Incoterms or
International
Commercial
Terms are a series of
international sales terms that are widely used throughout the world. They are used
to divide transaction costs and responsibilities between buyer and seller and reflect
state-of-the-art transportation practices. They closely correspond to the
U.N. Convention on Contracts for the International Sale of Goods. Incoterms
deal with the questions related to the delivery of the products from the seller
to the buyer. This includes the carriage of products, export and import clearance
responsibilities, who pays for what, and who has risk for the condition of the products
at different locations within the transport process. Incoterms are always used with
a geographical location and do not deal with transfer of title. They are devised
and published by the
International Chamber of Commerce
(ICC). The English text is the original and official version of Incoterms 2000,
which have been endorsed by the United Nations Commission on International Trade
Law (
UNCITRAL). Authorized translations
into 31 languages are available from ICC national committees.
EXW. Ex Works
(named place): the seller makes the goods available at his premises.
Group F - Main Carriage Unpaid:
FCA. Free Carrier
(named place): The seller hands over the goods, cleared for export, into the custody
of the first carrier (named by the buyer) at the named place. This term is suitable
for all modes of transport, including carriage by air, rail, road, and containerised
/ multi-modal transport.
FAS. Free Alongside
Ship
(named loading port): free Alongside Ship: The seller must place the goods alongside
the ship at the named port. The seller must clear the goods for export; this changed
in the 2000 version of the Incoterms. Suitable for maritime transport only.
FOB. Free On Board
(named loading port): the classic maritime trade term, Free On Board: seller must
load the goods on board the ship nominated by the buyer, cost and risk being divided
at ship's rail. The seller must clear the goods for export. Maritime transport only.
Group C - Main Carriage Paid:
CFR. Cost and
Freight
(named destination port): seller must pay the costs and freight to bring the goods
to the port of destination. However, risk is transferred to the buyer once the goods
have crossed the ship's rail. Maritime transport only.
CIF.
Cost, Insurance and Freight
(named destination port): Exactly the same as CFR except that the seller must in
addition procure and pay for insurance for the buyer. Maritime transport only.
CIF ASWP. Cost, Insurance
and Freight with ASWP
Same as CIF, with the indication of Any Safe World Port
CPT. Carriage
Paid To
(named destination port): the general/containerised/multimodal equivalent of CFR.
The seller pays for carriage to the named point of destination, but risk passes
when the goods are handed over to the first carrier.
CIP.
Carriage and Insurance Paid to
(named destination port): the containerised transport/multimodal equivalent of CIF.
Seller pays for carriage and insurance to the named destination point, but risk
passes when the goods are handed over to the first carrier.
DAF. Delivered
At Frontier
(named place)
DES. Delivered
Ex Ship
(named port)
DEQ. Delivered
Ex Quay
(named port)
DDU. Delivered
Duty Unpaid
(named destination place)
DDP. Delivered
Duty Paid
(named destination place)
Ex Works
Ex works (EXW) is an
Incoterm. It means that the seller
X has the goods ready for collection at his premises (Works, factory, warehouse,
plant) on the date agreed upon. The buyer pays all transportation costs and also
bears the risks for bringing the goods to their final destination. This term requires
that the buyer must be able to carry out export formalities in the country of supply,
these days almost impossible. Therefore in the vast majority of cases where terms
are quoted EXW they actually intend the seller to carry out export formalities which
means that the correct term is FCA (Seller's premises).
Free Carrier
Free Carrier (FCA) is an
Incoterm. The seller delivers the
goods into the custody of the first carrier, and this is where risk passes from
seller to buyer. The buyer pays for the transportation. It can be used for all modes
of transportation including multimodal transport, such as in shipping containers
where the ship's rail plays no relevant part in determining a shipping point. FCA
is also the term to use in place of FOB for airfreight transactions.
Free Alongside Ship
Free Along Side (FAS) is an
Incoterm. It means that the
seller pays for transportation of the goods to the port of shipment. The buyer pays
loading costs, freight, insurance, unloading costs and transportation from the port
of destination to his factory. The passing of risk occurs when the goods have been
delivered to the quay at the port of shipme
Free On Board
FOB, an abbreviation for either Free On Board or Freight on Board, is a term commonly
used when shipping goods, to indicate who pays loading and transportation costs,
and/or the point at which the responsibility and ownership of the goods transfers
from shipper to buyer. The precise meaning of the term FOB varies. ___________________________
Contents
1
Incoterm
2
North American use
3
Accounting and auditing
4
eCommerce an abbreviation
________________________
Incoterm
Under the Incoterm standard, FOB stands for "Free On Board". Indicating
"FOB" means that the seller pays for transportation of the goods to the
port of shipment, plus loading costs. The buyer pays freight, insurance, unloading
costs and transportation from the arrival port to the final destination. The passing
of risks occurs when the goods pass the ship's rail at the port of shipment. Internationally
the term specifies the port of loading, e.g., "FOB New York" or "FOB
Vancouver."
North American use
Domestically within the United States and Canada, "FOB" is sometimes still
used as per the long-discontinued "Foreign Trade Definitions" of 1941,
with at least four different precise meanings. The term is used in two common phrases,
"FOB shipping point" and "FOB destination," to distinguish when
the title of goods passes from the seller to the buyer. Under the terms of "FOB
shipping point," the title of the goods passes to the buyer at the shipping
point. Similarly, under the terms of "FOB destination", the title of the
goods passes to the buyer when the goods arrive at their destination. The distinction
is important because it determines who pays for the shipping costs of the merchandise:
whoever holds the title to the merchandise at the time of its shipping pays for
its transportation costs unless otherwise noted (e.g., freight prepaid or freight
collect). Also, it is important that if the shipment is damaged while traveling
the owner must file the freight claim. Note that this usage is inconsistent with
the official Incoterm definitions. North American FOB definitions correspond to
Incoterm approximately as follows:
|
North America
|
Incoterm
|
|
FOB shipping point or FOB shipping point, freight collect
|
FCA shipping point
|
|
FOB shipping point, freight prepaid
|
CPT destination
|
|
FOB destination or FOB destination, freight prepaid
|
DDU destination
|
|
FOB destination, freight collect
|
No Incoterm equivalent
|
Accounting and auditing
When counting inventory, merchandise in transit plays a crucial role depending on
whether it is added to the company's balance sheet. Items under "FOB shipping
point/destination" generally do not appear in stock listings at year ends.
However, they should be included as the risk and rewards of ownership have transferred
to the buyer. A trade term requiring the seller to deliver goods on board a vessel
designated by the buyer. The seller fulfills its obligations to deliver when the
goods have passed over the ship's rail. When used in trade terms, the word "free"means
the seller has an obligation to deliver goods to a named place for transfer to a
carrier.
eCommerce
With the advent of e-commerce, most commercial electronic transactions occur under
the terms of "FOB shipping point" or "
FCA
shipping point". Most analysts see this as a disadvantage of online shopping
compared to traditional in-person purchasing, where "FOB destination"
is more prevalent.
Cost and Freight
Cost and Freight (CFR) is an
Incoterm. It means that the
seller pays for
transportation
to the
Port of Loading (POL), loading
and
freight.
The buyer pays for the
insurance
and transportation of the
goods from the Port of Discharge (POD) to his
factory. The passing of
risk
occurs when the goods pass the
ship's rail
at the port of shipment which means that this term cannot be used for airfreight
or land transport and also is inappropriate for most containerised sea shipments
- the term CPT is the appropriate one for these.
Cost, Insurance and Freight
Cost, Insurance and Freight (CIF) is a common term in a sales contract that may
be encountered in international trading when ocean transport is used. When a price
is quoted CIF, it means that the selling price includes the cost of the goods, the
freight or transport costs and also the cost of marine insurance. CIF is an international
commerce term (Incoterm). CIF is identical in most particulars with Cost and Freight
(
CFR), and the same comments apply, including its
applicability only to conventional maritime transport.
In addition to the CFR responsibilities, the seller under CIF must obtain in transferable
form a marine insurance policy to cover the risks of transit with insurers of repute.
The policy must cover the CIF price plus 10 per cent and where possible be in the
currency of the contract. Note that only very basic cover is required equivalent
to the Institute "C" clauses, and buyers should normally insist on an
"all-risk" type of policy such as that under the Institute "A"
clauses.
The seller's responsibility for the goods ends when the goods have been delivered
on board the shipping vessel. In the guidelines for CIF published in Incoterms 2000
the term "carrier" does not appear and it clearly states "the seller
must deliver the goods on board the vessel at the port of shipment" which makes
CIF the incorrect term to use where the seller wishes their responsibility to end
when they deliver the goods into the hands of a carrier prior to the goods passing
the ship's rail at the port of loading. In the great majority of transactions
the more correct term is CIP. This term is only appropriate for conventional maritime
transport, not
ro/ro or international
container movements.
CIF ASWP
CIF ASWP indicates that the
supplier
is responsible for insuring on behalf of the buyer until goods arrive and are unloaded
at the port of destination. The opposite to this is FOB (Free On Board), which means
the buyer is responsible for payment to the seller when the good is loaded onto
the ship at the port of origination. ASWP indicates Any Safe World Port. Apart from
the above poor English it should be carefully noted that "CIF ASWP" is
NOT an INCOTERM of the International Chamber of Commerce. "ASWP" (any
safe world port) may be added as a separate article in a Purchase Contract but should
not be confused with an INCOTERM
Carriage Paid To
Carriage Paid To (CPT) is an
Incoterm. It can be used for
all modes of transport including multimodal transport. The seller pays for the freight
to the named point of destination. The buyer pays for the insurance. The passing
of risk occurs when the goods have been delivered into the custody of the first
carrier.
Carriage and Insurance Paid to
Carriage and Insurance Paid to (CIP) is an
Incoterm, usable
with any mode of transport. The passing of risk occurs when the goods have been
delivered into the custody of the first carrier. This means that the buyer bears
all risk and any additional costs occurring after the goods have been so delivered.It
is the same as
CPT except that the seller also pays
for the insurance. Seller is required to obtain insurance only on minimum cover,
additional coverage is responsibility of buyer or must be agreed between seller
and buyer. Under CIP seller is also required to clear the goods for export.
Delivered At Frontier
Delivered At Frontier (DAF) is an
Incoterm. It can be used
when the goods are transported by rail and road. The seller pays for transportation
to the named place of delivery at the frontier. The buyer arranges for customs clearance
and pays for transportation from the frontier to his factory. The passing of risk
occurs at the frontier.
Delivered Ex Ship
Delivered Ex Ship (DES) is an
Incoterm. Where goods are delivered
ex ship, the passing of risk does not occur until the ship has arrived at the named
port of destination and the goods made available for unloading to the buyer. The
seller pays the same freight and insurance costs as he would under a
CIF arrangement.
Delivered Ex Quay
Delivered Ex Quay (DEQ) is an
Incoterm. It means the same
as DES, but the passing of risk does not occur until the goods have been unloaded
at the port of destination Quay
The qay or jetty at
Lundy Island,
UK A qay, or also called "Quay" pronounced 'key', is a
wharf or bank where
ships
and other vessels are loaded. A qay is constructed parallel to the bank of a waterway.
The word is commonly used in
United
Kingdom,
Ireland,
Canada,
Australia and
New Zealand
Delivered Duty Unpaid:
Delivered Duty Unpaid (DDU) is an
Incoterm. It means that
the seller delivers the goods to the buyer to the named placed of destination in
the contract of sale. The goods are not cleared for import or unloaded from any
form of transport at the place of destination. The buyer is responsible for the
costs and risks for the unloading,
duty and any subsequent delivery beyond the place of destination. However,
if the buyer wishes the seller to bare cost and risks associated with the import
clearance, duty, unloading and subsequent delivery beyond the place of destination,
then this all needs to be explicitly agreed upon in the contract of sale. The term
is used irrespective of the mode of transport. However when the delivery is to take
place at the port of destination, either on board the vessel or on the quay, then
the
DES or
DEQ
terms shall be used.
Delivered Duty Paid
Delivered Duty Paid (DDP) is an
Incoterm. It means that
the seller pays for all transportation costs and bears all risk until the goods
have been delivered and pays the
duty