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When negotiating an international sales contract, both parties need to pay as much attention to the terms of sale as to the sales price. To make it as clear as possible, an international set of trade terms (INCOTERMS) 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.
What are Incoterms?
Incoterms are a set of international rules for the interpretation of the most commonly used trade terms. There are 13 main terms and several secondary terms. These denote the points at which shipper, carrier and consignee risk and responsibility start and end.
This set of international rules was first published in 1936 known as "INCOTERMS 1936" by the International Chamber of Commerce. Incoterms are amended every 10 years.
Incoterms are recognized globally by courts and other authorities. Frequently, parties to a contract are unaware of the different trading practices in their respective countries. This lack of knowledge can lead to misunderstandings and disputes between customer and supplier. The incorporation of Incoterms in international sales contracts reduces this risk.
Incoterms 2000 - How will this effect you?
As of January 1st 2000 a new set of Incoterms will apply. Included in these are six minor differences which could prove costly if ignored.
Delivered Duty Paid - Delivery takes place on the premises of the buyer where the arriving vehicle cargos are discharged from the vehicle.If delivery takes place elsewhere, delivery is completed by loading the cargo onto the vehicle sent by the buyer to collect the goods.
Delivered Duty Unpaid - Delivery takes place on the premises of the buyer, still loaded on the arriving vehicle. If delivery takes place elsewhere, delivery is completed by loading the cargo onto the vehicle sent by the buyer to collect the goods.
Delivered Ex Quay - The obligation for customs clearance and payment of of import duties will change from the seller/exporter to the buyer/importer at the named port of destination.
Ex Works - The responsibility for loading cargo onto a collecting vehicle at the sellers/exporters premises is no longer the obligation of the seller/exporter. The buyer is now responsible. If there is more than one loading area at the sellers premises the seller has the option to designate any one of them for loading.
Free Alongside Ship - The obligation of customs entry and obtaining an export license will change from the buyer/importer to the seller/exporter at the named port of sailing.
Free Carrier - This defines two possibilities.1. Delivery to the carrier at the premises of the seller, when the latter is under the obligation to load the cargo onto the vehicle of the carrier.2. Delivery to the carrier at any other point such as a terminal, quay...etc, where the carrier on behalf of the buyer is responsible for discharging the shipment from the vehicle sent by the seller.
The Thirteen Incoterms: 1990
Cost and Freight*
As for CIF except that the cost of insurance is covered by the buyer.
Cost, Insurance and Freight*
Cost of goods plus insurance and freight, duty unpaid, to a named port of destination. Sea or inland waterway transport only.
Carriage and Insurance Paid To
Costs of carriage and insurance of the goods, duty unpaid to the named destination. Applies to all modes of transport.
Carriage Paid To
As for CIP, except the cost of insurance is carried by the buyer.
Delivered At Frontier
Costs of delivery, duty unpaid at the named point and place at the frontier. Applies to all modes of transport.
Delivered Duty Paid
Costs of delivery, including duty, paid up to a named place in the country of importation. Applies to all modes of transport.
Delivered Duty Unpaid
As for DDP, except that the buyer pays the import duty.
Delivered Ex Quay*
Costs of delivery, duty paid, to the named port of destination. Sea or inland waterway transport only.
Delivered Ex Ship*
Costs of delivery on board the vessel, duty unpaid, at the named port of destination. Sea or inland waterway transport only.
The goods are made available to the buyer at the exporter's premises, suitably packed unless otherwise arranged for a known means of transport.
Cost of delivery, cleared for export, into the charge of the carrier named by the buyer at the named place or point. Allied mostly to air and rail transport but could be used for all modes.
Free Alongside Ship*
All cost up to delivery on quay or in lighters (barges) at the named port of shipment. Sea or inland waterway transport only.
Free On Board*
All costs up to delivery over the ships rail at the named port of shipment. Sea or inland waterway transport only.
* These terms are for maritime transport only. The other terms apply to all transport modes.
Guidelines to Using Incoterms
Always specify which terms are applicable ie FAS in Incoterms 2000 as opposed to Incoterms 1990.
When completing documents ensure that you are using the correct format of a term. The term CFR is persistently misused/replaced with C&F or C+F.
▪ C+F has never existed.
▪ C&F did exist but was replaced with CFR in 1980. If C&F is used by mistake a court of law will use the pre 1980 meaning of the term which is very different from the current meaning of CFR as in Incoterms 1990 and Incoterms 2000.
Urge your trading partners to confirm their acceptance of the specified term in writing.
Draw up a check list of your duties and rights under the selected term and check that every intended or completed transaction conforms to this list, and that nothing is omitted.
Request your trading partner to do the same, and exchange this information with them.
Change or add nothing, but in any event as little as possible to the selected term.
In case of any inevitable change or addition, inform your trading partner and request them to accept it in writing. Such an addition could be 'stowed and trimmed' to FOB.
Compare your duties and rights under the selected Incoterm(s) with your company's standard terms of sales (or purchase), to make sure that there are no conflicts. If your business is run under standard conditions established by a trade body or similar association, request that this association amend its terms on behalf of all the membership.
In the event of such conflict(s), amend your standard conditions, rather than the Incoterm(s), in order to remedy the problem. If the standard conditions are those of an association, act similarly through this association.
Never instruct the carriers or any third party to do or omit anything on the basis of the Incoterms which do not apply to them at all.
Inform your bank and insurance company which Incoterm(s) have been selected for your business, so that they can determine exactly what your duties and rights are with regard to a transaction in which they may have a role to play.