Lect 2

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INCOTERMS

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Objectives
On completion of this unit, you should
be able to :
• Describe the functions of Incoterms.
• Understand the obligations of the
sellers and buyers for each Incoterm.
• Compare and contrast the different
Incoterms.

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In every international trade...

• who will arrange and pay for the


carriage?
• who will bear the risk if these
operations cannot be carried out?
• who will bear the risk of loss or
damage to the goods in transit?

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What are Incoterms?
Incoterms defines the rights and
obligations of both sellers & buyers
in relation to transportation of goods.
Standardised & internationally
recognised trade terms by ICC
Versions : 1936, 1953, 1976, 1980,
1990, 2000 & 2010
Standardised 3-letter code
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2.2 Function of Incoterms
3 separate contracts of transport for the
goods
• Pre – carriage
* From exporter’s => transport
operator.
• Main carriage
* From transport operator => named point
in buyer’s country.
• On-carriage
* From named point in buyer’s country to
buyer’s
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Understanding the diagram

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EXPORT IMPORT

Seller’s Risk Buyer’s Risk

Seller’s Cost Buyer’s Cost


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2.2 Function of Incoterms
Primary function
• To determine at what point the seller
has fulfilled his obligations so that the
goods in a legal sense could be said to
have been delivered to the buyer.
• This cut off point is often referred to as
“Critical Point /Technical Delivery”
• It refers to the point where the risk of loss
or damages to the goods are transferred
from the seller to the buyer.
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EXPORT IMPORT

Seller’s Risk Buyer’s Risk


Technical
Delivery
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Secondary function
• To ascertain who is to provide export
& import licences
• To determine the type of documents
• To confirm insurance protection
• Others e.g. packing, loading and
notification

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Note the shipping terms...
• Carriage cost = Transportation cost =
Freight cost
• Port of departure = Port of shipment =
Port of export = Port of loading
• Port of arrival = Port of destination = Port
of import = Port of discharge
• Carrier = Transport company = Shipping
company
• Export/Import Clearance = licence, taxes/
duties. 11
2.3 Categories of Incoterms
“E” EXW “C” CFR
CIF
“F” FCA CPT
FAS CIP
FOB “D” DAT
DAP
DDP

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Note – Risk line

• Technical delivery takes place


where the seller’s and buyer’s risk
lines meet.

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Note - Cost line

• Included in the cost line is freight /


transportation charges and
sometimes insurance costs.

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2.4.1. Ex Works
(EXW)
Seller’s primary duty
• Make goods available at his
premises (technical delivery)
Buyer’s primary duties
• Take delivery at the seller’s
premises.
• To bring the goods to destination at
buyer’s own cost & risk.
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EXPORT IMPORT

EXW

Seller’s Risk Buyer’s Risk

Seller’s Cost Buyer’s Cost


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2.4.2. Free Carrier (FCA)
Seller’s primary duties
• Deliver the goods at the named point into
the custody of the 1st carrier named by
the buyer
• Arrange for export clearance
• Provide evidence of delivery of the goods
to the carrier

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Free Carrier (FCA)

Buyer’s primary duties


• Contract for carriage & pay
transport charges
• Responsible for import clearance

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FCA EXPORT IMPORT

1st carrier

Seller’s Risk Buyer’s Risk

Seller’s Cost Buyer’s Cost 19


2.4.3. Free Alongside Ship
(FAS)
Seller’s primary duty

• Seller’s obligations are fulfilled when the


goods are placed alongside the ship
i.e. on the quay or in the lighter/barge at
the port of departure.

• Arrange for export clearance.


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Buyer’s primary duties
• Contract for carriage & pay
transport charges
• Responsible for import
clearance

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FAS EXPORT IMPORT

Seller’s Risk Buyer’s Risk

Seller’s Cost Buyer’s Cost 22


2.4.4. Free On Board (FOB)
Seller’s Primary Duties
• Deliver the goods on board the ship
at the port of departure.
• Provide a clean on board receipt.
• Pay for loading costs.
• Arrange for export clearance.

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Free On Board (FOB)
Buyer’s Primary Duties
• Contract for carriage & pay transport
costs
• Pay for unloading costs
• Arrange for import clearance

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FOB EXPORT IMPORT

Seller’s Risk Buyer’s Risk

Seller’s Cost Buyer’s Cost 25


2.4.5. Cost and Freight (CFR)
Seller’s primary duties

• Deliver the goods on board the ship at


the port of departure.
• Contract for carriage & pay freight
charges to the port of destination.
• Arrange for export clearance.
• Pay unloading costs if for his account
under the contract of carriage.
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Buyer’s primary duties
• Arrange for import clearance.
• To arrange and pay for marine
insurance for the main carriage.
• Pay such costs as are not for the
seller’s account under the contract
of carriage

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CFR EXPORT IMPORT

Seller’s Risk Buyer’s Risk

Seller’s Cost Buyer’s Costs


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2.4.6. Cost, Insurance and
Freight (CIF)
Seller’s Primary Buyer’s Primary
Duties Duties
• Similar to CFR • Similar to CFR
• Contract & pay minus the duties
for marine for marine
insurance insurance

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CIF EXPORT IMPORT

Seller’s Risk Buyer’s Risk

Seller’s Cost + Insurance Buyer’s


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Cost
2.4.7. Carriage Paid To (CPT)
Seller’s primary duties
• Contract for carriage & pay freight charges
to the named destination in the buyer’s
country.
• Deliver the goods into the custody of the
first carrier.
• Arrange for export clearance
• Pay loading costs & unloading costs if for
his account under the contract of carriage
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Buyer’s primary duties
• Accept delivery of the goods when they
are delivered to the first carrier.
• Arrange and pay for transport
insurance.
• Pay such costs as are not for the
seller’s account under the contract of
carriage.
• Responsible for import clearance.

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CPT EXPORT IMPORT

1st
carrier
Seller’s Risk Buyer’s Risk

Seller’s Cost Buyer’s Cost 33


2.4.8. Carriage & Insurance
Paid To (CIP)
• Seller’s primary Buyer’s primary
duties duties
• Same as CPT • Same as CPT
• Arrange & pay for minus the
transport transport
insurance. insurance.

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CIP EXPORT IMPORT

1st carrier

Seller’s Risk Buyer’s Risk

Seller’s Cost + Insurance Buyer’s Cost 35


2.4.9. Delivered at Terminal
(DAT)
Seller’s primary duties
• Deliver goods to a named “terminal”
at the place of destination
• Terminal – quay, warehouse,
container yard or road/rail/air terminal
• Provide a document to enable the
buyer to take delivery from the
terminal (eg BL).
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• Arrange export clearance.
9. Delivered at Terminal
(DAT)
Buyer’s primary duties
• Take delivery of the goods from at
the named “terminal”
• Arrange import formalities

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DAT EXPORT IMPORT

Seller’s Risk Buyer’s Risk

Seller’s Cost Buyer’s


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Costs
2.4.10. Delivered at Place (DAP)

Seller’s primary duties


• Deliver the goods cleared for export
to a named placed in the buyer’s
country AFTER “terminal” or at a
named placed ready for buyer’s
unloading.
• Responsible export clearance.

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Buyer’s primary duties
• Take delivery of the goods at the
named place.

• Arrange for import formalities.

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DAP EXPORT IMPORT

Seller’s Risk Buyer’s Risk

Seller’s Cost Buyer’s Cost


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2.4.11. Delivered Duty
Paid (DDP)
Seller’s primary duties
• Maximum obligation.
• Bears all costs to deliver the goods to
the named place of destination in the
buyer’s country.
• Arrange for export clearance.
• Arrange for import clearance.

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DDP EXPORT IMPORT

Seller’s Risk Buyer’s Risk

Seller’s Cost Buyer’s Cost


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2.5 Points to note – named place

• EXW (named place)


• EXW Singapore
• FOB Singapore
• CIF Tokyo
• DDP Tokyo

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2.5 Points to note –
Duty to Provide Insurance

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Factors affecting the choice of
Incoterm
• Market situation
* bargaining power of sellers & buyers

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Control of transport & insurance
* larger firms
vs.

smaller firms

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• Governmental involvement
* governmental directives to channel
business to national carriers or to
promote domestic insurance market

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“Buy using FOB method,
importers advised”
Star Maritime – 24 October 2005

“Malaysian importers are urged to acquire local


insurance premiums and freight services that
offer better cost, cargo management as well as
competitive pricing”.
…CIF seems like an easy business agreement for
an importer to rely on but most of them do not
realise that FOB is a better choice in terms of
cost. Obviously local insurance premiums and
freight forwarding charges are lower compared to
foreign rates.”

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• Country situation
* labour & political conditions
* infrastructure

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