Definitions - the basics to the advanced

Incoterms (International Commercial Terms) are a series of international sales terms

widely used throughout the world. They define monetary transaction and role
responsibilities for both sides of the international trading buyer and seller transaction.
The purpose of standardized incoterms is to determine export and import clearance
responsibilities, who is owning the risk for the condition of the products at each stage in
the transport process, and who is responsible for paying for what.

Incoterms were first produced in 1936. Since that time expert international trade lawyers
and practitioners have made six updates, completing in 2000. Contracts that include
incoterms, produced in 2008 or 2009, should abide by the 2000 standard.

Here is the shortlist of the Incoterm definitions from the International Chamber of
Commerce that you should be familiar with:

EXW “Ex Works”

The seller delivers when he places the goods at the disposal of the buyer at the seller's
premises or another named place (i.e. works, factory, warehouse, etc.) not cleared for
export and not loaded on any collecting vehicle. This term thus represents the minimum
obligation for the seller, and the buyer has to bear all costs and risks involved in taking
the goods from the seller's premises.

FCA "Free Carrier"

The seller delivers the goods, cleared for export, to the carrier nominated by the buyer at
the named place. It should be noted that the chosen place of delivery has an impact on the
obligations of loading and unloading the goods at that place. If delivery occurs at the
seller's premises, the seller is responsible for loading. If delivery occurs at any other
place, the seller is not responsible for unloading. This term may be used irrespective of
the mode of transport, including multimodal transport.

"Carrier" means any person who, in a contract of carriage, undertakes to perform or to

procure the performance of transport by rail, road, air, sea, inland waterway or by a
combination of such modes.

If the buyer nominates a person other than a carrier to receive the goods, the seller is
deemed to have fulfilled his obligation to deliver the goods when they are delivered to
that person.

FAS “Free Alongside Ship”

The seller delivers when the goods are placed alongside the vessel at the named port of
shipment. This means that the buyer has to bear all costs and risks of loss or damage of
the goods from that moment. The FAS term requires the seller to clear the goods for
export.

FOB "Free on Board”

The seller delivers when the goods pass the ship's call at the named port of shipment.
This means that the buyer has to bear all costs and risks of loss of or damage to the goods
from that point. The FOB term requires the seller to clear the goods for export. This term
can be used only for sea or inland waterway transport. Many people use either FOB or
CIF and aren't sure of the exact differences. SourceJuice wrote an article To FOB of CIF
That is The Question which may be of assistance.

CFR "Cost and Freight"

The seller delivers when the goods pass the ship's rail in the port of shipment. The seller
must pay the costs and freight necessary to bring the goods to the named port of
destination but the risk of loss of or damage to the goods, as well as any additional costs
due to events occurring after the time of delivery, are transferred from the seller to the
buyer. The CFR term requires the seller to clear the goods for export.
CIF “Cost Insurance and Freight"

The seller delivers when the goods pass the ship's rail in the port of shipment. The seller
must pay the costs and freight necessary to bring the goods to the named port of
destination, but the risk of loss of or damage to the goods, as well as any additional costs
due to events occurring after the time of delivery, are transferred from the seller to the
buyer.

However, with CIF the seller also has to procure marine insurance against the buyer’s
risk of loss of or damage to the goods during the carriage. Consequently, the seller
contracts for insurance and pays the insurance premium. The buyer should note that
under the CIF term the seller is required to obtain insurance only on minimum coverage.
Should the buyer wish to have protection of greater coverage, he would either need to
agree as much expressly with the seller or to make his own extra insurance arrangements.

The CIF term requires the seller to clear the goods for export. This term can be used only
for sea and inland waterway transport. If the parties do not intend to deliver the goods
across the ship's rail, the CIP term should be used.

CIP "Carriage and Insurance paid to..."

The seller delivers the goods to the carrier nominated by him but the seller must in
addition pay the cost of carriage necessary to bring the goods to the named destination.
This means that the buyer bears all risks and any additional costs occurring after the
goods have been delivered. However, in CIP the seller also has to procure insurance
against the buyer's risk of loss of or damage to the goods during the carriage.

Consequently, the seller contracts for insurance and pays the insurance premium. The
buyer should note that under the CIP term the seller is required to obtain insurance only
on minimum coverage. Should the buyer wish to have the protection of greater cover, he
would either need to agree as much expressly with the seller or to make his own extra
insurance arrangements.

"Carrier" means any person who, in a contract of carriage, undertakes to perform or to

procure the performance of transportation by rail, road, air, sea, inland waterway or by a
combination of such modes.

If subsequent carriers are used for the carriage to the agreed destination, the risk passes
when the goods have been delivered to the first carrier. The CIP term requires the seller
to clear the goods for export.

CPT “Carriage paid to..."

The seller delivers the goods to the carrier nominated by him but the seller must in
addition pay the cost of carriage necessary to bring the goods to the named destination.
This means that the buyer bears all risks and any other costs occurring after the goods
have been so delivered.

'Carrier" means any person who, in a contract of carriage, undertakes to perform or to

procure the performance of transport, by rail, road, air, sea, inland waterway or by a
combination of such modes.

If subsequent carriers are used for the carriage to the agreed destination, the risk passes
when the goods have been delivered to the first carrier, The CPT term requires the seller
to clear the goods for export.

DAF "Delivered at Frontier"

The seller delivers when the goods are placed at the disposal of the buyer on the arriving
means of transport not unloaded, cleared for export, but not cleared for import at the
named point and place at the frontier, but before the customs border of the adjoining
country. The term "frontier" may be used for any frontier including that of the country of
export. Therefore, it is of vital importance that the frontier in question be defined
precisely by always naming the point and place in the term.

However, if the parties wish the seller to be responsible for the unloading of the goods
from the arriving means of transport and to bear the risks and costs of unloading, this
should be made clear by adding explicit wording to this effect in the contract of sale.

DES “Delivered Ex Ship”

means that the seller delivers when the goods are placed at the disposal of the buyer on
board the ship not cleared for import at the named port of destination. The seller has to
bear all the costs and risks involved in bringing the goods to the named port of
destination before discharging. If the parties wish the seller to bear the costs and risks of
discharging the goods, then the DEQ term should be used.

This term can be used only when the goods are to be delivered by see or Inland waterway
or multimodal transport on a vessel in the port of destination.

DEQ “Delivered Ex Quay”

The seller delivers when the goods are placed at the disposal of the buyer not cleared for
import on the quay (wharf) at the named port of destination. The seller has to bear costs
and risks involved in bringing the goods to the named port of destination and discharging
the goods on the quay (wharf). The DEQ term requires the buyer to clear the goods for
import and to pay for all formalities, duties, taxes and other charges upon import.

If the parties wish to include in the seller's obligations all or part of the costs payable
upon import of the goods this should be made cear by adding explicit wording to this
effect in the contract of sale.

This term can be used only when the goods are to be delivered by sea or inland waterway
or multimodal transport on discharging from a vessel onto the quay (wharf) in the port of
destination. However if the parties wish to include in the seller's obligations the risks and
costs of the handling of the goods from the quay to another place (warehouse, terminal,
transport station, etc.) in or outside the port, the DDU or DDP terms should be used.

DDU “Delivered Duty Unpaid”

The seller delivers the goods to the buyer, not cleared for import, and not unloaded from
any arriving means of transport at the named place of destination. The seller has to bear
the costs and risks involved in bringing the goods thereto, other than, where applicable,
any "duty" (which term includes the responsibility for and the risks of the carrying out of
customs formalities, and the payment of formalities, customs dudes, taxes and other
charges) for import in the country of destination. Such "duty" has to be borne by the
buyer as well as any costs and risks caused by his failure to clear the goods for import in
time. However, if the parties wish the seller to carry out customs formalities and bear the
costs and risks resulting there from as well as some of the costs payable upon import of
the goods should be made clear by adding explicit wording to this effect in the contract of
sale.

DDP "Delivered Duty Paid”

The seller delivers the goods to the buyer, cleared for import, and not unloaded from any
arriving means of transport at the named place of destination. The seller has to bear all
the costs and risks involved in bringing the goods thereto including, where applicable,
any "duty” (which term includes the responsibility for and the risks of the carrying out of
customs formalities and the payment of formalities, customs duties, taxes and other
charges) for import in the country of destination.

Whilst the EXW term represents the minimum obligation for the seller, DDP represents
the maximum obligation. This term should not be used if the seller is unable directly or
indirectly to obtain the import licence. However, if the parties wish to exclude from the
seller's obligations some of the costs payable upon import of the goods (such as value-
added tax : VAT), this should be made cear by adding explicit wording to this effect in
the contract of sale. If the parties wish the buyer to bear all risks and costs of the import,
the DDU term should be used.

Here is the legend that should be used inconjunction with the diagrams displayed with
each above Incoterm. This legend indicates the balance of risks and costs for both the
buyer and seller when entering into international trade business during 2008 and 2009.