Table of Contents

Background information

The Incoterms 2010 rules are standard sets of trading terms and conditions designed to assist traders when goods are sold and transported.

The Incoterms rules are created and published by the International Chamber of Commerce (ICC) and are revised from time to time. The most recent revision is Incoterms 2010 which came into force on 1st January 2011.

The definitive publication on the Incoterms 2010 rules is the ICC publication number 715, which is available from various national bookshops.

This is essential reading for those with responsibility for setting a corporate policy or negotiating contracts with trading partners or service providers. Whale Logistics is a freight forwarder and when we work with you to transport your goods, we must agree on common terms in order for your shipment to be handled correctly.

The rules below are extracted from the International Chamber of Commerce. All rights are reserved to the owner of the publication. See here.

Who are the parties involved?

The Incoterms Rules apply to two parties - the supplier and buyer. The supplier is usually the manufacturer, where the goods are sourced. The buyer is the person who is exchanging those goods for money. The rules state which party is involved in what services, such as organizing shipment, transport, and delivery. The buyer/supplier could also outsource these services to a third party, usually a freight forwarder, customs broker or customs agent.

Each Incoterms rule specifies:

  • the obligations of each party (e.g. who is responsible for services such as transport; import and export clearance etc)
  • the point in the journey where risk transfers from the seller to the buyer

So by agreeing on an Incoterms rule and incorporating it into the sales contract, the buyer and seller can achieve a precise understanding of what each party is obliged to do, and where responsibility lies in event of loss, damage or other mishap.

Explanation

“Ex Works” means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e.,works, factory, warehouse, etc.). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable.

Seller

The only responsibility of the seller is to prepare the merchandise for the buyer, at his own premises, suitably packed for export shipping purposes (in general, the price includes loading the merchandise in the pallet).

Buyer

The buyer is responsible for all the charges and risks involved in the shipment of the merchandise from the moment it leaves the seller’s warehouse until it reaches its destination place. This is the primary Incoterm we use at Whale and thus we handle freight forwarding from the seller direct to the buyer.

The term EXW represents a minimum obligation for the seller. However, if the parties agree that the vendor insures the loading of the merchandise at the point of departure “EXW Loaded”, and make the vendor responsible of these risks and charges, they have to precise this issue very clearly on an explicit clause included in the sales contract (ex: EXW Paris loaded, CCI 2010).

The seller is expected to provide for the buyer, at his request and at his charge and risks, all the assistance required to obtain an export license, insurance and provide the buyer with all the useful information in his possession which will allow the buyer to insure the export of his merchandise in full security.

Illustration

exworks animation whale logistics incoterms

Explanation

“Free Carrier” means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.

Seller

If the delivery takes place at the seller’s premises, it is the seller, who handles the loading of the suitably packaged goods into the vehicle provided by the buyer, (specify “FCA seller’s premises”). Export customs clearance is the responsibility of the seller.

Buyer

The buyer has chosen the type of transportation and the carrier with whom he has signed a transportation contract and pays for the main transportation. The transfer of charges and risks takes place at the moment when the carrier picks up the merchandise. The parties must agree upon naming a place where to hand over the merchandise (the carrier’s terminal or the vendor’s premises).

The seller must, should the case arise, provide for the buyer, at the right time, all the assistance needed to obtain all the documents and information regarding the security requirements for the export and/or import of the merchandise and/or for its transportation to its final destination. The cost of the documents furnished and/or the assistance given are costs and risks paid by the buyer.

Geographical precision

More than in any of the other Incoterms, in FCA, the “named place” agreed upon must be precise and indicated with care. FCA (Le Havre) is not enough if the buyer is located in Le Havre. Is it FCA (warehouse Le Havre) or FCA (in-transit bulking warehouse X Le Havre) or even FCA (dock No. X at the port of Le Havre)?

If the delivery is going to be done at a place other than the vendor’s premises, for example: handing it over at a transportation terminal –truck, rail, air, maritime – the vendor will be in charge of transporting the merchandise up to this named terminal but he will not be responsible for unloading the vehicle. The unloading will be handled by the one in charge of receiving the merchandise at the transportation terminal. Prefer FCA instead of FOB if the transportation is done in containers or by roll-on roll-off ship.

Illustration

free carrier animation whale logistics incoterms

Explanation

“Carriage Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

Seller

The seller controls the logistic chain. After having taken care of export customs clearance, he chooses the cargo carrier and pays the charges up to the designated place.

Buyer

The risk of damage or loss is borne by the buyer from the moment that the merchandise is loaded into the first carrier. After that, the buyer takes care of the import customs clearance and the unloading expenses.

Unloading fees

It is important to clarify the concept of who is responsible for the unloading charges into the frame of the transportation contract. Normally, the buyer must be responsible for these charges unless they are included in the transportation fee. In this case, they are charged to the vendor. The vendor must clarify this question with the buyer in order to prevent finding himself in a situation where the receiver refuses to pay and the cargo carrier turns back to the provider (the seller) to demand his part of the payment for the unloading charges as well as the eventual fees for the vehicle’s immobilization while waiting for the problem to be solved.

Geographical precisions

Under the rule CPT, there are transfers of risks and charges in different places. It is recommended that the parties involved specify clearly in their contract the delivery place where the risk is transferred to the buyer and the named destination up to which the seller is required to arrange a transportation contract.

Documents fees

The information and documents related to security, that the buyer needs for the export/import of merchandise and/or for the transportation up to its final destination must be provided by the seller at the request of the buyer and at its own charge and risks.

Illustration

carriage-paid-to animation whale logistics incoterms

Explanation

“Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

‘The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”

Seller

CIP is identical to CPT, but the seller must supply, in additional, a transportation insurance. The seller settles the transportation contract, pays the freight and the insurance premium.

Buyer

The risk of damage or loss is borne by the buyer from the moment that the merchandise is loaded into the first carrier. After that, the buyer takes care of the import customs clearance and the unloading expenses.

Insurance Coverage

According to the term CIP, the seller is not obliged to apply for insurance but for a minimum coverage. If the buyer wishes to protect himself by a superior coverage, under these circumstances, he would need to obtain the agreement of the seller or apply on his own for a complementary insurance.

Documents fees

The information and documents related to security, that the buyer needs for the export/import of merchandise and/or for the transportation up to its final destination must be provided by the seller at the request of the buyer and at his own charge and risks. In this case, a third party individual such as a local customs broker may be useful to deploy to minimize problems during documentation preparation, especially if in another country or language.

Illustration

carriage-and-insurance-paid to animation whale logistics incoterms

Explanation

“Delivered at Terminal” means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes a place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.

Seller

The seller must deliver the merchandise, placing it at the buyer’s disposal at a designated terminal either at the port or at the place of destination on the date or within the time-limit period established. The seller has to obtain, at his own expense, a contract for the transportation of the merchandise up to the point where it reaches this terminal and unload the merchandise from the transportation carrier at its arrival. The seller has no obligation towards the buyer of obtaining an insurance contract. Nevertheless, he must provide the buyer, at his own expense, the documents that will allow him to pick up the merchandise delivered. The Incoterm DAT obliges the seller to take care of the export customs clearance. However, he is under no obligation of performing the import customs clearance.

Buyer

The buyer (or third party logistics provider) must pick up the merchandise once it is delivered and pay the price agreed on the sales contract. The buyer has to request from the seller all the information related to the security which he will need for the export, import and transportation of the merchandise until its final destination. This Incoterm rule was created specifically for the transportation of containers. It is also adapted to conventional maritime transport when the seller wants to be responsible for the risks involved during the unloading process from the vessel at the port of destination. It is convenient in this case to specify the exact place where the merchandise will be placed at disposal (quay, hoist, etc.).

Illustration

delivered-at-terminal animation whale logistics incoterms

Explanation

“Delivered at Place” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.

Seller

The seller has to deliver the merchandise and place it at the buyer’s disposal into the inland freight transportation carrier ready to be unloaded at the designated place of destination. He has to take care of the export customs clearance; however, he is under no obligation of performing the import customs clearance. The seller has to obtain at his own expense, a contract for the transportation of the merchandise up to the named destination and unload it from the transportation carrier at its arrival. The seller has no obligation towards the buyer of obtaining an insurance contract. Nevertheless, he must provide the buyer, at his own expense, the documents that will allow him to pick up the merchandise delivered.

Buyer

The buyer has to pay the price of the merchandise as stipulated in the sales contract and he has to pick up the merchandise once it has been delivered.

Security

The buyer must request from the seller to furnish him with all the information required in relation to the security which he will need for the export, import and transportation of the merchandise until its final destination. This new rule replaces the DDU. It is advised to use it only in the countries where the means of transportation to a destination are under good control.

Illustration

 

Explanation

“Delivered Duty Paid” means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

Seller

The seller has, in this case, the maximum obligation; he is responsible for all transfer charges and risks until the merchandise is delivered to the buyer. The import customs clearance is also under his charge.

Buyer

The buyer picks up the delivery at the designated destination place and pays the unloading fees. He must request from the seller to furnish him with all the information required in relation to the security which he will need for the export, import and transportation of the merchandise until its final destination.

DDP versus EXW

The term DDP is exactly the opposite of EXW.

Charges relating to the importation of merchandise

If the parties wish to exclude from the seller's obligations the payment of particular fees payable, by reason of imports of the merchandise, it must specify. For example: "Delivered Duty Paid, VAT unpaid (DDP, VAT unpaid)".

Illustration

delivered-duty-paid animation whale logistics incoterms

THIS RULE ONLY APPLIES FOR SEA AND INLAND WATERWAY TRANSPORT

Explanation

“Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.

Seller

The obligations of the seller are henceforth fulfilled when the merchandise is placed, after customs clearance, alongside the ship at the dock or at the lading of the designated port of shipment.

Buyer

From this moment on, the buyer is responsible for all charges and risks of loss or damages, from the moment that the merchandise is delivered alongside the ship, especially in the case of a ship’s schedule delay or the cancellation of a port of call. The buyer designates the carrier, arranges the transportation contract and pays for the freight.

Obligations of place and moment

The seller does not deliver FAS if the vessel is not at the dock. It is a responsibility of time and moment (From Marseilles to Anvers, where every company offers at least one weekly departure, bringing the delivery eight days before the date of the departure of the ship chosen by the buyer is too premature).

License acquisition

The acquisition of an export license or any other official authorization is at the charge and risk of the seller. In the same way, the buyer is responsible for the import license. The buyer must provide the vendor with all the information regarding the name of the vessel, the loading place and the time chosen to deliver the merchandise within the period accorded.

Documents fees

The seller must, should the case arise, provide for the buyer, at the right time, all the assistance needed to obtain all the documents and information regarding the security requirements for the export and/or import of the merchandise and/or for its transportation to its final destination. The cost of the documents furnished and/or the assistance given are costs and risks paid by the buyer.

Illustration

free-alongside-ship animation whale logistics incoterms

THIS RULE ONLY APPLIES FOR SEA AND INLAND WATERWAY TRANSPORT

Explanation

“Free On Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.

Seller

He has to deliver the merchandise at the designated loading port, on board of the vessel chosen by the buyer and fulfill all the formalities of export customs clearance, if there are any.

Under a contract type FOB, the seller fulfills his delivery obligation when the merchandise is on board of the vessel at the designated loading port, or in the case of successive sales, the vendor obtains the merchandise and delivers it, as well, in order to have it all transported up to the designated destination place indicated in the sales contract.

Buyer

He selects the vessel, pays the maritime freight, the insurance and he takes care of the formalities at the arrival. He is also responsible for all the charges and risks of loss and damage that could arise to the merchandise from the moment it was delivered.

Variant

For information, the "ARRANGING FOB" is the term used by the freight brokers to indicate that the operations that take place prior to placing the merchandise aboard have been done and accomplished, as well as the export customs clearance operations, if needed. All these operations represent an extra cost, to be paid by the seller, which is sometimes called “fee of placing into FOB”.

The "FOB STOWED" and/or "FOB STOWED and TRIMMED" are variations. The seller is responsible for the total charges incurred by the merchandise at the loading port. However, it has to be stipulated in the contract at which point the transfer of risks takes place.

The seller must, should the case arise, provide for the buyer, at the right time, all the assistance needed to obtain all the documents and information regarding the security requirements for the export and/or import of the merchandise and/or for its transportation to its final destination. The cost of the documents furnished and/or the assistance given are costs and risks paid by the buyer.

The American FOB

The American FOB is different. In the United States, the Incoterm FOB (Free on Board) does not refer to a shipment in a boat or to a port but to an American destination, at the border. In the United States there could be, mainly, four types of FOB:
  • FOB/Point of departure: The buyer pays for everything;
  • FOB/Border: The manufacturer pays for the charges up to the border without clearing the merchandise through customs;
  • FOB/Point of Sale: The merchandise arrives to a designated American city. It is then, the supplier, who pays for customs clearance. The chosen free port must always be marked, in general, the city;
  • FOB/Destination Customs Clearance: In this case, the manufacturer takes care of everything, without the cooperation of the buyer. It is also called DDP/Delivery duty paid. Most of the sales into the United States are done on this basis.

Illustration

free-on-board animation whale logistics incoterms

THIS RULE ONLY APPLIES FOR SEA AND INLAND WATERWAY TRANSPORT

Explanation

“Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. the seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

Seller

He chooses the transportation, contracts and pays for the freight up to the named port of destination; the unloading of the merchandise is not included. The loading of the merchandise after customs clearance into the vessel is his responsibility as well as the shipping formalities. However, the transfer of risk is the same as in FOB.

Buyer

He is responsible for the risk of transportation from the moment that the merchandise is delivered alongside the ship at the loading port; he receives the carrier and picks up the merchandise delivered at the designated destination port.

Documents fees

The seller must, at his own expense, furnish the buyer with a customary transportation document to be used until the merchandise reaches the designated port of destination, covering the contractual merchandise which serves him as a guarantee (ex: claims of merchandise to the carrier, sale of merchandise while in transit, etc.). He also has to provide all the information required in order to take proper measures in receiving the merchandise.
The information and documents related to the security that the buyer needs in order to export and/or import and/or for the transportation of the merchandise until its final destination must be furnished by the seller, following the buyer’s request, and at his own expense and risks.

Illustration

cost-and-freight animation whale logistics incoterms

THIS RULE ONLY APPLIES FOR SEA AND INLAND WATERWAY TRANSPORT

Explanation

“Cost, Insurance and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination (usually prganized by your freight forwarder on your behalf).

"The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”

Seller

It is a term identical to CFR, but with the supplementary obligation for the seller to provide maritime insurance against the risk of loss or damage caused to the merchandise. The vendor pays the insurance premium. The insurance must be done according to the “minimum guarantee” clauses stipulated by the faculties of the Institute of London Underwriters or any other series with similar clauses. It has to cover the minimum anticipated price in the contract plus a surcharge of 10% and it has to be drawn up in the same currency of the contract. It is an insurance FPA (free of particular average) for 110% of its value. It is possible to add a surcharge of 20% without justification. A greater surcharge could be authorized by the insurance company if it is justified. This surcharge over the value serves to cover the expenses that can result from damage (cost of filing and following suit, correspondence, etc.) and the financial loss (interest) between the time of the loss and the indemnification by the insurance company. The seller pays the premium for this insurance.

Buyer

The buyer is responsible for the cost and risk of transportation from the moment that the merchandise is delivered alongside the ship at the loading port. He receives and takes the merchandise from the carrier at the named destination port.

The buyers appreciate this Incoterm because they are released from logistics formalities.

Documents fees

The information and documents related to the security that the buyer needs in order to export and/or import and/or for the transportation of the merchandise up to its final destination must be furnished by the seller following the buyer’s request and at his own expense and risks.

Illustration

cost-insurance-and-freight animation whale logistics incoterms

What are the most commonly used Incoterms?

See below for a table of the most commonly used incoterms, and the duties of each party (seller and buyer).

incoterms-most-common-terms.png

Should I buy CIF or FOB?

CIF (Cost Insurance & Freight) is when the seller must pay the costs and freight includes insurance to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods are loaded on the ship.

FOB (Free On Board) is when the seller must themselves 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 but NOT for multimodal sea transport in containers.

The major difference between CIF and FOB is the transportation costs and insurance during it. Therefore, if you are new to international trade, CIF may be more convenient, as it does save you energy and time in dealing with freight and shipping details. However, if you are shipping large amounts of freight, you might consider doing the hard yards yourself as FOB can be cheaper than CIF in most situations.

Who covers the logistics charges?

The below table details who pays for the logistics charges during transportation of goods, such as import customs clearance, main transportation, unloading freight into warehouse, etc. Usually, with a freight forwarder, each stage of your shipment will be handled according to this chart based on responsibility falling on the owner or seller. Your freight forwarder and customs broker should be in contact with you frequently to discuss these charges should they come to you.

incoterms.png

Click to zoom.

DDP - If the seller undervalues goods, can the buyer be liable?

As of May 2016 the Australian Department of Immigration and Border Protection states that under DDP, the buyer may be liable for duty underpayment as a result of seller undervalueing goods.

See the official document here

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Brenton Gray Davell Products Pty Limited