to the parties in any international transaction be in possession of this publication.
The following pages generalise a very complex topic. Acknowledgement of this must be made when using these notes to interpret any individual needs you may have.
It must be stressed that INCO terms are explicit,
not implicit. Thus, for Incoterms 1990 to be used for the mutual protection
of the buyer and seller, then the actual expression "Incoterms 1990" must
appear on the initial purchase order, contract and / or Credit. Without
this clear reference to the applicability of Incoterms 1990, neither party
could look to the protection that Incoterms 1990 affords in the event of
a dispute.
Incoterms 1990
All of the Incoterms are expressed as three-letter
codes. This uniformity is in acknowledgement of the requirements of EDI
(Electronic Data Interchange).
An individual three-letter Incoterm, without
further qualification, is quite meaningless however, and in each and every
instance the term has to be further qualified by the naming of the place
or point where the term initiates. For example, EXW (ex works), offers
no protection to either the buyer or the seller unless it is qualified
as follows:
EXW 158 Moss Lane, Liverpool. Incoterms 1990
The above clause declares the agreed terms
of purchase as being ex works, from a nominated location, in a nominated
city, and with reference to Incoterms 1990.
The fact that Incoterms 1990 is declared is of great importance. The strength of stating that Incoterms 1990 applies is that the Inco definitions are then clearly and formally acknowledged to be applicable to the sale. Any subsequent dispute could be resolved by referring to the well-documented ICC definition of that term of purchase.
Note that, if "Incoterms 1990" is not specified, then any resultant dispute would rest on the seller's definition of EXW versus the buyer's definition of EXW. Bearing in mind that a dispute involving international traders may have to be settled , for at least one of the parties, in a foreign country, (where preference will be given to the local definition of any term of purchase), it is easy to see why the opportunity to refer to an independent and authoritative third party definition (that is frequently recognised by the domestic law courts in both countries, and is further recognised as being superior to the local definition) is attractive.
There are thirteen [13] terms altogether in
Incoterms 1990. As the Incoterms are made not just for maritime but also
for air, road and rail methods of transport and as they are equally applicable
in each country throughout the world, so many of the Incoterms are not
applicable to transport to and from every country.
The 13 International Chamber of Commerce Incoterms
EXW Ex works - naming the physical address
of the ‘works’
FCA Free Carrier At - naming the carrier &
the place where the carrier is
FAS Free Alongside Ship - naming the seaport
of loading & the vessel
FOB Free On Board - naming the seaport of
loading
CFR Cost and Freight - naming the seaport
of discharge
CIF Cost, Insurance and Freight - naming the
seaport of discharge
CPT Carriage Paid To - naming the place of
handover at destination
CIP Carriage & Insurance Paid to - naming
the place as in CPT
DES Delivered Ex Ship - naming the seaport
of discharge
DEQ Delivered Ex Quay - naming the seaport
of discharge
DDU Delivered Duty Unpaid - naming a place
of handover at destination
DDP Delivered Duty Paid - naming a place of
handover at destination
DAF Delivered At Frontier - naming the frontier
of handover
EXW Ex works - naming the physical address of the ‘works’
As has been stated, ex works (EXW) must be further qualified by the naming of the place or ‘works’ at which point the goods are to be made available.
For each and every Incoterm, there are certain responsibilities that devolve on the seller and the buyer irrespective of the term used. However, it is accurate to say that EXW (ex works) represents the minimum responsibility for the seller and the maximum responsibility for the buyer in terms of risks, liabilities and costs for the international transport to be undertaken.
Accepting an EXW price means that the buyer undertakes to take responsibility for the cargo from the seller’s factory (or works). Once the seller has made the goods available for collection, the seller’s physical obligations under the contract of sale have been met. The buyer therefore takes control at a place where he has no representation and is exposed in terms of insurance in that risks pass to him on availability, not collection.
This Incoterm is Multi Modal: It can be used for any single type of transport as well as any combination of transport types.
As the Incoterms advance (from EXW through to DDP) so the balance between the seller and the buyer shifts, with each development placing more and more responsibility on the seller and less and less responsibility on the buyer (to organise the transport event).
FCA Free Carrier At - naming the carrier & the place where the carrier is
This term must be qualified by a statement as to who the buyer’s appointed carrier is and where that carrier is prepared to take control of the cargo.
Incoterms define a Carrier is either an actual carrier, such as a Shipping Line or Airline, or a contractual carrier - such as a Freight Forwarder.
The seller undertakes to deliver the goods, ‘free’ from any cost of transportation to the named place, having cleared the cargo for export. In undertaking the delivery, the seller is accepting the risks and responsibilities for the cargo up to the point of handover at the named place and also the costs of that transport.
FCA is also a Multi modal term.
This term was created by the ICC and introduced as a new term in the 1990 publication. Amongst other considerations, the term FCA was introduced to represent a fair and definable term for all types of traffic where previously the expression FOB (Free On Board) had been used.
For much of contemporary trade, FCA can be used as a direct substitute for FOB, which is now inaccurate for many aspects of transit in terms of Incoterms 1990. FOB is discussed in detail in the next section.
But, one note of caution should be made. In previous years the term FOB had been used - rightly or wrongly - to indicate that all charges up to and including the cost of loading the cargo into or onto the international vehicle - often called the ‘origin terminal handling’ - would be paid by the seller.
With the changed definition of FCA, origin terminal handling now becomes the automatic liability of the buyer as it is a cost incurred after the cargo has been handed over to the carrier.
In practice, when buyers and sellers change terms from FOB to FCA the commercial purchase price offered by the seller should decrease by an amount equal to the origin terminal handling which they will now not pay.
If, however, this is not desired, the Incoterm can be modified to allow for the same cost responsibilities as have been previously associated with the term FOB. For example, buying on the basis of "FCA (named carrier named place) excluding origin terminal handling - Incoterms 1990", is quite legitimate and would cover the immediate requirements of this particular example. Note that such modifications to INCO terms are permitted under mutual agreement between the seller and buyer. The modification or variant must not, however, contradict the main theme of the INCO term. There is no strict rule as to where such a modification should be placed eg, either after the PLACE, before the REFERENCE or after the REFERENCE.
There are yet further complications for part-load traffic involving the costs of containerisation. These too must be accommodated for and agreed between the buyer and seller before the term FCA should be considered and used.
Again, there is considerably more to the term FCA than can be covered here. The further reading of the International Chamber of Commerce book "Incoterms 1990" is strongly recommended along with Chapter 7 of Incoterms in Practice ( ICC Publication 505) which deals with the FCA term in depth.
FAS Free Alongside Ship - naming the seaport of loading & the vessel
The term FAS is not a multi modal expression. The use of FAS is limited to a specific type of transport only. In requiring the naming of the seaport of loading as well as the vessel, to complete the Incoterm expression, it can be seen that this term is applied to Seafreight transactions only.
It should be noted that the term applies only to transactions were the main and final carriage is exclusively Seafreight. The term FAS cannot be used in a transaction which involves a main carriage which uses any other type of transport - even when used in combination with Seafreight craft.
Other terms are equally restricted to Seafreight events in this manner.
The term FAS requires the seller to deliver the goods, free from any operational or transport costs incurred getting the cargo alongside the named ship in the named port, not cleared through the export customs process. In many cases, this term offers a viable option to the buyer and seller who use charters or who may be involved in bulk movement where ‘traditional’ expressions involve risks of definition, some of which vary from country to country, or even between ports in the same country.
FOB Free On Board - naming the seaport of loading
The Commercial Term ‘FOB’ is one of the most commonly used terms throughout the world. The expression goes back many years, but it is possibly the most misunderstood and misused term throughout the world. The prudent importer and exporter must become familiar with the exact definition of FOB so as to avoid possible misunderstandings and to authoritatively guide their client away from this term, should it not apply to the trading situation in question.
The term FOB is not a multi modal expression. The use of FOB is limited to a specific type of transport only. In requiring the naming of the seaport of loading to complete the Incoterm expression, it can be seen that this term is applied to Seafreight transactions only. This is to say the main and final carriage must be by Seafreight.
The point at which risks and costs pass from the seller to the buyer, under FOB is the passage of the cargo over a ship's rail. What is important here is that the mechanism is the ship's rail. It is clearly impossible for FOB to be used for air, rail or road transit as neither 'planes, trains or trucks have a ship's rail.
Note: If you are involved in ro/ro (roll on / roll off) transactions, then equally FOB cannot be used. Cargo ‘rolled’ on or off a vessel passes under the ship's rail and not over the ship's rail.
The term FOB goes back a couple of hundred years. It was devised during a period when the exporter could load the sling attached to the vessel’s weather-deck crane. Thus as the crane lifted the sling, if the exporter had misloaded then the cargo would fall out. It was taken that if the cargo was lifted safely, then once it passed onto the vessel i.e. once it passed over the ship’s rail, the cargo handling was now the exclusive action of the buyer (if he was crewing the vessel) or the buyer’s appointed carrier. Thus, risk was deemed to pass ‘over the rail’. Risk prior to that point would be for the seller, risks after that point would be the buyers.
Progressively during this century, and at an accelerated rate since the introduction of containerisation, the seller’s involvement in such transactions has receded, away from any direct involvement at the ship’s side.
In a modern transaction, the seller relinquishes control of the cargo to the buyer’s appointed carrier, PRIOR to the rail, in fact often prior to the port.
It is in recognition of the physical reality of how risks are transferred, that the International Chamber of Commerce’s INCO TERMS 1990 incorporate the defined term FCA (Free Carrier At).(see above) This defines the passing of risk at the point when the buyer’s carriers take control. In the modern context, the term FCA is only giving a name to what happens and is not asking the buyer or seller to change any aspect of their existing relationship, other than to trade with the protection of a definable term.
The use of the term FOB ( as a traditional expression, not as an INCO term) when the rail has no significance is NOT ‘illegal’. Any party can still use the term. The problem is one of agreed definition, however. What exactly does FOB mean? In a modern trading environment, in a dispute, none of the concerned parties will have any higher or more authoritative definition than any other. It will be – literally – one man’s definition versus another man’s – with each defining the term to his own best advantage.
The only recognised definition of FOB – other than one specifically set out in a given and ruling contract – is that which is incorporated in the INCO terms. This corresponds to the traditional definition given above. The ship’s rail is the dividing line and for the ship’s rail to serve a purpose, the seller has to have access to that rail and to be in a physical position to undertake the loading themselves – actually or contractually. This condition does not exist in the modern market with one or two notable exceptions involving bulk movement, although it does apply in many minor ports and inland waterway transactions, where FOB as an INCO Term can be correctly applied.
The ICC are very clear on the inappropriate nature of the term FOB to the modern sea movement and preclude its use from air, rail, road or sea traffic that involves containers, roll on / roll off operations or ports where the rail cannot be accessed by either, or both, the seller or buyer.
To use the term in a modern context is to trade inefficiently and dangerously. Everybody uses it – but the differences in defining it will ONLY come to light when there is a dispute, and by then it will be too late for at least one of the two parties involved.
To trade using an indefinable term is to take a risk that CAN BE AVOIDED. With its variable and loose definition, FOB would mean that the contract is not completed until the goods cross the rail. The seller therefore has to take liability for the actions of a third party (the carrier) appointed by the buyer.
Unless both parties are either happy to trade with this risk or have a separate agreed and documented definition that will rule the contract, the term FCA is more appropriate.
Again, we stress that there is no legislative law compelling the use of INCO, but there is the practical commercial law of looking after one’s best interests that make the use of INCO Terms the only informed, intelligent and prudent option.
In containerised shipping, the seller will release control at a point prior to the vessel. Either (for example with a Freight Forwarder’s groupage operation) loose cargo will be delivered into a depot outside of the dock area or, if the seller is loading the whole container (FCL or Full Container Load) the containerised traffic will be handed over to the shipping line, but again outside of the dock area. In either example the seller surrenders his control of the goods prior to the ship's rail.
FOB should be restricted for use in conventional shipping where the ship's gear or dockside gear involves slings and thus cargo can be physically sighted crossing the ship's rail. Yet even so restricted, FOB should only be used when involving those ports where the seller has access into the port itself to supervise, or even conduct, the loading.
Finally, it is important to note that (like all the other Incoterms), if FOB is used it must be further qualified. It is recommended that FOB is not limited to the nomination of a particular vessel. This is too narrow a range and would cause complications if that vessel was cancelled, brought forward or delayed etc. Rather, FOB should be qualified with a named port and perhaps named shipping line.
Bearing in mind the long history of the term FOB and the almost universal misunderstanding of this term, the further reading of the International Chamber of Commerce's book "Incoterms 1990" is strongly recommended.
Of all of the risks and responsibilities that the buyer has undertaken using the terms which begin ‘E’ (EXW) or ‘F’ (FCA, FAS, FOB), the buyer has also been responsible for the cost of the international transport event - the payment of the Freight.
Under the remaining terms, the seller assumes
this responsibility. Identifying the party who will pay the international
freight is of importance - whoever pays the freight appoints the carrier
i.e., selects which Actual Carrier or Freight Forwarder that will be.
Important Note
All of the Incoterms beginning with the letter
‘C’ differ from all other Incoterms in that they allow for two points of
division. Under all other terms, at the point where risks and responsibilities
pass from the seller to the buyer, so the seller also passes over the liability
for transport and administration costs.
When trading using the ‘C’ terms this is not the case. These terms alone make a distinction between the point where risk passes from the seller to the buyer and the point where cost pass from the seller to the buyer.
For this reason, the C-prefixed terms are referred to as being ‘Contracts of Dispatch’ - when the cargo is dispatched from the country of origin, the contract is completed, even though the seller may have appointed and paid the carrier for actions beyond that point.
CFR Cost and Freight - naming the seaport of discharge, and
CIF Cost, Insurance and Freight - naming the seaport of discharge
The terms CFR and CIF are not multi modal expressions. The use of either term is limited to a specific type of transport only. In requiring the naming of the seaport of discharge to complete the Incoterm expression, it can be seen that this term is applied to Seafreight transactions only.
Equally with FOB (above) , the traditional ‘Contracts of Dispatch’ identified by the C prefixes as C&F or CIF cannot be applied to modern contracts as INCO terms, as the ship’s rail at origin is still the division point of risk (although not of cost). The defined equivalent terms are CPT (carriage paid to) and CIP (including insurance). The reservations given regarding FOB versus FCA apply to CFR and CIF also.
These C terms must be qualified by the naming of the destination seaport. The seller undertakes to deliver the goods, onto an appropriate vessel and to pay all of the normal charges to get the cargo to the named seaport.
The buyer, however, assumes all risks from the time that the cargo is placed onto the vessel at the seaport of loading.
In using the term CIF, the buyer and seller are agreeing to the seller organising insurance as an automatic condition of the contract of sale. Under all other contracts (except CIP) the buyer alone is bound to organise insurance, unless the buyer and seller agree otherwise.
CPT Carriage Paid To - naming the place of handover at destination
CIP Carriage & Insurance Paid to - naming the place as in CPT
These C terms must be qualified by the naming of the destination up to which point the seller has arranged and paid ‘Carriage To’.
The seller undertakes to deliver the goods, and to pay all of the normal charges to get the cargo to the named place.
The buyer, however, assumes all risks from the time that the cargo is placed under the control of the first carrier used by the seller to achieve the movement.
Both CPT and CIP are multi modal terms.
In using the term CIP, the buyer and seller are agreeing to the seller organising insurance as an automatic condition of the contract of sale. Under all other contracts (except CIF) the buyer alone is bound to organise insurance, unless the buyer and seller agree otherwise.
As stated, only the C terms allow for two points of handover: One point to distinguish the handover of risk and a second point to distinguish the handover of costs.
The remaining terms - all prefixed with the letter ‘D’ - return to the identification of only one point in the transport chain for both risk and cost to transfer from the seller to the buyer. Consequently, and in contrast to the C terms being ‘Contracts of Dispatch’, the D terms are termed ‘Contracts of Arrival’, recognising that the contract of sale is only completed when the goods "arrive" at the declared destination.
DESM Delivered Ex Ship - naming the seaport of discharge
DEQ Delivered Ex Quay - naming the seaport of discharge
The terms DES and DEQ are not multi modal expressions. The use of either term is limited to a specific type of transport only. In requiring the naming of the seaport of discharge to complete the Incoterm expression, it can be seen that this term is applied to Seafreight transactions only, where the main and final carriage is by sea.
These D terms must be qualified by the naming of the destination seaport. Under DES, the seller undertakes to deliver the goods, and to pay all of the charges associated to that delivery, to the named seaport.
In addition, the seller assumes all risks to the cargo until the time that the cargo is made available to the buyer, on board the vessel, not cleared for import.
Under DEQ, the seller has deliver the goods onto the quay (dock or wharf), having cleared the goods for import and having paid all taxes, duties etc. as may be applicable to that clearance.
The Incoterm DEQ actually carries an additional, bracketed, expression of "(Duty Paid)"
DDU Delivered Duty Unpaid - naming a place of handover at destination
DDP Delivered Duty Paid - naming a place of handover at destination
These terms must be qualified by the naming of the destination up to which point the seller has arranged and paid for delivery to.
The seller undertakes to deliver the goods, and to pay all of the normal charges to get the cargo to the named place.
The buyer only assumes risks from the time that the cargo is placed or made available at the named destination.
Both DDU and DDP are multi modal terms.
Under DDU, the seller undertakes to deliver the goods, to accept all risks and to pay all of the charges associated to that delivery, to the named destination in the country of importation - excluding the charges of customs clearing and all local duties, taxes or similar charges.
Under DDP, the seller undertakes to deliver the goods, to accept all risks and to pay all of the charges associated to that delivery, to the named destination in the country of importation - including the charges of customs clearing and all local duties, taxes or similar charges.
DAF Delivered At Frontier - naming the frontier of handover
The final Incoterm is qualified by the naming of the frontier or border post at which point risks and costs will both pass from the seller to the buyer.
The border post is taken as being on the seller’s side of the transport chain - i.e. before the adjoining country to that border - unless otherwise stated in an adapted expression of the Incoterm.
The seller will have also cleared the goods for export.
Although this is a multi modal expression, its prime use is with land-based transport - road, rail or a combination of these.
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