INCOTERMS
We will now see examples of some important INCOTERMS only:-
EXW-Ex Works: location mentioned-The “seller” is to place the goods at the disposal of the “customer”, at the “seller’s” premises, or another specified location, not cleared for export and not loaded onto any collecting vehicle. The “title” and “risk” pass on to the “customer”, at the “seller’s” door.
CFR-Cost and Freight (port of destination specified)-The “seller” delivers the goods when they cross the ship’s rails at the specified loading port and must pay the costs and freight necessary to bring the goods to a specified port of destination. The “customer” bears all the additional costs and risks, after the goods have been delivered over the ship’s rails at the loading port. The title and risk pass on to the “customer” once the goods are delivered on board the ship.
CIF- Cost, Insurance and Freight (port of destination specified)-The “seller’s” obligations are the same as under “CFR” above, with the addition that the ‘seller” must obtain insurance-cover against the “customer’s” risk of loss/damage during the carriage by sea. The title and risk pass on to the “customer” once the goods are delivered on board the ship.
CPT-Carriage Paid To(port of destination specified)-The “seller” delivers the goods to the nominated carrier and pays the cost of carriage to the named destination. The “customer” bears all the additional costs and risks after the goods are delivered to the carrier. The title, risk and insurance cost pass on to the buyer, when the goods are delivered to the carrier.
CIP-Carriage and Insurance Paid To(port of destination specified)-The obligations are same as shown above under CPT, with the addition that the “seller” procures insurance cover against the “customer’s” risk of loss or damage to the goods during carriage. The title and risk pass on to the “customer” once the goods are delivered to the carrier.
FOB-Free On Board(port of shipment specified)-The “seller” delivers the goods, cleared for export, when they cross the ship’s rail at the specified loading port. The title and risk pass on to the “customer” when the goods cross the ship’s rail.
DES-Delivered Ex -Ship(destination specified)-The “seller” delivers when the goods are placed at the “customer’s” disposal on board the ship, not cleared for import, at the specified port of destination. The title, risk and responsibility, for the vessel’s discharge and import clearance pass on to the “customer” when the “seller” delivers the goods on the ship at the specified destination port.
Incoterms is the acronym for International Commercial terms. These terms were developed by the International Chamber of Commerce for the following reasons:
- To define standard terms of sale internationally.
- To eliminate barriers in a sales contract.
- To provide a universal vocabulary for price basis in international trade.
- To reduce risks associated with a sales contract.
There are four categories of incoterms and these are:
- The ‘E’ Terms – Departure.
- The ‘F’ terms – main carriage unpaid.
- The ‘C’ terms – main carriage paid.
- The ‘D’ terms – arrival.
Incoterms sets rules on how price is established for goods sold internationally. This is because the invoice price depends on several factors, as below:
- The cost of manufacturing and packing with a mark up as profit.
- The cost of manufacturing, packing and transportation with a mark up as profit.
- The cost of manufacturing, packing, transportation and insurance cover for the transport leg with a mark up as profit.
The transfer of risk and costs from the Seller to the Buyer of the goods during transit is clearly defined in the various Incoterms.
The various Incoterm categories are as below. To understand a category, one must know the answers to the following questions:
- Who arranges transport?
- Who arranges insurance?
- When does the risk of damage to/loss of goods transfer during transport from the Seller to the Buyer?
- When do costs in relation to transport and delivery transfer from the Seller to the Buyer?
The Incoterm categories are elaborated by answering the questions above.
