4

Incoterms

A trade contract imposes certain rights and obligations on the buyer and seller, these
rights and obligations varying in accordance with the convenience of the parties
concerned and as agreed by them. Certain specific terms have been evolved, known as
‘trade terms’ or ‘contract terms’, such as Free on Board (FOB), Cost, Insurance and Freight
(CIF), each of which carries a specific set of rights and obligations between the parties. While
quoting the price, the seller takes into account not only the cost of production but also
additional costs and risks involved as per the trade terms agreed. For instance, the price
quoted for a consignment on CIF basis will be higher than that on FOB basis as the former
requires insurance and freight charges to be incurred additionally.

  NEED AND SCOPE 

The existence of difference in interpretation of trade terms in different countries has been a
cause of friction in international trade leading to misunderstanding, disputes and references
to courts with all the waste of time and money. The Incoterms (International Commercial
Terms) were evolved by the International Chamber of Commerce to provide a set of
international rules for the interpretation of the chief terms used in foreign trade contracts.
Incoterms were published first in 1936 and subsequently amended and added to in 1953,
1967, 1976, 1980 and 1990. The latest 2000 version defines 13 contract terms, providing an
up-to-date set of rules broadly in the line with the current international trade practices.
 THE TERMS
Arranged in the ascending order of obligations to the seller the contract terms defined are
as under:
Contract Terms Standard abbreviation
E – Term
1. Ex Works EXW
F - Terms
2. Free Carrier Carriage Unpaid FCA
3. Free Alongside Ship FAS
4. Free On Board FOB
C - Terms
5. Cost and Freight CFR
6. Cost, Insurance and Freight CIF
7. Carriage Paid to CPT
8. Carriage and Insurance Paid to CIP
D - Terms
9. Delivered at Frontier DAF
10. Delivered Ex Ship DES
11. Delivered Ex Quay DEQ
12. Delivered Duty Unpaid DDU
13. Delivered Duty Paid DDP
According to the mode of transport for which they are used, the contract terms may be
classified as follows:
Sea and inland waterway All modes including multimodal
1. Free Alongside Ship 1. Ex Works
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2. Free on Board 2. Free Carrier

3. Cost and Freight 3. Carriage Paid to
4. Cost, Insurance and Freight 4. Carriage and Insurance Paid to
5. Delivered Ex Ship 5. Delivered at Frontier
6. Delivered Ex Quay 6. Delivered Duty Unpaid
7. Delivered Duty Paid
The main reason for the 1990 revision of the Incoterms was the desire to adapt terms to
the increasing use of electronic data interchange (EDI). The revision provided that in all the
contract terms where the seller has to send a transport document to the buyer, when the
seller and buyer have agreed to communicate electronically, the transport document may
be replaced by an equivalent EDI message.
Incoterms have been further revised for the new millennium in line with developments in
commercial practice. Published in September 1999, Incoterms 2000 may be used to define the
responsibilities of buyer and seller in contracts effective from January 1, 2000. The current revision
concentrated on ensuring that the wordings used clearly and accurately reflect the trade practice.
Wherever possible, the same expressions as appear in UN Convention on Contracts for
International Sale of Goods (CISG) have been used. Moreover, substantive changes have been
made in two areas:
(a) The customs clearance and payment of duty obligations under DAS and DEQ and
(b) the loading and unloading obligations under FCA.
 CONTRACT TERMS FOR C ARRIAGE BY SEA TRANSPORT
• FAS—Free Alongside Ship (...named port of shipment)
‘Free Alongside Ship’ means that 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 of or damage to the goods from that moment. (Incoterms 2000)
The price quoted under this contract includes charges up to placing the goods alongside the ship in
the seller’s country. The seller’s obligation is to bring the goods to the named port and place them
alongside the vessel nominated by the buyer. The buyer has to bear all costs and risks of loss of or
damage to the goods from that moment.
The buyer has to contract the sea carrier and arrange for the transportation. He should
intimate the seller about the name and loading berth of the ship and the delivery dates. The
seller should obtain the export licence or other official authorisation, where applicable and
carry out customs formalities. He should tender to the buyer dock or warehouse receipt or
warrant which evidences the delivery of goods alongside the ship. He has to bear the cost of
any checking operations such as checking quality, measuring, weighing and counting which
are necessary for delivering the goods alongside the ship.
The seller may arrange for booking the cargo with the shipping company and obtain a
bill of lading. In such cases, the cost should be borne by the buyer. The seller may also
provide at the buyer’s request and cost the certificate of origin and any other documents
that the latter may require.
Documents. The documents that the seller has to submit to the buyer are :
(a) Dock or Warehouse Receipt or Warrant,
(b) Invoice, and
(c) Any other document as required by the buyer.
• FOB—Free on Board (...named port of shipment)
‘Free on Board’ means that the seller delivers when the goods pass the ship’s rails 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. (Incoterms 2000)
The price quoted under this contract charges up to preparation of goods for export and
placing them on board the named vessel in the seller’s country. The buyer should arrange
for the space in the vessel and intimate the seller so that the latter may arrange to take the
goods to the port at the appropriate time and get them placed on the vessel. The right in the
goods passes on to the importer the moment goods are placed on the vessel as per his
instructions and hence any loss of or damage to the goods after this stage should be borne
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entirely by the buyer. The buyer has to pay freight at destination and arrange for insurance
covering the journey. As regards the loading charges at the port in the seller’s country, the
seller has to bear to the extent they are not included in the freight.
The seller’s duty is to arrange to prepare the goods, pack them, place them on the
vessel as per the terms of the contract and obtain a bill of lading evidencing shipment. He
has to bear the cost of any checking operations like checking quality, measuring, etc., which
may be necessary for delivering the goods. He has to obtain export licence and pay export
taxes and fees that may be required. If the buyer requests, the seller has to provide him
with a certificate of origin, the cost of which has to be borne by the buyer. Further, he may
assist the buyer, at buyer’s risk and expense, in other matters relating to the contract.
The term FOB is normally followed by the name of a port in the seller’s country. For
example, an Indian seller may quote FOB Chennai. It means the price quoted is for delivery
of goods at Chennai port. If no port is mentioned in the terms, the buyer has the right to ask
for shipment at any port in India. Therefore, he may require the seller to ship from Mumbai,
which may mean additional cost to the seller.
Documents to be submitted under FOB contract are :
(a) Freight to pay or freight collect bill of lading,
(b) Invoice, and
(c) Other documents as required by the buyer.
• CFR—Cost and Freight (...named port of destination)
‘Cost and Freight’ means that 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. (Incoterms 2000)
The price quoted under this contract includes the cost of the goods and freight charges up to
the named destination. That means, the contract term should indicate the port of discharge
up to which the freight is included. For instance, for delivery at New York the contract terms
should be CFR New York.
The seller has to prepare, pack, transport up to the port and arrange to place the goods
on board a vessel and obtain clean freight paid bill of lading. The obligation of arranging for
the contract of carriage rests with the seller. He has to pay for checking operations and pay
unloading charges to the extent they are included in the freight. He has to obtain export
licence and carry out all formalities necessary for the exportation of the goods. He may
furnish the certificate of origin, consular invoice and any other document at the cost and
request of the buyer.
The buyer has to arrange to receive the goods at the destination. He has to arrange for
insurance of the goods during transportation. He has to pay unloading charges to the extent they
are not included in freight. He has to reimburse the expense incurred by the seller in providing
documents like certificate of origin at his request.
Though under CFR contract the seller pays charges up to the destination, the risk of loss
of or damage to the goods passes to the buyer the moment the goods are placed on board
the ship in the seller’s country. Thus the seller bears the cost up to the destination, but the
buyer acquires the interest in the goods from the time they are loaded on board a ship in
the seller’s country.
Documents to be furnished under this contract are :
(a) Freight paid bill of lading,
(b) Invoice, and
(c) Other documents as required by the importer.
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• CIF—Cost, Insurance and Freight (...named port of

destination)
‘Cost Insurance and Freight’ means that 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 in 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. (Incoterms 2000)
The price quoted under this contract includes cost of goods, freight charges up to named
destination and insurance covering the voyage. In other words, all expenses incurred up to
the port of destination are borne by the seller. Unless otherwise specified in the contract,
insurance for 110% of contract price with minimum cover of the Institute Cargo clauses shall
be obtained. In other respects the duties of the seller and buyer are similar to that under
CFR contract. Similarly, the risk in the goods passes on to the buyer the moment they are
placed on board a vessel in the seller’s country.
Documents to be furnished under this contract are :
(a) Freight paid bill of lading,
(b) Insurance policy,
(c) Invoice, and
(d) Other documents as required by the buyer.
• DES—Delivered Ex Ship (...named port of destination)
‘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. (Incoterms 2000)
The price quoted includes all expenses up to carriage of goods by ship to the named
destination. Thus the price quoted may be same as the price under CIF contract. But the
essential difference between Ex Ship contract and other contracts discussed above is the
time at which the risk for loss of or damage to the goods is passed to the buyer. The
responsibility, under the Ex Ship contract, of the seller is to make available to the buyer the
goods at the named destination. Therefore, the risk is borne by the seller till the goods are
carried to the port of destination. The risk is transferred to the buyer from the time he takes
delivery of the goods. In other respects, the duties of the seller and the buyer are similar to
those under the CIF contract.
Documents to be submitted under Ex Ship contract are:
(a) Freight paid bill of lading,
(b) Invoice,
(c) Insurance policy, and
(d) Other documents as required by the buyer
• DEQ—Delivered Ex Quay (...named port of
destination)
‘Delivered Ex Ship’ means that 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. (Incoterms 2000)
This is in effect an extension of the Ex Ship contract. The seller has to bear the additional
risks and cost to bring the goods ashore and make them available to the buyer on the wharf
at the destination named in the sale contract. That means, he has to prepare the goods,
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pack them, arrange for checking operations, transport and insure them. The risk of loss or
damage to the goods passes to the buyer from the time the goods are placed at the quay.
The buyer’s duty is to take delivery of the goods from the quay or wharf at the port of
destination. The buyer has to obtain the import licence and bear the cost of any import duty,
cost of customs clearance and any other taxes to be paid on imports. If the parties wish to
include in the seller’s obligation all or part of the costs payable upon import of the goods,
this should be made clear by adding explicit wording to this effect in the contract of sale.
Documents to be submitted by the seller :
(a) Delivery order,
(b) Invoice, and
(c) Other documents as required by buyer.
 C ONTRACT TERMS FOR CARRIAGE BY ANY MODE OF TRANSPORT
• EXW—Ex Works (...named place)
‘Ex Works’ means that the seller delivers when the goods are placed 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. (Incoterms
2000)
The price under this contract represents the minimum since the goods are delivered at the
seller’s premises. The price excludes all other expenses. The obligation of the seller is to
make the goods available at his premises, i.e., works or factory.
The seller should bear all costs and risks in packing the goods, arranging for checking
operations like checking quantity, measurements, weighing and counting, that may be
necessary for the purpose of placing the goods at the disposal of the buyer. He should give
reasonable notice to the buyer as to when the goods would be at his disposal. If the buyer so
desires and at his risk, the seller may render assistance in getting documents that may be
required for exportation and/or importation of the goods. The seller is not responsible for
loading the goods on vehicle provided by the buyer. If the parties desire wish the seller to be
responsible for the loading of the goods on departure and to bear the risks and all the costs
of such loading, this should be made clear by adding explicit wording to the effect in the
contract of sale.
The buyer has to bear the cost and risk involved in bringing the goods from the seller’s
works to the desired destination. All costs, taxes, etc., both at the seller’s country and the
buyer’s country have to be borne by the buyer.
Documents :
(a) Invoice, and
(b) Other documents as required by the buyer.
• FCA—Free Carrier (...named place)
‘Free Carrier’ means that 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. (Incoterms 2000)
This term corresponds to FOB under sea transport. The seller fulfils his obligation to deliver
when he has handed over the goods, cleared for export, into the charge of the carrier
named by the buyer at the named place or point. If the named place is the seller’s premises,
delivery is completed when the goods have been loaded on the means of transport provided
by the carrier. If any other place is mentioned, the seller carries the goods there and places
the goods at the disposal of the carrier without unloading from the seller’s means of
transport. If no precise point is indicated by the buyer, the seller may choose within the
place or range stipulated where the carrier shall take the goods into his charge.
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‘Carrier’ means any person who, in a contract of carriage, undertakes to perform or to

procure the performance of carriage by rail, road, sea, air, inland waterway or by a
combination of such modes. If the buyer instructs the seller to deliver the cargo to a person,
e.g., a freight forwarder who is not a carrier, the seller is deemed to have fulfilled his
obligation to deliver the goods when they are in custody of that person.
Except for the mode of transport and place of delivery, the respective positions of seller
and buyer are similar to that under FOB contract.
Documents required are:
(a) A transport document,
(b) Invoice, and
(c) Other documents as required by the buyer.
• CPT—Carriage paid to (...named place of destination)
‘Carriage paid to…’ means that 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. (Incoterms 2000)
This contract term can be compared to the CFR term used for carriage by sea transport. The
price quoted includes cost of goods and freight charges.
The seller has to prepare the goods, pack them, pay for checking operations and take
them for transportation to the carrier. If there are more than one carrier, the seller’s
obligation is fulfilled when he delivers goods to the first carrier. The risk for loss of or
damage to the goods passes to the buyer when they are delivered to the first carrier. The
formalities for export, like obtaining licence, payment of export duty, have to be borne by
the seller. If customary, the seller should provide the buyer with the usual transport
document.
The buyer, on receipt of intimation from the seller, may arrange for insuring the goods.
He should arrange for getting import licence and pay import duties. If he required the seller
to furnish him with certificate of origin or any other document, he should reimburse the
seller for the expenses.
Documents to be submitted by the seller are :
(a) Freight paid waybill,
(b) Invoice, and
(c) Other documents as required by the buyer.
• CIP—Carriage and Insurance Paid to (...named place
of destination)
‘Carriage and Insurance paid to…’ means that 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. 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. (Incoterms 2000)
This term corresponds to CIF contract under sea transport. In addition to the obligations
under ‘Carriage Paid to’ contract, the seller should arrange for insurance for the goods and
furnish the buyer with the insurance policy or other acceptable document. Therefore, the
price quoted includes cost of the goods, freight charges and insurance premium.
The cargo insurance should be on such terms that the buyer would be entitled to claim
directly from the insurer. Unless otherwise agreed it should be for 110% of the contract
value with minimum cover of the Institute Cargo Clauses. When required by the buyer, the
seller shall provide at the buyer’s expense war, strikes, riots and civil commotion risk
insurances if procurable.
In all other respects, the responsibilities of the seller and the buyer are same as under
‘Carriage Paid to’ contract.
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Documents to be furnished :
(a) Freight paid waybill,
(b) Insurance policy,
(c) Invoice, and
(d) Other documents as required by the buyer.
• DAF—Delivered at Frontier (...named place)
‘Delivered at Frontier’ means that 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. (Incoterms 2000)
Under this contract, the seller’s obligations are fulfilled when the goods have arrived at the
frontier, but before the customs border of the adjoining country. To avoid misunderstanding,
the parties may indicate (i) the countries separated by that frontier, and (ii) the name of
place of delivery. For example, “Delivered a Franco-Italian Frontier (Mondane)”.
The seller should arrange for packing the goods, checking operations where required,
procure exchange control authorisation required for exportation of the goods, contract for
transportation of the goods to the place named in the contract and bear all risks and
expenses up to this stage. If no particular point (station, pier, quay, wharf, warehouse as the
case may be) as the named place of delivery is stipulated in the contract, the seller may
choose any point for delivery. He should provide the goods at the frontier. The document
may be a transport document or warehouse warrant. He may assist the buyer, at the latter’s
request and, cost in obtaining other documents that may be required.
The buyer should arrange for taking delivery of the goods at the frontier. He should
obtain import licence and pay import duties, taxes and fees that may be required for this
purpose.
Documents :
(a) Document of transport or warehouse warrant,
(b) Invoice, and
(c) Other documents as required by the buyer.
• DDP—Delivery Duty Paid (...named place of
destination)
‘Delivered Duty Paid’ means that the seller delivers the goods to the buyer, cleared for
import, and not unloaded from the 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 risk 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.
(Incoterms 2000)
While the term “Ex Works” signifies the seller’s minimum obligation, the term “Delivered
Duty Paid”, when followed by words naming the buyer’s premises, denotes the other
extreme—the seller’s maximum obligation. The seller has to do all that is necessary to place
the goods at the premises of the buyer. He has to prepare the goods, pack them, arrange for
their transportation, comply with the export and import formalities, arrange for the internal
transport in the buyer’s country and ultimately place the goods at premises of the buyer. Till
that time the risk in the goods also rests with the seller. If the buyer has indicated a place
other than his premises as the destination for the goods, the seller should provide the buyer
with a customary document of transport warehouse, warrant, dock warrant, delivery order or
the like, as the case may be, to enable the buyer to take delivery of the goods. The seller
retains the risks of the goods till they reach such destination. The seller should reimburse
the buyer for any assistance rendered by the buyer in getting import licence, etc.
The buyer’s only duty is to take delivery of the goods at the destination.
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If the parties wish that the seller should clear the goods for import but that some of the
costs payable upon the import of the goods should be excluded—such as value added tax
(VAT) and/or other similar taxes—this should be made clear by adding words to this effect in
the contract of sale.
Documents :
(a) Document of transport, if required,
(b) Invoice, and
(c) Other documents if required by the buyer.
• DDU—Delivered Duty Unpaid (...named place of
destination)
‘Delivered Duty Unpaid’ means that the seller delivers the goods to the buyer, not cleared
for import, and not unloaded from the 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, other than, where applicable, any ‘duty’ (which term includes the responsibility for
and the risk 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. Such
‘duty’ has to be borne by the buyer as well as any costs and risks caused by the failure to
clear the goods for import in time. (Incoterms 2000)
This term is similar to DDP except that the seller’s obligation excludes obtention of import
licence, payment of duties, taxes and other official charges payable upon importation. If the
parties wish the seller to carry out customs formalities and bear the costs and risks resulting
therefrom this has to be made clear by adding words to this effect.
Documents :
(a) Transport document,
(b) Invoice, and
(c) Other documents if required by the buyer.
 COMPARISON OF I
EXW FCA FAS FOB
CPTCFR
CIPDAF
CIF DE DEQ DDU DDP
Seller should: IN ALL CASES
S

1. Mandatory preshipment inspection B S S S S S S S S S

(b) (a)
tity etc. Pack the goods Supply the goods 2. Loading at seller’s premises B S S S S S S S S S
3. Local transport in seller’s country B B* S S S S S S S S
carrier4. Unloading at premises of main B B S S S S S S S S
5. Export licence B S S S S S S S S S
6. Export clearance B S S S S S S S S S
7. Arrangement for contract of carriage B B B B S S S S S S
8. Loading into the carrier B B B S S S S S S S
9. Risk during voyage B B B B B B S S S S
10. Freight charges B B B B S S S S S S
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11. Transport insurance - - - - - S - - - -

12. Import licence B B B B B B B B B S
13. Import clearance B B B B B B B B B S
14. Unloading at place of destination B B B B B B B S B B

livered at Frontier, DEQ = Delivered Ex Quay, DD * S, in case the named place is other than the seller’s premises. – indicates no obligation under Incoterms.