INTERNATIONAL COMMERCIAL TERMS (INCOTERMS)

INTRODUCTION:

During the past, there used to be lot confusion and improper understanding between the BUYER and SELLER when
an offer for the sale is made.

If the transaction is through commercial banks and instruments like Letter of credits or documentary credits are used
for setting the payments, then there are more parties in a transaction like the one quoted below:

Seller
Buyer
Sellers agent
Buyer representative
Credit opening bank( buyers bank)
Advising bank in the sellers country
Confirming bank
Negotiating bank (seller bank)

INCOTERMS

The international chamber of commerce (ICC), Paris took lead to set out incoterms to overcome the problems of
conflicting national laws and the interpretations of the same. A standard set of trade terms were developed established
which will define and offer neutral effects for the rules and the ICC with the trade. Experts and others around the world
developed practices and these as an outcome of the interaction.

Over the years a three letter abbreviations referred to most of the frequently used trade terms. This is a standardization,
which has taken place after the effective use of these terms for a very long period. Now let us look at the 14 currently
used INCOTERMS and the Abbreviations used to represent them. They are:

1. EX-WORKS : EXW
2. FREE CARRIER (NAMED POINT) : FCA
3. FREE ON RAIL/FREE ON TRUCK : FOR/FOT
4. FOB(AIRPORT) : FOA
5. FAS(FREE ALONG SIDE SHIP) : FAS
6. FREE ON BOARD : FOB
7. COST AND FREIGHT : CFR
8. COST INSURANCE AND FREIGHT : CIF
9. CARRIAGE PAID TO : CPT
10. CARRIAGE & INSURANCE PAID TO : CIP
11. DELIVERED EX SHIP : DES
12. DELIVERED EX QUAY : DEQ
13. DELIVERED AT FRONTIER : DAF
14. DELIVERED DUTY UNPAID : DDU
15. DELIVERED DUTY PAID : DDP
 1. EX-WORKS (EXW)
Ex-works means that the sellers responsibility is only to produce the goods and male the same available his premises i.e.
Works or factory and inform the buyer that the same is now ready as per the terms and conditions of the order.

In particular seller is not responsible even for loading the goods in the vehicle or conveyance provided by the buyer
unless otherwise agreed upon by them.

The buyer bears the full cost and risks involved in collecting the goods from the premises of the seller and bring the
same to the desired destination. Thus this trade term represents the minimum obligation for the seller. The buyer has to
provide for any export license at his own risk and cost.

Ex works is basically a sale in the country of exportation.

2. FREE CARIER (named point) FCA

The principle is based on the main term FOB except for the seller completes his obligations when the goods are delivered to
the custody of the carrier at a named point.

When the seller has to furnish a bill of lading or way bill or carrier receipt, he shall fulfill his obligation by presenting
the same to the buyer. However if the seller is entrusted with the responsibility of selecting a cargo consolidating agent
for the stowing the goods in to containers or for palletization of cargo or unitization of cargo etc then he should include
such costs in his price

3. FREE ON RAIL/FREE ON TRUCK (FOR/FOT)

FOR and FOT mean free on rail and these terms are synonymous and can be used only when the goods are carried by the
railway. This trade term means the transaction as a deal in the domestic market and not considered as an export.

Here there can be full wagonloads and less than a wagon loads and depending on this and this facilities of the railway
sidings etc. available, the seller has to arrange to deliver the goods to the railway booking station or can show the
wagon at his siding etc. sellers obligation are fulfilled when the goods are handed over to the railways for the
transportation and the necessary receipt are collected from them and passed on the buyer.

4. FOB AIRPORT (FOA)

Fob air port is based on the same main principle as the term FOB. The seller fulfills the obligation by delivering the goods to
the air carrier at the airport of departure. The risks of the loss or damage to the goods are transferred from the seller to the
buyer when the goods have been so delivered.

There are a lot of difference and different factual situations when you compare sea and air transportation. In the case of
air transportation, the point of delivery is not tied to the means of conveyance and the responsibility of the seller will be
over when the goods are handed over to the Air lines at the airport. Delivery at a town terminal or booking office is not
sufficient unless agreed upon by the seller and buyer.

Generally as a practice the seller usually arranges for air transport under the term FOB. However under FOB airport,
the buyer has the option to name the air carrier which may be convenient and important to him on account of
convenience, better freight rates etc. FOB air port implies to an export transaction. The seller has to provide for the
export license at his own cost and risk. Under the transportation by air, the document of transportation is generally
called as airway bill or air consignment note. In the modern times the loose packages and consignments are converted
to pallet or unit load devices and if any cost is incurred for the same the seller may have to include this cost into his
prices or alternatively arrange with the buyer to reimburse such expenses. We shall now examine the responsibilities of
both buyer and seller under these terms.
 5. FREE ALONG SIDE SHIP (FAS)

Under this term the sellers obligations are fulfilled when the goods have been placed alongside the ship on the wharf. This
means that the buyer has to meet with all costs and risks of loss or damage to the goods from the moment it has been so
placed as above.

Here the buyer will have the responsibility to clear the goods for export. Buyer and seller should have effective
communication and buyer should inform the details of the shipping line and the berth of the ship etc. to enable the
seller to deliver the goods alongside the ship.

Buyer should also arrange risk insurance of the goods without fail from the time they have been so delivered. The
seller must tender a clear document to the buyer to prove that the goods have been so delivered like a dock or
warehouse document for the delivery of goods. By chance the seller has arranged for the carrier, it is deemed to be an
additional services provided by him and the buyer will have to reimburse him any costs so involved by him etc.

6. FREE ON BOARD (FOB)

FOB means free on board. The seller as named in the contract places the goods on board of the ship at a port of shipment.
The risks of loss of the goods are transferred from the seller to the buyer when the goods pass the ships rail. The buyer should
contact with a sea carrier for the transportation of the goods and pay the freight as per the contract point of delivery is the
ships rail and the risks pass on to the buyer thereafter.

The buyer should enter into a contract with the shipping company for the carriage of the goods to the destination and
settle the payment. The point of delivery is the ships rail and the risks of loss or damage passes on to the buyer at that
point. If the goods are carried on the liner terms, i.e. cost of loading and unloading etc. shall be included in the freight
and the same may fall on the buyer.

However of the terms are for free in and out buy the shipping on then the loading and unloading etc. may be additional
and then this burden will be on the shipper. This cost may be divided between the buyer and seller depending upon the
custom of the port of loading. Seller may bear the cost of loading if agreed terms are fob stowed. FOB terms imply
an export sales hence if any export licenses or any other such documents are required the same would have to be
organised by the seller at his cost.

7. COST AND FREIGHT (C&F)

C & F means cost and freight. The seller must pay the costs and freight necessary to bring the goods to the named
destination, but he cost of risk or loss or damage to the goods as well as any cost increased is to the account of the buyer after
the goods pass the ships rail in the port of loading.

It is understand that in a C&F contract the buyer should indicate the agreed destination to which the seller has to
arrange to ship the goods and pay the freight. If the port of shipment is left to the choice of the seller, then seller must
arrange the carriage by the usual route or if different alternatives are available choose the best so that the goods are not
exposed to greater risks etc.

When the goods are kept on board, the seller should inform the buyer all the information required to arrange to take the
insurance and other risks covers etc. seller has to obtain Export licenses or any such required to export the cargo and
the buyer will have to arrange for any import license etc. in his country.

Like in the case of FOB, the critical point for the division of the costs of risks will be passing of the goods of the ships
rail. Cost of loading will be to the sellers accounts ad the unloading costs may be divided between the buyer and seller
as per the negotiations they had. If the terms are C&F landed, seller may have to pay the unloading costs in full.
 8. COST, INSURANCE AND FREIGHT (CIF)

CIF means cost, insurance and freight. This term is basically the same as C & F but with the additional liability to the seller
for arranging the insurance of the cargo for the risks of loss or damages to the goods during the carriage of the same.

The seller contracts with the insurance companies or underwriters for the insurance of the cargo and pays the premium
for the same under the CIF terms, in case of loss or damage to the cargo the buyers turns to the insurance companies
and prefer a claim for their loss or damage.

The insured amount is generally 110% of the CIF value.

The extent of the cover of insurance for the risks of loss or damage varies under different terms followed by the
insurance companies. CIF incoterm is based on the principle of minimum liability for the seller. Under this term the
risk is already transferred to the buyer in the port of loading itself and therefore a CIF buyer has to mainly rely upon
the terms of insurance for the protection of the same and recovery of loss or damage.

He also bears the right of compensation from the carrier. In case of claim for loss or damage a claim will have to be
preferred on the insurance company, comply with their procedures and surrender their right of goods to the insurance
and this is termed as Subrogation.

9. CARRIAGE PAID TO (CPT)

Similar to C&F in the case of Freight or Carriage paid to also the seller pays the freight for the carriage of the goods to
the named destination.

However the risk of loss or damage to the goods as well as any cost increased etc. is transferred to the buyer when the
goods have been delivered into the custody of the first carrier and not at the ships rail. This term can be used for all the
modes of transportation including multi model transportation and containerized cargo movement or Roll on-Roll of
traffic by trailers and ferries etc.

10. CARRIAGE AND INSURANCE PAID TO (CIP)

This incoterm carriage and insurance paid to is very much similar to the previous term Freight or Carriage paid to
except of the insurance liability to the seller for the loss or damages to the goods during the carriage.

While the term CIF is used while shipping the goods by sea. This is used in any mode of transportation including the
multi model transportation as explained in the previous case. The seller contracts with the insurance company or
underwriters to arrange for the insurance for the risks of loss or damage while the goods are in carriage.

11. DELIVERED EX SHIP (DES)

The incoterm Ex ship means that the seller shall make the goods available to the buyer on board of the ship at the port of
destination named in the contract. The seller has to bear the full cost and risk involved in bringing the goods there.

As in the case of C&F or Freight or Carriage Paid to the seller has to pay for the freight or cost of carriage, but in
addition he also has to bear the cost of loss or damage of the goods till the vessel reaches the port of destination or any
increase in costs etc. Sellers obligations will be completed when the vessel enters the custom border of the country of
destination.
 12. DELIVERED EX QUAY (DEQ)

The term Ex Quay means that the seller makes the goods available to the buyer on the quay (Wharf) at the port of
destination named in the contract. The seller has to bear the full cost and risk involved in bringing the goods there.

In practice there are two Ex-Quay contracts possible.

a) Ex quay (Duty paid)

b) Ex Quay (duties on buyers account)

In the first case, the seller has the responsibility to pay the duty, clear the goods and keep the same at the disposal of
the buyer to take delivery. In the second case the responsibility of paying the duty is on the buyer. Hence when
selecting the Ex Quay term the contract should clearly state the liability of duty of the destination country as otherwise
there will be confusion and uncertainty as to who is responsible to pay the levies to clear the goods for import.

13. DELIVERED AT FRONTIER (DAF)

Delivered at frontier means that the sellers obligations are fulfilled when the goods have arrived at the frontier. Frontier
means the border of the country-but before the customs border.

This term is primarily intended to be used when are carried by road or rail, but may be used irrespective of the mode of
transport. When the goods are exported to neighboring countries or imported from them this term will be very useful.

14. DELIVERED DUTY UNPAID (DDU)

The incoterm delivered duty unpaid when followed by words mean the maximum obligation for the seller in the total
transaction except for the payment of import duty in the country of destination.

This is the other way and here minimum liability is for the buyer DDU except for arranging the import duty when
requested by the seller. This term can be used irrespective of the mode of transport employed for the shipment. If by
and between the parties wish that the seller should clear the goods for import but that some of the costs payable like
VAT and/or other levies could be excluded such exemptions or costs excluded should be clearly mentioned in the
terms of contract like Exclusive of VAT/and or other takes along with the incoterm.

We shall have a look of the primary and other responsibilities of seller and buyer under this term. The sale under DDU
is a sale in the importing country i.e. all the liabilities except for the import duties or other local levies at the buyers
country.

15. DELIVERED DUTY PAID (DDP)

This incoterm delivered duty paid when followed by words mean the maximum obligation for the seller in the total
transaction. While the term Ex works represents minimum liability for the seller.

This is the other way and here minimum liability is for the buyer DDP can be used irrespective of the mode of transport
employed for the shipment. If by and between the parties wish that the seller should cleat the goods for import but that
some of the costs payable like Vat and/or other levies could be excluded such exemptions or costs excluded should be
clearly mentioned in the terms of contract like Exclusive of VAT/and or other taxes along with the incoterm.

We shall have a look of the primary and other reasonability of seller and buyer under this term. This sale under DDP is
a sale in the importing country i.e. at the buyers domestic market and hence the liability paying local levies are also on
the seller and hence if there is any exclusive of liabilities it should be clearly spelled out in the contract.